Corporations law : in principle [Tenth edition.] 9780455237978, 0455237972
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CORPORATIONS LAW: IN PRINCIPLE ..................
Thomson Reuters (Professional) Australia Limited 19 Harris Street Pyrmont NSW 2009 Tel: (02) 8587 7000 Fax: (02) 8587 7100 [email protected] http://legal.thomsonreuters.com.au For all customer inquiries please ring 1300 304 195 (for calls within Australia only)
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CORPORATIONS LAW: IN PRINCIPLE .....................................
TENTH EDITION
Jeswynn Yogaratnam LLB (Hons) (University of London), LLM (Tax) (University of Queensland)
Lecturer in Law, Charles Darwin University
Lidia Xynas BEc (Monash), LLB (Hon)(Deakin), LLM (Monash), GDLP (Monash), GCHE (Deakin), FGIA, TIA
Associate Professor, Victoria University Director Teaching & Learning, College of Law & Justice, Victoria University Australian Lawyer of the Supreme Court of Victoria
LAWBOOK CO. 2017
Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 19 Harris Street, Pyrmont, NSW First edition (L Griffiths & R Rouse)
1992
Second edition (L Griffiths)
1994
Third edition (L Griffiths & S Woodward)
1996
Fourth edition (S Woodward & H Bird)
1999
Fifth edition (S Woodward, H Bird & S Sievers)
2001
Sixth edition
2003
Seventh edition
2005
Eighth edition (T Ciro & C Symes)
2009
Ninth edition (T Ciro & C Symes)
2013
National Library of Australia Cataloguing-in-Publication entry Creator: Yogaratnam, Jeswynn, author. Corporations law : in principle / Jeswynn Yogaratnam, Lidia Xynas 10th ed. ISBN 9780455237961 (pbk) Includes index. Previous edition: 2013 Corporation law—Australia. Corporation law—Australia—Problems, exercises, etc. Other Creators/Contributors: Xynas, Lidia, author. 346.94066 © 2017 Thomson Reuters (Professional) Australia Limited This publication is copyright. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act 1968, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Inquiries should be addressed to the publishers. Copyright of Cth legislative material: All Commonwealth legislative material is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. For reproduction or publication beyond that permitted by the Copyright Act 1968 (Cth), permission should be sought in writing from the current Commonwealth Government agency with the relevant policy responsibility. Editor: Lalitha Vyamajala
Product Developer: Elizabeth Gandy
Publisher: Robert Wilson Printed by Ligare Pty Ltd, Riverwood, NSW This book has been printed on paper certified by the Programme for the Endorsement of Forest Certification (PEFC). PEFC is committed to sustainable forest management through third party forest certification of responsibly managed forests. For more info: http:// www.pefc.org
Preface How up to date? The tenth edition of Corporations Law: In Principle has been based on corporations legislation in force as at June 2016. This has meant revision of several Topics to reect changes to the Corporations Act 2001 (Cth), the publication of recent government and industry reports and discussion papers, and new case law. Another key feature in this edition is an attempt to include material from the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act) and the Office of the Registrar Indigenous Corporations, in particular corresponding provisions with the Corporations Act 2001 (Cth). Recent amendments to corporations legislation: • Corporations Legislation Amendment (Audit Enhancement) Act 2012 (Cth) • Corporations Amendment (Proxy Voting) Act 2012 (Cth) • Corporations Legislation Amendment (Financial Reporting Panel) Act 2012 (Cth) • Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012 (Cth) • Corporations Legislation Amendment (Derivative Transactions) Act 2012 (Cth) • Personal Liability for Corporate Fault Reform Act 2012 (Cth) • Corporations and Financial Sector Legislation Amendment Act 2013 (Cth) • Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth) • Corporations Legislation Amendment (Deregulatory and Other Measures) Act 2015 (Cth) • Corporations Amendment (Financial Advice Measures) Act 2016 (Cth) • Insolvency Law Reform Act 2016 (Cth) Recent government department and industry reports, discussion papers, guidance notes, inquiries and reviews: • ASIC “Consultation Paper 256: Remaking and repealing ASIC class orders on trustee company common funds” (March 2016) • ASIC “Consultation Paper 255: Remaking ASIC class orders on financial services disclosure requirements” (March 2016) • ASIC “Consultation Paper 254: Regulating digital financial product advice” (March 2016) • ASIC “Consultation Paper 253: Remaking and repealing ASIC class orders on dollar disclosure” (February 2016) • ASIC “Consultation Paper 252: Remaking ASIC class order on share and interest sale facilities” (February 2016) • ASIC “Consultation Paper 154: Infrastructure Entities: Improving Disclosure to Retail Investors” (April 2011)
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CORPORATIONS LAW: IN PRINCIPLE
• ASIC “Consultation Paper 150: Disclosing Financial Information Other Than in Accordance with Accounting Standards” (March 2011) • CAMAC “Managed Investment Schemes Discussion Paper” (June 2011) • CAMAC “Derivatives Report” (December 2011) • Council of Financial Regulators “OTC Derivatives Market Reform Considerations: A Report by the Council of Financial Regulators” (March 2012) • Council of Financial Regulators “Review of Financial Market Infrastructure Regulation” (October 2011) Significant cases in this edition, particularly in relation to directors’ duty of care, include: Agricultural Land Management Ltd v Jackson (No 2) (2014); and ASIC v Marinier Corp Ltd (2015). Acknowledgments We would like to thank all staff from Thomson Reuters who were involved in the production of the tenth edition of this publication. In particular, our sincere thanks goes to Janet Armstrong for conveying our ideas to the publishers, Natasha Naude for bringing the team together, Elizabeth Gandy for her expedient product development coordination and Lalitha Vyamajala for her attention to detail as the Editor. We also acknowledge all the previous authors for their contributions to earlier editions, which have built a solid basis for this continuing work. Many thanks are also due to Ann O’Connell for revising and updating the topics she has contributed since the 4th edition (Chapters 21, 22 and 23). As for research assistance, we acknowledge Genna Churches for her excellent research skills, shared enthusiasm in the area of law and expedient delivery to meet tight timelines. Both authors also thank their academic institutions at Charles Darwin University and Victoria University, respectively for supporting their research and work in this edition. We would also like to thank the Office of the Registrar of Indigenous Corporations (ORIC) for granting us the permission to use their materials in this edition. Most importantly, Jeswynn Yogaratnam expresses gratitude to his family especially mum Chandra Muthu and her husband Thomas Kley for their continued emotional nourishment, support and motivation which allowed for the timely completion of this edition. Similarly, Lidia Xynas expresses her gratitude to her husband Arthur Xynas and her children Alexander and Billy, for their love, support and understanding over the many months it has taken to finalise this edition. We would welcome any comments or suggestions you have. JESWYNN YOGARATNAM [email protected] LIDIA XYNAS [email protected] Darwin and Melbourne September 2016
Acknowledgments Extracts from the material below have been reproduced in this book: The Age (by Fairfax Media Publications Pty Ltd): http://www.theage.com.au • Michael Maiden, “Hardie Case Puts Boards on Notice”, 4 May 2012. • Leonie Wood, “ASIC Wins Case against Centro Directors”, 27 June 2011. The Australian: http://www.theaustralian.com.au/ • Damon Kitney, “ASIC Pushes For More Powers As it Wants to Impose Listing Rules on ASX”, Tuesday 27 December 2011 • Blair Speedy, “ASIC Confirms Investigation into EB Bid for David Jones”, Tuesday 3 July 2012 The Australian Financial Review (by Fairfax Media Publications Pty Ltd): http:// www.afr.com • Brett Clegg & Patrick Durkin, “Directors Urge Overhaul of Corporate Law”, 10 March 2008 ASIC (Australian Securities and Investments Commission): http://www.asic.gov.au • ASIC Regulatory Guide 6, “Takeovers: Exceptions to the General Prohibition”. • ASIC Regulatory Guide 25, “Takeovers: False and Misleading Statements”. • Media Release 11-150, “Opes Prime Directors Jailed”, Wednesday 27 July 2011. • Media Release 11-188, “Centro Civil Penalty Proceedings”, Wednesday 31 August 2011. • Media Release 12-191, “Former AWB Managing Director Found to Have Breached His Duties”, Thursday 9 August 2012. • Media Release 12-192, “Former AWB Chief Financial Officer Found to Have Breached Duties”, Friday 10 August 2012. • Media Release 15-007, “ASIC acts against Pluton Resources for disclosure and reporting failures”, Wednesday 21 January 2015. • Media Release 16-010, “Margin lenders improve lending standards following ASIC review”, Thursday 21 January 2016. • ASIC “Report 469: ASIC Regulation of Corporate Finance: July to December 2015”, Friday 26 February 2016. ASX Limited (Australian Securities Exchange): http://www.asx.com.au • ASX Listing Rule 3.1 (partially reproduced). ORIC (Office of the Registrar of Indigenous Corporations): http://www.oric.gov.au/ • Media Release 1213–16, “Landmark decision against former CEO of Kempsey Medical Service”, Wednesday 31 October 2012.
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CORPORATIONS LAW: IN PRINCIPLE
• Media Release 1314–08, “Women lead the way in Aboriginal and Torres Strait Islander corporations”, Monday 16 September 2013. • Media Release 1415–08, “Former Darwin CEO committed to stand trial in NT Supreme Court”, Wednesday 17 September 2014. • Media Release 1415–27, “Registrar takes action against former directors of Canberra housing corporation”, Monday 30 March 2015. • Media Release 1415–29, “Federal Court bans former Bunurong directors”, Thursday 16 April 2015. • Media Release 1415–35, “Former Darwin CEO sentenced”, Tuesday 12 May 2015. • Media Release 1415–36, “School is back in for Minimbah”, Thursday 28 May 2015. • Media Release 1516–17, “Registrar calls general meeting for Yindjibarndi”, Wednesday 23 March 2016. • Media Release 1516–21, “Restructure breaks deadlock at GSNT”, Monday 30 May 2016. • Media Release 1516–23, “Registrar assists Larrakia Nation”, Monday 06 June 2016. • Media Release 1516–25, “Registrar lays charges against former native title director”, Thursday 30 June 2016. • Image of “The Rule Book Condensed”. • Image of “Corporation Reporting Guide”. Takeovers Panel: http://www.takeovers.gov.au • Guidance Note 4: Remedies General. • Guidance Note 5: Specic Remedies — Information Deciencies. • Guidance Note 20: Equity Derivatives.
Table of Contents Preface ........................................................................................ v Acknowledgments .................................................................... vii Abbreviations ............................................................................. xi Tips on Studying ....................................................................... xv 1 History, Administration and Reform ........................................
1
2 Business Organisations ........................................................
31
3 Registration ..........................................................................
83
4 Consequences of Registration ............................................... 97 5 Internal Rules ...................................................................... 119 6 Management of Companies ................................................ 147 7 Corporate Liability: Contract, Tort and Crime ....................... 183 8 Promoters and Pre-registration Contracts ...........................
221
9 Membership .......................................................................
235
10 Meetings ..........................................................................
257
11 Directors’ Duties – Part 1 Duty of Care, Skill and Diligence .............................................................
291
12 Directors’ Duties – Part 2 Good Faith and Proper Purpose ............................................................... 367 13 Directors’ Duties – Part 3 Conflict of Interest and Disclosure ...........................................................
387
14 Members’ Rights and Remedies ........................................ 423 15 Financial Reports and Audit .............................................. 467 16 Share Capital – General Nature .......................................... 499 17 Classes of Shares .............................................................. 517 18 Transactions Affecting Share Capital ................................. 545 19 Dividends .......................................................................... 575 20 Loan Capital ...................................................................... 587 21 Fundraising ....................................................................... 611 22 Financial Services, Products and Markets .........................
643
23 Takeovers .......................................................................... 687 24 External Administration ..................................................... 723 Glossary .................................................................................. 757
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CORPORATIONS LAW: IN PRINCIPLE
Table of cases ....................................................................... 785 Table of statutes ................................................................... 801 Index ..................................................................................... 819
Abbreviations AASB
Australian Accounting Standards Board
ABLR
Australian Business Law Review
ABN
Australian Business Number
ACN
Australian Company Number
AC
Appeal Cases (England)
ACCC
Australian Competition and Consumer Commission
ACLC
Australian Company Law Cases
ACLR
Australian Company Law Reports
ACSR
Australian Corporations and Securities Reports
AGM
Annual General Meeting
ALJ
Australian Law Journal
ALJR
Australian Law Journal Reports
All ER
All England Law Reports
ALR
Australian Law Reports (after 1973); Argus Law Reports (until 1973)
APRA
Australian Prudential Regulatory Authority
ARBN
Australian Registered Body Number
ABA
Australian Bankers Association
ASA
Australian Shareholders Association
ASIC
Australian Securities and Investments Commission (formerly ASC — Australian Securities Commission)
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CORPORATIONS LAW: IN PRINCIPLE
ASIC Law
Australian Securities and Investments Commission Act 1989 (Cth) (as amended)
ASIC Act
Australian Securities and Investments Commission Act 2001 (Cth) (as amended)
ASX
Australian Securities Exchange Ltd
ATR
Australian Tax Review
Aust Jnl of Corp Australian Journal of Corporate Law Law CALDB
Companies Auditors and Liquidators Disciplinary Board
CAMAC
Corporations and Markets Advisory Committee (2001–2014)
CASAC
Companies and Securities Advisory Committee (1990–2001)
CATSI Act
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth)
Ch
Chancery (England)
Ch App
Chancery Appeals (England)
Corporations Act
Corporations Act 2001 (Cth) (as amended)
Corporations Law
Corporations Act 1989 (Cth) (as amended) (for the Australian Capital Territory) and Corporations ([State/Territory]) Act 1990 (as amended) of each State and the Northern Territory
CLR
Commonwealth Law Reports
CLERP
Corporate Law Economic Reform Program
CLERP Act 1999 Corporate Law Economic Law Reform Program Act 1999 (Cth) CLERP 7
Corporations Legislation Amendment Act 2003 (Cth)
CLERP 8
Cross-Border Insolvency Act 2008 (Cth)
CLERP 9
Corporate Law Reform (Audit Reform and Corporate Disclosure) Act 2004 (Cth)
ABBREVIATIONS
XIII
C&SLJ
Company and Securities Law Journal
COAG
Council of Australian Governments
CSLRC
Companies and Securities Law Review Committee (1984–1990)
Cth
Commonwealth
EGM
Extraordinary General Meeting
FCA
Federal Court of Australia
FCR
Federal Court Reports
FLR
Federal Law Reports
FSR Act
Financial Services Reform Act 2001 (Cth)
GST
Goods and Services Tax
KB
King’s Bench (England)
IASB
International Accounting Standards Board
ILJ
Insolvency Law Journal
JIBLR
Journal of International Banking Law and Regulation
LIJ
Law Institute of Victoria Journal
Listing Rules
Australian Securities Exchange Ltd Listing Rules
MonLR
Monash Law Review
MLR
Modern Law Review
MULR
Melbourne University Law Review
NSWLR
New South Wales Law Reports
NSWR
New South Wales Reports
NSWSC
New South Wales Supreme Court
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CORPORATIONS LAW: IN PRINCIPLE
NZLR
New Zealand Law Reports
ORIC
Office of the Registrar of Indigenous Corporations
QB
Queen’s Bench (England)
QLR
Queensland Law Reports
QSC
Queensland Supreme Court
SASC
South Australian Supreme Court
SASR
South Australian State Reports
SR (NSW)
State Reports (New South Wales)
TLR
Tasmanian Law Reports
TSC
Tasmanian Supreme Court
UNSWLJ
University of New South Wales Law Journal
VLR
Victorian Law Reports
VR
Victorian Reports
VSC
Victorian Supreme Court
WAR
Western Australian Reports
WASC
Western Australian Supreme Court
WLR
Weekly Law Reports (England)
WN (NSW)
Weekly Notes (New South Wales)
Tips on Studying The aim of this book is to make understanding company law easier. The material covered in this subject is vitally important for people who are going out into the business world. The Corporations Act is a very complex piece of legislation and some of the general law principles which underpin it are difficult to comprehend. This book is an attempt to re-state the law in understandable terms and to provide a clear structure. Wider reading is further encouraged once basic principles are understood. The reason many students struggle with their understanding of corporations law is that they fail to identify the relevant issues in problems. It is therefore important that students adopt a workable study technique. Corporations Law as a subject should be divided into manageable topics and a framework developed to aid understanding for each topic. The framework should be related to the issues likely to arise under each topic. This book contains a number of aids to assist students in this task. Workbook Study Aids Aid Purpose of Aid Guide to Problem Solving — Set out in a step-by-step forat the end of each Chapter mat the points to be considered when answering problem questions Flowcharts, timelines and Set out in a summary form the tables — throughout each issues which are likely to arise Chapter on problem-based questions on a particular topic
Student Use Preparation for essays and exams involving issue-based problems Preparation for essays and exams — in particular, structuring the answer to ensure that all issues are discussed in a logical order
The Guide to Problem Solving at the end of each Chapter gives examples of some of the different methods that can be used. Students should use a method of summarising issues that best suits their way of learning and develop their own checklists or tests. Exam preparation
There are numerous excellent texts on examination technique and students should avail themselves of them. 1 Time management is one area which must not be overlooked. Most marks are usually awarded early in an answer, so it is a poor strategy to spend time improving an answer instead of starting the next one. For revision, this book provides a good starting point with the Guides to Problem Solving. However, it is vital that students obtain a sound knowledge of the major points of each Chapter during the semester in order to be able to identify the relevant issues. Once a basic understanding of the subject has been achieved, the next thing to do is to look closely at past examination papers and make a list of the most likely issues to 1
For example, Frazer S, How to Study Law, 2nd ed, LBC, 1997, Keyzer P, Legal Problem Solving, Butterworths, 1994 and Krever R, Mastering Law Studies and Law Exam Techniques, 9th ed, LexisNexis, 2016.
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be covered. At least 10 to 12 should be identied. These issues should be concentrated upon and the guidelines (in this book or self-prepared) annotated. Finally, past questions should be attempted in point form with most effort directed to selecting the right issue(s). The standard technique for answering legal problems is: (a)
the issue is stated;
(b)
the relevant legal principle (for example, section of the Corporations Act) is stated;
(c)
the law is applied in precise detail to the facts of the problem; and
(d)
a reasoned conclusion is drawn from the arguments presented.
Where more than one legal principle is mentioned, the whole procedure is repeated for each principle and an overall reasoned conclusion drawn. Writing a formal answer
1.
State the issue(s) involved in the question.
2.
State the relevant law for the rst issue (if there are more than one). If both statute and case law apply, deal with the statute rst.
3.
Apply the law to the facts. This means explaining why the law that you have just stated is relevant to the facts of the problem. As far as possible, use the actual words stated in the problem when explaining the law’s relevance. (a) If the relevant law is the statute, you must explain why the statute is wide enough to cover the fact situation you are analysing. This may involve explaining how the words of the statute have been interpreted by courts and in turn, whether they cover or include the facts of the problem. (b)
If the relevant law is case law, you must explain why the case law is relevant to the facts of your problem. You should make use of the principles known as the doctrine of precedent to do this.
4.
Provide argument. It is necessary to consider the law from both parties’ points of view. Sometimes the law can be interpreted in different ways for argument’s sake; sometimes the relevant cases differ in their interpretations of the law. One side might choose one interpretation, the other side, another. The best answers show an understanding of these differences.
5.
Do the same for each issue.
6.
Draw a reasoned conclusion from your preceding arguments. You should try to decide in favour of one of the parties.
EXAMPLE Hacker and McIntosh owned a small computer company, Honeypot Pty Ltd, which produced specialised software programs. Hacker acted as the managing director even though he had never actually been appointed. One contract he entered into on behalf of Honeypot was for $50,000 worth of hardware from BIM. At the time, the sales manager at BIM suspected
TIPS ON STUDYING
XVII
Honeypot was in trouble so he obtained guarantees from Hacker and McIntosh, to protect BIM’s position. When Honeypot failed, Hacker and McIntosh realised that as guarantors they would have to pay the $50,000 (as the company had no assets). They desperately sought a way out and were delighted when they remembered that Hacker had no real authority to enter into the contract on Honeypot’s behalf. Therefore, they thought the contract was unenforceable. Assuming that the manner in which the contract has been executed is not in contention, will Hacker and McIntosh be liable for the $50,000 under their personal guarantees? Explain. SUGGESTED ANSWER The issue The legal issue in the dispute concerning Honeypot Pty Ltd and BIM is: “When is a company bound in contract by a person who purported to represent the company, but who in fact has no authority to do so?” Relevant law The argument would centre on interpretation of ss 128–129 of the Corporations Act, and the cases of Freeman & Lockyer and Brick & Pipe. Main legal principle Section 129 lists certain assumptions that a person dealing with a company (in this case, BIM) is entitled to make. The relevant assumption in this problem is s 129(3)(c), which says: that a person may assume that anyone who is held out by the company to be an officer ... of the company has been duly appointed and has authority to exercise the powers ... customarily exercised ... by that kind of officer — of a similar company. Argument on the facts It would seem that Hacker was held out by Honeypot to be managing director as the facts state that “Hacker acted as managing director”. It is likely that Hacker would have entered into other contracts on behalf of Honeypot before the contract between Honeypot and BIM was established. If this was the case, then it would appear to outside parties that Hacker did hold the position of managing director at Honeypot. As Hacker and McIntosh are equivalent to the company, being at such a senior level (owners) that their state of mind is regarded as that of the company’s, BIM has held out Hacker to be managing director. Therefore, BIM is entitled to make the assumption that Hacker is authorised to act on its behalf as it would normally be within a managing director’s powers to enter into a contract for $50,000. Supporting cases Cases which support this view are Freeman & Lockyer and Brick & Pipe. In both cases it was held that the company was bound to a contract entered into by a person who was not properly appointed as managing director. The court said that as the company had allowed the person to act as managing director, the company was estopped from denying that representation.
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CORPORATIONS LAW: IN PRINCIPLE
Second principle and opposing argument However, it is not always the case that an outsider can rely on the statutory assumptions in s 129. Section 128(4) contains a proviso that these assumptions cannot be made if at the time of the dealings they “knew or suspected” that the assumption in s 129(3) was incorrect. Application of the second principle If s 128(4) applies, then the assumption in s 129(3) cannot be relied upon and, therefore, the contract between Honeypot and BIM will be unenforceable because of the absence of (substantive) authority. It is mentioned that the sales manager of BIM “suspected” Honeypot was in financial trouble and so obtained guarantees from Hacker and McIntosh. However, there does not appear to be any evidence that he knew or suspected that the assumption in s 129(3) was incorrect — that is, that Hacker was not duly appointed as Honeypot’s managing director with authority to enter such a contract. It is therefore arguable that the exception in s 128(4) will not apply to BIM. Conclusion In conclusion, it would seem most likely that BIM will, by reliance on the assumption in s 129(3), be able to enforce its contract with Honeypot. On balance, it is unlikely that the knowledge of BIM’s sales manager would be sufficient to bring the exception into play. If Honeypot has insufficient assets to meet its obligations under the contract, then Hacker and McIntosh will be liable for any shortfall in the $50,000 under their personal guarantees. NOTES Be careful to read the question closely. The reference in the question to “Assuming that the manner in which the contract has been executed is not in contention”, tells you not to spend valuable time discussing the ways a company can execute a contract — that is, formal authority, ss 126–127. The lecturer has deliberately narrowed the scope of the question (possibly because of the amount of time there might be in the exam to spend on this question), to a consideration of the issue of authority (that is, substantive authority). The question raises a very contentious point namely, how will the exceptions in s 128(4) be interpreted: see Chapter 7. There is no clear answer to this especially on the facts given. Remember, marks are awarded for: • identifying that the law is unclear; and • expressing a considered opinion, whether or not the lecturer would take the same view. The length (and detail) of the answer should reflect the proportion of marks allocated to the question. If more time was allowed, the cases could be discussed in more detail. However, the basic structure should still be followed. Short headings are a helpful way to guide the marker (for example, “Issue”, “Relevant Law”, “Conclusions” etc).
.......................................................................................................
History, Administration and Reform Useful Websites ......................................................................... 1 Recent Developments ................................................................ 1 Aim ............................................................................................. 2 Principles ................................................................................... 2 Pre-1991 ........................................................................................ 3 Corporations Law scheme – 1991-2001 ................................................. 4 Referral of powers to the Commonwealth July 2001 – Corporations Act 2001 (Cth) ...................................................................................... 6 Reform programs post-1991 ............................................................... 7 Australian Securities and Investments Commission (ASIC) ....................... 15 Office of the Registrar of Indigenous Corporations and the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) .............................. 27 Mentor: Test your Knowledge ................................................. 28 Practice Questions ................................................................... 29 Essay Questions ...................................................................... 29 Further Reading ....................................................................... 29
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of History, Administration and Reform.)
Recent Developments ...................................................................................................................................... Australian Securities and Investments Commission
Consultation Paper 256: Remaking and repealing ASIC class orders on trustee company common funds (March 2016) Consultation Paper 255: Remaking ASIC class orders on financial services disclosure requirements (March 2016) Consultation Paper 254: Regulating digital financial product advice (March 2016)
Chapter 1
CHAPTER 1
2
CORPORATIONS LAW: IN PRINCIPLE
Consultation Paper 253: Remaking and repealing ASIC class orders on dollar disclosure (February 2016) Consultation Paper 252: Remaking ASIC class order on share and interest sale facilities (February 2016) Corporations Act Amendments
Corporations Legislation Amendment (Audit Enhancement) Act 2012 (Cth) Corporations Amendment (Proxy Voting) Act 2012 (Cth) Corporations Legislation Amendment (Financial Reporting Panel) Act 2012 (Cth) Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012 (Cth) Corporations Legislation Amendment (Derivative Transactions) Act 2012 (Cth) Personal Liability for Corporate Fault Reform Act 2012 (Cth) Corporations and Financial Sector Legislation Amendment Act 2013 (Cth) Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth) Corporations Legislation Amendment (Deregulatory and Other Measures) Act 2015 (Cth) Corporations Amendment (Financial Advice Measures) Act 2016 (Cth)
Aim ...................................................................................................................................... At the end of this topic you should know: • how the Corporations Law came into existence and how the scheme worked from 1991 until 2001; • why it was replaced by a Commonwealth Corporations Act; • the role and functions of the Australian Securities and Investments Commission (ASIC); and • the major reform programs that have occurred and the process for future reforms.
PRINCIPLES Companies are artificial creations. Characteristics of companies which we now take for granted were acquired gradually over a long period of time. Australia has adopted several different legislative approaches to the regulation of companies over the years. From 15 July 2001, a truly national regulatory scheme has finally been put in place. It is important for you to have some knowledge of the evolution of the legislation in order to be able to understand the cases and the reasons why it has been necessary for the States to pass legislation referring certain powers to the Commonwealth government
[1.10]
1
HISTORY, ADMINISTRATION AND REFORM
3
allowing it to enact the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). [1.20] Figure 1.1: Evolution of national regulatory scheme ....................................................................................................
Pre-1991 Constitutional difficulties .......................................................................................................................................................................
In Australia, the administration of company law has been complicated by our political system. The States are sovereign; they can make their own laws except in relation to those matters which the Commonwealth Constitution states to be within the legislative powers of the Commonwealth government. Section 51(xx) of the Constitution gives the Commonwealth government a limited power to make laws with respect to “foreign corporations and trading or financial corporations formed within the limits of the Commonwealth”, but power to legislate for the registration (that is, the formation) of corporations belongs to the States: see New South Wales v Commonwealth (1990) 169 CLR 482. However, the States can “refer” their powers to the Commonwealth and did so in this case. Originally, each State passed and administered its own Companies Act. However, it was realised over time that a national scheme was necessary. Companies wishing to raise funds or conduct business on a national basis were frustrated by the need to meet different requirements in each State. This lack
[1.30]
Chapter 1
CHAPTER
4
CORPORATIONS LAW: IN PRINCIPLE
of legislative and administrative uniformity combined with multiple regulators was also hampering supervision of the share markets and, thus, prejudicing investor protection. Co-operative scheme – 1979-1990 .......................................................................................................................................................................
Moves to enact uniform companies legislation to overcome these difficulties began in the 1960s, but uniformity was not achieved until the introduction of the Co-operative Scheme in 1979. Under this scheme the Commonwealth Parliament passed a package of legislation regulating companies and securities that applied directly in the Australian Capital Territory. Each State then passed statutes applying the Commonwealth Acts as part of the laws of that State. The existing State bodies (Corporate Affairs Commissions) administered the routine aspects of the new scheme, while the National Companies and Securities Commission (NCSC) was responsible for policy decisions and the regulation of takeovers and securities. By the end of the 1980s, it was clear that there were serious defects in the Co-operative Scheme. Despite increasing pressure for a national scheme, the Commonwealth had to struggle to assert supremacy. In 1989 the then Commonwealth (Labor) government attempted to enact legislation to cover the field of incorporation and regulation of companies. However, the validity of the Corporations Act 1989 (Cth) was successfully challenged in the High Court by the States of New South Wales, South Australia and Western Australia: New South Wales v Commonwealth (1990) 169 CLR 482.
[1.40]
Corporations Law scheme – 1991-2001 Evolution .......................................................................................................................................................................
After this decision, it was recognised that a compromise was required. The compromise (known as the Alice Springs Agreement) resulted in the Commonwealth Parliament passing an amendment to the Corporations Act 1989 (Cth) to apply it in the Australian Capital Territory. Each State and the Northern Territory agreed to adopt the Commonwealth legislation by passing an Application Act. The amended legislation, once adopted, became known as the “Corporations Law”. Thus, in this respect, the Corporations Law scheme that applied until 15 July 2001 was similar to the Co-operative Scheme it replaced. The Corporations Law scheme was distinguished from the earlier Cooperative Scheme because in 1991, for the first time, the Commonwealth government gained control of the administration, enforcement and (to a large
[1.50]
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extent) reform of corporate law. From 1991, administration and enforcement has been carried out by the Australian Securities and Investments Commission (ASIC) which is responsible to the Commonwealth Attorney-General. Operation of the Corporations Law scheme .......................................................................................................................................................................
Several provisions were enacted to ensure that the Corporations Law scheme would operate in a truly national way (as distinct from the Co-operative Scheme). For example, a national regulator (ASIC) was in sole charge of administration and enforcement of the legislation and it was not necessary for each jurisdiction to pass amending legislation each time the Corporations Law was amended (each State's Application Law applied the Corporations Law “as in force for the time being”). This “federalising” of the Corporations Law scheme was expressly embodied in s 26(a) of each State's Act. This section provided that the Corporations Law of each jurisdiction was to be:
[1.60]
administered and enforced on a national basis, in the same way as if those Laws constituted a single law of the Commonwealth.
As mentioned earlier, the Corporations Law scheme gave the Commonwealth Government the most important role to play in reform programs. Soleresponsibility for reforms to national markets (that is, securities, takeovers, futures and public fundraising) was given to the Commonwealth Government, although the advice of the Ministerial Council (which included the State Attorneys-General) was required to be tabled when such reforms were introduced in the Commonwealth Parliament. Although reforms in other areas required the approval of the Ministerial Council, the Commonwealth Government was not obliged to introduce any proposals with which it did not agree. Thus, the States could use the Ministerial Council to block reforms in certain areas, but they could not use it to force changes that the Commonwealth did not agree with. Constitutional challenges .......................................................................................................................................................................
Several cases, notably Re Wakim; ex parte McNally (1999) 198 CLR 511, Bond v R (2000) 201 CLR 213 and R v Hughes (2000) 202 CLR 535 indicated that the High Court doubted the constitutional validity of the Corporations Law scheme. In Re Wakim, the High Court held that the cross-vesting legislation, under which State jurisdiction to hear corporate law matters had been conferred on federal courts, was unconstitutional. Even though both the Commonwealth and the States had agreed to the scheme, under the Commonwealth Constitution the States had no power to pass this legislation. Following this decision, the States were forced to pass legislation [1.70]
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validating all earlier decisions of the Federal Court in Corporations Law matters: see, for example, Federal Courts (Consequential Amendments) Act 2000 (Vic), Pt 4. Cases in progress were transferred to State Supreme Courts. The decisions in Bond v R and R v Hughes raised issues about the constitutionality of aspects of the administration of the Corporations Law, the powers of ASIC and the Commonwealth Director of Public Prosecutions (DPP). In 2007, the Takeovers Panel's ability to hear and determine applications for unacceptable circumstances made under s 657A(2)(b) of the Corporations Act 2001 (Cth) was challenged on grounds that the Takeovers Panel was exercising judicial powers of the Commonwealth. Under the Australian Constitution, a court can only exercise Commonwealth judicial powers. The Full Federal Court held by a 2:1 majority that applications dealing with unacceptable circumstances under s 657 amounted to an exercise of Commonwealth judicial power and under the Commonwealth Constitution only a court could determine the matter: Australian Pipeline Ltd v Alinta Ltd (2007) 159 FCR 301. On appeal, the High Court upheld the validity of s 657A(2)(b), including the Takeover's Panel jurisdiction to hear and determine such applications: Attorney-General (Cth) v Alinta Ltd (2008) 233 CLR 542.
Referral of powers to the Commonwealth July 2001 – Corporations Act 2001 (Cth) The successful constitutional challenges in Re Wakim; ex parte McNally (1999) 198 CLR 511 and the other cases mentioned in [1.70] caused widespread uncertainty for the Australian and the international business community. Pressure from business led the Commonwealth and the States to reach an inter-governmental reference agreement on 21 December 2000 to resolve these constitutional difficulties by the States passing legislation referring the following powers to the Commonwealth Parliament:
[1.80]
• the power to make laws in respect of corporations; and • the power to make amendments to those laws. The wording of the referral has been carefully limited to ensure that it cannot be used by the Commonwealth except for the purposes of corporations law. A sunset clause provides that the referral will operate for five years and will then terminate unless extended by the States. At a meeting of the Ministerial Council on 5 November 2004, the States and the Northern Territory agreed
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unanimously to extend the referral of power until 2011. The legislation contains an additional safeguard specifically providing that the power given to the Commonwealth under this referral cannot be used for regulating industrial relations. This legislation was passed by all the States and the new scheme commenced on 15 July 2001 when the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) came into force. The substance of these statutes is largely the same as that of the former Corporations Law and ASIC Act. The inter-governmental reference agreement was formalised in the Corporations Agreement 2002, entered into on 17 December 2002 between the Commonwealth, the States and the Northern Territory (replacing the Alice Springs Agreement). This Agreement sets out the political basis of the scheme regulating corporations and the financial services industry. The Commonwealth has agreed not to amend the Corporations Act without prior consultation with the Ministerial Council and, in most cases, obtaining the approval of the Ministers of at least three States. Similar amendments to the former Corporations Law required the approval of the Ministerial Council.
Reform programs post-1991 As well as the constitutional reforms made to the Corporations Law Scheme itself in 2001 by the referral of powers to the Commonwealth, it is important to be aware of the extensive reform programs to the substance of the legislation implemented since 1991. From its introduction, the provisions of the Corporations Law underwent almost annual reform. Some of the reforms were substantive, while others were aimed at simplifying the legislation and making sure that it used plain English wherever possible. The following table summarises the major amending Acts between 1991 and 2016. The two major reform programs (the Corporations Law Simplification Program and the Corporate Law Economic Reform Program) are then discussed. [1.90]
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[1.100] TABLE 1.1 Reforms to the Corporations Law 1991-2016 Legislation Corporations Legislation Amendment (Financial Services Modernisation) Act 2009 (Cth)
Main provisions affected the Amendment Act on financial services introduces new measures on margin lending, trustee companies and debenture regulation: • margin loans to be included as financial products for the purposes of Ch 7
•
•
Initiated by Council of Australian Governments (COAG) reached an in-principle agreement on 26 March 2008 to assume responsibility for regulating mortgage credit and advice, margin loans and trustee companies. Treasury issued the Green Paper Financial Services and new Ch 5D to be introduced Credit Reform (June 2008). to transfer regulation of trustee companies from the States and Territories to the Commonwealth introduces amendments designed to harmonise the regulation of debentures and promissory notes and create a debentures trustee
Corporations Amendment (Financial the Amendment Act on financial market supervision transfers Market Supervision) Act 2010 supervisory oversight of the (Cth) listed Australian securities markets from the Australian Securities Exchange (ASX) to ASIC
Corporations Amendment (Improving Accountability on Termination Payments) Act 2010 (Cth)
introduces amendments to improve the regulatory framework for executive pay. The reforms address growing community concern on the payment of termination benefits that were considered to be excessive, especially in light of the onset of the Global Financial Crisis (GFC) the Amendment Act provides for a “two strikes and re-election” process when a company's remuneration report receives a 25% or more “no” vote in two consecutive years
Treasury and the Council of Financial Regulators released a consultation paper on proposals to enhance the supervision of Australia's financial markets and their related infrastructure. It was considered that reforms to the supervisory oversight of Australian listed companies were necessary to preserve the integrity of financial markets and to promote the ability of market regulators to maintain robust oversight in all market conditions. Productivity Commission, Executive Remuneration in Australia (January 2010). Recommendations were made by the Productivity Commission which were designed to strengthen the corporate governance framework regulating the payment of termination benefits and executive remuneration for directors and company executives
Legislation Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth)
Corporations Amendment (Sons of Gwalia) Act 2010 (Cth)
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Main provisions affected introduces amendments designed to improve Australia's corporate reporting framework by reducing regulatory burden and overlap on companies, improving disclosure requirements and implementing a number of changes designed to improve corporate reporting including: • changes to the requirement for the payment of dividends from a profits-based test to a solvency test under a revised s 254T
•
changes to the reporting of parent-entity financial statements so that were accounting standards require an entity to prepare financial statements in relation to a consolidated entity, separate financial statements do not have to be prepared in relation to the entity itself
•
allow companies to change their annual reporting period provided it is in good faith and in the best interests of the company
•
listed registered schemes will be required to provide financial reports to their members under s 299A of the Corporations Act
introduces amendments to the rights of members bringing claims for damages in relation their shareholdings under the Corporations Act the amendments contained in the Corporations Amendment (Sons of Gwalia) Act 2010 (Cth) overturn the High Court's ruling in Sons of Gwalia Ltd v Margaretic (2007) 232 ALR 232
9
Initiated by Australian Accounting Standards Board (AASB), The Relevance of Parent Entity Financial Report (2003) (investigated the relevance of existing financial reporting arrangements for a consolidated entity) In 2002, the Australian Accounting Research Foundation (AARF) released a discussion paper recommending that Australia move away from the current profits based test for the payment of dividends and move towards a solvency based requirement. This was to ensure that Australian companies were aligned with other comparative jurisdictions when assessing the payment of a dividend.
The High Court in Sons of Gwalia Ltd v Margaretic (2007) 232 ALR 232 held that shareholder claims in the form of monetary compensation for torts would not be postponed by s 563A of the and instead would rank equally with unsecured creditors. The High Court's decision generated considerable concern, especially for companies that were reliant on creditor support and funding for their day-to-day operations. The Corporations Amendment (Sons of Gwalia) Act 2010 (Cth) sought to overturn the High Court's ruling and was based on proposals announced by the Minister for Financial Services and Corporate Law in a media release dated 19 January 2010.
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Legislation Corporations Amendment (No 1) Act 2010 (Cth)
Main provisions affected amends the ASIC Act to allow ASIC a number of procedural investigative powers including the ability to conduct a search of premises by applying for a search warrant also makes changes to s 1019G of the Corporations Act so that any unsolicited offer that is made to purchase financial products off-market must remain open for at least one month from the date of the offer also made changes to the magnitude of penalties that can be imposed for breaches of the insider trading and market misconduct provisions contained in Pt 7.10 of the Corporations Act Personal Property Securities Act the PPS Act introduces amendments to the Corporations 2009 (Cth) (PPS Act) Act in relation to registrable Personal Property Securities charges, the vesting of security (Corporations and Other interests as well as the liability of Amendments) Act 2010 (Cth) voluntary administrators. The PPS legislation will harmonise the current Commonwealth, state and territory laws on securities in personal property. The PPS legislative regime creates one single national set of rules and a single national online register Personal Property Securities the Personal Property Securities (Corporations and Other (Corporations and Other Amendments) Act 2011 (Cth) Amendments) Act 2010 (Cth) and Personal Property Securities (Corporations and Other Amendments) Act 2011 (Cth) contain consequential amendments arising from the PPS Act following an inquiry by the Senate Standing Committees on Legal and Constitutional Affairs Corporations and Other Legislation amends the Corporations Act to Amendment (Trustee Companies create a new administrative and Other Measures) Act 2011 process for the voluntary transfer (Cth) of estate assets and liabilities from a transferring entity which generally involves a trustee company previously authorised under State or Territory legislation to be a trustee company prescribed by the Corporations Regulations 2001 (Cth) Corporations (Fees) Amendment Act amends the Corporations Act to 2011 (Cth) allow ASIC to impose fees on market licensees in relation to ASIC's market supervisory functions
Initiated by Full Federal Court decision in National Exchange Pty Ltd v ASIC [2005] FCAFC 226 which held that existing provisions (s 1091G) were ambiguous
Commonwealth Attorney General, Discussion Paper No 1 on Personal Property Securities (November 2006); Discussion Paper No 2 on Personal Property Securities (March 2007); Discussion Paper No 3 on Personal Property Securities (April 2007)
Council of Australian Governments (COAG) initiative designed to improve regulation of trustee companies under a single national regulatory regime
proposals introduced by CLERP 7 reforms
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Legislation Corporations Amendment (Future of Financial Advice Measures) Act 2012 (Cth)
Main provisions affected introduces amendments to the Corporations Act to require financial advisers to act in the best interests of their clients, to avoid conflicts of interest and to prohibit the payment of commissions which have the potential to cause conflicts of interest
Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Cth)
amends the Corporations Act to provide ASIC with the power and authority to undertake the winding up of a company that has been deemed abandoned in certain circumstances an Act to amend the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, and for related purposes. Amendments enable directors of a listed company or listed registered scheme to extend the auditor rotation period for up to two years in certain circumstances; and require auditors who audit 10 or more certain types of entities to publish a transparency report amends the Corporations Act 2001 to clarify that the chair of an annual general meeting, who is a member of the key management personnel or a closely related party of a key management personnel, is able to vote undirected proxies in the non-binding vote where the shareholder provides their express authorisation for the chair to exercise the proxy. amends the law relating to corporations to repeal provisions relating to the Financial Reporting Panel, and for related purposes
Corporations Legislation Amendment (Audit Enhancement) Act 2012
Corporations Amendment (Proxy Voting) Act 2012
Corporations Legislation Amendment (Financial Reporting Panel) Act 2012
11
Initiated by Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into Financial Products and Services in Australia (2009). The Joint Committee considered a variety of issues associated with the recent corporate collapses involving financial advisers, Storm Financial and Opes Prime. ASIC Consultation Paper 180: ASIC's ability to wind up abandoned companies (July 2012)
Followed the 2010 strategic review of audit quality in Australia by Treasury.
Followed reforms, which were introduced to strengthen Australia's remuneration framework via the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011.
The Financial Reporting Panel operated between 2009-2012 with its function to resolve disputes between ASIC and companies concerning accounting treatments in their financial reports. The Corporations Legislation Amendment (Financial Reporting Panel) Act 2012 abolished this panel.
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Legislation Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012
Corporations Legislation Amendment (Derivative Transactions) Act 2012
Personal Liability for Corporate Fault Reform Act 2012
Main provisions affected changes the law relating to securities issued by the Commonwealth and beneficial interests in such securities, and for related purposes. Amendments to the Corporations Act 2001 were made to ensure that the investor protection and market integrity provisions in the Corporations Act apply to the CGS retail market amends the law relating to transactions in derivatives, and for other purposes. The amendments to the Corporations Act 2001 allow the minister to prescribe certain types derivatives amends the law relating to personal liability for offences committed by corporations, and for related purposes
Corporations and Financial Sector Legislation Amendment Act 2013
amends the law relating to corporations and the financial sector, and for other purposes
Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014
amends the law relating to corporations, and for other purposes
Corporations Legislation Amendment (Deregulatory and Other Measures) Act 2015
amends the law relating to corporations, and for related purposes
Corporations Amendment (Financial amends the law in relation to financial products and financial Advice Measures) Act 2016 advice, and for related purposes
Initiated by As part of broader Government reforms to encourage the local and foreign investor market.
Followed a commitment made by the Australian Government at the G-20 summit in Pittsburgh in 2009, to reform practices in over the counter (OTC) derivative markets. Followed the Council of Australian Governments' Director's Liability reform recommendations (COAG Reform). The changes to the Corporations Act 2001 replaced criminal liability for company secretaries and directors for offences under s 188 with a civil liability, together with relevant civil penalties. The implementation of this Act followed the framework established by the Corporations Legislation Amendment (Derivative Transactions) Act 2012 on over-the-counter derivatives market reform. Reforms introduced by Treasury in order to stimulate and grow a retail debt market in Australia. It aims to simplify regulation governing “simple corporate bonds” with respect to disclosure and removes the presumptive civil liability for directors of issuers of simple corporate bonds under a defective prospectus. Initiated by Treasury as part of overall reforms, the Act effected changes to the Corporations Act 2001 with respect the holding of general meetings; remuneration reporting; auditor appointment for companies limited by guarantee and to changes in financial years. Part of the Future of Financial Advice (FoFA) reforms which are focused on improving the quality of advice and enhancing retail investor protection.
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Simplification Task Force .......................................................................................................................................................................
From 1993-1997, the most important initiatives for reform came before the Commonwealth Parliament as a result of work undertaken by the Corporations Law Simplification Task Force. This Task Force was established in October 1993 by the then Commonwealth Attorney-General, Michael Lavarch. The central objective of the program was:
[1.110]
to simplify the Corporations Law and make it capable of being understood so that users can act on their rights and carry out their responsibilities.
For the first time, emphasis was placed on testing draft proposals with representatives of Corporations Law user groups. The Task Force was responsible for the introduction of the First Corporate Law Simplification Act 1995 (Cth), drafting the Second Corporate Law Simplification Bill 1996 (Cth) and preparing a discussion paper on the Third Corporate Law Simplification Proposals. The Second Corporate Law Simplification Bill 1996 (Cth) was (with some modifications) implemented as the Company Law Review Act 1998 (Cth). The Third Corporate Law Simplification Proposals, together with other matters, were taken up in the draft Bills prepared by the Corporate Law Economic Reform Program (CLERP). The Task Force not only redesigned the layout and improved the language of the Corporations Law, but also scrutinised many of the fundamental underlying concepts, such as the need for at least two shareholders and two directors, and concepts relating to share capital. Corporate Law Economic Reform Program .......................................................................................................................................................................
Following the change of government that took place in 1996 when Labor lost the federal election to the Coalition, responsibility for the Corporations Law was transferred from the Commonwealth Attorney-General's Department to the Commonwealth Treasury. The Simplification Task Force was subsequently disbanded and the Corporate Law Economic Reform Program initiated. The primary focus of CLERP has been to develop policy in a wider economic framework – giving greater consideration to the interaction between policies on corporate law, taxation, financial institutions and competition. The key principles which underpin CLERP proposals are:
[1.120]
• cost/benefit analysis of new legislative proposals as against existing law; • the development of a regulatory, legislative framework that is consistent, flexible, adaptable and cost effective; • the reduction of transaction costs for firms and market participants;
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• the provision of an appropriate balance between government regulation and industry self-regulation; • the removal of barriers to entry for service providers; and • the improved harmonisation of Australia's regulations and laws applying in major world financial markets. (CLERP Strategy Document, 4 March 1997.) As with the Simplification Program, the CLERP reforms have been developed in consultation with business, industry and consumer bodies. In particular, there is input from the Business Regulation Advisory Group. This Group consists of representatives of peak business groups such as the Australian Institute of Company Directors, the Australian Securities Exchange (ASX) and the Business Council of Australia. The reforms made by the Corporate Law Economic Reform Program Act 1999 (Cth) included important changes to directors' duties and to members' remedies, notably the introduction of the statutory business judgment rule, and the statutory derivative action, as well as changes to the rules governing accounting standards, fundraising and takeovers. The CLERP 7 reforms that came into force on 1 July 2003 have simplified and reduced compliance and lodging requirements, especially for small companies, and have facilitated greater use of electronic lodgment procedures. The requirement for all companies to lodge an annual return has been abolished. Instead, each year ASIC sends each company an annual review statement with an extract of particulars (showing the company's details on the ASIC database) and an invoice for the annual review fee. If there have been no changes to the company's details as shown in the extract, it pays the annual review fee but does not have to lodge any paperwork. CLERP 8 ....................................................................................................................................................................... [1.130] Cross-Border Insolvency: Promoting International Co-operation and Co-ordination (CLERP 8) sets out the Commonwealth's plans to adopt an international model law on cross-border insolvency. This model was developed by the United Nations Commission on International Law and is intended to improve the existing procedures allowing liquidators to trace assets of failed companies overseas and return them to Australia, thereby allowing faster and more efficient administration of cross-border insolvencies. CLERP 8 was open for public comment until the end of 2002. The Cross-Border Insolvency Act 2008 (Cth) was passed by Parliament in May 2008. The Act adopted the recommendations of CLERP 8. The central objectives of the CLERP 8 Act include:
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• improved co-operation between local and foreign courts and foreign insolvency practitioners involved in cross-border insolvency; • greater legal certainty for trade and investment; • fair and efficient administration of cross-border insolvencies; and • the protection and maxminsation of the value of debtor's assets. CLERP 9 .......................................................................................................................................................................
The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) was passed on 25 June 2004 and came into force on 1 July 2004. This legislation puts into effect the reforms recommended by the Report to the Minister of Financial Services and Regulation “Independence of Company Auditors” (The Ramsay Report), the Report of the Joint Committee of Public Accounts and Audit “Review of Independent Auditing by Registered Company Auditors” and the Report of the HIH Royal Commission. The legislation makes major changes to the regulation of auditors and the financial reporting system generally, most importantly by introducing a statutory requirement for auditors to be independent. The Act also strengthens the continuous disclosure provisions applying to listed companies and other companies that come within the definition of “disclosing entity” and allows ASIC to issue infringement notices (similar to “on-the-spot fines”) for breaches of these provisions. Other reforms include a requirement for increased disclosure of executives' and directors' remuneration to shareholders and allowing shareholders to pass non-binding resolutions on these matters at a general meeting.
[1.140]
Australian Securities and Investments Commission (ASIC) Background .......................................................................................................................................................................
The State Companies Acts which preceded the Co-operative Scheme were administered by the State Corporate Affairs Commissions (CACs). Under the Co-operative Scheme, the administrative and regulatory functions were shared between the CACs and the National Companies and Securities Commission (NCSC). Under the Australian Securities Commission Act 1989 (Cth), the Australian Securities Commission (ASC), as it then was, replaced the NCSC and took over the corporate law functions of the CACs. On 1 July 1998, the ASC was renamed the “Australian Securities and [1.150]
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Investments Commission” (ASIC) and given a broader role that includes the regulation of financial services and markets as well as companies: see ASIC Act. [1.160] Figure 1.2: ASIC’s corporate structure ....................................................................................................
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© Australian Securities & Investments Commission. Reproduced with permission. See: ASIC Our Structure @ 9 September 2014, available at http:// asic.gov.au/about-asic/what-we-do/our-structure, accessed 20 March 2016. The Act provides that ASIC is itself a body corporate. It is comprised of between three and eight “members” (not called directors as in companies regulated under the Corporations Act) and headed by a full-time Chair. The current Chair as at March 2016 is Greg Medcraft, who was appointed in May 2011 for a five-year term. To avoid potential Melbourne-Sydney rivalry, ASIC has no head office. It has “main offices” in Sydney and Melbourne, “regional offices” in State and Territory capital cities, “business centres” in other major cities and agencies in some smaller cities throughout Australia. Information can be obtained from the online database and documents can be lodged at all these offices. Aims and functions .......................................................................................................................................................................
ASIC's mission is to achieve maximum credibility for Australian financial and securities markets and, therein, for Australian companies. [1.170]
[ASIC] enforces and regulates company and financial services laws to protect consumers, investors and creditors. … The ASIC Act requires [ASIC] to: • maintain, facilitate and improve the performance of the financial system and entities in it • promote confident and informed participation by investors and consumers in the financial system • administer the law effectively and with minimal procedural requirements • enforce and give effect to the law • receive, process and store, efficiently and quickly, information that is given to [ASIC] • make information about companies and other bodies available to the public as soon as practicable. ASIC is Australia's corporate, markets and financial services regulator. We contribute to Australia's economic reputation and wellbeing by ensuring that Australia's financial markets are fair and transparent, supported by confident and informed investors and consumers. We are an independent Commonwealth Government body. We are set up under and administer the Australian Securities and Investments Commission Act 2001 (ASIC Act), and we carry out most of our work under the Corporations Act 2001 (Corporations Act). See ASIC Our Role, What we do available at: http://www.asic.gov.au/about-asic/what-we-do/our-role.
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The functions and powers of ASIC that are relevant to matters covered by this book are those conferred on it by the Corporations Act and ASIC Act. In general terms, ASIC's main functions are: • enforcement – broadly speaking, ASIC takes civil actions (see s 50 of the ASIC Act) while the Director of Public Prosecutions initiates criminal proceedings following ASIC investigations; • surveillance – ASIC checks compliance with – record-keeping (for example, company registers, consent of directors) – dealers' and advisers' licensing requirements – fundraising and takeover provisions – accounting standards – requirements for display of company name and number – timely lodgment of company documents – existing Industry Codes of Practice (for example, regarding administration of banks and building societies); • investigation; • provision of advice about law reform – changes that are needed to overcome problems it has encountered in performing its functions; • compilation, storage and dissemination of corporate information – ASIC maintains a central database of company information called ASCOT which can be easily accessed. ASIC has also introduced a number of electronic systems encouraging companies to take advantage of the convenience of obtaining information and lodging returns online. These include: – an electronic company registration system (ECR) for registering new companies – online access allowing company officeholders and ASIC-registered agents to check and change company details – an electronic lodgment system (EDGE) for lodging company documents and payment of fees, and – a document imaging system (DOCIMAGE) which digitises copies of all documents lodged with it. These documents are accessible to the public; • regulation of companies, and the financial services industry – see [1.190] for the legislation ASIC is responsible for administering;
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• education – ASIC produces information booklets for the public and newsletters for investment advisors, and issues Regulatory Guides (formerly Policy Statements and Practice Notes) as aids to interpretation of the law; and • monitoring and promoting market integrity and consumer protection in relation to the Australian financial system, the provision of financial services and the payments system – this includes monitoring superannuation, approved deposit and retirement savings accounts via product disclosure, licensing and complaint resolution mechanisms. Strategic Review of ASIC .......................................................................................................................................................................
In July 2015, the federal government announced that a review was to be implemented which would evaluate ASIC's capabilities and its performance of its statutory functions. According to the Australian Government, The Treasury, Media Release, the Terms of reference are: [1.180]
...................................................................................................................... Capability Review of the Australian Securities and Investments Commission (ASIC)
The Government is considering the recommendation of the Financial System Inquiry (Murray Inquiry) for ASIC’s regulatory activities to be funded by industry. To support these considerations, the Government is commissioning a review of ASIC’s capabilities. The review will consider how ASIC uses its current resources and powers to deliver its statutory objectives and assess ASIC’s ability to perform as a capable and transparent regulator. ASIC is a statutory Commonwealth agency, established by the Australian Securities and Investments Commission Act 2001. ASIC’s responsibilities have increased over time to now include regulatory supervision and enforcement of company and financial services laws to protect Australian consumers, investors and creditors. ASIC also has responsibility for the operation of related public information registers. The Murray Inquiry recommended that regulators undertake periodic capability reviews. Capability reviews provide the opportunity to assess a body’s ability to meet future objectives and challenges and support efficient and effective policy development and service delivery through more productive use of resources. The capability review will be led by three experts with extensive public and private sector experience, and supported by a secretariat. The capability review may examine, and make recommendations on how efficiently and effectively ASIC operates to achieve its strategic objectives, including: • identification and analysis of immediate and forward-looking priorities or risks;
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Capability Review of the Australian Securities and Investments Commission (ASIC) cont. • resource prioritisation and responsiveness to emerging issues, including: • how ASIC allocates its current resources among its regulatory tools, such as supervision, surveillance, education, policy, enforcement and litigation; and • how ASIC allocates its current resources across its regulated population; • the skills, capabilities and culture of the Commission and its staff, including in respect of internal review and improvement mechanisms; and • organisational governance and accountability arrangements. The capability review should have regard to how comparable international regulators operate and relevant legislation, including the Public Governance, Performance and Accountability Act 2013. In assessing ASIC’s approach to its statutory objectives, the review may provide observations, but not make recommendations on ASIC’s regulatory framework or powers. See: http://jaf.ministers.treasury.gov.au/media-release/036-2015. The federal government in 2016 announced proposals to introduce a “user-pays” industry funding model for the funding of ASIC as a body. See: http://www.treasury.gov.au/ConsulationsandReviews/ Consultations/2015/Proposed-inducstry-funding-model-for-ASIC.
Relevant legislation ....................................................................................................................................................................... [1.190] Pursuant to its expanded role, ASIC now administers the following legislation:
• Australian Securities and Investments Commission Act 2001 (Cth) • Corporations Act 2001 (Cth) • Business Names Registration Act 2011 (Cth) • Business Names Registration (Transitional and Consequential Provisions) Act 2011 (Cth) • Insurance Contracts Act 1984 (Cth) • Superannuation (Resolution of Complaints) Act 1993 (Cth) • Superannuation Industry (Supervision) Act 1993 (Cth) • Retirement Savings Accounts Act 1997 (Cth) • Life Insurance Act 1995 (Cth) • National Consumer Credit Protection Act 2009 (Cth), and • Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 (Cth).
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21
ASIC also has consumer protection-related functions under other related Acts. For the purposes of this book, we are only concerned with ASIC's role in relation to the administration of the ASIC Act 2001 and the Corporations Act 2001 (Cth). Accountability .......................................................................................................................................................................
The ASIC Act 2001 provides that ASIC is responsible to the Commonwealth Treasurer and, therefore, is ultimately responsible to the Commonwealth Parliament. While it is possible for the Treasurer to give written directions to ASIC (s 12, ASIC Act), they must relate only to policies and priorities, not to particular cases. The Parliamentary Joint Committee on Corporations and Financial Services (formerly the Parliamentary Joint Committee on Corporations and Securities) also has responsibility for supervision of ASIC: Pt 14, ASIC Act. [1.200]
Relevant organisational links .......................................................................................................................................................................
Australian Securities Exchange (ASX)
To assist in the achievement of effective corporate regulation, ASIC has an agreement (called a “Memorandum of Understanding”) with the ASX to share information. ASIC also has another role in relation to the ASX. The ASX itself is a listed company, with ASIC having a supervisory role to monitor compliance by the ASX with the (ASX's own) listing rules. A supervisory Memorandum of Understanding was signed by ASIC and the ASX on 1 July 2004. The intended effect was to increase regulatory co-operation and reinforce confidence in the system regulating the market. Further market consolidation occurred in 2006 with the merger of the Sydney Futures Exchange (SFE) and the ASX. The merger of the two exchanges created a “super” financial market for the trading of futures contracts, derivatives instruments and listed securities. The ASX released a position paper in 2008, ASX Position Paper (May 2008), which explains the role and functions of the ASX. The ASX fulfills its functions as a market supervisor by providing real-time surveillance to detect market manipulation, insider trading and breaches of the continuous disclosure regime. This supervisory role has now been transferred from the ASX to ASIC pursuant to the Corporations Amendment (Financial Market Supervision) Act 2010 (Cth). Treasury and the Council of Financial Regulators released a consultation paper on proposals to enhance the supervision of Australia's financial markets and their related infrastructure. It was considered that [1.210]
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reforms to the supervisory oversight of Australian listed companies were necessary to preserve the integrity of financial markets and to promote the ability of market regulators to maintain robust oversight in all market conditions. Takeovers Panel
ASIC and the Takeovers Panel entered into a Memorandum of Understanding on 20 August 2001. This agreement formalised the existing good working relationship between the two regulators and was intended to ensure that they worked together harmoniously in the future. [1.220]
Australian Competition and Consumer Commission (ACCC)
A Co-operation Agreement was signed by ASIC and the ACCC on 17 July 1998 and updated on 21 December 2004 to reflect the close working relationship developed by these agencies. Under the Agreement, the two agencies will refer complaints to the most appropriate agency, exchange information (where that is permitted by law) and, if required, undertake joint responses to problems in the market. For example, some complaints may involve financial and non-financial services, or both consumer protection and competition issues. The aim is to avoid duplication and reduce administrative costs. [1.230]
Australian Prudential Regulation Authority (APRA) [1.240] APRA is responsible for the prudential supervision of banks, life and general insurance companies and superannuation funds. As part of its expanded role for investments, ASIC has entered into a Memorandum of Understanding with APRA. The agreement provides a framework for enforcement and compliance. Legislation was recently passed by the Commonwealth Parliament in the form of the Financial Sector Legislation Amendment (Review of Prudential Decisions) Act 2008 (Cth). The Amendment Act introduces a court-based process for disqualifying an individual from operating an APRA-regulated entity: Financial Sector Legislation Amendment (Review of Prudential Decisions) Act 2008, Sch 1. Schedule 2 of the Amendment Act harmonises APRA's discretionary powers in a number of Acts commonly referred to as the “Prudential Acts”. Schedule 3 removes ministerial consent from a number of administrative decisions made by APRA. Schedule 4 amends each of the Prudential Acts to expand the availability of merits review for administrative decisions made by APRA or the Australian Taxation Office (ATO).
1
HISTORY, ADMINISTRATION AND REFORM
23
Commonwealth Director of Public Prosecutions [1.250] There is an overlap between ASIC's powers to begin criminal proceedings and similar powers granted to the Commonwealth Director of Public Prosecutions (DPP). Following some tension between these agencies, guidelines were established. As well as ensuring regular communication, the guidelines require ASIC to consult with the DPP before taking any civil enforcement action, where a criminal prosecution may also be available.
Financial Reporting Council
The Financial Reporting Council is responsible for monitoring the process of setting auditing and accounting standards and for monitoring and assessing the arrangements for auditor independence and audit-related disclosure. To assist the Financial Reporting Council and ASIC to discharge their responsibilities in relation to the requirements of the CLERP 9 Act, these agencies entered into a Memorandum of Understanding on 30 June 2004. [1.260]
Corporate regulators in other countries [1.270] ASIC has also signed Memoranda of Understanding with corporate regulators in other countries, including the United States, the United Kingdom, New Zealand, Hong Kong, Italy, France, Malaysia, Germany, Indonesia, Thailand, China, Brazil and Canada. These agreements aim to co-ordinate enforcement where transactions occur outside Australia, and thereby enhance investor protection.
Other bodies .......................................................................................................................................................................
The ASIC Act also establishes several other bodies that have a role to play in the administration of the Corporations Act 2001 (Cth).
[1.280]
Corporations and Markets Advisory Committee (CAMAC)
CAMAC was established as the principal advisory body on the administration of the Corporations Act and any requirements for legislative reform. The committee produced a number of reports which have been the impetus for reform: see Table 1.1 at [1.100]. CAMAC provided submissions on law reform proposals (such as the Simplification and CLERP proposals), as well as initiating its own reports and proposals for reform. It reported on derivatives, voluntary administrations and corporate groups. See ss 146 – 168 of the ASIC Act. In the context of the Federal Government's Smaller and More Rational Government Reform Agenda, the Federal Government as part of the [1.290]
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2014–15 Budget announced its decision to cease the operation of CAMAC and its legal committee. The Australian Securities and Investments Commission Amendment (Corporations and Markets Advisory Committee Abolition) Bill 2014 was introduced on 4 December 2014 and is currently before the Senate. Takeovers Panel
The Takeovers Panel is the primary forum, which resolves disputes in relation to takeover bids until a bid period has ended. The panel has two major roles: [1.300]
• to make declarations of “unacceptable circumstances” under s 657A of the Corporations Act 2001 (Cth) and orders under s 657D of the Corporations Act 2001 (Cth) in order to remedy those relevant circumstances; and • to review decisions of ASIC under s 656A of the Corporations Act 2001 (Cth) and during a takeover bid under s 673 of the Corporations Act 2001 (Cth). In 2007 the Takeovers Panel's power to accept and determine applications for “unacceptable circumstances” made under s 657A(2)(b) of the Corporations Act was challenged in the Federal Court and doubt was cast on whether the Panel could hear and make such determinations. On appeal the High Court of Australia in Attorney-General (Cth) v Alinta Ltd [2007] HCATrans 308 determined that the Takeovers Panel could hear and determine applications made under s 657A(2)(b) because such applications did not involve an exercise of the Commonwealth's judicial power. Companies Auditors and Liquidators Disciplinary Board (CALDB)
The Companies Auditors and Liquidators Disciplinary Board (CALDB) took over the disciplinary role from individual State and Territory bodies under the Corporations Law Scheme. CLERP 9 Act. The Board can, on application from ASIC and after a hearing conducted by a Panel, cancel or suspend the registration of, or impose monetary penalties on, an auditor or liquidator who has failed to carry out her or his duties properly, or is otherwise unfit to remain registered. [1.310]
Parliamentary Joint Committee on Corporations and Financial Services
The Parliamentary Joint Committee on Corporations and Financial Services (formerly the Parliamentary Joint Committee on Corporations and Securities) comprises five Senators and five members from the Commonwealth House of Representatives. While primary responsibility for ASIC rests with [1.320]
1
HISTORY, ADMINISTRATION AND REFORM
25
the Treasurer, the Committee provides additional parliamentary supervision. It reviews ASIC's Annual Report and is sometimes asked to consider proposed legislation. Treasury [1.330] The Commonwealth Treasury represents another important and powerful body which both advises and instigates proposals for reform of the Corporations Act 2001 (Cth). In 2015/2016, Treasury released the following discussion/exposure drafts with respect to Corporations Law for further consultation and review:
• Objective of superannuation (9 March 2016) – Discussion Paper • Extending unfair contract term protections to small businesses (4 March 2016) – Consultation Paper • Crowd-sourced equity funding (22 December 2015) – Exposure Draft • Raising professional standards of financial advisers (3 December 2015) – Draft Legislation • Regulations to implement foreign investment reforms (13 October 2015) – Exposure Draft • Draft legislation to implement in Australia the OECD's common reporting standard for the automatic exchange of financial account information (18 September 2015) – Exposure Draft • Proposed industry funding model for the Australian Securities and Investments Commission (28 August 2015) – Consultation Paper • Facilitating crowd-sourced equity funding and reducing compliance costs (4 August 2015) – Consultation Paper • Implementing foreign investment reforms (6 July 2015) – Exposure Draft • OTC derivatives central clearing and single-sided trade reporting (28 May 2015) – Draft Regulations • Proposed financial institutions supervisory levies 2015-16 (20 May 2015) – Discussion Paper • Modernising Australia's foreign investment framework (18 May 2015) – Options Paper • ASIC market supervision cost recovery arrangements July 2015 – June 2016 (15 May 2015) – Invitation to Comment • Reforms to the scrip for scrip roll-over (29 April 2015) – Exposure Draft • Lifting the professional, ethical and education standards in the financial services industry (25 March 2015) – Consultation Paper
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• Australian Small Business and Family Enterprise Ombudsman (11 March 2015) – Exposure Draft • Strenghtening Australia's foreign investment framework (25 February 2015) – Consultation Paper • Resolution regime for financial market infrastructures (20 February 2015) – Proposals Paper [1.340] Figure 1.3: Corporations law bodies – corporations law scheme ....................................................................................................
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HISTORY, ADMINISTRATION AND REFORM
27
Office of the Registrar of Indigenous Corporations and the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) Similar to ASIC, Office of the Registrar of Indigenous Corporations (ORIC) is an independent Commonwealth statutory body. The Registrar of ORIC is appointed by the Minister for Indigenous Affairs under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act). The CATSI Act is perceived as a measure for the advancement and protection of Aboriginal peoples and Torres Strait Islanders. The objects of the CATSI Act stated in ss 1 – 25 are to: [1.350]
(a)
provide for the Registrar of Aboriginal and Torres Strait Islander Corporations; and
(b)
provide for the Registrar's function and powers; and
(c)
provide for the incorporation, operation and regulation of those bodies that is appropriate for this Act to cover; and
(d)
without limiting paragraph (c) – provide for the incorporation, operation and regulation of bodies that are incorporated for the purpose of becoming a registered native title body corporate; and
(e)
provide for the duties of officers of Aboriginal and Torres Strait Islander corporations and regulate those officers in the performance of those duties. The CATSI Act is streamlined alongside the Corporations Act 2001 (Cth) and is viewed as a move forward in the empowerment of Indigenous Australians. It is said to be consistent with Australia's endorsement on 3 April 2009 of the 2007 United Nations General Assembly Declaration on the Rights of Indigenous Peoples in terms of granting Indigenous Australians control of their economic futures. Importantly, the CATSI Act not only promotes modern corporate governance standards for Indigenous corporations but also acknowledges the special risks and requirements of the Indigenous corporate sector. ORIC was set up with the key purpose of supporting and regulating corporations incorporated under CATSI, for example corporations under the Native Title Act 1993 and the Native Title (Prescribed Bodies Corporate) Regulations 1999. Some of the functions of ORIC include advising Indigenous business structures on how to incorporate and providing training in good corporate governance to directors, members and officers of the corporation. Importantly, ORIC acts as a check and balance by ensuring that Indigenous corporations comply with the law and in some instances intervene when needed. Through CATSI the Registrar can provide compliance support, provide non-binding advice for dispute management of Indigenous
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corporations, investigate complaints, receive reports from whistle blowers on breaches of CATSI, exercise power to call for general meetings and to call meetings of interested people. Below is an example of an investigation by ORIC in 2016 (extracted from the ORIC website - http://www.oric.gov.au/publications/media-release/ registrar-assists-larrakia-nation).
...................................................................................................................... MR1516-23 – Registrar assists Larrakia Nation
In June 2016, the Registrar of Indigenous Corporations, Anthony Beven, placed the Larrakia Nation Aboriginal Corporation (Larrakia Nation) under special administration. Larrakia Nation is a large community service corporation based in Darwin in the Northern Territory. It’s funded by both the Australian and Northern Territory governments to deliver essential support services and develop business opportunities for local Aboriginal people. Larrakia Nation’s activities include night patrol, homelessness support, land care and sea monitoring through the Larrakia Rangers, and the preservation of the Larrakia people’s culture and knowledge. Larrakia Nation is however best known for its Return to Home program that helps Aboriginal people in Darwin to return to their home communities. In 2013–14 the corporation returned 3,801 people to their communities under the program. In mid-April 2016 concerns were raised with the Registrar about Larrakia’s financial position, which led to the suspension of some activities, including the Return to Home program. On 29 April 2016 the Registrar wrote to the directors of Larrakia Nation explaining ways in which his office could assist. “During May 2016 the Larrakia directors were in almost daily contact with my office as they worked through possible solutions,” said Mr Beven. “The Northern Territory Government also assisted the directors by providing an external accountant to review and report on the finances of the corporation.” On 1 June 2016 a majority of Larrakia’s directors wrote to the Registrar requesting the appointment of a special administrator. The Registrar has appointed Gerry Mier and Anthony Jonsson from the Cairns-based firm of Grant Thornton Australia as the special administrators for a period of six months. “I commend the directors for seeking my assistance once they realised they were not able to resolve the corporation’s issues themselves,” said Mr Beven. “The special administrators will work closely with Larrakia Nation’s members and stakeholders to help resolve the corporation’s financial problems so it can continue its important services.”
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of History, Administration and Reform.)
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HISTORY, ADMINISTRATION AND REFORM
29
Practice Questions ...................................................................................................................................... 1.
Write a brief history of the development of company law and administration in Australia.
2.
List the main criticisms of the Co-operative Scheme and explain to what extent they were overcome by the Corporations Law Scheme and now by the Corporations Act.
3.
What did the High Court decide in New South Wales v Commonwealth (1990) 169 CLR 482 and what was the consequence of this decision?
4.
Describe the fundamental constitutional flaws in the Corporations Law Scheme which led to the need for the referral of powers to the Commonwealth by the States. What other possible solutions might there be for these problems?
5.
In relation to the Corporations Act, how does ASIC try to achieve its mission? Do you think it is successful?
6.
In relation to its Corporations Act responsibilities, who is ASIC responsible to and what (if any) role does it have in law reform?
Essay Questions ...................................................................................................................................... 1.
“Constitutional impediments and Commonwealth-State rivalry prevent Australia having effective national, corporate regulation.” Is this statement an accurate description of the situation in Australia today? Discuss, in the light of recent reforms to the regulatory scheme and problems which may arise in the future.
2.
“One major problem with the corporate regulatory bodies in Australia relates to their piecemeal structure and organisation.” Should Australia's regulatory and administrative bodies be further harmonised to create one “super” regulator responsible for design and enforcement of regulation for all business entities?
Further Reading ...................................................................................................................................... Austin RP and Ramsay I Ford's Principles of Corporations Law 16th ed, LexisNexis, 2014, Chs 2-3 Australian Securities and Investments Commission, Consultation Paper 256: Remaking and repealing ASIC class orders on trustee company common funds (March 2016) available at http://www.asic.gov.au Australian Securities and Investments Commission, Consultation Paper 255: Remaking ASIC class orders on financial services disclosure requirements (March 2016) available at http://www.asic.gov.au
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Australian Securities and Investments Commission, Consultation Paper 254: Regulating digital financial product advice (March 2016) available at http:// www.asic.gov.au Australian Securities and Investments Commission, Consultation Paper 253: Remaking and repealing ASIC class orders on dollar disclosure (February 2016) available at http://www.asic.gov.au Australian Securities and Investments Commission, Consultation Paper 252: Remaking ASIC class order on share and interest sale facilities (February 2016) available at http://www.asic.gov.au Bottomley S “Where Did the Law Go? The Delegation of Australian Corporate Regulation” (2003) 15 Australian Journal of Corporate Law 105 Hill G “Revisiting Wakim and Hughes: the Distinct Demands of Federalism” (2002) 13 Public Law Review 171 Lipton P, Herzberg A and Welsh M Understanding Company Law 18th ed, Thomson Reuters, 2015, Ch 1 Mason R “Cross-Border Insolvency: Adoption of CLERP 8 as an Evolution of Australian Insolvency Law” (2003) 11 Insolvency Law Journal 62 Middleton T “ASIC's Investigation and Enforcement Powers – Current Issues and Suggested Reforms” (2004) 22 C&SLJ 503 Santow GFK “Corporations Law in a Federal System” (2000) 20 Australian Bar Review 162 Tomasic R “The Modernization of Corporations Law: Corporate Law Reform in Australia and Beyond” (2006) 19 Aust Jnl of Corp Law 2 Williams G “Cooperative Federalism and the Revival of the Corporations Law: Wakim and Beyond” (2002) 20 C&SLJ 160 Note: “CLERP (Audit Reform and Corporate Disclosure) Bill and Financial Reporting” (2004) 22 C&SLJ 205
.......................................................................................................
Business Organisations Useful Websites ....................................................................... 31 Aim ........................................................................................... 31 Related Topics ......................................................................... 32 Principles – General .................................................................. 32 Non-corporate forms of association .................................................... 34 Corporate forms of association .......................................................... 52 Incorporated associations ................................................................ 53 Companies registered under the Corporations Act ................................. 64 Mentor: Test your Knowledge ................................................. 72 Practice Questions ................................................................... 72 Essay Questions ...................................................................... 74 Problems for Discussion .......................................................... 74 Guide to Problem Solving ........................................................ 77 Further Reading ....................................................................... 81
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Business Organisations.)
Aim ...................................................................................................................................... At the end of this topic you should know: Partnerships:
• what constitutes a partnership; • the circumstances in which one partner can bind other partners in contract; • the circumstances in which a partner can be liable in contract or tort; • the legal duties partners owe to other partners; and • how a partnership can be dissolved and the rights and liabilities of partners upon dissolution.
Chapter 2
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CORPORATIONS LAW: IN PRINCIPLE
Incorporated associations:
• the characteristics and disadvantages of an unincorporated not-for-profit association; • what constitutes an incorporated association; • how to register an incorporated association; • the basic structure and management of an incorporated association; • the ongoing regulatory requirements; • the rights and duties of members; and • how an incorporated association can be wound up and what happens to any surplus assets. Companies:
• how companies differ from other forms of association; • how various incorporated bodies can be formed; • how companies can be classified; and • the differences between public and proprietary companies.
Related Topics ...................................................................................................................................... Chapter 3 Registration; Chapter 4 Consequences of Registration; Chapter 5 Internal Rules; Chapter 7 Corporate Liability: Contract, Tort and Crime; Chapter 11 Directors' Duties – Part 1 Duty of Care, Skill and Diligence; Chapter 12 Directors' Duties – Part 2 Good Faith and Proper Purpose
PRINCIPLES – GENERAL There exist a number of different types of business structures in the Australian economy. Typically, a business will incorporate if a company structure provides the necessary advantages and flexibility for its day-to-day activities. However, at times other non-corporate business organisations may be appropriate. Whether a business decides to incorporate or not will usually depend on the needs of its operator. Companies have proven to be popular because they provide a number of advantages including taxation considerations, limited liability and succession planning. Non-corporate business structures such as partnerships, unincorporated associations, joint ventures, trusts and sole operators have also desirable qualities.
[2.10]
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BUSINESS ORGANISATIONS
33
Prior to the CATSI Act, the Aboriginal Councils and Associations Act 1976 (Cth) (ACA Act) allowed for two types of corporate bodies, that is, Aboriginal councils (Part III of the ACA Act) and Aboriginal associations (Part IV of the ACA Act). The former was aimed to meet the incorporation needs of Indigenous communities which provided government-type services. The latter was aimed at providing Indigenous people with an expedient business entity to achieve various objectives so they could conduct a business enterprise which generate profits for its members. The ACA allowed for Indigenous Australians to operate their businesses not only in a culturally appropriate manner but in accordance with Aboriginal and Torres Strait Islander custom. Following various reviews from 1989 to 2002 to reform the ACA Act (Cth), the CATSI Act was introduced in 2006. Unlike the ACA Act (Cth), the 2006 legislation disallowed for incorporations in the form of Aboriginal councils. However such Indigenous councils would still be created at the state and territory level. The registration process and procedure of an Aboriginal and Torres Strait Islander corporation is found in Parts 2-1 to 2-4 of the CATSI Act. Division 37 of the CATSI Act deals with registration of an Indigenous corporation as a small, medium or large size corporation. The Dictionary section in Part 17-3 Division 700 of the CATSI Act provides for the following meaning of key words: Aboriginal and Torres Strait Islander person means the following: (a) an Aboriginal person; (b) a Torres Strait Islander; (c) an Aboriginal and Torres Strait Islander person; (d) a Torres Strait Islander and Aboriginal person; (e) an Aboriginal and Torres Strait Islander corporation; (f) a body corporate prescribed by name in the regulations for the purposes of this paragraph; (g) a body corporate that falls within a class of bodies specified in the regulations for the purposes of this paragraph; (h) a body corporate in which a controlling interest is held by any, or all, of the following persons: (i) Aboriginal persons; (ii) Torres Strait Islanders; (iii) Aboriginal and Torres Strait Islander persons; (iv) Torres Strait Islander and Aboriginal persons.
Chapter 2
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
34
CORPORATIONS LAW: IN PRINCIPLE
Aboriginal person means a person of the Aboriginal race of Australia. body means a body corporate or an unincorporated body and includes, for example, a society or association. entity: for the purposes of Part 6-6, an entity is any of the following: (a) a body corporate; (b) a partnership; (c) an unincorporated body; (d) an individual; (e) for a trust that has only 1 trustee–the trustee; (f) for a trust that has more than 1 trustee–the trustees together.
Otherwise, entity has the meaning given by section 694-40. body means a body corporate or an unincorporated body and includes, for example, a society or association.
Non-corporate forms of association [2.20]
The main non-corporate forms of association are:
(a)
sole trader;
(b)
partnership;
(c)
trust;
(d)
unincorporated not-for-profit association; and
(e) unincorporated joint venture. In order to better understand the nature of the different types of business entities, the following provides a general outline of unincorporated business structures. A comparative table is also provided at [2.240] which contains the key characteristics of each business association. Sole trader .......................................................................................................................................................................
Operating as a sole trader is the simplest form of business organisation (it is not strictly correct to describe a sole trader as an “association” because the concept of an association inherently involves more than one person). Nothing is required to establish a structure – one person simply “owns” the business, although they may employ others and operate under a business name. Because there is no separate body, the assets and liabilities of the business cannot be separated from those of the individual owner. Thus there is no real or genuine separation of ownership from management. This form of organisation has the attraction of simplicity and control. Profits do not have to be shared and no-one (for example, members) has to be
[2.30]
2
BUSINESS ORGANISATIONS
35
consulted or informed about how the business is running. Unlike a company or an incorporated association, the only public filing requirement is the need to obtain an Australian Business Number (ABN) and if necessary, register for the goods and services tax (GST). If the business is not to be carried on in the name of the sole trader, it will be necessary to register a business name with ASIC. This can now be done via ASIC Connect which is their new online service for interacting with ASIC's registers. See ASIC Connect, available at: https://www.connectonline.asic.gov.au/HLP/using-this-service/how-touse-asic-connect/WelcometoASICConnect/index.htm. Hence, a sole trader enjoys a very high degree of commercial privacy. The other side of the coin is that a sole trader is personally liable for any unpaid debts of the business, meaning that a sole trader's personal assets (such as her or his home) will be sold to meet any shortfall. There is also no formal legislative process to enable another person to inherit the business. Death or incapacity of the sole trader may bring the business to an end. Partnership .......................................................................................................................................................................
A “partnership” is generally defined as relationship that exists between people (which includes companies) who carry on a business in common with a view to making profits. See for example: Partnership Act 1892 (NSW), s 1; Partnership Act 1891 (Qld), s 5; and Partnership Act 1958 (Vic), s 5. A partnership can be viewed as an aggregate of individual people or traders who have come together for a joint, profit-making business purpose. The “people” can be either individuals, companies or other bodies corporate. It is important to distinguish partnerships from other unincorporated business associations, such as joint ventures. [2.40]
Legal basis
A partnership is essentially a matter of contract. The individual partners enter into a contract (the partnership agreement) as to how they will conduct the partnership business. Subject to any contrary statutory provisions, the mutual rights and obligations of each partner are governed by this agreement. A partnership agreement may be:
[2.50]
(a)
a formal written agreement;
(b)
partly in writing and partly oral; or
(c)
may be purely oral or wholly or partly implied from the conduct of the partners.
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CORPORATIONS LAW: IN PRINCIPLE
Statutory regulation
Each State and Territory has its own legislation governing partnerships. These Partnership Acts are not a Code, and are primarily a consolidation of the most important of the pre-existing general law rules applying to partnerships. References to section numbers in this part of Chapter 2 are to the Partnership Act 1958 (Vic). The Partnership Acts expressly provide that the pre-existing rules continue to apply except in so far as they are inconsistent with the Partnership Acts: see for example, s 4 (Vic). To a large extent the Partnership Acts operate as default provisions and apply subject to, or in the absence of, any contrary provisions in a partnership agreement. In substance the Partnership Acts are almost identical, although the section numbers vary. For provisions in other State and Territory Acts see the Comparative Table 2.4 under Guide to Problem Solving section at the end of this Chapter and in KL Fletcher, The Law of Partnership in Australia (9th ed, Thomson Lawbook Co, 2007) pp xli-lii.
[2.60]
Formation
Forming a partnership does not involve any initial formalities, such as registration and there are no ongoing requirements to lodge returns of any kind (although a partnership tax return would be completed). The partners may trade under their own names or may use a business name. This can now be done via ASIC Connect which is their new online service for interacting with ASIC's registers. See ASIC Connect, available at: https:// www.connectonline.asic.gov.au/HLP/using-this-service/how-to-use-asicconnect/WelcometoASICConnect/index.htm Additionally, each registration has an Australian Business Number: see http://www.abr.gov.au. The partners are collectively described as a “firm” and the name in which they carry on business is called the firm name: Partnership Act 1958 (Vic), s 8 (for other States and Territories see the Comparative Table 2.4 under Guide to Problem Solving section at the end of this Chapter).
[2.70]
Legal nature
A partnership is a relationship, it is not a separate legal entity, although, for procedural convenience, Rules of Court allow a partnership to sue or be sued in the partnership or firm name: see, for example, Supreme Court (General Civil Procedure) Rules 2015 (Vic), O 17. A partnership is not an entity in its own right – that is, the “partnership” does not exist separately from the partners themselves; and as a result:
[2.80]
2
BUSINESS ORGANISATIONS
37
• each partner pays tax at her or his individual rate (a return is lodged for the partnership, but only for the purpose of ascertaining each partner's share of the profit or loss); • a partnership is automatically dissolved on the retirement, death or bankruptcy of a partner unless the partnership agreement provides otherwise; and • a partner can assign her or his interest in the partnership but, unless all the other partners consent, the assignee only has the right to receive the assignor's share of profits and has no right to take any part in the management of the firm. Retiring partners remain liable for debts incurred while they were partners, unless creditors agree to a release. The maximum size of a partnership is limited. Section 115 of the Corporations Act 2001 (Cth) limits the number of members to 20. There are some exceptions allowing a greater number of members. For example, there is a maximum of 50 members for partnerships involving medical practitioners and stockbrokers, 100 for architects, chemists and veterinary surgeons, 400 for legal practitioners and 1,000 for accountants: see Corporations Regulations 2001 (Cth), reg 2A.1.01. Any partnership that exceeds this size must register under the Corporations Act 2001 (Cth). What constitutes a partnership?
A partnership does not exist unless each of the elements in the statutory definition is satisfied: s 5 (Vic). This definition requires there to be:
[2.90]
• an existing relationship; • between persons who are; • carrying on a business in common; and • have a view to profit. If each of these elements are present, then a partnership exists regardless of the intention of the people involved. If the situation fits the definition in the Partnership Acts, a partnership exists: see Canny Gabriel Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321. It is necessary to examine each of these elements to determine the existence of a partnership. For example, when looking at the need to be “carrying on a business in common” the Partnership Acts define “business” as including every trade, occupation or profession s 3 (Vic). Then the element of carrying on a business can be explored even if the business has only one transaction. In Re Griffin; ex parte Board of Trade (1890) 60 LJQB 235 at 237 Lord Esher MR commented:
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CORPORATIONS LAW: IN PRINCIPLE
I take the test to be this: if an isolated transaction … is proved to have been undertaken with the intent that it should be the first of several transactions, that is, with the intent of carrying on a business, then it is a first transaction in an existing business. The business exists from the time of the commencement of that transaction with the intent that it should be one of a series.
The Australian courts have also contemplated that a single transaction could, depending on the circumstances, amount to the carrying on of a business. In United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 Dawson J espoused at 15 that: A single adventure under our law may or may not, depending upon its scope, amount to the carrying on of a business … Whilst the phrase “carrying on a business” contains an element of continuity or repetition in contrast with an isolated transaction which is not to be repeated … the emphasis which will be placed upon continuity may not be heavy.
Another aspect of this definitional element is that the carrying on of the business is done “in common”. Here it appears that the partners who are running the business must do so for all partners and not just for themselves. There is, therefore, a true mutuality of rights and obligations between the partners. The definition's final element is that the partners “have a view to profit” and there will be a profit if a comparison of the balance sheet at two different times shows an increase at the later time. The requirement to have a view to profit serves to exclude clubs and societies that have their own legislative treatment elsewhere and are not governed by the Partnership Acts. Because a partnership agreement need not be in writing, it may sometimes be difficult to determine whether a partnership exists. The statutory rules of construction provide some guidelines, but do not go as far as creating a presumption of partnership: s 6 (Vic). It is always necessary to look carefully at all the facts in any given case. If a person shares in the net profits of a business, as opposed to the gross returns, that is prima facie evidence that the person is a partner in the business: s 6(2) – (3) (Vic). However, sharing in net profits does not necessarily make a person a partner, in particular in the circumstances listed in s 6(3) (Vic): see Cox v Hickman (1860) 8 HL Cas 268; 11 ER 431; Re Megevand; Ex parte Delhasse (1878) 7 Ch D 511; Cox v Coulson [1916] 2 KB 177. The distinction between an agreement to share the gross returns as opposed to the net profits is well illustrated by the following High Court decision. Cribb v Korn [2.100] Cribb v Korn (1911) 12 CLR 205 (High Court of Australia) FACTS: Cribb owned a farming property. He agreed to allow Rano to use two of the paddocks for farming purposes. Cribb agreed to provide the land,
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tools and the livestock while Rano would provide labour. They agreed to each take half of the gross proceeds of the sale of the eventual produce. Rano employed Korn to help work the land and Korn was injured in the course of his employment. Korn sued both Rano and Cribb, alleging that they were partners and so were jointly liable as his employers. DECISION: The High Court held that Rano and Cribb were not partners as they had not agreed to carry on business in common. There was no evidence to show that Cribb had intended to be involved in farming the paddocks. All he had done was agree to allow Rano to use the paddocks and equipment in return for an agreed sum – half the gross proceeds of sale. Rano, not Cribb was entitled to the eventual profits.
Partnerships and outsiders Authority of a partner to bind the firm
Because partners carry on business in common with a view to profit, each partner is both a principal in the business and the agent of the firm and each of the other partners. Transactions entered into by one partner which are within the usual scope of the firm's business will normally bind both the firm and the other partner(s). Whether or not the other partners have authorised that transaction is irrelevant. If the transaction is one which can be said to be “carrying on in the usual way business of the kind carried on by the firm”, the other party is entitled to assume that the partner is authorised to act and the other partners and the firm will normally be bound: ss 9 – 12 (Vic). The exceptions are: [2.110]
• if the partner was acting without authority and the other party knows this; or • the other party does not know or believe that he or she is a partner in the business: s 9 (Vic). See the discussion of actual and ostensible authority in Chapter 7; Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541; Goldberg v Jenkins (1889) 15 VLR 36. The following case illustrates what is meant by “carrying on in the usual way business of the kind carried on by the firm”. Mercantile Credit v Garrod [2.115] Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 (Queen’s Bench Division) FACTS: Garrod and Parkin were partners running a garage. Garrod was a “sleeping partner” who took no part in running the business. The partnership agreement expressly excluded buying and selling motor vehicles from the scope of the partnership business. In breach of this agreement and without telling Garrod, Parkin fraudulently sold a car to a third party who later sued
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cont. both partners for the return of the purchase price. Garrod’s argument that he was not liable because Parkin had no actual or ostensible authority to act on behalf of the firm, failed. DECISION: The court held that even though the partnership agreement expressly excluded selling motor vehicles, this was the kind of business that would normally be carried on by a garage and so Garrod was liable. People who are carrying on business together are often keen to argue that they are not in partnership. The main reason for this is that a partner can be liable for the actions of a fellow partner even when that partner has acted contrary to their express agreement. See for example: Partnership Act 1892 (NSW), s 5; Partnership Act 1891 (Qld), s 8; and Partnership Act 1958 (Vic), s 9. Partners can be liable jointly and severally. See for example: Partnership Act 1892 (NSW), s 12; Partnership Act 1891 (Qld), s 15; and Partnership Act 1958 (Vic), s 16.
Liability of partners in contract [2.120] Partners do not have limited liability (compare the position of members in a limited liability company. If the firm's assets are insufficient, each partner is liable to the full extent of her or his personal assets for debts and other obligations incurred by a partnership. Each partner is liable jointly with all the other partners for debts incurred by the firm while he or she is a partner: s 13 (Vic). This means that every partner is responsible, not just for her or his share of the debt, but for the whole amount. A creditor has the choice either to sue the firm by name or to sue any one or more individual partner or partners. In the latter case, judgment will be enforced against the nominated partner(s) only, and it is up to her or him to obtain contribution from the other partners. If they are bankrupt or have disappeared, the unfortunate partner sued must satisfy the whole claim.
Note: Because a partner's liability in contract is joint, not joint and several (except in respect of the estate of a deceased partner), a plaintiff has only one opportunity to sue. If a creditor sues and obtains judgment against an individual partner(s) without also naming the firm as a defendant, this will bar any subsequent proceedings against other partners: see Kendall v Hamilton (1879) 4 App Cas 504. Liability of partners in tort
In contrast, partners are jointly and severally liable in tort. Both the firm and all the partners will be bound by any tortious acts, provided the acts are committed by a partner(s):
[2.130]
• “in the ordinary course of the business”; or • “with the authority” of the co-partners: s 14 (Vic). See Polkinghorne v Holland (1934) 51 CLR 143; National Commercial Banking Corp of Australia Ltd v Batty (1986) 160 CLR 251.
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If money or property of a third person is received: • by a firm in the course of its business; and • is misapplied by one or more of the partners, the firm will be liable to make good the loss: s 15 (Vic). Note: Because liability for tort is joint and several, a plaintiff has more than one opportunity to sue: s 16 (Vic). A plaintiff can bring separate actions against the firm and/or some or all of the partners. Limited liability partnerships
Limited liability partnerships may be formed in New South Wales, Queensland, Tasmania, Victoria, South Australia and Western Australia. Unlike ordinary (“general”) partnerships, they must be registered and a registration fee is payable. In Victoria, for example, limited and incorporated limited partnerships must be registered with Consumer Affairs Victoria (CAV). Limited liability partnerships are similar to other partnerships but have two classes of partners. Active (general) partners run the business and are in the same position as partners in an ordinary partnership. Silent (limited) partners contribute capital to the partnership but, as long as they do not take any active part in running the business, they have the benefit of limited liability. Their liability is limited to the contribution they have made to the firm's capital. This encourages investors to contribute capital. Limited partnerships were starting to become popular in the 1980s because of their ease of setting up, simpler documentation and ability to keep information confidential. However, since 1992 limited partnerships have been treated as companies for taxation purposes, which means that a limited liability partner can no longer claim a tax deduction for partnership losses. Recent amendments to the Corporations Act have meant that all but the smallest limited partnerships must now comply with the fundraising provisions: see ASIC Policy Statement 41: Limited Partnership Fundraising. The combined effect of these changes has greatly reduced the popularity of limited partnerships.
[2.50]
Holding out a person as a partner [2.140] The doctrine of ostensible or apparent authority applies to partnerships as well as to companies: see Chapter 7. Partners and people who hold themselves out as partners, or who consent or acquiesce to being held out, may be liable in contract or tort if:
(a)
there is a representation that the person is a partner, either by that person or by someone else;
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• by a partner acting within the scope of her or his apparent authority; or
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(b)
credit is given to the firm; and
(c) that credit is given in reliance on that representation. See s 18 (Vic); Martyn v Gray (1863) 14 CB (NS) 824; 143 ER 667; D & H Bunny Pty Ltd v Atkins [1961] VR 31. Holding out is often a problem in professional partnerships where a senior employee whose name appears on the firm's letterhead may be assumed by a third party to be a partner, even though that person is actually only a salaried employee. Lynch v Stiff [2.150] Lynch v Stiff (1943) 68 CLR 428 (High Court of Australia) FACTS: Lynch was a “salaried partner” in a legal firm. This meant that although he was only an employee, his name appeared on the firm’s letterhead. Stiff had been a client of the firm for many years and Lynch had always handled his business. When Stiff sold some property he entrusted the proceeds to Williamson, who was a partner in the firm, to be invested. Williamson misappropriated the money. Stiff then sued Lynch on the basis that he had been held out by the firm as a partner. DECISION: The High Court agreed. The evidence indicated that Stiff invested the money through the firm because he believed, on the basis of the letterhead, that “Lynch, whom he trusted, was a partner”: at 435. Stiff had relied on this representation.
Relationship between partners
A fundamental principle of partnership law is that a partnership is a fiduciary relationship based on mutual trust and confidence between partners: see Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384; Chan v Zacharia (1984) 154 CLR 178 and recently Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd (No 9) [2010] WASC 44. As fiduciaries, partners have mutual rights and duties which generally require them to act in good faith and for the common good of the partnership. Compare the similar fiduciary duties which require directors to act in good faith and in the best interests of the company which are discussed in Chapter 12. Partners may modify these rights and duties in any way they wish in the partnership agreement: s 23 (Vic). More specifically, unless permitted by the terms of the partnership agreement, partners: [2.160]
(1)
must not use their position or any information gained as a result of that position for their personal profit;
(2)
must not put themselves in a situation where there will be any conflict between their duty as partners and their personal interest;
(3)
must fully disclose all matters likely to affect the partnership to the other partner(s) (s 32 (Vic); and see Law v Law [1905] 1 Ch 140);
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must account for any private profits made without the consent of the other partners as a consequence of any of the above (s 33 (Vic)); and
(5) must not compete with the firm: s 34 (Vic). Subject to any express or implied agreement to the contrary, the following basic statutory rules govern the rights and duties of partners: (a)
all partners have a right to share equally in the capital and profits of the business and must contribute equally towards any losses (s 28(1) (Vic)) (Note this may not be what the partners want and so the partnership agreement will be drafted to address this);
(b)
partners are entitled to be indemnified for payments and liabilities made or incurred in conducting the firm's business (s 28(2) (Vic));
(c)
partners are entitled to interest on any money lent to the firm, but not to interest on their capital contribution (s 28(3), (4) (Vic));
(d)
every partner has a right to take part in the management of the firm's business (s 28(5) (Vic));
(e)
no partner is entitled to be paid for acting in the firm's business (s 28(6) (Vic));
(f)
a new partner cannot be introduced without the consent of all other partners (s 28(7) (Vic)); and
(g)
differences of opinion are to be decided by a majority of partners, but all partners must consent to any change in the nature of the business: s 28(8) (Vic). A partner may assign her or his share in the partnership without the consent of the other partners, but the assignee will only be entitled to the assignor's share in the profits and has no right to interfere in the management of the business: s 35 (Vic). A partner cannot be expelled from the partnership unless the partnership agreement expressly gives this power to a majority of partners: s 29 (Vic). Partnership property [2.170] Ownership of partnership property is one aspect of the partnership relationship that is specifically governed by the Partnership Acts: for example, ss 24 – 26 (Vic). The basic rule is that all property that was originally brought into a partnership, or is acquired by it later, is partnership property: s 24 (Vic). In the absence of any contrary intention, any property that is bought with partnership money will be deemed to have been bought for the partnership: s 25 (Vic). It is very important to distinguish between property that is partnership property and property that is being used in the business, but that remains the personal property of individual partners: see Robinson v Ashton (1875) LR 20 Eq 25; Kelly v Kelly (1990) 64 ALJR 234.
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(4)
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Harvey v Harvey [2.180] Harvey v Harvey (1970) 120 CLR 529 (High Court of Australia) FACTS: Harold Harvey was unable to run his pastoral property, Fonthill, himself because of illness. He agreed with his brother Horace that they would enter into a partnership. Under the agreement, Harold would provide the land, stock and machinery and Horace and his sons would provide the skill and labour. This arrangement would give Horace’s sons experience in running a property and would keep Fonthill operating until Harold’s young son was old enough to take it over. When the partnership was eventually dissolved there was a dispute as to whether Fonthill remained Harold’s personal property or had become partnership property. DECISION: The High Court held that Fonthill remained Harold’s personal property. The evidence showed that Harold had never intended it to become partnership property. The partnership had only been formed to keep Fonthill going until Harold’s son was old enough to run it himself.
Liability of incoming and outgoing partners
Each time the composition of a firm changes because a partner retires or dies or a new partner is admitted, a new partnership relationship is created. Subject to any agreement to the contrary (including a written partnership agreement), an outgoing partner will still be liable for all debts and obligations incurred while he or she was a partner, and an incoming partner will only be liable for debts incurred after joining the firm: s 21 (Vic). This section allows a retiring partner to discharge her or his liabilities by obtaining a release from the continuing partners and the firm's creditors: s 21(3) (Vic). It is important for retiring partners to ensure that this is done, and that notice of any change in the firm's composition is given to all creditors and clients. Until notice is given, a person is entitled to treat all apparent members of the firm as partners: s 40 (Vic). For example, existing clients of a firm are entitled to assume that all the people listed as partners on a firm's letterhead are partners in the firm unless they have actual notice to the contrary: Hamerhaven Pty Ltd v Ogge [1996] 2 VR 488. What constitutes notice to new clients is set out in the Partnership Acts (eg, s 40(2) (Vic)). [2.190]
Termination and dissolution
A partnership is a contractual relationship so, unless the partnership agreement provides otherwise, a partnership will be automatically dissolved if a partner retires, dies or becomes bankrupt: s 37 (Vic). To address this, almost all partnership agreements make provision for the orderly restructure of a firm in these circumstances without requiring it to be formally dissolved and the business wound up. Any partnership which is, or which becomes, illegal – for
[2.200]
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example, because the number of partners exceeds the maximum allowed, will be dissolved by operation of law: s 38 (Vic); and see Hudgell Yeates & Co v Watson [1978] QB 451. A partnership which is entered into for a fixed term or to carry out a single undertaking will be dissolved automatically at the end of that period or undertaking unless the partners agree otherwise: s 36(a) – (b) (Vic). If a partnership is entered into for an indefinite term, any partner may dissolve it by giving notice to the other partners: s 36(c) (Vic). A partnership may also be dissolved by a court order on the application of one or more partners: s 39 (Vic). The grounds for making such an order are: (a)
lack of capacity due to mental illness;
(b)
permanent incapacity;
(c)
conduct which prejudicially affects the firm's business;
(d)
wilful or persistent breach of the partnership agreement;
(e)
the business can only be carried on at a loss; and
(f) it is just and equitable to dissolve the partnership. See Jenkins v Bennett [1965] WAR 42. Consequences of dissolution
Dissolution of a firm ends the partnership relationship between the partners, but the business itself remains. Public notice of the dissolution of a firm (or the retirement of a partner) must be given: s 41 (Vic). The business of the firm may be taken over by one or more of the former partners who buy out the others, or it may be wound up. If the business is continued by some of the former partners without a final settlement of accounts, subject to any contrary agreement the outgoing partner(s) will be entitled to either a share of profits made after the dissolution or to interest on their share in the partnership: s 46 (Vic); and see Pathirana v Pathirana [1967] 1 AC 233; Fry v Oddy [1998] VSCA 26. If the business is to be wound up, the winding up may be carried out by the former partners (s 43 (Vic)) or if necessary, by a receiver appointed by the court. To enable the business to be wound up in an orderly manner, the rights and obligations of the former partners continue after dissolution as far as is necessary to wind up the affairs of the partnership and to complete any transactions which were in progress at the time the firm was dissolved: s 42 (Vic). If the former partners are unable to agree, any partner may apply to the court for the appointment of a receiver. Once the business has been wound up and the firm's assets have been realised, its debts and liabilities are paid and any surplus assets distributed [2.210]
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according to the terms of the partnership agreement. In the absence of agreement, the following priority rules are to be followed in distributing assets: • debts and other external liabilities – which are paid first out of profits, next out of capital and then if necessary, by the individual partners in the same proportion as they shared profits; • repayment of advances (not capital) to partners; • repayment of capital to partners; and finally, • any remaining assets are shared in the same proportion as the partners had shared profits. If the money runs out at any stage the partners share what there is rateably (in the same proportion as they had shared profits): s 48 (Vic). Trust ....................................................................................................................................................................... [2.220] In its simplest form, a trust exists when one party (the trustee) is required to hold or invest property on behalf of another (the beneficiary). One fundamental difference between a company and a trust is that a trust is not a separate legal entity. While the trustee and the beneficiaries are separate legal persons, the “trust” itself is not a separate legal person. Hence, a trust, unlike a corporation, cannot sue or be sued as a separate entity. The “trust” itself cannot incur debts and liabilities – the trustee is personally liable. For this reason, the trustee is often a company. However, in the controversial majority decision of Hanel v O'Neill (2003) 180 FLR 360 the majority of the Full Supreme Court of South Australia held that the corporate veil may be pierced under s 197(1) of the Corporations Act making the directors of a company that is a trustee liable for the liabilities of the trustee if there are insufficient trust assets. Generally, a trustee will be protected by an indemnity from the trust fund, but only for liabilities properly incurred in the administration of the trust. The terms of the trust deed will usually exclude any right to claim an indemnity for any shortfall in the trust assets from the beneficiaries. For taxation purposes, a trust is not recognised as a separate entity. Tax is either payable in the hands of the beneficiaries or, if income is not distributed in any year, the trustee is personally liable for tax at penalty rates. Aside from public unit trusts (which fall within the definition of managed investment schemes), a trust does not require any formality, although sometimes evidence in writing is required. There are no ongoing public filing requirements. There are no limits to the number of beneficiaries and the death of a beneficiary does not affect the existence of the trust. However, a trust cannot continue indefinitely. A trust can only exist for the duration of the life of a
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Incorporated and unincorporated associations .......................................................................................................................................................................
Definition
A not-for-profit (or non-profit) association is a group of two or more people who have agreed to join together to pursue a common lawful purpose of some kind.
[2.230]
Not-for-profit vs partnership
It is important to distinguish a not-for-profit association from a partnership. Both are associations, the members of which agree to be bound by mutual rights and duties, but a partnership is a business association. It is a relationship between people carrying on business in common with a view to profit. In contrast, a not-for-profit association is not formed for the purpose of trading or carrying on business, and any profits which may result from its activities must be used for the purposes of the association. A not-for-profit association is not forbidden to make a profit as an incidental result of its activities, but if it does, any distribution of that profit or of the association's property to the members is prohibited. Section 115 of the Corporations Act 2001 (Cth), which limits a partnership to a maximum of 20 members, does not apply to a not-for-profit association because the members of a not-forprofit association are not in partnership. [2.240]
TABLE 2.1 Comparative table Partnership Relationship between people who carry on business in common Carried on with a view to profit Profits divided among the partners
Not-For-Profit Association Relationship between people associated together for a non-business purpose Carried on for not-for-profit purposes Any distribution of profit to members prohibited
A not-for-profit association may be formed for any kind of lawful purpose which does not primarily involve trading or carrying on business. Not-for-profit associations include groups such as: [2.250]
(a)
social and sporting clubs;
(b)
artistic and learned societies;
(c)
trade and professional associations;
(d)
educational, religious or charitable organisations; and
(e)
associations formed to promote cultural, environmental or other purposes intended to benefit the community.
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nominated person plus 21 years (this is a general law rule known as “the rule against perpetuities”). In some States an alternative period of 80 years applies.
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CORPORATIONS LAW: IN PRINCIPLE
Like business associations, not-for-profit associations may be unincorporated (compare partnerships) or incorporated (compare companies – see below). A not-for-profit association may incorporate by registration under the applicable State or Territory Act (“Associations Incorporation Acts”), or as a company limited by guarantee under the Corporations Act 2001 (Cth). Some not-forprofit associations are incorporated by Royal Charter or by a special statute. An unincorporated association has certain advantages. No formalities are involved in its formation or the conduct of its affairs. Its members are free to agree to whatever structure or rules they wish and can conduct the association's affairs in complete privacy. However, for all but the smallest associations, these advantages are almost always outweighed by the wellknown difficulties inherent in an unincorporated association's lack of legal status, some of which are summarised at [2.280]. The association can choose to have a set of rules or constitution. Unincorporated not-for-profit association [2.270] The simplest form of unincorporated organisation is a “not-forprofit” association such as a social or sporting club which is formed on the basis that any profits made by the association are used solely for the purposes for which the association was formed and any distribution of profits to the members is prohibited. Since there is no intention to share profits among the members, the association is not a partnership and does not have to register as an “outsize partnership” under s 115 of the Corporations Act 2001 (Cth) if the association or club has more than 20 members. These associations are not regarded as separate entities for legal purposes. Its property belongs to its members and so will be owned by different people from time to time as the membership changes: see Williams v Hursey (1959) 103 CLR 30 at 54 per Fullagar J.
Limitations of not-for-profit associations [2.280]
An unincorporated not-for-profit association cannot:
(a)
buy or own property;
(b)
enter into a contract or be liable in tort;
(c)
sue or be sued; or
(d) receive a gift, be the beneficiary of a trust or be left property by will. It can only act through its members. It is possible to get around at least some of these difficulties by using trustees or individual members, usually committee members, to act on behalf of the general body of members. Trustees may be appointed to hold the legal title to association property and committee members may act as representatives of the other members in dealings with outsiders. However, there are many
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49
well-known cases illustrating the problems which may arise when an unincorporated association purports to enter a contract or incurs liability in tort: see Carlton Cricket & Football Social Club v Joseph [1970] VR 487; and Smith v Yarnold [1969] 2 NSWR 410. These difficulties are made more acute for committee members because, unless the rules of an unincorporated association state otherwise, the liability of the members of unincorporated association is limited to the amount of their subscription: Wise v Perpetual Trustee Co Ltd [1903] AC 139. Lawsuits [2.290] Many modern courts have adopted a pragmatic approach to disputes in contract and tort involving unincorporated associations and outsiders. Where possible the committee members, as the persons mainly responsible for the operations of an association, have been held personally liable in contract (and in some cases also in tort) for the actions of the association: see Bradley Egg Farm Ltd v Clifford [1943] 2 All ER 378; Smith v Yarnold [1969] 2 NSWR 410, but contrast Carlton Cricket & Football Social Club v Joseph [1970] VR 487. It is not clear whether the committee members would have a right to be indemnified out of an association's funds against these liabilities, unless this was specifically provided for in the rules: see Peckham v Moore [1975] 1 NSWLR 353 (in dicta). This gives committee members a strong incentive to encourage the members to incorporate the association.
Members’ rights
Many difficult issues arise in the context of disputes concerning the rights of members of an unincorporated association. Courts have traditionally been extremely reluctant to intervene in the internal affairs of an association, except in circumstances involving members' proprietary rights or where an association's rules were intended to create a legally enforceable contract: Cameron v Hogan (1934) 51 CLR 358. Unless a member's trade, profession or livelihood was at stake, as in the case of a professional or semi-professional sportsperson, courts have usually refused and may still refuse to accept jurisdiction to hear internal disputes. However, some judges have adopted a more liberal approach: see Nagle v Feilden [1966] 2 QB 633. [2.300]
Dissolution
Many unincorporated associations are only active for a short period and rapidly become defunct if the original purposes of the association are no longer relevant, or if members lose interest in the association's purposes or activities. When this happens, an association may no longer have any members, but its bank account or other property may still exist. In these circumstances it may be difficult or even impossible to wind up the affairs of
[2.310]
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the association and distribute its property in an orderly and appropriate manner without the intervention of the court: see Master Grocers' Association of Victoria v Northern District Grocers Co-operative Ltd [1983] 1 VR 195. Alternatively it is possible that the unincorporated association had a set of rules or constitution that expressly mentioned the formalities of dissolution and in that event these would be followed. Conclusion
These serious disadvantages make it clear that once an association is well established and it appears that it will remain in existence for a considerable time, in most circumstances it is probably sensible for the members to consider incorporation.
[2.320]
Unincorporated joint venture .......................................................................................................................................................................
There is often a fine line between an unincorporated joint venture and a partnership. “Joint venture” is not a technical term with a single legally defined meaning. Traditionally, if several people agreed to work together on a single project rather than on a continuing basis, this was likely to be considered to be a joint venture rather than a partnership. However, this distinction is no longer always valid and a “joint venture” may often be a partnership: see United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 and iWave Pty Ltd v Break O'Day Business Enterprise Board Inc [2004] TASSC 43. Unincorporated joint ventures are frequently used in the mining and petroleum industry for taxation and liability reasons. A typical example would be where a promising mineral deposit has been found and two or more companies agree to develop the mine together and to share the ore extracted from it. Each company would then use its own separate facilities to refine and sell the minerals and make separate profits. The parties in a joint venture generate a product which is shared between them, in contrast to partners who carry on business in common and share profits. [2.330]
Conclusion
The non-corporate forms of association discussed in this topic which include sole trader, partnerships and trusts do not create a “separate legal entity” – that is, an entity recognised by law as being separate and distinct from the individual(s) who formed it or who manage it. This is to be contrasted with a corporation, which is a separate legal entity from its members, external stakeholders and company officers. [2.340]
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51
TABLE 2.2 Non-corporate and corporate forms Sole trader no
Partnership no
Trust no
Incorp assoc yes
unlimited
liable for acts of fellow partners (unless limited partnership)
limited to may be limited membership fee (eg, company limited by shares) or unlimited
Transferability of interest
difficult – would need new contracts with creditors
good – continuity not affected by changes to members
good – continuity not affected by changes to members – ASX listing possible
Finance
– capital contributed by sole trader or by loan– cannot grant circulating security interest– cannot raise funds from the public
requires all partners to consent; retiring partners continue to be liable unless creditors consent – capital contributed by partners or loans– cannot give a circulating security interest– cannot raise funds from the public
trustee personally liable with right of indemnity from trust fund beneficiary may assign their interest
– capital comes from gift by settlor– trust deed may limit ability to deal with trust assets– managed trusts can raise funds from the public
– capital contributed by members' annual sub-scription and fundraising– possible for association to issue circulating security interest# as security– cannot raise funds from public – are minimum size limits in some states (eg 5 members in NSW, Vic, ACT, NT)– formation requires registration
– capital contributed by members or by loans to company– possible for company to issue circulating security interest# as security– company can raise funds from public
Separate entity Type of liability
Size, – one owner duration and but can employ formation others– no formality to establish
– generally limited to 20 (s 115)– no formality to establish: can have verbal p/s agreement
– no limit to beneficiaries– limited to life +21 years or 80 years– generally no formality except public trusts
Ongoing disclosure requirements
no public disclosure or filing required
no public disclosure or filing required
no public disclosure or filing required
Taxation
personal rate applies
– personal rate applies– ltd liability p/s taxed as company
– tax paid by beneficiaries or by trustee (penalty rate)
Company yes
– Pty Ltd limit 50 nonemployee shareholders– public company no limit– formation requires registration – varies, but – depends on larger type of associations are company (eg, required to small pty ltd have audited not required to accounts and lodge audited lodge annual accounts)– all returns– must companies lodge notice of must notify certain changes ASIC of certain with Registrar changes and check annual statements – treated as – company rate company ie, applies– company rate Australian applies however shareholders many imputation associations credits exempt
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[2.350]
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Company – directors have powers set out in internal rules and general law– generally, members cannot interfere # Circulating security interests: for incorporated associations see eg Associations Incorporation Act 1981 (Vic) s 16; for companies see Corporations Act, s 124(1)(f). Subject to some exceptions, the requirement to obtain an ABN and possible need to register for GST will apply to all non-corporate and corporate forms. Management and control
Sole trader absolute
Partnership unless limited partnership, have right to take part in management
Trust – vested in trustee– generally, beneficiaries cannot interfere
Incorp assoc – committee has powers set out in association's rules– generally, members cannot interfere
Corporate forms of association [2.360]
The law recognises two types of “entities”:
• natural persons – that is, you; and • artificial legal entities – that is, corporations. Each type of artificial legal entity (corporation) is brought into existence by a different method. A “company” registered under the Corporations Act is only one type of corporation: see definitions in ss 9 and 57A. The Corporations Act 2001 (Cth) does not cover all corporations. The other types of corporations are described briefly below. Corporations formed by Royal Charter ....................................................................................................................................................................... [2.370] This type of corporation gains its status from the Crown. Traditionally, people wishing to form such a corporation petitioned the monarch. Institutions such as the Institute of Chartered Accountants and the Royal College of Surgeons were formed this way. In Australia, this method of incorporation is no longer available.
Corporations sole ....................................................................................................................................................................... [2.380] This concept originated in early English law as a device that enabled the successors to a particular office or position in the church to constitute an artificial legal entity/person in whom title to church property could vest. The concept still exists today, for example, the Public Trustee or State Trustee is a corporation sole.
Corporations formed by special statute .......................................................................................................................................................................
Statutory corporations and many educational institutions are formed by Parliament passing a special statute to set them up, for example, The University of Melbourne. [2.390]
CHAPTER
2
BUSINESS ORGANISATIONS
53
Corporations formed by registration These corporations come into existence as separate legal entities by registration under a specific Act. Examples are:
[2.400]
• co-operatives; • incorporated associations; • trade unions; and • companies. [2.410] Figure 2.1: Summary – types of artificial legal entities ....................................................................................................
Incorporated associations Many not-for-profit organisations obtain the benefits of incorporation by registering under the associations incorporation legislation that is in force in each State and Territory: see, for example, Associations Incorporation Act 2009 (NSW), Associations Incorporation Act 1981 (Qld), and Associations Incorporation Reform Act 2012 (Vic). This legislation is specifically designed for not-for-profit associations and, although it is not uniform, in most cases it provides a simpler and more affordable method of incorporation compared with the Corporations Act 2001 (Cth). Alternatively, some larger and/or national not-for-profit organisations choose, or are required, to register as companies limited by guarantee under the Corporations Act 2001 (Cth). The members of an incorporated association are protected from any personal liability: See for example, Associations Incorporation Reform Act 2012 (Vic), s 15(1). The association may hold its assets and enter into contracts in [2.420]
Chapter 2
.......................................................................................................................................................................
54
CORPORATIONS LAW: IN PRINCIPLE
the name under which it is registered, s 29 Associations Incorporation Reform Act 2012 (Vic). Other not-for-profit associations are incorporated by Royal Charter or special statute. Subject to some limited exceptions, an incorporated association must not be formed for trading or profit-making purposes. If an incorporated association makes monetary profits as a result of its activities, these profits must be used for the association's purposes and must not be divided among the members: see, for example, Associations Incorporation Reform Act 2012 (Vic), s 33. Incorporation procedure .......................................................................................................................................................................
Incorporation of association
In most jurisdictions the procedure for incorporation is reasonably straightforward. The steps required are: [2.430]
(a)
the members of a not-for-profit association authorise a person to lodge an application for registration: for example - Associations Incorporation Reform Act 2012 (Vic), s 5;
(b)
The association must have a written set of rules, also known as a constitution. For example the rules in Victoria must deal with the 23 matters set out in Schedule 1 to the Associations Incorporation Reform Act 2012 (Vic): s 47;
(c)
The members approve a statement of purposes and rules – unless for example in Victoria members agree to adopt the Model Rules provided in the Associations Incorporation Regulations 2009 (Vic): s 6 (Vic);
(d)
the members choose a name which complies with the relevant Associations Incorporation Acts in each jurisdiction. For example, in Victoria under s 22 of the Associations Incorporation Reform Act 2012 (Vic), the suffix “Incorporated” or “Inc” must be used to indicate the status of the association although in Queensland an exemption can be granted; and
(e)
the application is lodged together with a copy of the statement of purposes (if required) and rules (if any): For example, s 6 Associations Incorporation Reform Act 2012 (Vic). The Registrar has power to refuse to register an association if the association is carried on for the purpose of securing pecuniary profit for its members; or the registration of the name of the proposed incorporated association is prohibited, for example, s 22 of the Associations Incorporation Reform Act 2012 (Vic); or the
2
BUSINESS ORGANISATIONS
55
rules of the proposed incorporated association do not comply with the requirements, for example ss 7(3) and 47 of the Associations Incorporation Reform Act 2012 (Vic). Registration of existing bodies [2.435] In Victoria, registration of existing bodies as incorporated associations is available. A company limited by guarantee, a co-operative, society, association, institution or body formed, incorporated or registered under the Co-operatives Act 1996 (Vic) or any Act relating to the incorporation, formation or registration of co-operatives, societies, associations, institutions or bodies (but not a trade union registered under the Trade Unions Act 1958 (Vic) may be eligible to apply for incorporation under the Associations Incorporation Reform Act 2012 (Vic) in certain circumstances as set out in s 11:
ASSOCIATIONS SECTION 11
INCORPORATION
REFORM
ACT
2012
(Vic)
–
Eligibility to apply to be registered under this Act (1)
A registrable body is eligible to apply for incorporation under this Act if– (a) The body has: (i) in the case of a company–passed a special resolution, within the meaning of the Corporations Act, approving the application; or (ii)
in any other case–resolved in accordance with its rules that the application be made; and
(b)
the purposes of the body (if any) are purposes for which an incorporated association may lawfully be carried on; and
(c)
the body has rules that– (i)
comply with; or
(ii)
will, on the incorporation of the body under this Act, comply with– the requirements under section 47 applying to the rules of an incorporated association; and (d)
the body has nominated a person who is at least 18 years of age and is resident in Australia to be the first secretary of the proposed incorporated association.
Chapter 2
CHAPTER
56
CORPORATIONS LAW: IN PRINCIPLE
Consequences of incorporation .......................................................................................................................................................................
Once a certificate of incorporation is granted, an incorporated association is a body corporate and so is a separate legal entity. This means that, like a company, its existence continues until it is wound up, regardless of changes to its membership, and it can acquire and own property, enter into contracts and sue or be sued in the name of the association: See s 29(2) Associations Incorporation Reform Act 2012 (Vic). Any property which was previously owned by or on behalf of an unincorporated association vests automatically in the incorporated association on registration: See s 9 Associations Incorporation Reform Act 2012 (Vic). An incorporated association may have a common seal: see s 23 of the Associations Incorporation Reform Act 2012 (Vic). Normally, the members of an incorporated association have limited liability and have no right or interest in the association's property: see s 52 of the Associations Incorporation Reform Act 2012 (Vic). [2.440]
Constitution and management .......................................................................................................................................................................
In Victoria, an association must have a written set of rules, or a constitution, which deal with the 23 matters set out in Schedule 1 to the Associations Incorporation Reform Act 2012 (Vic). A statement of purposes (broadly equivalent to the former “memorandum of association” for a company (see Chapter 5)) is also required which sets out the objects and purposes of the association. In most jurisdictions including Victoria, an association may adopt its own rules or may choose to rely wholly or partly on the Model Rules. In Victoria these are set out in the Associations Incorporation Regulations 2009 (Vic) and Associations Incorporation Reform Act 2012 (Vic). The Model Rules operate as default rules and, like replaceable rules for companies apply automatically unless excluded: for example, s 49 of the Associations Incorporation Reform Act 2012 (Vic). If an association adopts its own rules these must provide for the matters listed in Schedule 1 to the Associations Incorporation Reform Act 2012 (Vic). These include: The Association [2.450]
• The name of the incorporated association. • The purposes of the incorporated association. Membership • The qualifications (if any) for membership of the incorporated association.
CHAPTER
2
BUSINESS ORGANISATIONS
57
• The rights, obligations and liabilities of members. • Provisions for the resignation of a member or cessation of membership. • The procedure (if any) for the disciplining of members and the mechanism (if any) for appearances by members in respect of disciplinary action taken against them. • The grievance procedures for settling disputes under the rules between the incorporated association and any of its members or between a member and any other member. Management and record keeping • The name, membership and powers of the committee or other body having the management of the incorporated association (in this paragraph referred to as the committee) and– (a) the election or appointment of members of the committee; (b)
the terms of office of members of the committee;
(c)
the grounds on which, or reasons for which, the office of a member of the committee becomes vacant;
(d)
the filling of casual vacancies occurring within the committee;
(e)
the quorum and procedure at meetings of the committee.
• The procedures for the appointment and removal of the secretary of the incorporated association. • The custody of records, securities and other relevant documents of the incorporated association. • Provisions for the custody and use of the common seal (if any) of the incorporated association. • Provision for members to have access to, and to be able to obtain copies of, the records, securities and other relevant documents of the incorporated association. • The preparation and retention of accurate minutes of– (a) general meetings of the incorporated association; and (b)
meetings of the committee or other body having the management of the incorporated association.
• Provision for members to have access to, and to be able to obtain copies of, minutes of general meetings of the incorporated association, including financial statements submitted at a general meeting.
Chapter 2
• The entrance fees, subscriptions and other amounts (if any) to be paid by members of the incorporated association.
58
CORPORATIONS LAW: IN PRINCIPLE
• Right of access (if any) by members to minutes of meetings of the committee, including any terms and conditions subject to which access may be granted. Meetings • The intervals between general meetings of members of the incorporated association and the manner of calling general meetings. • The quorum and procedure at general meetings and whether members are entitled to vote by proxy at general meetings. • The time within which, and the manner in which, notices of general meetings and notices of motion must be given, published or circulated. Funds • The sources from which the funds of the incorporated association are to be or may be derived. • The manner in which the funds of the incorporated association must be managed and, in particular, the mode of drawing and signing cheques on behalf of the incorporated association. Alteration of rules • The manner of altering and rescinding the rules of the incorporated association and of making additional rules. Winding up and dissolution • The disposition of any surplus assets on the winding up or dissolution of the incorporated association. The members may amend the statement of purposes or rules by passing a special resolution (except in the Northern Territory), for example as provided under ss 50 and 64 of the Associations Incorporation Reform Act 2012 (Vic). The committee members of an incorporated association are in an analogous position to the directors of a company. They are subject to similar general law and, in some jurisdictions, statutory obligations: see generally Chapters 11 and 12. The statutory duties focus on the area of conflict of interest and attempt to require committee members to comply with higher standards of disclosure: see, for example, ss 82 – 87 of the Associations Incorporation Reform Act 2012 (Vic). Public officer .......................................................................................................................................................................
Except in Western Australia, all incorporated associations must appoint a person called a public officer (“secretary” in Queensland and Victoria): see ss 72 – 78 of the Associations Incorporation Reform Act 2012 (Vic). A public officer or secretary must be a resident of the jurisdiction. The public officer or secretary of an association is the point of contact between the
[2.460]
2
BUSINESS ORGANISATIONS
59
association, the government and the community generally and is responsible for ensuring that the association complies with any ongoing regulatory requirements. Notice of the appointment and of any changes to the public officer or secretary must be lodged. In Victoria, New South Wales and Queensland an incorporated association must also have a registered address or registered office: see, for example, s 28 of the Associations Incorporation Reform Act 2012 (Vic). Continuing regulatory requirements .......................................................................................................................................................................
The regulatory regime under most of the Associations Incorporation Acts is similar in many ways to the Corporations Act 2001 (Cth) but the requirements are generally much less onerous. An incorporated association must:
[2.470]
1.
lodge details of any changes to its name (see, for example, s 24 of the Associations Incorporation Reform Act 2012 (Vic));
2.
comply with basic standards requiring it to keep adequate and accurate accounts and financial records (see, for example, s 89 of the Associations Incorporation Reform Act 2012 (Vic)); and
3.
lodge financial returns as required by the Associations Incorporation Acts (see, for example, s 102 of the Associations Incorporation Reform Act 2012 (Vic)). The individual requirements vary, but as a general rule all incorporated associations must hold an annual general meeting at regular intervals as required by the Associations Incorporation Acts: see, for example, s 63 of the Associations Incorporation Reform Act 2012 (Vic). Audit requirements vary considerably. A tiered system applies in the Australian Capital Territory, the Northern Territory, South Australia, Queensland, New South Wales and Victoria. The Tiered System in Victoria
Under the Associations Incorporation Reform Act 2012 (Vic) an association falls within one of three tiers according to its total revenue:
[2.475]
Tier 1 – less than $250,000, s 90(2) of the Associations Incorporation Reform Act 2012 (Vic) . Tier 2 – $250,000 to $1 million, s 90(3) of the Associations Incorporation Reform Act 2012 (Vic). Tier 3 – more than $1 million, s 90(4) of the Associations Incorporation Reform Act 2012 (Vic).
Chapter 2
CHAPTER
60
CORPORATIONS LAW: IN PRINCIPLE
Total revenue refers to the association's total income from all its activities during its financial year, before deducting any expenses including the cost of goods that it sold, ss 90(5) and (6) of the Associations Incorporation Reform Act 2012 (Vic). Reporting and audit obligations ....................................................................................................................................................................... [2.477] In Victoria, Tier 1 associations must submit the financial statements at the first annual general meeting for that financial year. See, for example, s 92 of the Associations Incorporation Reform Act 2012 (Vic). Tier 1 associations do not need to have their financial statements externally reviewed or audited unless:
• their rules state otherwise (audit or review); • a majority of members vote to do so at a general meeting (review only), or • the Registrar of Incorporated Associations directs them to do so. See s 93 of the Associations Incorporation Reform Act 2012 (Vic). Associations that fall under Tier 2 and 3 must be prepare financial statements in accordance with the Australian Accounting Standards issued by the Australian Accounting Standards Board. See ss 95 and 98 of the Associations Incorporation Reform Act 2012 (Vic). For Tier 2 associations, financial statements must be reviewed by an independent accountant, in accordance with Auditing Standards on Review Engagements; ss 95 and 96 of the Associations Incorporation Reform Act 2012 (Vic). Where the rules of the Association require that the accounts are audited then that auditor's report may be submitted, together with the financial statements, to members at the AGM and there is no need to have the accounts reviewed by an independent accountant. For Tier 3 associations, the financial statements must be prepared and audited by an independent auditor in accordance with the Australian Auditing Standards; ss 98 and 99 of the Associations Incorporation Reform Act 2012 (Vic). The Registrar, or any other official responsible for the administration of the Associations Incorporation Acts in each jurisdiction, has wide powers of inspection similar to those of ASIC under the Corporations Act 2001 (Cth): see, for example, Pt 13 of the Associations Incorporation Reform Act 2012 (Vic). The Associations Incorporation Acts provide specific penalties for breaches of particular sections and include general offence and penalty provisions: see, for example, Pt 14 of the Associations Incorporation Reform Act 2012 (Vic). These are intended primarily to protect the general public against any abuse by an incorporated association of its not-for-profit status, and to ensure compliance with the regulatory scheme. If an association breaches the prohibition against trading or if its members derive any pecuniary profits as a
2
BUSINESS ORGANISATIONS
61
result of its activities, the association's registration may be cancelled, and the members will be subject to financial penalties and may lose the protection of limited liability: see, for example, s 52 of the Associations Incorporation Reform Act 2012 (Vic). Restructuring incorporated associations ....................................................................................................................................................................... [2.480] It is possible in some jurisdictions for an incorporated association (or a not-for-profit association which is eligible to be incorporated as an association) to be restructured, either voluntarily or at the direction of the Registrar, without the need for the association to be formally wound up: see for example, Associations Incorporation Act 1985 (SA), s 40B.
Transfer of incorporation Voluntary transfer to or from the associations incorporation regime [2.490] A not-for-profit association which is incorporated under another statutory regime such as the Corporations Act 2001 (Cth) may apply to transfer its registration or “migrate” to one of the Associations Incorporation Acts without first having to wind up the association and reincorporate: see, for example, ss 10 – 15 of the Associations Incorporation Reform Act 2012 (Vic). Conversely, an incorporated association may resolve by special resolution to migrate to another statutory regime if, for example, it had become a national organisation and registration as a company limited by guarantee was more appropriate: see, for example, ss 109 – 115 of the Associations Incorporation Reform Act 2012 (Vic). Directed transfer from the associations incorporation regime
In circumstances where an incorporated association has in effect “outgrown” the regime, the Registrar may direct it to transfer its registration to another statutory regime on the grounds that its continued incorporation as an association would be inappropriate or inconvenient because of:
[2.500]
(a)
the scale of nature of its activities;
(b)
the value or nature of its property;
(c)
the extent or nature of its dealing with the public; or
(d)
any other prescribed reason: see, for example, Associations Incorporation Reform Act 2012 (Vic), s 111(4). The existence of this power reflects public concern that large not-for-profit organisations should be required to be registered under the as companies limited by guarantee and subject to the rules regulating public companies, rather than under the less stringent regulatory regime imposed by the Associations Incorporation Acts.
Chapter 2
CHAPTER
62
CORPORATIONS LAW: IN PRINCIPLE
Members’ rights .......................................................................................................................................................................
The courts have traditionally been very reluctant to intervene in the internal affairs of any associations, regardless of whether an association was incorporated or not. The exceptions were:
[2.510]
1.
where the members had a proprietary right or interest in an association's property – members of an incorporated association do not have such rights (see, for example, s 9 of the Associations Incorporation Reform Act 2012 (Vic)); or
2.
where a member's trade, profession or livelihood was involved, as with trade or professional associations or professional or semi-professional sporting bodies. In any other circumstances it was very difficult to convince a court to accept jurisdiction in any disputes concerning members' rights: Cameron v Hogan (1934) 51 CLR 358. Several of the Associations Incorporation Acts now provide that, like the constitution of a company (see Chapter 5), the rules of an incorporated association take effect as a contract between an association and its members and between individual members: see, for example, Associations Incorporation Reform Act 2012 (Vic), s 46. On its face a provision of this kind would appear to make it clear that the rules are intended to create a legally enforceable relationship between the members. In Victoria (and in some other jurisdictions) the members also have a statutory right to go to the court for an order which: • directs that the rules be observed: s 67(1) Associations Incorporation Reform Act 2012 (Vic); or • declares and enforces the rights or obligations of the members amongst themselves, or of the members and the association: s 67(2) Associations Incorporation Reform Act 2012 (Vic). This right does not depend on the members having a proprietary or any other right or interest in the association's property: s 67(3) Associations Incorporation Reform Act 2012 (Vic). However, the little authority that exists as to the effect of these and similar provisions in other jurisdictions indicates that the existence of these provisions has had little effect on the traditional judicial reluctance to intervene in the internal affairs of associations: see Re Maggacis [1994] 1 Qd R 59. In Victoria, the rules of all incorporated associations are required to include a grievance procedure for dealing with disputes. A procedure of this kind, which must be in accordance with the principles of natural justice, provides an
2
BUSINESS ORGANISATIONS
63
alternative means for dealing with disputes arising under the rules of an association: Associations Incorporation Reform Act 2012 (Vic), s 55. Under the general law, an association could only expel or take any other disciplinary action against a member if its rules included power to do so. Any such action must: • comply strictly with the procedure set out in the rules; and • be carried out in accordance with the principles of natural justice. Cancellation of incorporation, winding up and distribution of surplus assets ....................................................................................................................................................................... [2.520] Many not-for-profit associations are formed to pursue purposes that are popular for a period of time but gradually become irrelevant. When this occurs an association often becomes inactive and its membership dwindles to a point where it is difficult to ascertain the identity of the members, or even whether any members still exist. The statutes include several procedures designed to provide an orderly method of dealing with this kind of situation. Furthermore, the rules of an association may contemplate this situation.
Cancellation of incorporation
Most Associations Incorporation Acts include an administrative power to initiate a procedure leading to the cancellation of the registration of an incorporated association that appears to be defunct. This is an effective sanction which can be used to ensure that associations which have in practice ceased to exist are removed from the register: see, for example, Associations Incorporation Reform Act 2012 (Vic), Pt 9. [2.530]
Winding up and Cancellation [2.540] An incorporated association is a body corporate and the grounds and procedures for winding it up are broadly similar to those which apply when a company is wound up: see Chapter 24 . An incorporated association may be wound up:
• voluntarily under the rules by the members passing a special resolution to that effect or as provided in the Associations Incorporation Acts (see, for example: Associations Incorporation Reform Act 2012 (Vic), s 125). • by order of the Court on the grounds set out in the statute (see, for example: Associations Incorporation Reform Act 2012 (Vic), s 126); or • in South Australia, Victoria and the Northern Territory on the certificate of the Registrar, or other appropriate official, on the grounds listed in the statute: (see for example: Associations Incorporation Reform Act 2012 (Vic), s 127).
Chapter 2
CHAPTER
64
CORPORATIONS LAW: IN PRINCIPLE
The grounds for winding up an incorporated association by the Court are essentially the same as for companies: for example, Associations Incorporation Reform Act 2012 (Vic), s 126. Similar but broader grounds may be relied on by the Registrar: for example, Associations Incorporation Reform Act 2012 (Vic), s 127. Distribution of surplus assets [2.550] After an incorporated association has been wound up or its registration has been cancelled and its debts and other liabilities have been paid, it is necessary to dispose of any surplus assets which were owned by the association. In many instances the rules will provide that surplus assets are to be transferred to another association with similar objects and purposes. In most Australian jurisdictions an association's rules will be subject to the overriding provisions in the Associations Incorporation Acts which:
• prohibit any distribution of surplus assets to the members of the former association; and • impose a varying degree of judicial control over any other proposed disposition. In Queensland, the members have power to decide on the disposition of surplus assets by special resolution, regardless of the manner in which an association was wound up.
Companies registered under the Corporations Act The focus of this book is on companies registered under the Corporations Act 2001 (Cth) (Corporations Act). There are several different types of companies that can be registered. These different types of companies can be classified according to liability of the members, public status and size. [2.560]
Companies classified according to liability of members ....................................................................................................................................................................... [2.570] The main way companies are classified is according to the liability of members.
CHAPTER
2
BUSINESS ORGANISATIONS
65
Figure 2.2: Classification of companies according to liability of members ....................................................................................................
Note: Prior to 1995, a company could be limited by shares and guarantee and any such company could be either a proprietary or public company. Any company limited by shares and guarantee registered between 9 December 1995 and 1 July 1998 had to be a public company. From 1 July 1998 it was no longer possible to register a company limited by both shares and guarantee. Transitional provisions preserve the status of the very small number of existing companies limited by both shares and guarantee. Limited by shares
A company limited by shares (whether public or proprietary) is by far the most common form of company. In the event that a company does not have sufficient assets to meet all its debts, each member (called a “shareholder”) is only liable for the amount, if any, that remains unpaid on their shares: Corporations Act, s 9 (definition of “company limited by shares”) and s 516. For example, if 1,000 shares have been allotted at an issue price of $1.20, the full extent of that member's liability for debts incurred by the company is $1,200. The name of a company limited by shares must end in either “Limited” or “Ltd” for public companies or “Proprietary Limited” or “Pty Ltd” for proprietary companies also commonly referred to as private companies, to indicate that the liability of the members is limited in this way. The shares are usually paid for in full at the time of issue. Alternatively, “partly paid” shares may be issued where some of the issue price will be paid on allotment with the balance paid in instalments when requested or “called up” by the company as it needs further capital: Corporations Act, s 254A(1)(c). [2.590]
Chapter 2
[2.580]
66
CORPORATIONS LAW: IN PRINCIPLE
The limitation of personal liability in this way is the main incentive for use of this type of company. It is important to appreciate that this advantage is often negated for small business operators unless the company has substantial assets. Financial institutions commonly insist that personal guarantees be given in addition to security over the company's assets. Thus, while the controllers will not be personally liable as members for any default in repayments by the company to unsecured creditors, they will be liable in their personal capacity as guarantors. Limited by guarantee
In a company limited by guarantee, a member is not required to contribute any capital unless and until there is a shortfall when the company is wound up: Corporations Act, s 9 (definition of “company limited by guarantee”) and s 517. The company's constitution must prescribe the amount of the guarantee – that is, the amount that each member is bound to contribute if necessary: Corporations Act, s 117(2)(m). For example, if the guarantee stated in the constitution is $10 per member then that is the full extent of each member's liability in the event that the company is unable to pay its creditors in full when it is wound up. The difference between a company limited by guarantee and a company limited by shares is the timing of the capital contribution. Because members of a company limited by guarantee do not contribute until a winding up, there is no injection of working capital when the company is formed or when additional people become members. Therefore, this type of company is usually not suitable for commercial enterprises. Virtually all companies that are limited by guarantee are not-for-profit organisations that raise funds from other sources such as grants, subscriptions, social activities and public appeals. This is reflected in the fact that, since 1 July 1998, the only new companies that may be registered without the word “limited” in their name are companies limited by guarantee that are formed solely for charitable purposes: Corporations Act, s 150. [2.600]
No liability
No liability companies evolved to cater for the speculative nature of the mining industry. See s 112(2) of the Corporations Act: [2.610]
SECTION 112(2) Types of companies No liability companies (2) A company may be registered as a no liability company only if:
2
BUSINESS ORGANISATIONS
67
(a)
the company has a share capital; and
(b)
the company’s constitution states that its sole objects are mining purposes; and
(c)
the company has no contractual right under its constitution to recover calls made on its shares from a shareholder who fails to pay them.
Note 1: Section 9 defines mining purposes and minerals. Note 2: Special provisions on no liability companies are found in the sections referred to in the following table: [not extracted].
A member of a no liability company will not be liable to pay any “calls” (that is, instalments of the issue price of partly paid shares). If, because the company needs further capital, it makes a call on the shares, the member can choose either to pay the call or to forfeit the shares: Corporations Act, s 254Q(1). Thus, there is “no liability” to pay any unpaid amount on the shares (contrast with a company limited by shares): Corporations Act, s 254M. The name of a no liability company must end in “NL”. Section 112(2)(b) of the Corporations Act above provides that a no liability company must be a mining company – that is, it must have a provision in its constitution that limits its business to mining purposes as defined in s 9 of the Corporations Act: see also Corporations Act, s 125. However, not all mining companies are no liability companies. In some circumstances, it may be preferable for a mining enterprise to be conducted as a company limited by shares in order to avoid the restrictions imposed on no liability companies under s 112(2) of the Corporations Act (and other provisions in the Corporations Act 2001 (Cth)). Unlimited company
An unlimited company must have a share capital but there is no limit placed on the liability of the members: Corporations Act, s 9 (definition of “unlimited company”) and s 112(1). That is, unlike a company limited by shares, the liability of the members is not limited to the issue price. These companies resemble partnerships in that a single member can be liable for the full amount of any shortfall between the company's assets and its debts, if other members cannot pay. Because the members do not have limited liability, an unlimited company is not required to add a suffix after its name. Some legal and accounting practices are conducted as unlimited liability companies because professional rules do not allow any other form of incorporation. Liability is not limited, but the other advantages of incorporation are still obtained. [2.620]
Chapter 2
CHAPTER
68
CORPORATIONS LAW: IN PRINCIPLE
Companies classified by public status .......................................................................................................................................................................
As well as being classified according to the liability of the members, all companies under the Corporations Act 2001 (Cth) are also classified as either public or proprietary. Proprietary companies are divided into a further subclassification of “small” or “large”. A small percentage of public companies are listed on the Australian Securities Exchange Ltd (ASX). To obtain listing, companies must comply with the ASX Listing Rules. Proprietary companies are by far the most popular type of company, and subsidiaries of public companies are often proprietary companies. A public company is any company that is not a proprietary company: Corporations Act, s 9 (definition of “public company”). A proprietary company is any company that registers as, or converts to, a proprietary company: Corporations Act, s 45A(1). Registration as, or conversion to, a proprietary company requires compliance with the restrictions contained in s 113(1) and (3) of the Corporations Act.
[2.630]
SECTION 113(1), (3) Proprietary companies (1)
(2) (3)
A company must have shareholders if it is to:
no
more
than
50
(a)
be registered as a proprietary company; or
(b)
change to a proprietary company; or
(c)
remain registered as a proprietary company.
non-employee
Note: Proprietary companies have different financial reporting obligations depending on whether they are small proprietary companies or large proprietary companies (see section 45A and Part 2M.3). … A proprietary company must not engage in any activity that would require disclosure to investors under Chapter 6D, except for an offer of its shares to: (a)
existing shareholders of the company; or
(b)
employees of the company or of a subsidiary of the company.
Note: If a proprietary company contravenes this subsection, ASIC may require it to change to a public company (see section 165).
The policy underlying the Corporations Act 2001 (Cth) is to impose greater ongoing reporting obligations on public companies than on proprietary companies. Proprietary companies are, therefore, less costly to administratively maintain.
CHAPTER
2
BUSINESS ORGANISATIONS
69
• a proprietary company limited by shares will have “Pty Ltd” as part of its name; • a public company limited by shares will only have “Ltd” as part of its name; and • a no liability company (which must be a public company) will have “NL” as part of its name. There are other differences between a public company and a proprietary company, for example, the number of directors required and the internal rules that apply. The main difference is the ability of public companies to raise funds from the public by complying with the disclosure requirements in Ch 6D: Corporations Act, s 113(3). If, at any time, the prohibition on fundraising becomes an onerous restriction for a proprietary company, it is possible for the company to convert to a public company. Small Business Guide
Part 1.5 of the Corporations Act 2001 (Cth) is a plain English guide to the main rules in the Corporations Act that apply to proprietary companies limited by shares. Because a proprietary company limited by shares is the most common type of company used by small business, it is intended to help those involved in such businesses understand their basic legal obligations. It refers the reader to the relevant sections of the legislation and is a useful summary of the registration and ongoing requirements of a proprietary company. [2.640]
[2.650] Figure 2.3: Summary – public and proprietary companies ....................................................................................................
Proprietary companies classified according to size
Proprietary companies are further classified as “small” or “large” by applying certain objective tests of size and value to the business. Thus, the classification of a company may vary from year to year – it cannot choose to
[2.660]
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It is easy to distinguish whether a company is a proprietary or public company from its name (Corporations Act, ss 148 – 149):
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be permanently small or large. The definitions of “small” and “large” are contained in s 45A(2) – (4) of the Corporations Act:
SECTION 45A(2) – (4) Proprietary companies Small proprietary company (2)
A proprietary company is a small proprietary company for a financial year if it satisfies at least 2 of the following paragraphs: (a) the consolidated gross operating revenue for the financial year of the company and the entities it controls (if any) is less than $25 million, or any other amount prescribed by the regulations for the purposes of this paragraph; (b)
the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $12.5 million, or any other amount prescribed by the regulations for the purposes of this paragraph;
(c)
the company and the entities it controls (if any) have fewer than 50 employees at the end of the financial year.
Note: A small proprietary company generally has reduced financial reporting requirements (see subsection 292(2)). Large proprietary company (3)
A proprietary company is a large proprietary company for a financial year if it satisfies at least 2 of the following paragraphs: (a)
the consolidated gross operating revenue for the financial year of the company and the entities it controls (if any) is $25 million or any other amount prescribed by the regulations for the purposes of paragraph (2)(a), or more;
(b)
the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is $12.5 million or more or any other amount prescribed by the regulations for the purposes of paragraph (2)(b), or more;
(c)
the company and the entities it controls (if any) have 50, or any other number prescribed by the regulations for the purposes of paragraph (2)(c), or more employees at the end of the financial year.
When a company controls an entity (4)
For the purposes of this section, the question whether a proprietary company controls an entity is to be decided in accordance with the accounting standards made for the purposes of paragraph 295(2)(b) (even if the standards do not otherwise apply to the company).
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Advantages of classification: reporting burden relief
The aim of the distinction is to ensure that truly small business operations have a reduced regulatory burden. Large businesses (that are still run as proprietary companies) need to have more demanding reporting obligations because, as a matter of policy, public accountability obligations (particularly to creditors) are thought to outweigh the consideration of commercial confidentiality. Unlike large proprietary companies, disclosing entities, public companies and registered schemes, small proprietary companies generally do not have to prepare financial reports or have them audited: Corporations Act, s 292(1) and (2) and ASIC Regulatory Guide 115. Audit requirement relief: ASIC Regulatory Guide 115
Difficulties arise with companies that fall somewhere between those that are clearly “small” or “large”. ASIC does, however, have power to relieve a proprietary company from the audit requirements imposed by the Corporations Act in the circumstances set out in s 342(1) of the Corporations Act. Section 342(2) and (3) of the Corporations Act set out the factors ASIC must consider when exercising its discretion – for example, the expected costs and practical difficulties for the company weighed against the expected benefits of compliance: see Incat Australia Pty Ltd v ASIC (2000) 33 ACSR 462; Re SRKKK and ASIC (2002) 42 ACSR 551. ASIC has issued a Regulatory Guide which sets out the conditions under which it will relieve large proprietary companies from the audit requirements: see ASIC Regulatory Guide RG 115 (formerly Policy Statement 115): “Audit Relief for Proprietary Companies”. [2.680]
Proposals for reform to classification of companies: Corporations Act vs Accounting and Auditing Standards [2.690] In March 2001, the Parliamentary Joint Committee on Corporations and Securities (now the Parliamentary Joint Committee on Corporations and Financial Services) recommended major changes to this system of classification in its “Report on Aspects of the Regulation of Proprietary Companies”. One of the recommendations of the Joint Committee's report was to replace the current distinction between “large and small” found in s 45A of the Corporations Act, with the previous distinction involving exempt and non-exempt proprietary companies. One of the key reasons for the proposed reform to the classification of companies was to align the reporting requirements under the Corporations Act 2001 (Cth) with that of the Australian Accounting and Auditing Standards. Under the Accounting Standards, an entity that meets the definition of “reporting entity” under the Australian Accounting Standards must comply with all relevant accounting standards when compiling its annual report. The requirement under the accounting
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[2.670]
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standards is at odds with the Corporations Act reporting requirements for small proprietary companies. As of January 2016 the Corporations Act has not been amended to reflect the recommendations of the Parliamentary Joint Committee. 2015 Total number of companies registered in Australia [2.695] TABLE 2.2 Statistics – Company registrations in Australia from 2009 – 2015 2014/15 2013/14 2012/13 2011/12 2010/11 2009/10 Companies 2,245,363 2,118,666 2,012,241 1,921,545 1,839,772 1,768,526 registered in Australia ASIC Annual Report 2014-15, 5.5.1 Summary of Key Stakeholder Data 2009-15, available at: http://www.download.asic.gov.au/media/3437945/asic-annual-report-2014-15-full.pdf
Change of status .......................................................................................................................................................................
After a company has been registered it is possible, in most instances, for it to convert to another type of company. The procedures set out in ss 163 – 164 of the Corporations Act must be followed. The requirements vary depending on the nature of the change, but include a special resolution of members. In some situations ASIC may alter a company's status. For example, if a proprietary company has not complied with the requirements of s 113 of the Corporations Act, ASIC may change the company's registration from a proprietary company to a public company: Corporations Act, s 165(3). Section 162 of the Corporations Act sets out the changes of status that are permitted: see also “ASIC Information Sheet: Changing Company Type” (INFO 18) available at http://www.asic.gov.au or from any ASIC office. [2.700]
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Business Organisations.)
Practice Questions ...................................................................................................................................... Partnerships
1.
Describe the essential features of a partnership as defined in s 5(1) of the Partnership Act 1958 (Vic) (or its equivalent in your State or Territory).
2.
Compile a list of guidelines to be followed when deciding whether or not a partnership exists in a particular fact situation.
3.
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73
Explain the most important differences between the position of a member of a partnership and a shareholder (member) of a company in respect of: (a) the partnership's or company's dealings with outsiders; and (b)
relations between the members.
4.
Describe a situation where a person could be held out as a partner under s 18 of the Partnership Act 1958 (Vic) (or its equivalent in your State or Territory).
5.
On what grounds can a partnership be terminated?
Associations
1.
Identify the major differences between a business association and a not-for-profit association.
2.
What are the major disadvantages of an unincorporated not-for-profit association's lack of legal status? Give some reasons why the members of an unincorporated association might decide not to apply for the association to be registered as an incorporated association.
3.
What does “not-for-profit” mean?
4.
What are the essential elements required for a not-for-profit association to become registered as an incorporated association in your State or Territory? On what grounds might an application be refused?
5.
Describe the procedure to be followed when incorporating an association. What requirements must be complied with in your State or Territory immediately after registration and what ongoing requirements must be complied with by all incorporated associations? Do different rules apply to some incorporated associations?
6.
What methods are employed when an incorporated association wants to disband?
Companies
1.
Define and briefly explain the following types of business entities: (a) proprietary companies – “small” and “large”; (b)
holding and subsidiary companies;
(c)
recognised and foreign companies;
(d)
related bodies corporate;
(e)
registrable Australian bodies; and
(f)
trustee companies.
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2.
What are the main differences between proprietary companies and public companies? Identify the main advantages of each.
3.
What are the main differences between a public entity and a listed entity? What procedure must be followed to convert: (a) a proprietary company limited by shares to a public company limited by shares;
4.
5.
(b)
a company limited by guarantee to a public company limited by shares; and
(c)
a public company limited by shares to a proprietary company limited by shares?
Do you agree with the 2007 changes in the threshold amounts for small and large proprietary companies under s 45A of the Corporations Act? Have the reforms gone far enough?
Essay Questions ...................................................................................................................................... 1.
What are the essential differences for reporting purposes between a “reporting entity” under the Accounting and Auditing Standards and a “small proprietary company” under the Corporations Act? Should reporting requirements be harmonised under both the Australian Accounting Standards and the Corporations Act?
2.
“A company structure is the most popular business entity in Australia because companies provide significant advantages.” Do you agree with this statement? Are there any disadvantages to incorporation?
Problems for Discussion ...................................................................................................................................... 1.
Andy, Bob and Chris were old school friends. Bob and Chris were running a surf shop together. The business was having financial difficulties. Andy had recently inherited a lot of money and Bob and Chris asked him to lend the business $100,000 to enable them to buy sufficient stock for the summer season. Andy wanted to help his friends but also wanted to ensure that he would get his money back. He agreed to lend Bob and Chris the money in return for a payment of $10,000 per year out of the gross returns of the shop. The terms of the loan also provided that Bob and Chris would consult Andy about any major contracts entered into by the business and gave him a right to inspect the accounts at regular intervals.
2.
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(a)
Discuss whether or not a partnership exists between Andy, Chris and Bob.
(b)
Would it make any difference if the terms of the loan provided for Andy to be paid $10,000 per year out of the profits of the business?
Quick and Smart are in partnership as public accountants. Smart entered into the following transactions in the name of the partnership without Quick's knowledge and without express authority to do so: (a) he purchased new stationery for the firm; and (b)
he subscribed for $10,000 worth of shares in New Crown Mining expecting to make a quick profit when the company listed, but the float was a failure. Discuss the liability of the partnership for these transactions. Explain when Quick may be personally liable for these transactions. 3.
Alex has recently retired from partnership in the firm of ABC & Co (ABC). When he retired he ensured that his name was removed from the firm's letterhead. No other notification of his retirement was given to the firm's clients. After Alex retired, ABC got into financial difficulties and is now insolvent. Alex has just received a demand for payment from Daniel, who is a creditor of ABC. This debt was incurred after Alex's retirement. Discuss whether Alex would be personally liable for ABC's debt owed to Daniel. Would the position be different if the debt had been incurred before Alex retired?
4.
In 1991 Tom, Bill and Jim decided to set up a vineyard and winery together. Tom owned suitable land in the Yarra Valley, Bill supplied the vines and Jim provided the winemaking machinery. They agreed to share the profits and losses equally but did not think it was necessary to enter into a written partnership agreement. The business was successful and after four years they increased the size of the vineyard by using some of the profits to buy another five hectares of land. A few months ago they sold the business and dissolved the partnership. The sale price reflected the fact that the value of the land had greatly increased since 1991 in proportion to the value of the vines and the machinery. (a) What constituted the partnership property when the partnership was formed? Was the extra 5 hectares of land partnership property?
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(b)
5.
How will the proceeds of the sale of the business be divided? Is Tom entitled to that part of the sale price that is attributable to the increased value of the original land?
Alice lives in a country town. She is one of a group of people living there who have a common interest in gardening. They have been meeting regularly for the past year to share ideas and exchange plants among themselves. Their meetings have been very informal and those attending have not so far considered that the group needs a constitution or rules of any kind. In the last few months the numbers have grown and more than 20 people now come to most of the meetings. At the invitation of the town's hospital auxiliary, the group organised a stall selling plants at the hospital's annual fete which was very successful. All the profits from the stall went to the hospital. At the last meeting several people suggested that it would be a good idea to run a stall on a regular basis at the local Sunday market. This led to an argument between some of those present at the meeting who wanted to donate all profits to local charities and others who felt that any profits should be divided among those contributing plants or helping to run the stall. Alice is seeking advice about the implications of the suggestion to run a stall on a regular basis. Advise Alice: (a) Whether the group should consider adopting a formal legal structure? (b)
If so, what legal structure would be most appropriate?
(c)
Would it make any difference if any profits made from running a stall were: (i) donated to local charities, or (ii)
6.
divided among the members?
Nicola and May are partners in a business which operates a secondhand bookshop. They have two employees working for the business. The shop is located in leased premises. The business is doing well and has been profitable for them. An opportunity has arisen to purchase two second-hand bookshops in nearby suburbs. Nicola and May are keen to expand their business. They will need a large injection of funds to purchase the additional businesses. They will need to appoint a manager to at least one of the
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77
Nicola is concerned about her potential liability for the debts and liabilities of the partnership. Also, she is concerned about the future of the business if one of them should decide to leave, as the lease is in both of their names. Advise Nicola on the advantages and disadvantages of incorporating. If you recommend incorporation, what form of incorporation would be the most appropriate? Why? 7.
Mary is the owner of a very successful business selling women's shoes. Mary's business is expanding rapidly and she wants to update her business structure from that of sole trader to a more appropriate structure. She seeks the advice of her accountant who tells her that she has a number of options, all of which have advantages and disadvantages. What would be your recommendation to Mary and why? What factors would influence your advice? Susan is a mineral geologist and is keen on capitalising on Australia's mineral boom. She decides to start a mining venture. Her main asset is a lease agreement which provides her with exploration rights over 1,000 square kilometres in the Kimberley region of Western Australia. She is unsure what type of business structure to create. Her financial adviser has told her that she will need to go “public” to compete with the bigger mining operations. Susan is also unsure how much capital is required for her start-up but knows that mining exploration is expensive, with numerous ongoing costs and no guarantee of success. Advise Susan: (a) Whether a public entity is the most appropriate entity for her mining venture. (b)
Should Susan incorporate? If so, should Susan adopt a company structure?
(c)
Assuming Susan does adopt a company structure, what type of liability company should Susan adopt?
Guide to Problem Solving ...................................................................................................................................... Form of association
1.
Consider the possible forms of association – corporate and noncorporate – but exclude any that are clearly not appropriate (for example, exclude a no liability company when the venture is not a
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shops, as they will be fully occupied by the other two.
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mining business; exclude a partnership when it is a not-for-profit group; and exclude an incorporated association when there is a profit-making intention). 2.
Consider the comparative advantages and disadvantages of each form of association in the light of the facts given. For instance, if the client is concerned about potential tort claims, focus on a company that has limited liability; if the client is concerned about retaining control of the business, do not focus on a public company as the client would be forced to share control – a public company requires a minimum of three directors.
3.
Remember that there can be many relevant factors, not all of them related to corporate law issues. Taxation, stamp duty and “human factors” (such as the ability to understand the implications of transferring the business to a company) can also be important.
Partnerships Does a partnership exist? (a) Consider the four requirements of the statutory definition of partnership applying in your State or Territory (s 5 (Vic)) in the light of the facts given. (b)
Consider any special rules, if applicable: s 6 (Vic).
You are looking for the real intention of the parties as evidenced in the facts. It is necessary to weigh up the matters set out in the guidelines, such as the sharing of profits, against the way the parties acted. Remember that sharing of profits is not of itself enough to create a partnership or even a presumption of partnership which must be disproved. Maximum size is normally 20: Corporations Act, s 115
If a partnership exists, the maximum number of members is normally 20, except for some professional partnerships. If there are more than 20 partners the firm must register under the Corporations Act. Is a partner bound in contract?
Consider the tests in the Partnership Acts: s 9 (Vic). If the transaction: • was entered into in “the usual way”; • was “business of the kind carried on by the firm”; and • the third party had no knowledge of lack of authority, then the partner(s) will probably be bound. Liability of partners in contract: Sections 9, 13 (Vic)
Consider the tests above and remember that all partners are jointly liable in contract: s 13 (Vic). Note that joint liability means the outsider should sue the firm: Kendall v Hamilton (1879) 4 App Cas 504.
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79
Liability in tort: Sections 14-16 (Vic)
(a)
where the act was committed by the partner in the “ordinary course of the business”; or
(b) where the partner was authorised to so act: s 14 (Vic). Liability in tort is joint and several: s 16 (Vic). Where money or property is misapplied, the firm is liable: s 15 (Vic). Liability of incoming and outgoing partners
First, establish when the obligation was incurred. If it was incurred after a partner joined the firm and before retirement, that partner will be liable: ss 13 and 21 (Vic). If the obligation was incurred after retirement, the issues will be: (a)
whether the person is liable by holding out (s 18 (Vic)); and
(b) whether adequate notice of retirement has been given: s 40 (Vic). If the question does not say when the obligation was incurred, a discussion of all of these rules is required. Duties of partners to each other
Partnership is a fiduciary relationship based on agency law. Remember that to a large extent the fiduciary obligations between partners can be modified by the partnership agreement. (a)
For management matters, check the partnership agreement (express or implied) and/or the Act: s 28 (Vic).
(b)
On partnership property: ss 24 – 27 (Vic).
(c)
On private profits and disclosure to other partners: ss 32 and 33 (Vic).
(d)
On competing with the firm: s 34 (Vic); and Jenkins v Bennett [1965] WAR 42.
Profits after dissolution: Section 46 (Vic)
A retired partner may share in such profits subject to two qualifications: (a)
where there has been no final settlement of accounts; and
(b) where there is no contrary agreement. The share is based on what is attributable to the use of the retired partner's share of the partnership assets. Partnership property: Sections 24–25 (Vic)
The normal position is that all property brought into a partnership is partnership property: s 24 (Vic). Similarly, all property bought with partnership money is deemed to have been bought on account of the firm so is also partnership property: s 25 (Vic). When a firm is dissolved the normal rule is that each partner is entitled to share equally in the firm's property subject to any agreement to the contrary.
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A firm is liable in tort:
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Incorporated associations Eligibility for incorporation as an incorporated association
An association must be formed for a lawful, not-for-profit purpose. • Consider the meaning of not-for-profit, especially in the light of the expanded definition of trading and pecuniary profit and gain in the Associations Incorporation Acts. • Consider the strict statutory prohibition against trading or the members' deriving any pecuniary profit or gain from the association's activities and note the exceptions to this. • Consider the policy reasons for the Registrar's discretionary powers to refuse an application for incorporation or to direct that an incorporated association transfer its registration to a different regime. TABLE 2.3 Unincorporated vs incorporated associations Unincorporated Not-for-Profit Association No status as a separate legal entity Cannot buy or own property, enter into contracts, sue or be sued, be the donee of a gift etc.
Incorporated Association Body corporate Has perpetual succession (ie, is not dependent on the existence of members) can own property, make contracts, sue and be sued etc Liability of members limited to subscription unless Members have limited liability rules provide otherwise Committee members liable in contract and in The association is normally liable in contract and some cases in tort tort The members can conduct the association's affairs Subject to the regulatory regime in the relevant in privacy – no regulation State Act May be difficult for members to enforce their Some statutory protection of members' rights rights No financial accountability Required to keep proper accounts and lodge financial returns Dissolution and distribution of assets as decided by Winding up and distribution of assets controlled the members by the relevant State Act
TABLE 2.4 Partnership Acts Comparative Table VIC 4 5 6 8 9 10 11 12 13 14 15 16 21 23 24 25 26 28
ACT 5 6 7 2 9 10 11 12 13 14 15 16 21 23 24 26 27 29
NSW 46 1 2 4 5 6 7 8 9 10 11 12 17 19 20 21 22 24
NT 4 5 6 8 9 10 11 12 13 14 15 16 21 23 24 25 26 28
QLD 121 5 6 4 8 9 10 11 12 13 14 15 20 22 23 24 25 27
SA 1C(1) 1 2 4 5 6 7 8 9 10 11 12 17 19 20 21 22 24
TAS 5 6 7 9 10 11 12 13 14 15 16 17 22 24 25 26 27 29
WA 6 7 8 10 26 13 14 15 16 17 18 19 24 29 30 31 32 34
VIC 29 32 33 34 35 36 37 38 39 40 41 42 43 46 48
ACT 30 33 34 35 36 37 38 39 40 41 42 44 45 48 50
NSW 25 28 29 30 31 32 33 34 35 36 37 38 39 42 44
NT 29 32 33 34 35 36 37 38 39 40 41 42 43 46 48
2
QLD 28 31 32 33 34 35 36 37 38 39 40 41 42 45 47
BUSINESS ORGANISATIONS
SA 25 28 29 30 31 32 33 34 35 36 37 38 39 42 44
TAS 30 33 34 35 36 37 38 39 40 41 42 43 44 47 49
81
WA 35 39 40 41 42 43 44 45 46 47 48 49 50 55 57
Further Reading ...................................................................................................................................... Michael A “Australian corporate law reform or evolution?” [2012] ALRS 1 Austin RP and Ramsay I Ford's Principles of Corporations Law 16th ed, LexisNexis, 2014, Ch 1 Baxt R, Fletcher KL and Fridman S, Corporations and Associations: Cases and Materials 10th ed, LexisNexis Butterworths, 2008, Chs 1-2 Fletcher KL The Law of Partnership in Australia 9th ed, Thomson Lawbook Co, 2007 Fletcher KL “Interstate Trade: The Last Hurdle for Limited Partnerships?” (1993) 11 C&SLJ 433 Graw S An Outline of the Law of Partnership 4th ed, Thomson Reuters, 2011 Harris J and Hargovan A “The Relevance of Control in Establishing an Implied Agency Relationship Between a Company and its Owners” (2005) 23 C&SLJ 459 Harris J “Lifting the Corporate Veil on the basis of an Implied Agency: A Re-evalution of Smith, Stone and Knight” (2005) 23 C&SLJ 7 Alice K, Thomas C and Michael A “Corporate Governance Reform: An Empirical Study of the Changing Role and Responsibilities of Australian Boards and Directors” (2010) 24 Australian Journal of Corporate Law 148. Keeler JF “Contractual Actions for Damages against Unincorporated Bodies” (1971) 34 Modern Law Review 615 Lipton P, Herzberg A and Welsh M Understanding Company Law 18th ed, Thomson Reuters, 2015, Ch 3 Miles C and Dowler W A Guide to Business Law 21 st ed, Thomson Reuters, 2014
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Ramsay I M “The Expansion of Limited Liability: A Comment on Limited Liability Partnerships” (1993) 15 Sydney Law Review 537 Redmond P Companies and Securities Law: Commentary and Materials 6th ed, Thomson Reuters, 2013, Ch 1 Renton N Guide for Meetings and Organisations, Volume 1 8th ed, Thomson Lawbook Co, 2005 Sievers AS Halsbury's Laws of Australia (LexisNexis Butterworths, 2004) 435: Voluntary Associations Sievers AS Associations and Clubs Law in Australia and New Zealand 3rd ed, The Federation Press, 2010 Twomey M “Protection for Partners from Unlimited Liability in Certain Circumstances?” (2003) 24 The Company Lawyer 86 Veljanovski A “Limiting Liability: The Third Way” (2005) 79 Law Institute Journal 46 Woodward S ““Not-for-Profit” Motivation in a “For-Profit” Company Law Regime – National Baseline Data” (2003) 21 C&SLJ 102 Woodward S “Not-for-Profit Companies – Some Implications of Recent Corporate Law Reform” (1999) 17 C&SLJ 390
CHAPTER 3 .......................................................................................................
Useful Websites ....................................................................... 83 Aim ........................................................................................... 83 Related Topics ......................................................................... 84 Principles ................................................................................. 84 Which bodies must be registered? ..................................................... 84 Incorporation ................................................................................ 85 Registration .................................................................................. 85 Australian Company Numbers (ACNs) and Australian Business Numbers (ABNs) ........................................................................... 89 Company names ........................................................................... 90 Ongoing requirements .................................................................... 91 Company searches ......................................................................... 94 Mentor: Test your Knowledge ................................................. 94 Practice Questions ................................................................... 95 Problems for Discussion .......................................................... 95 Further Reading ....................................................................... 96
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for websites on the Topic of Registration.)
Aim ...................................................................................................................................... At the end of this topic you should know: • which companies and other bodies must register under the Corporations Act; • the basic requirements for registration of a company; and • the ongoing and administrative requirements imposed by the Corporations Act.
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Related Topics ...................................................................................................................................... Chapter 1 History, Administration and Reform; Chapter 2 Business Organisations; Chapter 5 Internal Rules
PRINCIPLES Which bodies must be registered? All companies and some other corporations that wish to carry on business in Australia must be registered under the Corporations Act 2001 (Cth).
[3.10]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Chapter 2—Aboriginal and Torres Strait Islander corporations, in particular Part 2–3—Applications for registration of an Aboriginal and Torres Strait Islander corporation and Division 29—What are the basic requirements for registration?;Part 3–3—Minimum Number of members in Aboriginal and Torres Strait corporatios, Division 77–5—Minimum number of members of Aboriginal and Torres Strait Islander corporations of the CATSI Act. It is important to note that the CATSI Act provides for an “indigeneity requirement” which reflects the “special measure” provision in the Preamble as follows: The Parliament of Australia intends that the following law will take effect according to its terms and be a special law for the descendants of the original inhabitants of Australia. The law is intended, for the purposes of paragraph 4 of Article 1 of the International Convention on the Elimination of All Forms of Racial Discrimination and the Racial Discrimination Act 1975, to be a special measure for the advancement and protection of Aboriginal peoples and Torres Strait Islanders.
The “indigeneity requirement” is found in Division 29-5: An Aboriginal and Torres Strait Islander corporation meets the Indigeneity requirement if the corporation has the following required number or percentage of its members who are Aboriginal and Torres Strait Islander persons: (a) if the corporation has 5 or more members—at least the percentage of members prescribed in the regulations for the purposes of this section; (b) if the corporation has fewer than 5 members but more than one member—all of the members, or all but one of the members; (c) if the corporation has only one member—that member.
For the meaning of Aboriginal and Torres Strait Islander person, see section 700–1.
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85
Pre-existing companies .......................................................................................................................................................................
Companies incorporated in Australia prior to 1 January 1991 and foreign companies registered in Australia at that time were automatically transferred to the Corporations Act when it came into force. Their certificates and documentation were recognised and taken over by ASIC. Registrable Australian bodies .......................................................................................................................................................................
Some types of corporations, such as incorporated associations and co-operatives, are governed by specific State or Territory legislation and are normally excluded from the operation of the Corporations Act: s 5F. However, such bodies are included in the definition of “registrable Australian bodies”: s 9. These bodies must register under Pt 5B.2, Div 1 if they wish to carry on business outside their home State or Territory.
[3.30]
Foreign companies .......................................................................................................................................................................
Foreign companies (that is, companies incorporated outside Australia: s 9) that wish to carry on business in Australia must obtain registration: see Pt 5B.2, Div 2.
[3.40]
Incorporation Incorporation (that is, the process of becoming a body corporate) occurs upon registration by ASIC. The company is a separate legal entity from that date until its name is removed from ASIC's register following deregistration.
[3.50]
Shelf companies .......................................................................................................................................................................
When a person wants to incorporate a company or transfer their existing business to a company, they may buy a “shelf company” from an accountant or solicitor. A shelf company is a company that is already in existence (that is, registered by ASIC under the Corporations Act 2001 (Cth)) but has not traded – it is sitting “on the shelf”. All that happens is that the name is changed and the shares are transferred to the new owner. If necessary, the internal rules can be altered.
[3.60]
Registration Part 2A.2 sets out the requirements and procedure for registration. See Figure 3.1 at [3.90].
[3.70]
Chapter 3
[3.20]
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The registration process has been streamlined so that the key step for every type of company is the lodging of an application form. The contents of the application are listed in s 117(2) and there is a standard form (Form 201) prescribed by Sch 2 to the Corporations Regulations 2001 (Cth) (Corporations Regulations). For a company with share capital, a $463 fee (as at 2016) is payable when the form is lodged. For a company without share capital, a fee of $382 (as at 2016) is payable. The application can be lodged over the counter at an ASIC business centre or via the internet using the Electronic Company Registration (ECR) service. This service enables the entire process of registration to be conducted online within a few minutes and substantially reduces the administrative costs involved. Prior to lodging the completed application form, decisions will need to be made about the following: • what type of company is to be registered; • what form the internal rules are to take – constitution or replaceable rules or a combination of both; • who is to be the first member or members; • who is to be the first director or directors, and who is to be the company secretary (s 204A, optional for a proprietary company); • what (if any) share capital there is to be; • where the registered office of the company will be; and • what is to be the company's name (if a name other than the company's Australian Company Number (ACN) is to be used).
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Certain names cannot be used. Note s 119:
SECTION 119
A company comes into existence as a body corporate at the beginning of the day on which it is registered. The company’s name is the name specified in the certificate of registration. Note: The company remains in existence until it is deregistered (see Chapter 5A).
Certificate of registration .......................................................................................................................................................................
Once the application has been processed, ASIC gives the company its ACN and issues a certificate of registration: s 118(1).
[3.80]
The certificate of registration contains the following information: • the company's name; and • the company's ACN; and • the company's type; and • that the company is registered as a company under the Corporations Act; and • the State or Territory in which it is registered; and • the date of registration. Section 1274(7A) provides that the certificate of registration is conclusive evidence that: (a)
all requirements of this Act for its registration have been complied with; and
(b)
the company was duly registered as a company under this Act on the date specified in the certificate.
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Company comes into existence on registration
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[3.90] Figure 3.1: Steps for registration of a proprietary company ....................................................................................................
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Registered office .......................................................................................................................................................................
The application for registration must include the address of the company's registered office in Australia. The purpose of the registered office is to have a place where all communications and notices to the company may be sent: s 142. It is not sufficient to specify a post office box, but the registered office can be premises occupied by someone else (for example, the company's accountant): s 100. A proprietary company is not required to open its registered office to the public but this does not affect its obligation to make certain documents available for inspection: ss 173, 1300. However, a public company should have its registered office open to the public each day for at least three hours per day: s 145.
Australian Company Numbers (ACNs) and Australian Business Numbers (ABNs) As previously mentioned, ASIC allots every company an ACN upon registration. Registrable Australian bodies are also given a number known as an “Australian Registered Body Number” (ARBN): s 601CB. For details about the proper use of numbers (ACNs and ARBNs) and company names see ASIC Regulatory Guide 13: ACN, ARBN and Company Names. Since the introduction of the Australian Business Number (ABN) as part of the tax reform package that came into force on 1 July 2000, all companies have now been allocated an ABN (defined in Corporations Act 2001 (Cth), s 9) that will progressively replace the ACN and ARBN as the single business identifier for Commonwealth purposes. The ABNs allocated to companies and registered bodies are derived by adding two digits in front of the existing nine-digit ACN or ARBN. As long as the last nine digits of a company's ABN are the same, and in the same order, as its ACN or ARBN, the quotation of an ACN, ARBN or ABN on documents satisfies the requirements of the Corporations Act 2001 (Cth): see Corporations Act, ss 123(1), 153(2), 1344; Corporations Regulations, regs 2B.6.03, 5B.3.03 and the list of exemptions in reg 7004, Sch 7. This identifying number must be: [3.110]
• shown on the company's common seal (if any) (s 123(1)); • shown on its public documents (as defined in s 88A) and on negotiable instruments (ss 153 – 155, see ASIC Regulatory Guide 13 and National Education Advancement Programs Pty Ltd v Ashton (1996) 14 ACLC 30); • displayed prominently at every place at which the company carries on business and that is open to the public (s 144); and • shown on all documents lodged with ASIC: s 88A(1)(a).
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[3.100]
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Company names Provisions relating to the use of company names are contained in Pt 2B.6 and those dealing with foreign companies and registrable Australian bodies are contained in Pt 5B.3. The company's name is chosen by the promoters and application can be made to “reserve” the name prior to lodgment of the application for registration of the company: s 152. Alternatively, the name may simply be the company's ACN. Company names must also include words or abbreviations to show their type – for example, “Pty” for proprietary companies, “Ltd” for limited liability companies and “NL” for no liability companies: ss 148 – 149. This serves as notice to those intending to deal with these companies that the liability of the members is limited. This is not required for unlimited companies, the members of which do not have limited liability. [3.120]
Exclusion of “Limited” .......................................................................................................................................................................
Companies limited by guarantee that are established for charitable purposes may, if their constitution contains certain restrictions, be registered without the word “Limited” in the company name or apply to ASIC for removal of “Limited” from their name: s 150.
[3.130]
Restrictions on certain names .......................................................................................................................................................................
Promoters (see Chapter 8) who wish to use a name for their company should first search the register of companies to see if the name they have chosen is available. See s 147(1):
[3.140]
SECTION 147(1) When a name is available Name is available unless identical or unacceptable (1) A name is available to a company unless the name is: (a) identical (under rules set out in the regulations) to a name that is reserved or registered under this Act for another body; or (b)
identical (under rules set out in the regulations) to a name that is included on the national business names register in respect of another individual or body who is not the person applying to have the name; or
(c)
unacceptable for registration under the regulations.
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Care should also be taken not to choose a name that infringes a trade mark or that closely resembles an existing company or business name. This could be seen as “passing off” – that is, appearing to be another company. The tort of passing off is a breach of the general law and may also be a breach of s 18 of the Australian Consumer Law contained in the Competition and Consumer Act 2010 (Cth). The rules stating how ASIC is to determine whether names are “identical” or “unacceptable” for the purposes of s 147(1)(c) are contained in Sch 6 to the Corporations Regulations 2001 (Cth). For example, words which imply a connection with the Crown or government and those which ASIC considers offensive are “unacceptable”: Corporations Regulations, reg 6203, Sch 6. For a discussion of what is an “offensive” name, see the decision in Re Little and Australian Securities Commission (1996) 14 ACLC 1,730 where the (then) ASC's decision to register a company under the name “Virgin Mary's Pty Ltd” was overturned by the Administrative Appeals Tribunal. See also ASIC Information Sheet: Company Name Availability (INFO 71) available at http://www.asic.gov.au or from any ASIC office.
Ongoing requirements The Corporations Act provides for certain steps to be taken once the certificate of registration is issued: see Pt 1.5, paras 3-4 Small Business Guide, Corporations Act 2001 (Cth). When ASIC is notified of the appointment of a director, its practice is to send that person a letter and information sheet with a checklist of some of the main ongoing filing requirements. Some of these ongoing requirements apply to all companies. Other requirements vary, depending on the type or size of the company. In summary, a graduated scale (of greater disclosure) applies beginning with small proprietary companies, which have minimum obligations, then large proprietary companies, then (unlisted) public companies, through to the most stringent requirements for “disclosing entities” (as defined in Pt 1.2A). This point is highlighted by the comparative Table 3.1 at [3.160]. All companies must: [3.150]
• set up and maintain registers of members, option holders and debenture holders (s 168); • maintain minute books of resolutions of directors and members (Pt 2G.3); • allow minute books and registers to be inspected (ss 173, 251B); and • comply with rules regarding the use of the ACN/ABN and company name (if any). ASIC sends all companies an Annual Statement on the company's review date (normally the anniversary of the date on which it was registered: s 345A(1)).
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This statement includes an “Extract of Particulars” (stating the information about the company that is on ASIC's database) and an invoice for the prescribed annual review fee. If there are no changes to this information, the company need not lodge anything. The company's only obligation is to pay the review fee within two months of the review date. If any particulars in the Extract are incorrect, the company must notify ASIC within 28 days after the statement is issued: Pt 2N.2. Within two months after each review date, the directors must pass a “solvency resolution” which is defined in s 9 as a resolution stating whether or not, in their opinion, there are reasonable grounds to believe the company will be able to pay all its debts as and when they become due and payable. Payment of the annual review fee is taken to be a representation that the company is solvent: s 347C. If the directors do not pass a solvency resolution or if they pass a negative solvency resolution – that is, that the company will not be able to pay all its debts – the company must notify ASIC within seven days: s 347B. All companies must notify ASIC of the following changes or events: • issue or cancellation of shares (ss 254X, 254Y); • change in location of a register (s 172); • change of registered office or principal place of business (ss 142, 146); and • change of directors or company secretary or their personal details (for example, address) (ss 201L, 205B). Creation of certain kinds of charges. In addition, proprietary companies must notify ASIC of the following changes or events: • if the company is a subsidiary of another company, changes to the ultimate holding company of the company (ss 349A – 349D); • if the company has more than 20 members, changes to the particulars in the register of members relating to the top 20 members (ss 178A – 178B); and • changes to the share structure of the company: s 178C. Generally, the obligation to ensure that these requirements are met is imposed on the company secretary or, in the case of a proprietary company that does not have a secretary, on the directors: s 188, Corporations Act 2001 (Cth). The fees payable on lodgment of any form are set out in the Corporations (Fees) Regulations 2001 (Cth) and may be downloaded from the ASIC website. Forms may be lodged over the counter or electronically. ASIC encourages electronic lodgment of documents and has replaced a number of existing company forms with a single multi-purpose form (Form 484). The prescribed forms may be obtained on the ASIC website: see http://www.asic.gov.au. Generally, the time limit for lodgment is set out in the relevant section – for example, s 142(2) requires notification of the change of address of a company's
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registered office to be given not later than 28 days after the date the change occurs. In default of the section specifying the time limit, the period is one month: Corporations Regulations, reg 1.0.13. [3.160]
Small Pty Ltd
Large Pty Ltd
Registered office
Notify registered office in Australia Not required to open to the public: ss 100, 142, 143, 146, 173, 1300
Notify registered office in Australia Not required to open to the public: ss 100, 142 – 144, 146, 173, 1300
Notify change to ASIC
Must notify certain changes/events
Must notify certain changes/events
See Small Business Guide para 4.4
See Small Business Guide para 4.4
Yes – Pt 2N applies
Yes – Pt 2N applies
Financial records must be kept: ss 286 – 291 Not required to be audited or lodged unless requested by ASIC (s 294) or by members with 5%+ (s 293), or if controlled by a foreign company: s 292(2)(b)
Financial records must be kept: ss 286 – 291 Annual report (audited) and directors' report and auditors' report must be sent to members and lodged with ASIC. See generally Pt 2M
Annual statement Financial records Financial reports
Company minute books
Must comply with Pt 2G.3
Must comply with Pt 2G.3
Company registers Annual general meeting Continuous disclosure
Must comply with Ch 2C Not required
Must comply with Ch 2C Not required
Not required
Not required
Unlisted public company Notify registered office in Australia Required to open to the public for minimum hours per day: ss 100, 142 – 146, 173, 1300 Must notify certain changes/events and special resolution adopting or modifying constitution: s 136(5) Yes – Pt 2N applies Financial records must be kept: ss 286 – 291 Annual report (audited) and directors' report and auditors' report must be sent to members, ASIC and presented to the AGM. See generally Pt 2M
Additional disclosure in directors' report: s 300(10) Must comply with Pt 2G.3 Must comply with Ch 2C, s 169(2) Required unless only one member: s 250N Not required unless unlisted disclosing entity s 675
Disclosing entity Notify registered office in Australia Required to open to the public for minimum hours per day: ss 100, 142 – 146, 173, 1300 Must notify certain changes/events and special resolution adopting or modifying constitution: s 136(5) Yes – Pt 2N applies Financial records must be kept: ss 286 – 291 Annual and half-year reports (audited) and directors' report and auditors' report must be sent to members, ASIC and presented to the AGM. See generally Pt 2M and Pt 2M.3, Div 2 Additional disclosure in directors' report: s 300(10) – (11) Must comply with Pt 2G.3 and s 251AA Must comply with Ch 2C, s 169(2) Required: s 250N
Required: ss 674 – 678. Defined in Pt 1.2A
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TABLE 3.1 Comparative table – ongoing requirements
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Company searches [3.170] Anybody can, by paying the appropriate fee, conduct a search of any company or other body registered under the Corporations Act 2001 (Cth). Providing publicly accessible information on these companies is one of ASIC's most important functions. ASIC's database is called “ASCOT” and copies of ASCOT data are available from “printed extracts” at ASIC Business Centres, ASIC online information brokers and from the ASIC website. A printed extract of a document is a summary produced by ASIC, not a copy of the actual document lodged. Copies of the original documents lodged (post-1 January 1991) can be obtained using ASIC's document imaging system (called “DOCIMAGE”). Again, these are obtained from ASIC Business Centres, ASIC information brokers or online from the ASIC website. The ASCOT database can provide details such as:
• name and ACN/ARBN/ABN; • status of the company – for example, registered, deregistered or under external administration; • registered office; • officeholders; • share structure (if any); • details of shareholders (if any); • name of the ultimate holding company; • principal activities; and • name of any liquidator etc appointed The most basic information about a company (name, ACN/ABN, status and details of documents lodged) is now available free of charge on public access terminals in ASIC Business Centres or on the ASIC website. The fees charged for obtaining more detailed information by searching ASIC databases vary according to the type of information required and whether the information is provided online, at a Business Centre or by an information broker: see ASIC Information Sheet: ASIC Search Information and Fees (INFO 12) (http:// www.asic.gov.au).
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Registration.)
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1.
Outline briefly the procedure for registering a proprietary company and the ongoing requirements for a small proprietary company. What additional obligations does a large proprietary company have?
2.
What is the effect of the Certificate of Registration?
3.
Download the necessary registration form from the ASIC website (or copy it from Sch 2 of the Corporations Regulations). Complete it for the registration of a company of your choice.
4.
What costs are involved in the registration of a proprietary company?
5.
Go to the ASIC website and browse through the material in the “For Companies” tab that deals with registration. It is important to become familiar with this website.
6.
Go to the ASIC website and download and read ASIC Information Sheet: “Checklist for Registered Companies and their Officers” (INFO 20), which sets out the continuing obligations of officeholders, and Form 484 (the multi-purpose form used to notify changes). List the changes that must be notified to ASIC and the time limits allowed.
Problems for Discussion ...................................................................................................................................... 1.
Marcia is an entrepreneurial 17-year-old with a busy window cleaning business. She is studying for a commerce degree. She wants to incorporate her business. She wants to become an employee of the business so that she can be covered by workers' compensation and superannuation. She completes the registration documents for a proprietary company. She uses her own name as the sole director/ shareholder but falsifies her date of birth (showing she is 19 years old). ASIC subsequently registers the company, having no knowledge of the fraud. If the fraud were discovered what could ASIC do about the company?
2.
Now assume a slightly different scenario. Marcia does not register her company until she is over 18. She wants to call the company “Marcia's Guaranteed Sparkle Pty Ltd”. (a) Will Marcia be able to register the company with this name? If so, how can she ensure that no one else uses it before her company is registered? (b)
Is Marcia required to have a registered office? If so, can she use her parents' home address and, does the office have to be open to the public?
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Practice Questions ......................................................................................................................................
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(c)
Does she have to display the company name and/or ACN/ ABN • on her accounts? • outside her parents' house?
3.
Marcia has registered her company and it is trading profitably. After almost a year she decides to move to her own flat and moves the company's registered office to that address. A few days later the company receives an Annual Statement from ASIC which is forwarded from her parents' home address. How should Marcia respond to this statement?
Further Reading ...................................................................................................................................... Australian Securities and Investments Commission, ASIC Information Sheets – available from any ASIC Office or the website (http:// www.asic.gov.au) (policy-related information sheets are also published in Volume 4 of the ASIC Digest). Titles include: “ASIC Search Information and Fees”; “How to Register a Company”; “Checklist for Registered Companies and their Officers”; “Company Name Availability”; “Changing a Company Name”; “Australian Company Numbers”; “Deregistering a Company”; “Winding up a Solvent Company”; “Constitution and Replaceable Rules”; “Fees for Commonly Lodged Documents”. Australian Securities and Investments Commission, “ASIC Regulatory Guide 13: ACN, ABRN and Company Names” Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 2 Small Business Guide – Corporations Act 2001 (Cth), Pt 1.5
CHAPTER 4 .......................................................................................................
Consequences of Registration Useful Websites ....................................................................... 97 Recent Developments .............................................................. 97 Aim ........................................................................................... 97
Principles ................................................................................. 98 Effect of registration ....................................................................... 98 Corporate veil ............................................................................. 101 Lifting the corporate veil ................................................................ 103 Corporate groups ........................................................................ 107 Mentor: Test your Knowledge ............................................... 114 Practice Questions ................................................................. 114 Problems for Discussion ........................................................ 114 Guide to Problem Solving ...................................................... 116 Further Reading ..................................................................... 118
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for websites on the Topic of Consequences of Registration.)
Recent Developments ...................................................................................................................................... Corporations Act Amendments
Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Cth)
Aim ...................................................................................................................................... At the end of the topic you should know: • the effects of registration, the most important being the creation of a separate “legal person”; and • what is meant by “piercing the corporate veil”, together with some examples under both general law and statute.
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Related Topics ......................................................................... 98
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Related Topics ...................................................................................................................................... Chapter 2 Business Organisations; Chapter 3 Registration; Chapter 11 Directors' Duties – Part 1 Duty of Care, Skill and Diligence; Chapter 12 Directors' Duties – Part 2 Good Faith and Proper Purpose; Chapter 13 Directors' Duties – Part 3 Conflict of Interest and Disclosure; Chapter 24 External Administration
PRINCIPLES Effect of registration Upon registration, a company comes into existence as a separate “body corporate”: s 119 of the Corporations Act 2001 (Cth) (Corporations Act). A body corporate or company is regarded as a “person” for legal purposes, although there are differences between it and “natural” persons. Companies gain their powers from the Corporations Act: s 124. Although companies are given the powers of a natural person (with some limitations), companies can only act through humans because they have no minds of their own (nor physical bodies). The fact that a separate legal “person” comes into existence has several consequences. Some of these consequences were referred to in Chapter 2 when a company was compared with other forms of association. Because a company is a separate legal person, it can:
[4.10]
• sue and be sued in its own name; • continue to exist despite changes to its membership (often referred to as “perpetual succession”) – a company only ceases to exist when it is deregistered and struck off the register of companies maintained by ASIC; • acquire, hold and dispose of assets – members may own shares in the company but that does not confer on them a proprietary interest in the assets of the company (Macaura v Northern Assurance Co Ltd [1925] AC 619) [this means the members cannot dispose of a company's assets as if they owned them] nor does it allow them to fraudulently apply the company's property for their own benefit, even if that person is the company's sole member and sole director (Macleod v R (2003) 214 CLR 230); • enter into contracts and incur liabilities in its name; and • is capable of performing all the functions of a body corporate. Section 124 of the Corporations Act 2001 (Cth) states “a company has the legal capacity and powers of an individual both in and outside this jurisdiction”.
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The Corporations Act 2001 (Cth) also provides that a company has the following additional powers: • to distribute company property to members; • to grant security over company assets; • to register itself in other jurisdictions; • to issue and cancel shares in itself ; • to grant options over unissued shares; • to do any other act as permitted by law. Because a company is recognised as a separate legal entity, it is possible for the members of a company to enjoy limited liability. Put another way – the doctrine of separate legal entity facilitates limited liability. The liabilities (and assets) belong to the company and, in a limited liability company, the members' liability is limited to the amount (if any) unpaid on the shares or the amount of the guarantee given by the member: see Chapter 2. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Chapter 2—Aboriginal and Torres Strait Islander corporations, in particular Part 2-5-Division 42—Effects of Registration of the CATSI Act. 42–1 Corporation comes into existence on registration If an Aboriginal and Torres Strait Islander corporation is registered under Part 2–3 as a result of an application made under section 21–1, the Aboriginal and Torres Strait Islander corporation comes into existence as a body corporate with perpetual succession at the beginning of the day on which it is registered. The corporation remains in existence until it is deregistered (see Chapter 12).
42–3 Effect of registration of existing body corporate under Part 2–3 If a body corporate is registered under Part 2–3 as an Aboriginal and Torres Strait Islander corporation as a result of an application made under section 22–1, registration under Part 2–3 does not: (a) create a new legal entity; or (b) affect the body’s existing property, rights or obligations (except as against the members of the body in their capacity as members); or (c) render defective any legal proceedings by or against the body or its members.
The Aboriginal and Torres Strait Islander corporation remains in existence until it is deregistered (see Chapter 12).
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• to issue debentures; and
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[4.20] Figure 4.1: Effect of registration ....................................................................................................
Economic arguments are made for the existence of limited liability. However, there are also disadvantages. The risk of business failure is largely shifted to creditors. Some creditors can protect themselves against such a risk (by such means as obtaining sufficient security from the company or building an allowance into the price of their goods and services), or by registering their interest in the Personal Property Securities Register (see Personal Property Securities Act 2009 (Cth)), but others cannot. For example, tort claimants (who are “involuntary” creditors) are unable to protect themselves in the same way. Their position is discussed in Chapter 7. The company as a separate legal person .......................................................................................................................................................................
The full implications of a company being a separate legal person (that is, separate and distinct from its members and directors) were not recognised until the famous case of Salomon v Salomon & Co Ltd [1897] AC 22 in 1897.
[4.30]
Salomon v Salomon [4.33] Salomon v Salomon & Co Ltd [1897] AC 22 (House of Lords) FACTS: Salomon had carried on a successful business as a sole trader for over 30 years. In order to provide for his sons who, “troubled him all the while” for a share in the business, he incorporated it as a company limited by shares. At that time the Companies Act required a company to have a minimum of seven subscribers (the people who signed the application for incorporation). These were Salomon, his wife and five of his adult children, each of whom subscribed for one share in the company. After the company was registered it allotted 20,000 shares to Salomon as part payment for the transfer of his existing business to the company. The remainder of the purchase price was owed to Salomon by the company and this loan was secured by a debenture: see Chapter 20. Thus, Salomon was a secured creditor of the company as well being the holder of almost all its shares. Although the business was now owned by the company, not by Salomon,
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101
cont.
The business had been very prosperous but, shortly after it was sold to the company, it faced financial difficulties and was eventually put into liquidation: see Chapter 24. The company’s assets were insufficient to pay both Salomon (as a secured creditor) and the unsecured creditors. The liquidator (acting on behalf of the unsecured creditors) argued that Salomon was not entitled to be treated as a secured creditor. He alleged that because Salomon was effectively in complete control of the company, the company was acting either as an agent or a trustee for him in running the business. In either case, Salomon would have been required to indemnify the company for the debts it incurred on his behalf and he certainly would not have been entitled to any priority over the unsecured creditors. DECISION: The House of Lords held that, even though Salomon controlled the company, the company was a separate legal entity and it, not Salomon, was running the business so Salomon was entitled to recover the secured debt owed to him. Once a company was validly incorporated (today we say “registered”) it became a separate legal entity and as Lord Macnaghten said (at 51): the company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.
Since this case, many writers have debated the merits of what was, at that time, considered by many people to be a calamitous decision. Should “one-person companies” be able to take advantage of the corporate form, often to the disadvantage of unsecured creditors?
[4.37]
Corporate veil The “corporate veil” exists once a company is registered and it separates the company from the people who formed it (and from those who become its members).
[4.40]
Chapter 4
there was no change in the way it was run, with Salomon continuing to make all the major decisions in the same way as he had done before he transferred the business to the company.
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[4.50] Figure 4.2: Company separate from members ....................................................................................................
Veil COMPANY • separate legal entity with own
MEMBERS • own shares but not a proprietary interest in the company's assets
–
assets
•
may also be a creditor, debtor or director of the company
–
liabilities
•
have their own assets which are not in the company's control
–
contracts
Sometimes people form a company to take advantage of the veil of incorporation because it acts as a shield to protect them from personal liability, particularly in the event of insolvency of the company. The continuing problem of “phoenix companies” illustrates one situation where unscrupulous entrepreneurs have used the corporate form to avoid creditors. “Phoenix company” is not a legal or statutory term. It is used to describe a company that has failed, leaving behind unpaid creditors but, soon after, “rises (like a phoenix) from the ashes” with the same directors, often at the same address and using a similar name etc, operating under the guise of a new company. The new company then disclaims all responsibility for the debts of the old company on the basis of the separate legal entity doctrine. There have been a number of statutory reforms that have attempted to address this problem, for example: the Corporations Amendment (Phoenixing and Other Measures) Act 2012 (Cth). Earlier statutory reform clarified and reorganised the provisions dealing with disqualification from managing corporations (see Pt 2D.6 and Chapter 6) and increased protection for employee entitlements: see [4.130]. Auditors are required to notify ASIC of any significant contravention of the Corporations Act (s 311 and see Chapter 15), but small proprietary companies are not required to appoint an auditor: see Chpater 15. An additional factor is that unsecured creditors often do not bother to appoint a liquidator (there is no value for them in the extra expense) and, without a
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103
report from an auditor or a liquidator, the situation can go unnoticed by ASIC. The Corporations Act 2001 (Cth) now permits ASIC to liquidate abandoned companies. Furthermore the Federal Government provides an Assetless Administration Fund that provides money for liquidators to investigate contraventions of the Corporations Act and such investigations may uncover phoenix activity. It is also important to remember that, although ASIC has wide powers under Pt 2D.6, it has limited resources. In other situations, the fact that a company is a separate legal entity may seriously disadvantage its controllers. They may then seek to have the veil lifted: see, for example, Macaura v Northern Assurance Co Ltd [1925] AC 619; Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116; and Renato Evangelisti Nominees Pty Ltd v EEC (1990) Pty Ltd (in liq) (1995) 13 ACLC 1378. This is sometimes referred to as a “reverse lifting” of the corporate veil.
Lifting the corporate veil Usually, it is outsiders who wish to lift or pierce the corporate veil in order to gain access to assets. The veil may be lifted by either:
[4.60]
• a specific statutory provision; or • applying general law principles. These statutory provisions and general law principles have developed in response to abuses of the company's separate legal status. For topical examples of abuses of the corporate form, see [4.110]-[4.130]. Statute .......................................................................................................................................................................
Taxation, occupational health and safety and environmental protection statutes are among those that provide for lifting the corporate veil, as do various regulatory regimes such as banking, foreign investment, broadcasting and gaming. Certain sections of the Corporations Act 2001 (Cth) also lift the corporate veil by imposing personal liability or other restrictions on members, directors or other officers of the company. Some examples in the Corporations Act which are discussed later in this book, include:
[4.70]
• insolvent trading – where the company continues to trade even though there were reasonable grounds for suspecting that it would not be able to pay its debts (under ss 588G – 588M directors can be liable, and under ss 588V – 588X the holding company (the member) can be liable: see Chapters 11 and 24);
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• uncommercial transactions – certain transactions that occur prior to a company going into liquidation are voidable as against a liquidator, and the court has wide powers to order compensation by the party (who is commonly a director, member or a party related to them) who has received the benefit of the “uncommercial transaction” (see ss 588FB – 588FF and Chapter 24); a company which enters into an uncommercial transaction is deemed to incur a debt for the purposes of the insolvent trading provisions (s 588G(1A) see [4.130], Chapters 11 and 24); • unreasonable director-related transactions – transactions including payments, transfer of property or issue of securities made in favour of a director or a close associate of a director in circumstances where a reasonable person in the company's position would not have entered into the transaction (s 588FDA, see Chapter 24); • employee entitlements – transactions entered into with the intention of defeating employees' rights to their entitlements are prohibited; any breach is subject to criminal and civil penalties and the offenders may be required to pay compensation for any loss or damage (Pt 5.8A, see [4.140], Chapters 11 and 24); • company officer security interests – officers granted security interests by the company over the company's assets (that is, security) cannot enforce their security interest within six months unless the court grants leave to do so (s 588FP (a security interest is defined as a PPSA security interest within the meaning of the Personal Property Securities Act 2009 (Cth) or a charge, lien or pledge, and charge is defined in s 9 as one “created in any way and includes a mortgage”) and see Chapter 20); and • financial assistance – if a company provides “financial assistance” for the purchase of its shares, it is the person “involved in” the company's contravention (typically, a director) who is liable for a breach of the Corporations Act, not the company: s 260D(2) and see Chapter 18. General law .......................................................................................................................................................................
Other instances where the corporate veil is pierced arise where there is no relevant statutory provision but, for some overriding policy reason, a court has decided to lift the veil. Australian courts have been more reluctant than the English and United States courts to do this. For an example of this reluctance see Repatriation Commission v Harrison (1997) 78 FCR 442. The few Australian examples are in areas such as:
[4.80]
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• taxation – Commissioner of Taxation (Cth) v Whitford's Beach Pty Ltd (1982) 150 CLR 355;
• tort – some judicial observations in Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 and see Walker v Hungerfords (1987) 49 SASR 93 (there was an appeal to the High Court in this case, but not on the corporate veil issue: Hungerfords v Walker (1989) 171 CLR 125). It is difficult to reconcile the English and Australian cases beyond identifying general descriptive categories such as fraud, agency or partnership, trust, tort or avoidance of an existing legal obligation. However, there is always the possibility that there may be such special facts that the court will be prepared to lift the veil in order to prevent a “substantial injustice”: Walker v Hungerfords (1987) 49 SASR 93 (where the injustice would have been to the members); Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549; and obiter in Chen v Butterfield (1996) 7 NZCLC 261,086. [4.90] TABLE 4.1 Some cases where the corporate veil has been lifted Case
Re Darby [1911] 1 KB 95
Gilford Motor Co Ltd v Horne [1933] Ch 935
Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116
Green v Bestobell Industries Pty Ltd [1982] WAR 1
Issue
Was obligation imposed or advantage obtained? Liquidator claiming for Obligation imposed – secret profit made by director/ promoter director/ promoter's ordered to disgorge “dummy” company. profits due to presence of fraud. Avoidance of existing Obligation imposed – legal obligation (ie, injunction granted employment restriction against company even in service contract) by though company was setting up a new not a party to the company to run service agreement. business. Compensation claim Advantage obtained – by holding company holding company (owned the land) for entitled to compensadisturbance of business tion since subsidiary conducted by a wholly conducted business as owned subsidiary. its “agent”. In breach of their Obligation imposed – duties, directors new company (and formed new company directors) ordered to which made profit account for profits from successful tender. made as a result of breach of duty.
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• competition and consumer law – Spreag v Paeson Pty Ltd (1990) 94 ALR 679; and
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Case
Issue
Walker v Hungerfords (1987) 49 SASR 93
Action for compensation re negligence of accountants in preparation of partnership and individual tax returns. But, during the relation-back period, partnership had converted to company. Negligence action (asbestos injury) by employee against subsidiary (employer) and holding company.
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549
Creasey v Breachwood Motors Ltd (1992) 10 ACLC 3,052
Re H (restraint order) [1996] 2 All ER 391
Allen v Feather Products Pty Ltd (2008) 65 ACSR 642
Australian and International Pilots Association v Qantas Airways Ltd [2011] FWAFB 3706
Was obligation imposed or advantage obtained? Advantage obtained – could claim for both pre and post incorporation losses even though duty in tort and contract owed to the individuals, not the company.
Advantage obtained – succeeded at preliminary stage, ie, could also proceed against holding company. Matter sent for trial but case subsequently settled. Unfair dismissal claim Obligation imposed – commenced. Business judgment creditor and assets transferred to allowed to claim from another company prior company now to judgment. controlling the business. Corporate structure Obligation imposed – used as a device to company assets treated perpetrate (criminal) as realisable assets of avoidance of large defendants. amounts of excise duty. Liquidators sought to Application failed – apply pooling could not establish that provisions under joint activity or s 579E(1)(b)(i) enterprise was being conducted in order to Corporations Act 2001 satisfy a precondition (Cth) in the winding for a pooling order. up of three related body corporate entities so that assets distributable in the windings-up of all three entities were applied to all of their debts. The applicant union Corporate veil was and the respondent maintained. Court employers were in commented that it dispute over the would be lifted where coverage of an award. it could be shown that One respondent was a there was a mere sham wholly owned or façade in which the subsidiary of the other. company was playing a The applicant sought role. This was not the to bring the second case. respondent's pilots within its industrial instrument arguing that they should be regarded as a single entity.
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Case
University of Sydney v Objectivision Pty Ltd [2015] FCA 1528
Kempsey Shire Council v Slade [2015] NSWLEC 135
107
Issue
Was obligation imposed or advantage obtained? An applicant/crossA security for costs respondent sought ordered as respondent/ security for costs where cross-claimant was respondent/crossoffered a lesser amount claimant was without justification impecunious. and directors were not prepared to pay security from behind the corporate veil. Whether the company The respondents were formed by the found responsible for a respondents was for the debt under s 105(1) of objective of avoiding a the Protection of the statutory debt under Environment Operations s 105(1) of the Act 1997 (NSW). Protection of the However, this was not Environment Operations due to the corporate Act 1997 (NSW). veil being lifted, as the court was not satisfied that the company had been formed to with the dominant purpose of avoiding the respondent's obligations under the first lease: Al-Shennag v Statewide Roads Ltd [2008] NSWCA 300 at [42].
Remember: Australian courts have always shown a reluctance to lift the veil. In the absence of a clear case of fraud, the Australian courts seem unlikely to lift the veil particularly where it would result in the imposition of an obligation, rather than the conferring of an advantage. Generally, it will be necessary to rely on an express statutory provision (for example, the insolvent trading provisions).
Corporate groups Corporate groups are increasingly important in Australia and many other countries. There are a number of reasons why many companies operate as part of a corporate group, for example using separate companies in an attempt to reduce risk by quarantining certain assets from liability. Legally, each individual company remains a separate legal person (see [4.10]) but, commercially, many companies act together as a single unit rather than as discrete individual entities. A corporate group exists where there are either cross-shareholdings and/or cross-directorships between companies. Depending on the context, the Corporations Act 2001 (Cth) applies two different tests to determine whether the relationship between companies is sufficient for those companies to be considered to be a corporate group for legal purposes. Traditionally, the companies were required to satisfy the [4.100]
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definition of a holding and subsidiary company in s 46 and this still applies for some purposes, in particular insolvent trading: see Chapter 11. Section 46 requires the holding company to: • control the composition of the subsidiary company's board; or • be in a position to cast or control the casting of more than half of the maximum number of votes at a general meeting; or • hold more than half of the subsidiary's issued share capital. When this test is satisfied, the companies are considered to be “related” to each other: s 50. However, for an increasing number of purposes, the Corporations Act applies a broader definition of “control” which applies to “entities” (see the definition in s 9) as well as to companies. For the purposes of this definition, an entity (including a company) controls another entity if the first entity has the capacity to determine the outcome of decisions about the second entity's financial and operating policies: s 50AA. For example, this “control” test applies for the purposes of the related party provisions in Ch 2E: see Chapter 13. Legislation in 2007 introduced specific provisions dealing with pooling of companies in a corporate group for external administration purposes. The arrangements in the Corporations Amendment (Insolvency) Act 2007 (Cth) were designed to improve pooling arrangements for corporate groups. Under Pt 5.6, Div 8 pooling of debts in a corporate group can be achieved either voluntarily under s 574 or can be court ordered under s 579E. If pooling is court ordered a number of factors have to be satisfied under s 579E, including that the order is “just and equitable”: s 579E(12) (see also Chapter 24). The following flowchart illustrates a simple corporate group.
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[4.110]
In many cases, the relationship between individual companies in a corporate group will be much more complex: see, for example, Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50; see [12.120]. The operations of a corporate group may raise corporate veil issues, often in conjunction with issues involving directors' duties. The question of directors' duties in the group context (for example: Can a director act for the good of the “group”, even if that action is detrimental to one of the companies?) is discussed in more detail in Chapter 12. Some cases on directors' duties have taken a slightly more flexible approach than those cases that dealt only with the corporate veil issue: see [12.40]. A common example of the corporate veil issue arising in the context of a corporate group is where a creditor finds that their contract is with a company within the group that has no assets even though the group as a whole is solvent. Can the corporate veil of that individual company be pierced in order to allow the creditor to gain access to the assets of the group? In this situation, Australian courts have not been prepared to lift the veil. This approach has been criticised on the basis that it ignores commercial reality – the business is conducted as a group enterprise rather than as separate companies: Qintex Australia Finance Ltd v Schroders Australia Ltd (1991) 9 ACLC 109. For examples of where the Australian courts have maintained the veil in the group situation see Walker v Wimborne (1976) 137 CLR 1; Industrial Equity Ltd v Blackburn (1977) 137 CLR 567; Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254; and Wimborne v Brien (1997) 15 ACLC 793; see also Companies and Securities Advisory Committee (CASAC, now the Corporations and Markets Advisory Committee (CAMAC)), “Corporate Groups, Final Report” (May 2000) (CASAC Report), discussed at [4.160].
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Figure 4.3: A simple corporate group ....................................................................................................
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As a general rule, the Corporations Act, like the general law, preserves the separate existence of each legal entity within the group. However there are some important exceptions: • a holding company can be liable for the debts of a subsidiary that it has allowed to trade while insolvent (ss 588V – 588X and Chapter 11); • consolidated financial statements must be prepared for the whole of a corporate group rather than each individual company (s 296, AASB (Australian Accounting Standards Board) 1024 and Chapter 15); and • a subsidiary cannot acquire shares in its holding company or give financial assistance for that purpose: Pt 2J.2 and Chapter 18. Patrick Stevedores v Maritime Union of Australia – an illustration of the problems of corporate groups .......................................................................................................................................................................
In 1997 the well-publicised dispute between the Patrick Stevedore Group (the Group) and the Maritime Workers Union of Australia (MUA) brought the doctrine of separate legal entity into sharp focus. The boards of certain companies in the Group resolved that the companies were or were likely to become insolvent and so placed the companies into voluntary administration: see Chapter 24. The administrators dismissed the entire workforce (some 1,400 people) and, because the companies were insolvent, the employees would have been unlikely to receive their full entitlements such as long service leave. The MUA sought and obtained interlocutory orders preventing the dismissals from going ahead. These were upheld on appeal by the High Court. [4.120]
Restructuring
Prior to the companies being put into voluntary administration, the Group had undertaken a major restructuring. The majority judgment of the High Court (Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1) summarised the transactions involved in the restructure (at 19-20 and 21): [4.130]
In or before September 1997, officers of the Group decided to reorganise the Group in a manner which affected the capital structure, business, debts and inter-company accounts of the employer companies. The reorganisation was not then known to the employees. First, the employer companies sold their stevedoring businesses to Patrick Stevedores Operations No 2 Pty Ltd (“Patrick Operations No 2”) for a price of $314.9 million. The employer companies thus disposed of their property, plant, equipment and all contractual interests save those relating to their employees. The employer companies ceased to carry on the business of stevedores. Their businesses were reduced to the provision of their employees' labour to the stevedore –
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at first Patrick Operations No 2 and subsequently Patrick Stevedores Operations Pty Ltd (“Patrick Operations”), another wholly-owned subsidiary of Patrick Holdings. The agreements (“the Labour Supply Agreements”) under which each employer company supplied labour to Patrick Operations No 2 (and, later, to Patrick Operations) gave the stevedoring company the right to terminate the agreement without notice if there were any interference with, delay in or hindering of the supply of labour. Thus the security of the employer companies' businesses was extremely tenuous. The security of the employees' employment was consequentially altered to their prejudice.
The effect on the employees might have been less had the purchase price for the businesses of the employer companies been paid to and retained by those companies. But, after applying so much of the purchase price as was needed to discharge intra-Group loans and other debts owing by the employer companies, a significant amount – counsel variously stated the amount as $60 million or $70 million – was expended in buying back shares in the employer companies. Assuming that the buy-back was authorised by s 206B of the Corporations Law [now s 257A of the Corporations Act, buy-backs are discussed in Chapter 18] … the shares bought back were cancelled immediately after the registration of their transfer. The issued capital and shareholders' funds of the employer companies were reduced accordingly. The result of this restructuring was that somewhere between $60 and $70 million of the capital of the employer companies, which would have been available to finance their business operations, was returned to the shareholders.
In summary, therefore, as a result of those transactions in September 1997, one company (Patrick Operations No 2 Pty Ltd and, later, Patrick Operations Pty Ltd) held all the assets and the other companies (the employer or labour supply companies) held no assets except a contractual right to supply labour (if required). This contract could be terminated immediately if there was any interruption to the labour supply. When the MUA initiated industrial action, the contract was terminated, the employer companies were placed in voluntary administration and the employees were dismissed. Any claims by the employees lay only against the employer companies that hired them but that now had no assets.
Chapter 4
…
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[4.140] Figure 4.4: Patrick Stevedores’ restructuring ....................................................................................................
Note: Dotted lines indicate the flow of funds into the employer companies (from the business and asset sale), but then out of those companies to the parent company to repay loans and to finance a buy-back of the parent company's shares: see Chapter 18. The parties eventually agreed to a negotiated settlement. If the action had not been settled, the corporate veil (unless lifted by the court) would have prevented the employees making any claims for their entitlements against the stevedore company which held all the assets. The stevedore company, although part of the same group, was a separate legal entity to the company with which the employees had contracts. The position of employees of insolvent companies has caused much debate since the late 1990s. In February 2000 the Federal Government approved a national employee entitlement support scheme, funded by the government as a safety net to guarantee all employees a proportion of their entitlements lost as a result of an employer's insolvency. GEERS, the General Employee Entitlements and Redundancy Scheme (see http://www.deewr.gov.au) is the present administrative solution and it is the current government's policy to legislate this scheme. The bill known as the Fair Entitlements Guarantee Bill 2012 (Cth) is scheduled to be debated in the Federal Parliament in 2012. The Corporations Law Amendment (Employee Entitlements) Act 2000 (Cth) increased the protection for employee entitlements in two ways: • it extended the existing duty of directors to ensure that the company does not engage in insolvent trading to include entering into an uncommercial transaction (s 588G(1A) (see Chapters 11 and 24)); and
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• it introduced a new offence prohibiting agreements or transactions entered into for the purpose of avoiding payment of employee entitlements: Pt 5.8A. However, to date there is no record of the offence being prosecuted. There have been attempts by the non-government parties in the Senate to make more wide-ranging amendments to the insolvent trading provisions, making companies liable in certain circumstances for all or part of the debts of “related bodies corporate”. These attempts were strongly opposed by the government and the business community and were rejected by the House of Representatives.
[4.150] Another part of the dispute between Patrick Stevedores Group and the MUA was the action by the MUA against various parties associated with the Group and Peter Reith (the then Federal Minister of State for Workplace Relations and Small Business) for conspiracy: “by unlawful means – chiefly by conduct in contravention of s 298K(1) of [the Workplace Relations Act 1996 (Cth)] – to injure the employees”: Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1 at 24. As part of the negotiated settlement to the dispute, this action was discontinued by the MUA. However, it is interesting from a company law perspective to consider what the ramifications might have been had this conspiracy action been successful. Could the employees have then successfully argued that the court should lift the corporate veil? Could the transfer of assets that took place as part of the September “restructuring” be seen as part of the conspiracy/fraud, or perhaps as an attempt to avoid an existing legal obligation: see [4.90]? It is interesting to note that the CASAC Report in 2000 (see [4.160]) recommended against any changes to the existing principles of tort liability for corporate groups: see CASAC Report, Recommendation 14.
CASAC Report “Corporate Groups” ....................................................................................................................................................................... [4.160] The CASAC Report resulted from a comprehensive review of the application of Australian corporate law to corporate groups. It recommended that a single, uniform “control” test (see s 50AA) should replace the present “holding”, “subsidiary” and “related” company tests: see Recommendation 1. However, CASAC was against the introduction of a power for the court to order a company to contribute to the debts of related companies: see Recommendation 21. The Report also recommended that liquidators of group companies should be allowed to pool the unsecured assets and liabilities of two or more companies in liquidation with the prior approval of all the unsecured creditors: see Recommendation 22. Pooling arrangements were
Chapter 4
Conspiracy claim in the MUA case
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introduced into the Corporations Act by the Corporations Amendment (Insolvency) Act 2007 (Cth) for liquidations: Pt 5.6, Div 8. The arrangements were designed to improve pooling arrangements for corporate groups and can be achieved either voluntarily under s 574 or can be court ordered under s 579E. If pooling is court ordered a number of factors have to be satisfied under s 579E including that the order is “just and equitable”: s 579E(12); see also Chapter 24.
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Consequences of Registration.)
Practice Questions ...................................................................................................................................... 1.
What is meant by the expression “the doctrine of separate legal entity”?
2.
What is the “corporate veil” and under what circumstances is an Australian court likely to lift it?
3.
Consider the questions raised at [4.150] in relation to the Patrick Stevedores Operations No 2 Pty Ltd v MUA (1998) 195 CLR 1 dispute.
4.
What are the undesirable consequences of limited liability?
5.
What can overcome the undesirable consequences of limited liability?
6.
Is the recognition of single director/shareholder companies a backward step in regard to the undesirable consequences of limited liability?
7.
Explain the differences between the definition of a “subsidiary” in s 46 of the Corporations Act and the definition of “control” in s 50AA.
8.
How is phoenix company activity addressed in Australia?
Problems for Discussion ...................................................................................................................................... 1.
Indri runs a soil-testing business. He decides to form a company to take over the business. He is the sole shareholder and sole director. Indri sells his business to the company at an inflated price and lends the company $90,000 to help meet the cost of purchase. As security for the loan, Indri arranges a mortgage over a vacant block of land, which he transferred to the company as part of the business sale. In the first year of operation, the business makes a small profit (after paying both Indri and his daughter's wages), but by the end of 2012 it is clear that the building industry is going through a major slump. Indri becomes desperate and works even harder. While working late into the night, Indri badly lacerates his hand and needs micro-surgery. His
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efforts to keep the business afloat are in vain and the company is forced into liquidation. On realisation of the assets, it is found that the company has approximately $95,000 to go towards meeting creditors' claims of $210,000: (a) If Indri is the only secured creditor, will he get back his $90,000? (b)
Jasper is a qualified yet inept electrician, and the sole director and shareholder of Burg-Go Pty Ltd (Burg-Go). Burg-Go purports to specialise in installing burglar alarms. In fact, Jasper has had little success in installing alarms, and now has several disgruntled customers. In particular, one of Burg-Go's customers, Patrick, is threatening legal action against Burg-Go as the result of his alarm failing to go off when a burglar broke open his front door and stole his priceless stamp collection. The police report confirmed that the intruder had not deactivated the burglar system. Jasper is concerned that Patrick could be “difficult” so he transfers the assets from Burg-Go to a new company which he controls called Stop-Burg Pty Ltd. Shortly after this transaction, Burg-Go is wound up. Patrick wants compensation for the loss of his stamp collection, but Burg-Go has no assets. What possible legal arguments could Patrick make in order to get judgment against Jasper and Stop-Burg Pty Ltd?
3.
Tom has been running a small business growing vegetables on his farm and selling them at the farm gate and at Sunday markets. In 2012, on the advice of his accountant, Tom formed a company called Tom's Fresh Vegies Pty Ltd (Fresh Vegies). Tom had always bought his seeds and seedlings from Seeds Ltd (Seeds) and was well known to Seeds because of his poor credit record. When Fresh Vegies was formed, Tom told Seeds that it was now dealing with the company, but did not make any changes to the way in which he carried on the business. Tom owned the farm and the truck used for deliveries; Fresh Vegies did not pay rent or pay wages to Tom. The income from sales of vegetables and payments to suppliers were paid into and from Tom's personal bank account and Fresh Vegies did not lodge any tax returns (nor did Tom himself in most years). Seeds eventually sued Fresh Vegies to recover the debt of $10,000 owed by Fresh Vegies and sought leave to add Tom as a defendant.
Chapter 4
2.
Can Indri claim workers' compensation, assuming that he is otherwise entitled to it?
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(a)
What legal grounds could Seeds rely on to support its claim to have Tom added as a defendant?
(b)
Would an Australian court be likely to uphold Seeds' claim? Might their approach be different if the claim had been in tort rather than contract and if so, why?
Myra is the only shareholder and director of Kids Clothes Pty Ltd (Kids Clothes) which makes cheap children's clothing. The company has 10 employees. In the past Kids Clothes had operated profitably, however since 2011 it has been running at a loss. In July 2012 Myra paid herself a large bonus and then transferred all the remaining assets of Kids Clothes to a new company called Clothing for Kids Pty Ltd. The employees continue to be employed by Kids Clothes. Kids Clothes has no assets and owes each of its employees several thousand dollars in accumulated holiday, superannuation and long service leave entitlements. (a) What possible legal grounds might the employees have to claim their entitlements from Clothing for Kids Pty Ltd? (b)
Could any action be taken against Myra personally?
Guide to Problem Solving ...................................................................................................................................... There are two likely issues in this topic, although you should note that these issues are really different sides of the same coin. Company as a separate legal entity
Once a company is registered it obtains the status of a legal person: s 119. It has the powers of an individual plus some extra “corporate” powers: s 124. This means that the company is separate from the people who formed it (even when those people retain complete control). The main case example is Salomon v Salomon & Co Ltd [1897] AC 22. Specific examples are: (a)
(b)
Where the company gives security or issues debentures to the founder of the company. The rule is that the founder is a secured creditor and not a principal – that is, the company is not an agent of the founder: Salomon v Salomon (see [4.30]). Where the founder/controller is also an employee. The rule is that the founder/controller can act in two capacities – as organ of the company and employee: Lee v Lee's Air Farming Ltd [1961]
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AC 12 where Lee was the sole beneficial shareholder and sole governing director of a aerial crop-dusting company who was killed flying the company's plane. Lifting the corporate veil
(a)
Consider if any statutory provision applies, such as s 588G or s 588V (insolvent trading); Pt 5.8A (employee entitlements); or s 588FDA (unreasonable director-related transactions).
(b)
If no statutory provision is applicable, consider the general law. The following are examples of situations where a general law argument may need to be discussed: • the company is used to perpetrate fraud (Re Darby [1911] 1 KB 95); • the company is used to evade an existing legal obligation (cf Gilford Motor Co Ltd v Horne [1933] Ch 935 and Creasey v Breachwood Motors Ltd (1992) 10 ACLC 3,052 with Electric Light and Power Supply Corp Ltd v Cormack (1911) 11 SR (NSW) 350); • the company can be said to be the agent of the controller (Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116 but the special facts of this case require precise consideration (in other words, the particular circumstances need to be discussed)); • the company knowingly participates in a breach of a director's fiduciary duties (Green v Bestobell Industries Ltd [1982] WAR 1); • the company is part of a group of companies – if a creditor (other than a tort claimant, see below) has a contract with one company in the group and that company has no assets, Australian courts have not been prepared to lift the veil to give access to the assets of the group; – related issue: where a liquidator or creditor seeks compensation from the directors of a subsidiary but the directors argue that they acted in the best interests of the group (although that may have involved disadvantaging the particular subsidiary) – this is primarily a directors' duty issue (see Chapters 11 and 24); • tort claim – this is a situation where there may be strong policy reasons for lifting the veil. While no Australian case has yet done this, see comments in Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549; and
Chapter 4
The veil can be lifted either by statute or general law.
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• where the interests of justice or fairness require: Walker v Hungerfords (1987) 49 SASR 93 (but note the special facts of that case) and obiter in Chen v Butterfield (1996) 7 NZCLC 261,086. Conclusion
In Australia no broad principle has yet emerged from the cases. All that can be said is that, so far, the courts have been extremely reluctant to lift the corporate veil under any circumstances not covered by statute. Very strong arguments must be offered in support of such a lifting.
Further Reading ...................................................................................................................................... Anderson H “Piercing the Veil on Corporate Groups in Australia: The Case for Reform” (2009) MULR 333 Dickfos J “Enterprise Liability for Corporate Groups: A More Efficient Outcome for Creditors” (2011) 25 AJCL 242 Farrar J “Corporate Group Insolvencies, Reform and the United States Experience” (2000) 8 Insolvency Law Journal 148 Gronow M “Insolvent Corporate Groups and their Employees: The Case for further Reform” (2003) 21 C&SLJ 188 Hargovan A and Harris J “Cutting the Gordian knot of corporate law: revisiting veil piercing in corporate groups” AJCL 26 (1) 39 Lipton P Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, [2.05]-[2.355] Noakes DB “Corporate Groups and the Duties of Directors: Protecting the Employees or the Employer?” (2001) 29 ABLR 124 Parker D “Piercing the Veil of Incorporation: Company Law for a Modern Era” (2006) 19 AJCL 35 Priskich V “CASAC's Proposals for Reform of the Law Relating to Corporate Groups” (2001) 19 C&SLJ 360 Ramsay IM and Noakes DB “Piercing the Corporate Veil in Australia” (2001) 19 C&SLJ 250 Ramsay IM and Stapledon G “Corporate Groups in Australia” (2001) 29 ABLR 7 Rixon FG “Lifting the Veil between Holding and Subsidiary Companies” (1986) 102 LQR 415 Sealy LS “Modern Insolvency Laws and Mr Salomon” (1998) 16 C&SLJ 176 Spender P “Resurrecting Mrs Salomon” (1999) 27 FLR 217 Watson S “Who Hides behind the Corporate Veil? Finding a Way out of the Legal Quagmire” (2002) 20 C&SLJ 198
CHAPTER 5 .......................................................................................................
Internal Rules Useful Websites ..................................................................... 119 Aim ......................................................................................... 119 Related Topics ....................................................................... 120 Principles ............................................................................... 120 Sources of internal rules ................................................................ 121 Statutory provisions ..................................................................... 121 Constitution ............................................................................... 126
Effect of the constitution and replaceable rules .................................... 128 Alteration of the constitution and replaceable rules .............................. 129 Objects clauses and limitations on powers ......................................... 131 Enforcement of the constitution and rules .......................................... 134 Mentor: Test your Knowledge ............................................... 135 Practice Questions ................................................................. 135 Problems for Discussion ........................................................ 136 Guide to Problem Solving ...................................................... 138 Further Reading ..................................................................... 142
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Internal Rules.)
Aim ...................................................................................................................................... At the end of this topic you should know: • what a company's constitution may contain and its importance; • what replaceable rules are, where to find them and when they apply; • that under s 140(1), the constitution and any replaceable rules have effect as a contract between the company, its officers and members; and • how the constitution and replaceable rules can be enforced and altered.
Chapter 5
Companies registered before 1 July 1998 ........................................... 127
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Related Topics ...................................................................................................................................... Chapter 2 Business Organisations; Chapter 7 Corporate Liability: Contract, Tort and Crime; Chapter 10 Meetings; Chapter 14 Members' Rights and Remedies; Chapter 17 Classes of Shares
PRINCIPLES The internal rules of a company govern its various “internal” relationships between the company (as a separate legal entity) and its two main constituents – its members and officers. The Corporations Act 2001 (Cth) (Corporations Act) also has provisions that affect these “internal” relations, but to a large extent a company can adopt a “personalised” set of rules for its particular circumstances. For example, contrast what internal rules would be appropriate for a small family company that has only a few members, all of whom are closely involved in the day-to-day running of the company (like informally appointing a replacement director), with the rules that would be appropriate for a large public company that has many members and different classes of shares.
[5.10]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Part 3–2—Rules dealing with the internal governance of corporations, in particular, Divisions 57, 60, 63, 66, 69 and 72 of the CATSI Act are provisions on internal rules of Indigenous corporations. In order to encourage members to learn about the rules of incorporation, ORIC prepared a condensed rule book. It is expected that this condensed rule book will assist corporations registered or groups seeking to register under the CATSI Act to develop their own a rule book. ORIC has cautioned that corporations adopting these rules should be aware that the laws in the CATSI Act still apply to them and that the CATSI Act will apply in default if the rules set out by corporations do not follow the CATSI Act. The condensed rule book can be found at: http://oric.gov.au/free-templates/rule-book-templates.
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Sources of internal rules [5.20]
The internal rules of a company can be comprised of:
• a constitution that the company has adopted (if one has been adopted on or after registration); • the replaceable rules in the Corporations Act; or • a combination of both: s 134. If a company adopts a constitution, it can be modified from time to time by special resolutions approved by the members of the company. A special resolution must be passed by at least 75% of the votes cast by members entitled to vote on the resolution: s 9. Any such special resolutions also form part of the internal rules of the company.
• the type of company; and • whether the company was registered before or after 1 July 1998. The latter distinction is a consequence of substantive reforms introduced by the Company Law Review Act 1998 (Cth) which came into effect on 1 July 1998. Because companies registered prior to 1 July 1998 can continue with their existing internal rules, it is important to have at least a basic understanding of the sources of internal rules (and the related terminology) under the pre-1 July 1998 regime: see [5.110]-[5.140]. However, our major emphasis is on the current regime.
Statutory provisions [5.30]
The relevant statutory provisions are ss 134 – 136.
SECTIONS 134-136 134 Internal management of companies A company’s internal management may be governed by provisions of this Act that apply to the company as replaceable rules, by a constitution or by a combination of both. Note: There are additional rules about internal management in ordinary provisions of this Act and also in the common law. 135 Replaceable rules Companies to which replaceable rules apply
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The source of the rules applying to a particular company will depend on two factors:
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(1)
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A section or subsection (except subsection 129(1), this section and sections 140 and 141) whose heading contains the words: (a) replaceable rule – applies as a replaceable rule to: (i) each company that is or was registered after 1 July 1998; and (ii)
(b)
any company registered before 1 July 1998 that repeals or repealed its constitution after that day; and
replaceable rule for proprietary companies and mandatory rule for public companies – applies: (i)
as a replaceable rule to any proprietary company that is or was registered after 1 July 1998; and
(ii)
as a replaceable rule to any company that is or [was] registered after 1 July 1998 and that changes or changed to a proprietary company (but only while it is a proprietary company); and
(iii)
as a replaceable rule to any proprietary company that is or was registered before 1 July 1998 that repeals or repealed its constitution after that day; and
(iv)
as an ordinary provision of this Act to any public company whenever registered.
The section or subsection does not apply to a proprietary company while the same person is both its sole director and sole shareholder. Note 1: See sections 198E, 201F and 202C for the special provisions that apply to a proprietary company while the same person is both its sole director and sole shareholder. Note 2: A company may include in its constitution (by reference or otherwise) a replaceable rule that does not otherwise apply to it. [Editor’s Note: there is a typographical drafting error s 135(1)(b)(ii). Currently, the text reads “is or eas registered”.]
in
Company’s constitution can displace or modify replaceable rules (2)
A provision of a section or subsection that applies to a company as a replaceable rule can be displaced or modified by the company’s constitution.
Failure to comply with replaceable rules (3)
A failure to comply with the replaceable rules as they apply to a company is not of itself a contravention of this Act (so the provisions about criminal liability, civil liability and injunctions do not apply). Note: Replaceable rules that apply to a company have effect as a contract (see section 140).
136 Constitution of a company (1) A company adopts a constitution: (a) on registration – if each person specified in the application for the company’s registration as a person who consents to become a member agrees in writing to the terms of a constitution before the application is lodged; or
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after registration – if the company passes a special resolution adopting a constitution or a court order is made under section 233 that requires the company to adopt the constitution.
[Note to this subsection not extracted.] (2)
The company may modify or repeal its constitution, or a provision of its constitution, by special resolution. Note: The company may need leave of the Court to modify or repeal its constitution if it was adopted as the result of a Court order (see subsection 233(3)).
(3)
The company’s constitution may provide that the special resolution does not have any effect unless a further requirement specified in the constitution relating to that modification or repeal has been complied with.
(4)
Unless the constitution provides otherwise, the company may modify or repeal a further requirement described in subsection (3) only if the further requirement is itself complied with.
Evidence on compliance with s 136(1) of the Corporations Act .......................................................................................................................................................................
In Supercar International Holdings Ltd v Sommers; Tinkler Group Holdings Pty Ltd v Sommers [2011] NSWSC 336, questions were raised as to whether there was evidence that the constitution had been adopted pursuant to s 136(1) of the Corporations Act where a document was produced and purported to be the company constitution. White J observed on the facts that the ASIC company extract specified that the company was bound by the constitution “which would only be the case if s 136 has been complied with”″ (at [103]). White J concluded that the ASIC company extract is prima facie evidence that the constitution was adopted and thereby adopted in a manner contemplated by s 136 of the Corporations Act. The importance of compliance with s 136 was reiterated in Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326. The court held that a company does not have a constitution unless s 136 of the Corporations Act has been complied with. [5.35]
Replaceable rules .......................................................................................................................................................................
The relevant sections of the Corporations Act are described generally as the “replaceable rules”. These sections deal with internal matters such as the appointment and removal of directors, convening and conduct of meetings and share transfers. These replaceable rules operate as a series of “default
[5.40]
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[subsections (5) and (6) not extracted.]
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provisions” – that is, the replaceable rule applies “in default” of the members adopting a constitution that provides for a different rule. It is intended that the replaceable rules will be updated from time to time by amending these sections of the Corporations Act to reflect current “best practice”. Any updates will automatically amend the internal rules of a company relying on the replaceable rules, saving the company the expense of keeping its constitution up to date with the Corporations Act. The table contained in s 141 (extracted below) cross-references the relevant sections. Each rule appears under the relevant topic: for example, the replaceable rule for the appointment of directors is with the other sections on directors (in Ch 2D Officers and Employees). [5.50] TABLE 5.1 Replaceable rules – Table based on s 141 Description of provision Directors Company may appoint a director Alternate directors Directors may appoint other directors Powers of directors Executing negotiable instruments Managing director
Section
201G 201K 201H 198A 198B 198C, 201J, 203F Proprietary company may remove director 203C# Director may resign by giving written notice to company 203A Voting and completion of transactions by interested director of proprietary company 194# Remuneration of directors 202A Directors' meetings Circulating resolutions 248A Calling directors' meetings 248C Chairing directors' meetings 248E Quorum at directors' meetings 248F Passing of directors' resolutions 248G Meetings of members Calling of meetings of members by a director 249C Notice to joint members 249J(2) When notice by post or fax is given 249J(4) When notice under s 249J(3)(cb) is given 249J(5) Notice of adjourned meetings 249M Quorum 249T Chairing meetings of members 249U Business at adjourned meetings 249W(2) Who can appoint a proxy 249X* Proxy vote valid even if member dies, revokes appointment etc 250C(2) How many votes a member has 250E Jointly held shares 250F Objection to right to vote 250G
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Description of provision How voting is carried out When and how polls must be taken Company secretary Terms of office determined by directors Inspection of books Company or directors may allow member to inspect books Shares Pre-emption for existing shareholders on issue of shares in proprietary company Other provisions about paying dividends Dividend rights for shares in proprietary companies Transfer of shares Transmission of shares on death Transmission of shares on bankruptcy Transmission of shares on mental incapacity Registration of transfers Additional general discretion for directors of proprietary companies to refuse to register transfers #Replaceable rule that only applies to a proprietary company *Mandatory rule for public companies
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Section 250J 250M 204F 247D 254D# 254U 254W(2)# 1072A 1072B 1072D 1072F 1072G#
When replaceable rules apply
The replaceable rules apply to every company registered after 1 July 1998 unless the members opt out of them by adopting a constitution. They also apply to pre-1998 companies that repeal their entire existing internal rules (memorandum and articles) and do not adopt a new constitution.
[5.60]
Companies that must have a constitution
Certain types of companies must have their own constitution because of requirements in other sections of the Corporations Act and/or in the ASX Listing Rules. The following types of companies cannot rely solely on the replaceable rules:
[5.70]
• no liability companies; • companies limited by guarantee that want to be registered without the word “limited” in their name; and • public companies listed on the ASX. Also, the replaceable rules do not apply to a proprietary company that has the same person as its sole director and sole shareholder: s 135(1), see [5.30]. Other companies may, because of their particular circumstances, choose to adopt a constitution. In this situation, a company can either adopt a constitution that entirely replaces the replaceable rules, or adopt a constitution that modifies or supplements the replaceable rules. Further, the constitution can itself be made up of a series of special resolutions passed by the members (s 136(2), [5.30]), rather than a single document. A public company must lodge a copy with ASIC of any such
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special resolutions together with a copy of the amended constitution (s 136(5)), but this is not required of a proprietary company. Different replaceable rules – public vs proprietary
In some instances, the replaceable rules distinguish between proprietary and public companies. Some replaceable rules only apply to proprietary companies – s 254D (pre-emption rights for existing shareholders), s 254W(2) (dividend rights) and s 1072G (additional discretion for directors to refuse to register transfers of shares). The heading to the relevant section states that the replaceable rule applies only to shares in proprietary companies. For public companies, some of the replaceable rules are mandatory – that is, the rule can be displaced by a proprietary company but not by a public company. In this case, the heading to the relevant section states “replaceable rule for proprietary companies and mandatory rule for public companies”. As at June 2012, the only such rule is s 249X, appointment of proxies.
[5.80]
Constitution The constitution of a company can be a very important business planning tool. It enables the various stakeholders to “personalise” the company's structure to suit their particular needs. For example, consider the needs of the members of a group who have come together to establish a company for a new venture. They may want weighted voting rights (to reflect the different contribution made by each party) in order to give these holders more influence, but it may also be important to retain certain safeguards for the party with the minority vote. Not all of the replaceable rules may be appropriate for the new company. The type of specialised provisions that could be considered for the constitution of such a company would include:
[5.90]
• different classes of shares for the different types of participant; • different voting rights for the different classes of shares; and • provision for certain key decisions (for example, to dissolve the company or to make any large acquisitions) to be passed by a majority of each class. In addition to those companies that must have their own constitution (see [5.70]), the following are examples of situations where a constitution would generally be adopted: • a company with different classes of shares with different voting rights; • an “incorporated partnership” where partners transfer an existing business to a company but intend to each continue to take an active part in its management, as in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 extracted at [14.610]; • a foreign company (that is, incorporated outside Australia); and
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• a company that intends to or has issued partly paid shares. A sample constitution is provided at the end of this Topic. Single director/shareholder proprietary companies .......................................................................................................................................................................
Companies registered before 1 July 1998 Prior to 1 July 1998, a company's internal rules comprised two documents: [5.110]
(a)
the memorandum of association; and
(b)
the articles of association.
Memorandum of association .......................................................................................................................................................................
Before companies were given full legal capacity (see now s 124), the memorandum of association was an important document that set out a company's objects and powers, its name and share capital and the liability for members. The Company Law Review Act 1998 (Cth) abolished the memorandum of association. The basic information it contained is included in the company's registration application and can be ascertained from a company search. Any objects or restrictions on powers that may still be required (for example, because the company is a no liability company (s 112(2)(b))) can be included in the company's constitution. [5.120]
Articles of association .......................................................................................................................................................................
Every company was also required to have articles of association. These set out the internal rules that would now be covered by the replaceable rules or a constitution. While every company had to have articles, companies limited by shares and no liability companies did not have to register them by lodging the articles [5.130]
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[5.100] As mentioned at [5.30], the replaceable rules do not apply to a proprietary company with a single shareholder who is also the sole director. The concept of rules for internal management is largely redundant for these companies. If at any time another director is appointed and/or anyone else becomes a shareholder, the replaceable rules will (in the absence of the members adopting a constitution) automatically apply to the company: s 135(1). While there is a single director/shareholder, all the decision-making power rests with that person: s 198E(1) extracted at [6.60]. Section 198E is not a replaceable rule. Although a single director/ shareholder company can have a constitution, the effect of s 198E cannot be modified.
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with the ASC (now ASIC). If these companies did not register articles, the default provisions in what were formerly Table A or Table B of the First Schedule to the Corporations Law (in force prior to 1 July 1998 and before that in Sch 3 of the Companies Code 1981 (Cth)) were deemed to apply. A company limited by guarantee and an unlimited company had to register articles. Table A was used by proprietary companies and many companies chose it as the basis of their articles of association, often changing just one or two clauses. Impact of the 1998 reforms ....................................................................................................................................................................... [5.140] The memorandum and articles of a company registered prior to 1 July 1998 are taken together to be the “constitution” of that company: see former s 1415 (the effect of this section is continued by Corporations Act, Pt 10.1). Any modifications made to this constitution will be regarded as an amendment to the existing arrangement. The replaceable rules will only apply to these companies if and when they repeal their entire memorandum and articles: s 135(1). If this happens, a company will be in the same position as a company registered after 1 July 1998 and can then adopt all or some of the replaceable rules: see [5.40]. Consequently, although repealed, Tables A and B continue to be relevant for companies that have not repealed their entire existing memorandum and articles, in deciding pre-1 July 1998 issues. Both Tables can be found in later parts of printed companies legislation that applied at the time (and are still available in law libraries). It can be difficult to ascertain whether any post-1 July 1998 changes have occurred to the internal rules of a proprietary company because, unlike public companies, proprietary companies do not have to lodge copies of any special resolutions that adopt, modify or repeal their constitution: s 136(5). This means that it can be a complex exercise to work out what internal rules apply. It is difficult for someone who is not a member to obtain a copy of any constitution.
Effect of the constitution and replaceable rules Under s 140(1) the constitution (if any) and any replaceable rules that apply to the company are to “have effect as a contract”. This contract is between:
[5.150]
• each member and the company; • the company and each director and company secretary; and • the members themselves.
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The statutory contract created by this section is different from other contracts in that: • the remedies available for breach are generally limited to a declaration or an injunction, not damages; • the parties (members, directors and company secretary) are bound whether or not they agreed to the terms of the contract (for example, a person who was not a member when the company was formed or the constitution was adopted will still be bound by its terms); • it can be modified without the consent of every party to it (see [5.160]-[5.190] and NRMA Ltd v Snodgrass (2001) 37 ACSR 382);
• no consideration has been given. The contract only exists because the Corporations Act states that the constitution and replaceable rules bind the parties as if they had entered into a contract: s 140. Cases have considered whether rules or by-laws made pursuant to, or referred to in, the company's constitution also form part of this statutory contract so that they can be enforced by or against a member. See, for example, Wilcox v Kogarah Golf Club (1995) 14 ACLC 421.
Alteration of the constitution and replaceable rules Alteration of the constitution ....................................................................................................................................................................... [5.160] A company has power under s 136(2) to alter its constitution: see [5.30]. Alteration includes insertion and deletion of provisions as well as amendments. Any alteration has to be by special resolution (that is, approved by a 75% majority of members who are entitled to and cast a vote on the resolution: s 9 and see [10.270]). For public companies there is a requirement to lodge with ASIC a copy of a special resolution and constitution if it displaces a replaceable rule or modifies the constitution within 14 days of the resolution and to fail to do so is an offence of strict liability: 5 penalty units.
Effective date of alteration
Section 137 provides that a special resolution making any alteration to a constitution comes into effect on the date the resolution is passed or any later date specified in, or determined according to, the resolution. Where the constitution itself requires any repeal or modification to satisfy an additional requirement, the special resolution does not take effect until that [5.170]
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• it is a written contract notwithstanding that each party does not sign a copy of it; and
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additional requirement is complied with: s 136(3), see [5.30]. For example, the constitution may provide that it can only be altered with the written consent of a particular person. Displacing or modifying the replaceable rules .......................................................................................................................................................................
Section 135(2) (see [5.30]) provides that the replaceable rules can be displaced or modified if the company adopts a constitution that has the effect of displacing or modifying a particular replaceable rule. The constitution may expressly displace any replaceable rule, or could displace it by inference. For example, a provision in a proprietary company's constitution that provides that directors can only be removed by a special resolution of members would, by inference, displace the replaceable rule in s 203C(a). It is therefore possible to say that the replaceable rules can also be displaced or modified by a special resolution. That is, the procedure is the same for an alteration of a company's constitution and a displacement/modification of the replaceable rules – a special resolution of members is required for both. [5.180]
Limits to alteration of internal rules .......................................................................................................................................................................
Statutory limits
There are some statutory limits on the power to alter the internal rules of a company. The modification: [5.190]
• cannot, unless a member gives written consent, require that member to – take up more shares – increase their liability to the company – impose (or increase) restrictions on the right to transfer their shares, unless the modification is connected with the company's change from a public company to a proprietary company or the insertion of proportional takeover approval provisions (s 140(2), see also Austin J's explanation of the operation of this subsection in Ding v Sylvania Waterways Ltd (1999) 46 NSWLR 424); • must comply with any further requirement in the company's constitution (for example, that the consent of a particular person or statutory authority be obtained) (s 136(3) – (4)); • cannot, if it is a provision which deals with special rights of members, be altered except by means of the procedure laid down in Pt 2F.2 (see Chapter 17); and • cannot be oppressive: Pt 2F.1; see Chapter 14.
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General law limits
General law also has an important role to play here. In Gambotto v WCP Ltd (1995) 182 CLR 432 the High Court provided important new guidelines by which to assess amendments. If an alteration involves the removal of an important membership right (such as voting rights or dividend rights), or means that the shares of a member or any group of members are to be acquired without that member's consent, then the tests of fairness laid down in Gambotto's case must be satisfied: see [14.130]. Cases have also protected the role of directors and so attempts to change the constitution to provide that directors will take directions from members and thereby be forced to not consider the best interests of the company: See Capricornia Credit Union Ltd v ASIC [2007] FCAFC 112. In Vermillion Resources Pty Ltd v Gibbins Investments Pty Ltd [2011] FCAFC 149, it was observed that the Duomatic principle (Re Duomatic Ltd [1969] 2 Ch 365) can only operate where shareholders acting in concert are actually aware of any waiver or destruction of rights. The shareholders voted that the parties of two companies would not be bound by the provisions under a specific article of its Constitution. However, the doctrine only applies where shareholders “all agree, with full knowledge, effectively to depart from the company’s articles or Constitution so as to allow the company to proceed in a manner that could have been authorised by a resolution passed in a general meeting of the company.” However, in this case, the shareholders were unaware of certain facts therefore the doctrine did not apply.
Objects clauses and limitations on powers [5.210] Section 124 confers on a company the legal capacity and powers of an individual and also all the powers of a “body corporate”. Some of the powers peculiar to a “body corporate” are listed in s 124(1)(a) – (h), including the power to issue shares and the power to give a circulating security interest: see Chapter 20. If a company has a constitution, it can limit its powers by stating an express restriction on, or prohibition of, the exercise of any of its powers: s 125(1).
SECTION 125 Constitution may limit powers and set out objects (1)
If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company’s exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution.
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[5.200]
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(2)
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If a company has a constitution, it may set out the company’s objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution.
For example, it would be possible for a company's constitution to restrict its power to borrow in some way. A company can also set out objects (or purposes) in its constitution: s 125(2). As mentioned at [5.120], this used to be the function of the memorandum of association. The cases on interpretation of these objects/powers clauses will continue to be relevant for any company that has these clauses in its constitution. However, it is clear from ss 124(2) and 125 that a company's legal capacity to act is not affected merely because that act is not in its interests, or is in breach of its constitution. For example, the right of an innocent outsider to enforce a contract will not be affected simply because of these factors: see [5.250] and Chapter 7. Five main types of companies will still have constitutions setting out objects or restricting the company's powers: 1.
not-for-profit organisations that have incorporated under the Corporations Act (whether because of size or national coverage), particularly those not-for-profit organisations that seek to be registered without the word “limited” in their name as provided for by ss 150 – 151 and/or those required to have such objects under other legislation (such as taxation);
2.
joint venture companies – where the parties have come to together to form a new company which is only to exist for a specified purpose;
3.
no liability companies – s 112(2)(b) requires a no liability company to have a constitution which states that its “sole objects are mining purposes”;
4.
various professional practices – often statutory or membership requirements provide that these practices can only incorporate subject to certain additional requirements: see, for example, Pt 2.7 of the Legal Profession Act 2004 (Vic). These companies may have to include certain objects or restrictions in their constitutions; and
5.
companies that were registered prior to 1998 and have not altered their memorandum – these companies can, by a special resolution of members, repeal their memorandum.
Abolition of general law doctrine of ultra vires .......................................................................................................................................................................
Where a company has a constitution that includes an objects clause, the company's powers are limited to the purposes stated in it – that is, it cannot act outside the powers it is given in its constitution. Under the general [5.220]
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Ultra vires doctrine conclusions Companies without stated objects or restrictions on powers
If a company's constitution has no stated objects or restrictions on powers, the accepted view is that no question of ultra vires can arise. This is because these companies have the legal capacity and powers of an individual, plus any special powers given to them under the Corporations Act: s 124. [5.230]
Companies with stated objects or restrictions on powers
If a company's constitution does include an objects clause or restricts the company's powers, two issues arise. First, it is necessary to decide whether a particular act complies with any restrictions in the constitution. For example, if the company's objects include the conduct of research about the causes of heart-related deaths, does this include the conducting of trials of a new drug which may help prevent heart disease? The court has to examine the stated objects (or prohibitions) to see whether what the company has done falls within its powers or not. Often it is not an easy matter to decide, and depends on the court's construction of the relevant clauses and their context. Then, if the court decides that an act is outside the express objects of the company or breaches a restriction on its powers, it is necessary to consider the possible consequences. The act will not be invalid, but may be asserted in certain proceedings under the Corporations Act: see [5.250]. [5.240]
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law, if a company with objects (or restrictions on the use of its powers) acts outside the powers set out in its constitution, those acts are said to be “ultra vires” (outside the power) and any ultra vires acts are void. However, s 125 abolishes this doctrine and provides that no act that is beyond any object, or contrary to any express prohibition in the company's constitution, is invalid merely for that reason: see [5.210]. Thus, outsiders dealing with the company are safe from any claim that an act by the company is void simply because it is ultra vires: see Chapter 7. Note: The terminology can be confusing. Sometimes the expression “ultra vires” is used in a wider sense to describe unauthorised actions of directors (for example, a director who has acted without the necessary authority of the board of directors) or for situations where there is an abuse of power by directors or members. We use the expression in its strict sense, that is, beyond corporate capacity: see Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 at 367 where the Full Court of the Victorian Supreme Court makes this distinction.
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Enforcement of the constitution and rules [5.250] A breach of a provision in a company's constitution is not a contravention of the Corporations Act – in other words, it is not an offence which could lead to the imposition of criminal or civil liability or the granting of a statutory injunction under s 1324. Nor is a breach of a replaceable rule of itself a contravention of the Corporations Act: s 135(3) (see [5.30]). It seems, therefore, that the statements made about the enforcement of the constitution apply equally to the enforcement of the replaceable rules. Thus, while it is s 140(2) that provides that the constitution and replaceable rules form a “contract” between the company and members, it is the general law that enables the company to enforce that statutory contract. Under general law principles, there is little doubt that the company can force members to comply with its constitution: Hickman v Kent or Romney Marsh Sheep-Breeders' Association [1915] 1 Ch 881. Does the reverse apply? Suppose a provision in the constitution is breached by one director, several directors or any member or members. Can an individual member or group of members bring an action to enforce the provision? (In other words, can any member or group annoyed by the breach bring, in effect, a breach of contract suit?) In Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399, the High Court said that special facts enabled the member to enforce the terms of the constitution that existed on the date on which he was sued by an outsider, even though subsequent amendments to it meant that he would no longer have had the same protection under the constitution. The special facts of Bailey's case aside, there is no clear-cut answer to this question: see further discussion at [14.240]. Essentially, the court has to weigh up the rights of members to enforce their “contract” against the rights of the majority to excuse a breach. However, it is quite clear that outsiders (non-members) cannot obtain rights under the constitution nor can they enforce them, unless those non-members are directors or the company secretary. It would also seem that members can enforce only those provisions which affect them in their capacity as members – s 140(1) states “so far as they apply to that person”.
Consequences of a breach of objects clause or limitation on powers clause .......................................................................................................................................................................
A breach of an objects clause, or a restriction on powers clause is not of itself a contravention of the Corporations Act and will be treated in the same way as any other breach of the company's constitution. However, a [5.260]
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breach of such a provision of the constitution may still be asserted in other actions under the Corporations Act, such as: • an action against a director or other officer for breach of duty under Pt 2D.1 (see Chapters 11, 12 and 13); • a winding up application under s 461(1)(k): see Chapter 24. A statutory injunction is not available for a breach of the internal rules unless the breach also amounts to a contravention of the provisions mentioned above. It is not clear whether a member can use the statutory derivative action to obtain a general law injunction to prevent execution of a contract that would otherwise be in breach of stated objects or restrictions on powers. But it is clear that a completed transaction will be valid despite non-compliance with the stated objects or restrictions on powers. If a member could show that a breach of the constitution had caused them to suffer loss that was not a loss suffered by the company then it is possible that they can receive damages: see McLaughlin v Dungowan Manly Pty Ltd [2010] NSWSC 187. There is still some debate about whether directors can be personally liable for losses suffered by the company as a result of the directors allowing the company to act outside its objects or in breach of restrictions on its powers.
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/ for multiple choice questions and answers on the Topic of Internal Rules.)
Practice Questions ...................................................................................................................................... 1.
What can the internal rules of a company be comprised of? What two factors affect the exact source of those rules?
2.
Why is it important to understand both the pre- and post-1 July 1998 regimes?
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• an action for oppression under Pt 2F.1 (see Chapter 14); and
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CORPORATIONS LAW: IN PRINCIPLE
Complete the following table about the possible sources of internal rules that different types of companies can have. TABLE 5.2 Sources of internal rules Type of company Proprietary company (ie, Pty Ltd)
Registered post-1 July 1998 – if no constitution adopted then replaceable rules apply; or – adopt constitution that modifies replaceable rules (ie, combination); or – adopt own constitution (replaceable rules excluded).
Public company – limited by shares (unlisted) Public company – limited by guarantee seeking to be registered without including “Ltd” in its name (unlisted) Public company – no liability (unlisted) Single director/shareholder proprietary company
4.
In what circumstances would you advise a proprietary company to adopt a constitution?
5.
How does: (a)
a member; and
(b) a creditor, of a proprietary company obtain a copy of the internal rules that apply to the company? 6.
What does “ultra vires” mean and has it been abolished?
7.
Explain how a company's constitution can be changed.
Problems for Discussion ...................................................................................................................................... 1.
Susie is a director of BB Promotions Pty Ltd (BB Promotions). BB Promotions was registered on 8 August 2007. No constitution has been adopted and no relevant special resolutions have been passed. BB Promotions trades in Melbourne and Perth. Susie lives in Melbourne. She recently travelled to Perth for a meeting of the board of directors. She submitted receipts for these expenses but, even after repeated attempts, she cannot get the company secretary or the board to authorise payment. Susie had always assumed that these expenses would be reimbursed, but she had never actually discussed this with her fellow directors. What legal remedy (if any) does Susie have?
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137
2.
Eco Ltd (Eco) has been set up as a joint venture by Enviro Ltd (Enviro) (a non-profit company which promotes education and research into environmentally friendly products) and WP Pty Ltd (which operates a waste paper collection service). Eco's constitution restricts its activities to the production of recycled paper products and “such activities as are reasonably incidental thereto”. Eco enters into a contract to provide a glass and paper collection service to the City of Kuarna. Enviro had previously refused to deal with this Council because of its poor environmental record. Can Enviro, as a shareholder of Eco, have the contract set aside?
3.
Using the constitution of Acme Pty Ltd at the end of this chapter, answer the following questions. (a) What is a quorum for meetings of directors and members?
4.
(b)
How can directors be removed from their position by the members?
(c)
If the members want to rely on the replaceable rule in s 254D, what change must be made to the constitution and what procedure must be followed to implement that change?
(d)
Assume the constitution was changed to provide that the consent of member AA must be obtained before any future amendments to it can take effect. Summarise the steps that must now be taken to implement amendments.
Zio Pty Ltd (Zio) was registered in 2006. Angus and Max are its only shareholders and directors. Zio's constitution provides that Clare is to be Zio's solicitor. Clare is Max's wife, but after marriage difficulties they have recently separated. Clare has just received a letter from Zio stating that her services are no longer required. Advise Clare.
5.
Seawaters Pty Ltd was registered in 2001. The company owns the land forming the bed of a canal development. The only members of the company are the owners of the blocks of land with a frontage on the canal. The company's constitution provided that the members should pay an initial fee of $1,000 for the right to use the jetties and boatsheds giving access to the canal. At the company's annual general meeting in 2012, a special resolution was passed to amend the constitution by adding a clause requiring all members to pay a new annual levy which was to be used to maintain the canal. The amount of the levy was to be determined by the general meeting. Bob has been a member of the company since 2002. He voted against the special resolution approving
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the levy and is refusing to pay it. Advise Bob whether he is bound to pay the annual levy.
Guide to Problem Solving ...................................................................................................................................... Ascertaining internal rules
1.
Ascertain date of registration – on Certificate of Registration or conduct company search.
2.
If the company was registered after 1 July 1998:
Figure 5.1: Internal rules – post-1 July 1998 companies ....................................................................................................
RRs = replaceable rules
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3.
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If the company was registered before 1 July 1998:
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Figure 5.2: Internal rules – pre-1 July 1998 companies ....................................................................................................
M & A = Memorandum and Articles of Association RRs = replaceable rules # Tables A and B are preserved for existing companies by s 1415 of the Corporations Law (the effect of this section is continued by Corporations Act Pt 10.1). * Unless a company is: – a public company and the rule is a mandatory replaceable rule; or – a single member/shareholder company in which case s 198E cannot be excluded. 4.
Note that the constitution can be modified or repealed by special resolutions of the members: s 136(2). The replaceable rules can be displaced or modified by a company's constitution: s 135(2).
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5.
CORPORATIONS LAW: IN PRINCIPLE
There are practical difficulties for a creditor (or other outsider) who wants to ascertain the internal rules of a proprietary company. A company search will not be reliable because a proprietary company does not have to lodge a copy of its constitution or any special resolutions that might modify or repeal it – s 136(5) only applies to public companies.
Alteration of constitution and rules
1.
2.
Generally, companies may alter their internal rules. A special resolution of members is required: ss 135(2), 136(2)-(5) and 137. Note that a company's constitution may provide that it can only be altered if a further requirement such as approval by a larger majority or the consent of a particular person is complied with: s 136(3)-(4). There are some important limits on this power. (a) Statutory limits (see [5.190]): – s 140(2) (as explained by Austin J in Ding v Sylvania Waters Ltd (1999) 46 NSWLR 424) – s 136(3)-(4) – Pt 2F.2 – Pt 2F.1 (b)
General law limits (see [5.200]): – the tests laid down by the High Court in Gambotto v WCP Ltd (1995) 182 CLR 432
See Chapter 14. 3.
As to the date any alteration takes effect, see s 137.
Objects clauses and limitations on powers – ultra vires
1.
Does the company have stated objects or are there restrictions or prohibitions on the powers of the company in the constitution? If not, it is unlikely that “ultra vires” (in the strict sense – that is, beyond the powers of the company) is the issue?
2.
3.
If the company does have stated objects or restrictions on its powers, is the particular act or contract in question ultra vires? This requires interpretation of the wording of the objects/restrictions. If the contract is ultra vires, can the company avoid the contract? No, see s 125(1) and (2) and cross-reference the statutory assumptions a person dealing with a company can make: ss 128-129 and Chapter 7. If the contract is in the negotiation stage, it may be possible for the members to use a statutory derivative action to obtain a general law
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4.
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141
injunction to prevent execution: see Chapter 14. Subject to (4) below, a statutory injunction under s 1324 is not available because a breach of an objects or restriction on powers clause is not of itself a contravention of the Corporations Act. What (if any) are the consequences of an ultra vires act? The breach may be relevant to an action under some other provision of the Corporations Act, for example: – a breach by the directors of their duties under Pt 2D.1; – a winding up of the company under the “just and equitable” ground, s 461(k) (particularly the “failure of substratum” cases: see [14.610]-[14.650]); and – an application by a member under Pt 2F.1 (the oppression remedy: see [14.310]-[14.330]).
1.
The constitution (if any) and replaceable rules have effect as a contract under s 140(1). Restate the parties to the contract and note that it is a statutory contract.
2.
A breach of the internal rules of a company does not (of itself) constitute a contravention of the Corporations Act – it does not incur civil or criminal liability, nor can a statutory injunction be obtained under s 1324. The breach may, however, be asserted as a relevant fact in other actions under the Corporations Act – for example, breach of directors' duties under Pts 2D.1, 2F.1 and s 461(k): see s 135(3) and [5.260]. Enforcement of the statutory contract relies primarily on general law principles.
3.
Under general law, the company can force members to comply: Hickman v Kent or Romney Marsh Sheep Breeders' Association [1915] 1 Ch 881 (but note Andy Kala Pty Ltd v EJ Doherty (Northcote) Pty Ltd (1995) 13 ACLC 1630).
4.
Can members (and directors and the company secretary) enforce the contract? Probably yes, provided: – they are affected in their capacity as members, directors or company secretary respectively; and, – the breach is not a mere irregularity which the majority is prepared to ratify.
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Other remedies might be relevant: – infringement of personal rights; – fraud on the minority; – oppression; – winding up; – s 1322 which relates to procedural irregularities; and – Part 2F.2 which deals with variation of rights. See Chapter 14.
Further Reading ...................................................................................................................................... Baxt R “Giving the Articles of Association their Legal Effect: Some Interesting Comments from the High Court of Australia” (1996) 24 ABLR 154 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 4
...................................................................................................................... Sample Company Constitution
CORPORATIONS ACT COMPANY LIMITED BY SHARES CONSTITUTION OF ACME PTY LIMITED (ACN 059 345 876) 1.
The name of the Company is Acme Pty Ltd.
2.
The Company is a proprietary company limited by shares.
3.
The replaceable rules in the Corporations Act apply to the Company except:
4.
(a)
to the extent they are expressly excluded by this Constitution; and
(b)
while the Company has a sole member who is the same person as its sole director.
The replaceable rules in sections 201G, 201H, 203C and 254D of the Corporations Act are excluded.
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143
5.
If there is only one director, references to “the directors” in this Constitution will be a reference to that director.
6.
(a)
The holder or holders of a majority of the issued shares of the Company conferring the right to vote at general meetings of the Company may appoint any person to be a director to fill a casual vacancy or as an addition to the existing directors or remove a director from office.
(b)
The directors may appoint any person to be a director to fill a casual vacancy or as an addition to the existing directors.
(c)
Any appointment or removal under paragraph (a) must be in writing signed by or on behalf of the holder or holders of a majority of the issued shares of the Company conferring the right to vote at general meetings of the Company. Any appointment or removal will take effect immediately on delivery of the instrument of appointment or removal to the registered office of the Company.
(d)
A director is entitled to attend and be heard at general meetings despite the fact that the director does not hold any shares in the Company.
(e)
A director holds office subject only to paragraph (a) but the office of the director is vacated if the director: (i) ceases to be a director by virtue of the Corporations Act;
7.
becomes bankrupt or makes any arrangement or composition with the director’s creditors generally;
(iii)
becomes prohibited from being a director by reason of any order under the Corporations Act;
(iv)
becomes of unsound mind or a person whose person or estate is liable to be dealt with in any way under the laws relating to mental health; or
(v) resigns under section 203A of the Corporations Act. If the Company has a common seal: (a) the directors must provide for the safe custody of the seal; and (b)
8.
(ii)
the seal may be used only by the authority of the directors (or of a committee of the directors authorised by the directors to authorise the use of the seal) and each document to which the seal is fixed must be signed by: (i)
two directors; or
(ii)
a director and a company secretary; or
(iii)
if the Company has a sole director who is also a sole company secretary, that director.
A director may hold any other office or place of profit under the Company (except that of auditor) in conjunction with the office of director and on any terms the board of directors may approve. A director may be a director or member of, or hold any other office or place of profit under, any corporation promoted by the Company or in which it may be interested (whether as a vendor or shareholder or
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Sample Company Constitution cont.
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CORPORATIONS LAW: IN PRINCIPLE
Sample Company Constitution cont. otherwise) and a director is not accountable for any benefits received as such a director, member or holder of office or place of profit. 9.
(a)
If the Company is wound up, the liquidator may, with the sanction of a special resolution, divide among the members in kind the whole or any part of the property of the Company. For that purpose, the liquidator may set such value as the liquidator considers fair on any property to be so divided and may determine how the division is to be carried out as between the members or different classes of members.
(b)
10.
The liquidator may, with the sanction of a special resolution, vest the whole or any part of the property of the Company in trustees on any trusts for the benefit of the members as the liquidator thinks fit, but so that no member is compelled to accept any shares or other securities in respect of which there is any liability. Subject to and so far as permitted by the Act:
(a)
The Company must to the extent that the person is not otherwise indemnified, indemnify every officer of the Company and its wholly-owned subsidiaries and may indemnify its auditor against a Liability incurred as such an officer or auditor to a person (other than the Company or a related body corporate) including a Liability incurred as a result of appointment or nomination by the Company or subsidiary as a trustee or as an officer of another corporation, unless the Liability arises out of conduct involving a lack of good faith; and
(b)
The Company may make a payment (whether by way of advance, loan or otherwise) in respect of legal costs incurred by an officer or employee or auditor in defending an action for a Liability incurred as such an officer, employee or auditor or in resisting or responding to actions taken by a government agency or a liquidator. In this rule, “Liability” means a liability of any kind (whether actual or contingent and whether fixed or unascertained) and includes costs, damages and expenses, including costs and expenses incurred in connection with any investigation or inquiry by a government agency or a liquidator.
(c)
The indemnity in favour of officers in this rule is a continuing indemnity. It applies in respect of all acts done by a person while an officer of the Company or one of its wholly-owned subsidiaries even though the person is not an officer at the time the claim is made.
(d)
Subject to the Act, the Company may enter into and pay premiums on, a contract of insurance in respect of any person.
(e)
Subject to the Act, without limiting a person’s rights under this rule, the Company may enter into an agreement with a person who is or has been an officer of the Company or any of
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145
Sample Company Constitution cont.
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the Company’s subsidiaries, to give effect to the rights of the person under this rule on any terms or conditions that the board of directors thinks fit.
CHAPTER 6 .......................................................................................................
Management of Companies Useful Websites ..................................................................... 147 Recent Developments ............................................................ 148 Aim ......................................................................................... 148 Related Topics ....................................................................... 148 Principles ............................................................................... 149 Division of powers within a company ................................................ 149 Corporate governance .................................................................. 153 Types of directors ........................................................................ 161 Appointment of directors ............................................................... 162 Company secretary ...................................................................... 164 Defective appointments ................................................................. 165 Remuneration of directors ............................................................. 165
Disqualification from office ............................................................. 170 Access to information ................................................................... 173 Summary of legislation on personal liability of directors for corporate fault ......................................................................................... 174 Mentor: Test your Knowledge ............................................... 175 Practice Questions ................................................................. 175 Essay Questions .................................................................... 176 Problems for Discussion ........................................................ 176 Guide to Problem Solving ...................................................... 178 Further Reading ..................................................................... 180
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for websites on the Topic of Management of Companies.)
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Resignation or removal of directors .................................................. 168
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Recent Developments ...................................................................................................................................... Corporations Act Amendments
Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth) Productivity Commission
Australian Government, Productivity Commission, Remuneration in Australia”, Report No 49 (2009)
“Executive
Aim ...................................................................................................................................... At the end of this topic you should know: • how power is divided between the board of directors and the company in general meeting; • what the term “corporate governance” means and what some of the commonly debated corporate governance issues are; • the types of directors a company may have and how directors can be: – appointed; – remunerated; – removed from office; and – disqualified; • directors' rights to obtain access to company records; and • the duties of the company secretary.
Related Topics ...................................................................................................................................... Chapter 5 Internal Rules; Chapter 11 Directors' Duties – Part 1 Duty of Care, Skill and Diligence; Chapter 12 Directors' Duties – Part 2 Good Faith and Proper Purpose; Chapter 13 Directors' Duties – Part 3 Conflict of Interest and Disclosure; Chapter 14 Members' Rights and Remedies
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PRINCIPLES Division of powers within a company A company is an artificial legal entity – a creation of law. As such, people must act for and on behalf of the company. Persons authorised to act on its behalf become an “organ” of the company.
[6.10]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Part 3-2—Rules dealing with the internal governance of corporations, in particular, Divisions 57; and Part 6 of CATSI Act are some of the key provisions on management of Indigenous corporations. An example of where intervention by the Registrar of Indigenous Corporations had a positive impact on the Indigenous corporation. See extract from the ORIC's website: http://oric.gov.au/publications/mediarelease/school-back-minimbah.
.................................................................................................................. MR1415-36 – School is back in for Minimbah
The corporation was established in 1987 and is located in Armidale, New South Wales. It provides pre-school and primary school education to about 139 Aboriginal and non-Aboriginal children in the Armidale region. The Registrar placed it under special administration on 24 November 2014 after an examination revealed that the corporation had traded at a loss for three consecutive years, had poor record keeping and inadequate controls over payments to directors and senior staff. In just over six months the special administrator, Mr Brian Woods, has placed the corporation on a sound financial footing, implemented a new organisational structure and brought the corporation’s records up-todate. All outstanding financial statements were prepared and audited and an arrangement was negotiated with the Australian Taxation Office to repay the corporation’s tax debt over several years. The special administrator worked closely with an advisory group on a new rule book to open up membership to all Aboriginal members of the community, not just parents or guardians of children at the school. This has enabled community leaders and former students and parents to become or remain as members and contribute to the school. The rule book also now provides for the appointment of independent directors to the corporation’s board. In conjunction with the Association of Independent Schools of New South Wales the special administrator has also arranged for construction to resume on the school’s unfinished multi-purpose hall.
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The Registrar of Indigenous Corporations, Mr Anthony Beven, has today announced the end of the special administration at the Minimbah Pre-school, Primary School Aboriginal Corporation.
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MR1415-36 – School is back in for Minimbah cont. The special administrator has appointed a board of five directors, including three community elders, a parent and an independent director from The Armidale School, who has provided valuable support to the corporation during the special administration process. The Registrar will provide corporate governance training to the incoming directors in coming months. “It was important to achieve a successful outcome for this corporation so that it could continue providing strong educational and cultural outcomes to the children attending the school. I will continue to monitor the corporation closely over the next 12 months but the school now has a bright future,” Mr Beven said. See the Registrar’s (ORICMR1415-15).
media
release
of
24
November
2014
In the next example the Registrar of Indigenous Corporations took action against company directors for poor corporate governance who were former directors of a Canberra housing corporation. See extract from ORIC's website: http://www.oric.gov.au/publications/media-release/ registrar-takes-action-against-former-directors-canberra-housing.
.................................................................................................................. MR1415-27 – Registrar takes action against former directors of Canberra housing corporation
The Registrar of Indigenous Corporations, Anthony Beven, has begun civil penalty proceedings in the Federal Court in Canberra against three former directors of the Southside Housing Aboriginal Corporation (Southside Housing). Southside Housing is a Canberra-based not-for-profit corporation that was established to provide affordable housing to Aboriginal and Torres Strait Islander people in the ACT. In December 2013 the Registrar placed the corporation under special administration for the second time in seven years after an examination of the corporation’s books and records revealed a large number of serious concerns relating to poor governance and bad financial management. During the special administration an investigation was commenced by the Registrar. The Registrar has applied to the Federal Court for declarations and an order disqualifying the three former directors from managing corporations registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006. The Registrar is also seeking orders requiring them to pay a fine to the Commonwealth and compensation to Southside Housing. The Registrar alleges that the three former directors, Mr Fred Monaghan, Ms Teresa Monaghan and Ms Kim Peters controlled the corporation and ran it for their own benefit. The directors lived in the properties owned by the corporation, did not pay all of their rent and had the corporation pay part of their excess water charges.
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MR1415-27 – Registrar takes action against former directors of Canberra housing corporation cont. Of most concern was that the directors allowed the corporation’s seven houses to fall into disrepair with two declared uninhabitable. Significant expenditure is required to return the houses to a habitable state. “This is an unfortunate case where poor governance and the selfinterest of directors have led to at least two publicly funded houses not being available to the Aboriginal and Torres Strait Islander community,” Mr Beven said. “If directors are more interested in what they personally can get from a corporation then they should not be directors.” For more information about the special administration of Southside Housing Aboriginal Corporation see ORICMR1314-21 and ORICMR1415-19 at http://www.oric.gov.au.
Board of directors as an organ of the company .......................................................................................................................................................................
The organs of most companies will be the board of directors and the members in general meeting. The internal rules usually provide that the main organ of the company is the board of directors. For example, s 198A of the Corporations Act 2001 (Cth) (replaceable rule) provides:
[6.20]
Powers of directors (replaceable rule – see section 135) (1)
(2)
The business of a company is to be managed by or under the direction of the directors. Note: See section 198E for special rules about the powers of directors who are the single director/shareholder of proprietary companies. The directors may exercise all the powers of the company except any powers that this Act or the company’s constitution (if any) requires the company to exercise in general meeting. Note: For example, the directors may issue shares, borrow money and issue debentures.
General meeting as an organ of the company .......................................................................................................................................................................
Express powers
The general meeting becomes the organ of the company when the company's powers are expressly granted to the general meeting by either:
[6.30]
• the Corporations Act – for example, electing/removing directors, altering the constitution and appointing or removing auditors;
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152
• the company's own internal rules – for example, s 201G, a replaceable rule, giving the power to appoint directors to the general meeting; and • if a listed public company, the (Australian Securities Exchange) ASX Listing Rules. Residual powers
Residual power may also fall to the general meeting. Where the constitute on is silent as to who can exercise a particular power of the company, the general meeting will probably be the relevant organ.
[6.40]
Board vs Members .......................................................................................................................................................................
What is the situation if the general meeting objects to a decision of the board? [6.50] Where a company's internal rules include s 198A or a similar rule, the members in general meeting cannot give directions to the board on how to exercise its powers of management. Nor can the general meeting overrule any action of the board in relation to management of the company: see Automatic Self Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34; NRMA v Parker (1986) 6 NSWLR 517; NRMA v Bradley (2002) 42 ACSR 616; and Massey v Wales (2003) 57 NSWLR 718. The principle is a reincarnation of the genius of incorporation, namely that an artificial entity is created at the time of incorporation and the company has its own legal and managerial existence separate from its owners. The board of directors should not be seen as subordinate to, or merely an agent of, the general meeting. These two bodies are separate organs of the company with their respective powers delineated by the Corporations Act, the company's internal rules and (if applicable) the ASX Listing Rules. However, there are three situations where the general law has vested the general meeting with residual power to act for the company (the primary power resides in the board):
1.
when the board of directors is unable to act for any reason – for example, if the board is in deadlock and cannot reach a decision (Barron v Potter [1914] 1 Ch 895);
2.
when the general meeting has power to ratify breaches of duty by the directors as long as its ratification does not constitute fraud on, or oppression of, minority members or, in some circumstances, where the interests of creditors are involved; and
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3.
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when the directors are in breach of their duties and refuse to initiate an action on the company's behalf against themselves. The members may take such action in the name of the company by bringing a statutory derivative action: see Pt 2F.1A. (Conversely, the general meeting cannot stop legal proceedings where the board has initiated them under a power conferred on the board by the constitution: John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113.)
Single director/shareholder companies .......................................................................................................................................................................
For single director/shareholder companies the traditional distinction between ownership and management is somewhat artificial. This is reflected by ss 198E and 201F, which remove the conventional division of powers for single director/shareholder companies.
[6.60]
SECTION 198E(1)
(1)
Powers of director – The director of a proprietary company who is its only director and only shareholder may exercise all the powers of the company except any powers that this Act or the company’s constitution (if any) requires the company to exercise in general meeting. The business of the company is to be managed by or under the direction of the director. Note: For example, the director may issue shares, borrow money and issue debentures. …
Section 201F empowers the single director to appoint another director by recording the appointment and signing the record. As soon as another director is appointed or another person takes up shares in the company, the traditional division between directors and shareholders will apply.
Corporate governance What is corporate governance? .......................................................................................................................................................................
There is no standard definition for the term “corporate governance”. A useful definition of what is meant by the term “corporate governance” was provided by Justice Owen in HIH Royal Commission, “The Failure of HIH Insurance Volume 1: A Corporate Collapse and Its Lessons” (April 2003) where his Honour stated (at p xxxiii):
[6.70]
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Single director/shareholder proprietary companies
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[Corporate governance is] … the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.
Viewed in this way, corporate governance is a dynamic and evolving institution which attempts to provide a structured and binding framework for the resolution of disputes and conflicts involving members, company officers and other interested parties. Further, corporate governance lays down the rules which are designed to ensure accountability, particularly from company officers, and to promote the objectives of transparency and enhanced shareholder value. Debates, reforms and future proposals .......................................................................................................................................................................
The corporate governance debate was initially fuelled by investigations into some of the high profile entrepreneurs of the 1980s and took on increased importance following the collapse of companies such as Enron (in the US), HIH, Harris Scarfe, One.Tel and other companies, many of which were technology-based. The well-publicised dispute between directors of the National Bank in early 2004 has raised broader issues – notably the importance of board composition and of board committees and the role of shareholders, especially institutional shareholders. Originally, much of the debate centred around the question of whether increased statutory regulation was preferable to self-regulation. Following the corporate governance scandals of HIH, Harris Scarfe and other public entities, the Corporations and Market Advisory Committee (CAMAC) issued a discussion paper entitled “Corporate Duties Below Board Level” (May 2005) and a report similarlyentitled Corporations and Advisory Committee, “Corporate Duties Below Board Level” (April 2006). CAMAC recommended that the current directors' duties contained in ss 180 – 184 be extended beyond directors and company officers (and employees for ss 182 – 183) to “any other person who takes part, or is concerned, in the management of the company, including persons who have performed functions on behalf of the company”. The CAMAC recommendations were clearly aimed at extending the scope of directors' duties to any person engaged in a management function, past or present. The extended scope, if adopted, would have application to employees (full time, part time and casually employed) and contractors who are not directors or company officers. To date these recommendations have not been adopted. In addition, government policy in Australia (and other countries such as the United States and the United Kingdom), at least in respect of audit and financial reporting and continuous disclosure, has been to introduce more stringent statutory regulation as a means of achieving higher standards of
[6.80]
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155
corporate governance. International corporate governance developments have largely stemmed from perceived inadequacies in reporting, disclosure and auditing requirements in international regulatory frameworks. In the UK, much of the focus has been on strengthening director requirements under UK Financial Reporting Council, “UK Corporate Governance Code” (formerly The Combined Code on Corporate Governance) (June 2010) available via http://www.frc.org.uk; UK Financial Reporting Council, “Good Practice Suggestions from the Higgs Report” (June 2006) available at http:// www.frc.org.uk/getattachment/3e7365ee-8826-4ac8-aedf-66093cb0fd36/ Progress-Report-Review-of-the-effectiveness-of-The.aspx; and UK Financial Reporting Council, “Internal Control: Revised Guidance for Directors on the Combined Code” (October 2005) available at http:// www.sec.gov/news/press/4-511/chodge042806.pdf. The growth in private equity buy-outs has also been the subject of review in the Walker Working Group, “Guidelines for Disclosure and Transparency in Private Equity” (20 November 2007) available at http:// www.privateequityreportinggroup.co.uk/wp-content/uploads/2015/11/ wwg_report_final.pdf. The voluntary adoption of self-regulatory codes such as the ASX Corporate Governance Council, “Corporate Governance Principles and Recommendations with 2010 Amendments” (2nd ed, June 2010) is an important factor helping to improve standards of corporate governance, especially for listed companies. Although the ASX guidelines are voluntary, many listed companies include the principles in their annual reports outlining how the company has achieved good corporate governance. ASX Listing Rule 4.10.3 requires companies to provide details in their annual report which disclose whether the listed entity has followed the recommendations contained in the “Corporate Governance Principles and Recommendations with 2010 Amendments”, and provide reasons where Recommendations have not been followed. The higher standards for disclosure and corporate reporting have been reflected in the adoption of the CLERP 9 recommendations as reflected in the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9 Act): see below. Both the ASX (through the ASX Disciplinary Tribunal) and ASIC have taken an active role in enforcing contraventions to the continuous disclosure regime. In Australian Securities & Investments Commission v Chemeq Ltd (2006) 234 ALR 511 French J commented on the importance of maintaining corporate governance compliance systems. According to his Honour (at [96]), the existence or otherwise of corporate governance standards and procedures is a relevant factor when determining penalty:
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The presence or absence of compliance systems is of importance. It is desirable also that the Court, in fixing penalty, is made aware of the reasons for the contravention. This may enable it to determine whether there were inadequate compliance systems or whether the contravention involved aberrant disregard by an individual of relevant policies and procedures.
French J added (at [89]) that the adoption of corporate governance standards which resemble or embody the ASX Corporate Governance Principles may provide early warning signals to company directors and officers that there is material information which warrants disclosure: I am satisfied that, since the contraventions to which it has admitted, Chemeq has made substantial efforts to upgrade its compliance systems relating to continuing disclosure. It may be however that consideration should be given to some mechanism for providing internal early warning to officers of the company of material information or change in circumstances that may require disclosure. Auditor independence and auditor’s independence declaration reforms
The policy of auditor independence is illustrated by the CLERP 9 Act. The major reforms put in place by the Act were:
[6.90]
• the implementation of the recommendations of the Commonwealth Treasury, Independence of Australian Company Auditors Report (March 2002) (Ramsay Report) and the Report of the HIH Royal Commission in respect of the regulation of auditors and the financial reporting system including a statutory requirement for auditor independence; • the introduction of tougher continuous disclosure rules and more stringent enforcement of those rules, especially for listed companies, including power for ASIC to issue infringement notices imposing fines for breaches of these rules; and • greater disclosure of directors' and executives' remuneration to shareholders and the introduction of new powers allowing shareholders in general meeting to pass a non-binding resolution on these matters and to question the company's auditors. 2007 Reforms
Auditor independence was further strengthened by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (Cth). In 2007, the Amendment Act introduced changes to provide for auditor independence declarations to be given to directors before the auditor's report is signed: s 307C(5)(c). The conditions that must be satisfied to provide for auditor independence declarations are contained in s 307C(5A): [6.100]
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• the auditor's independence declaration is given to the directors and the directors must sign the report within seven days; • the auditor's report on the financial report is made within seven days after the directors' report is signed; and • the auditor's report includes a statement to the effect that either the declaration would be in the same terms if it had been given to the directors at the time the auditor's report was made, or circumstances have changed since the declaration would differ if it had been given to the directors at the time the auditor's report was made. Further, the Amendment Act introduced changes to the method of reporting inadvertent breaches of auditor independence. Auditors now will not be required to report inadvertent breaches of auditor independence where the statutory defence would be applicable: s 307C(5B). ASIC has now been given the authority to extend the period of time required for an auditor to resolve a conflict of interest situation. Concerns had been raised that the 21-day period provided insufficient time for an auditor to resolve a conflict of interest situation. Section 327B(2A) – (2C) has been amended to allow ASIC to grant more time to an auditor to resolve the conflict.
[6.110] The global financial crisis (GFC), which had its origins with subprime mortgages in the United States, produced unforeseen consequences for the world's financial markets. The GFC led to a collapse in the availability of credit and caused widespread dislocation of the world's equity, credit and debt markets. Dislocation of credit markets led to reassessment of credit risk, which in turn led to the perfect storm for debt-laden and financially vulnerable companies. Investors in listed companies such as ABC Learning, Allco Finance Group, Centro Property Group, MFS and RAMS Home Loans suffered significant losses. Difficulties in refinancing short-term debt were made worse with margin lending and short-selling practices, which continued to drive down share prices and exposed shareholders to further losses. The GFC ignited debate calling for further reforms to corporate governance designed to improve disclosure requirements for directors' margin loans and short-term corporate liabilities. More recently, debate has centred on whether current disclosure requirements for reporting entities have in fact achieved the desired goals of market transparency and market integrity. Some investors believe that disclosure of corporate liabilities from listed companies has been unsatisfactory. The GFC not only adversely affected companies with high borrowings but
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Recent issues in corporate governance: The global financial crisis and future reforms
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also placed company officers and directors who had used margin loans to finance the purchase of shares in their respective companies under significant financial strain, which in turn further adversely affected investor sentiment. Investors have blamed the lack of disclosure regarding outstanding corporate liabilities, margin lending activity by company directors and short-selling practices from domestic and international hedge funds as factors contributing to sharemarket volatility. Margin lending reform
In June 2008, the Minister for Superannuation and Corporate Law announced a review of the regulation governing margin loans. The Green Paper of the Commonwealth Treasury, “Financial Services and Credit Reform – Improving, Simplifying and Standardising Financial Services and Credit Regulation” (June 2008) (Green Paper) proposes three options for the regulation and disclosure of margin loans: [6.120]
• Option One: to maintain existing arrangements with limited disclosure of margin loans where the margin loan is provided by a financial adviser; • Option Two: margin loans would fall within the regulatory scope and ambit of Ch 7 of the Corporations Act. This would entail both the licensing framework contained under Pt 7.6 and the disclosure and advice frameworks to be applied to regulate the provision of margin loans to investors; • Option Three: a new Commonwealth regulatory regime would be developed which would exist separately from Ch 7 of the Corporations Act. It is envisaged that under Option Three, the new regulatory regime would regulate the licensing of margin loan providers, regulate the new disclosure requirements for margin loan products and regulate market misconduct that could arise in regard to margin lending. The Green Paper called for submissions to be made on all three options. In the end Option Two was adopted, namely that margin lending would be regulated under Ch 7 of the Corporations Act. At the end of 2009, the Corporations Legislation Amendment (Financial Services Modernisation) Act 2009 (Cth) amended Ch 7 of the Corporations Act to introduce new regulation of margin lending activity. Part of the new regulation requires margin lenders to undertake a proper assessment of the suitability of any new margin loan for retail clients. The assessment requires margin lenders to make reasonable inquiries of their retail client and to assess whether the margin loan is at all suitable. A margin loan would ordinarily be assessed as unsuitable if at the time of the assessment it was likely the margin facility would go into a margin call and compliance with the call would cause the retail client undue hardship.
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Public companies [6.130] In recent years, there has been increasing debate in Australia and overseas about corporate governance issues in relation to public companies. The recent GFC has led to calls for improving corporate governance standards, particularly with listed companies, in the United States, the United Kingdom, Europe and Australia. Proposals for reform of corporate governance include:
• improving directors' ethical standards and their disclosure of interests in their respective companies including the extent, if any, of margin loans and other debt instruments which have been used to purchase shares in a listed company; • greater disclosure of off-balance sheet items including unconventional debt financing used by the company as part of its day-to-day operations; • improved regulation of short selling of a listed company's securities (that is, shares that are sold “short” on the basis that prices will fall so the shares can be purchased at a lower price and thereby crystalise a profit); • board composition – for example, should all boards have a non-executive chair and have a majority of non-executive directors? • the composition of, and extent of disclosure of, directors' remuneration; • the independence of auditors and analysts and the effectiveness of audit procedures; • the conduct of general (shareholder) meetings and the way in which questions by shareholders are handled by the board; • the role of institutional investors, remembering that many of these hold shares on behalf of individual members of superannuation funds and other managed investments; and • compliance with the Corporations Act, ASX Listing Rules (where appropriate) and relevant Accounting Standards. Such disclosure should be of sufficiently high standard for shareholders and end-users of financial reports to make informed decisions regarding their investment allocation.
...................................................................................................................... Reforms Shield Directors David Crowe, Australian Financial Review, 19 May 2008 Canberra and the states have agreed to harmonise dozens of conflicting laws that impose harsh penalties on company directors, as part of an effort to restart sweeping national competition reforms once tipped to add billions of dollars to the national economy.
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• the composition and effectiveness of board committees;
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Reforms Shield Directors cont. The state and federal governments also agreed to create a single national licence for skilled workers to make it easier for qualified tradespeople to move between states without having to apply for new licences or repeat their training. Finance Minister Lindsay Tanner made the call for a new national reform agenda at a meeting with state officials on Friday that worked on ways to end differences between state and federal regulations. Mr Tanner’s proposal is aimed at reinvigorating a reform process that could add $17 billion to gross domestic product, according to a Productivity Commission analysis, but which has languished since the Howard government stopped incentive payments to the states in 2004. The minister assisting Mr Tanner on deregulation, Small Business Minister Craig Emerson, said the federal government wanted to “reenergise the reform agenda” by identifying new areas for co-operation with the states. While the reforms to directors’ liabilities are only part of the broader agenda, they act on industry calls for a single national regime setting out the personal liabilities of company directors in areas such as environmental protection, hazardous goods and fair trading. Dr Emerson said the goal was to review and reduce the laws in each jurisdiction that held directors to account for corporate problems. “The basic issue is the concern that we could be making life so difficult for company directors that nobody would want to be a company director,” Dr Emerson said. The Friday meeting convened the deregulation working group formed last year to implement the objectives agreed by Prime Minister Kevin Rudd and premiers at Council of Australian Governments meetings. Those at the Friday meeting included Victorian Treasury deputy secretary Lynne Williams, Queensland under treasurer Gerard Bradley and South Australian deputy under treasurer Garry Goddard. The working group is to meet again in early July in order to report back to state and federal leaders at the next COAG meeting in early July. The agreement is not expected to reduce personal liability in occupational health and safety, seen as a separate issue for negotiation. But it complements a process started by Corporate Governance Minister Nick Sherry to clarify the standards expected of directors and survey 600 company directors to prepare a Treasury report. Senator Sherry last month hinted the trend towards imposing personal liability on directors needed to be checked, saying in a speech: “While this may be appropriate in exceptional cases, it now appears to be the norm.” Dr Emerson said the working group meeting also agreed to consider national licences for tradespeople, an issue debated since 1992 but still the subject of differences between states because the system of mutual recognition of qualifications does not always allow individuals to move “seamlessly” between states.
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Reforms Shield Directors cont. The COAG working group is expected to identify some trades where a national licence could work.
Types of directors [6.140] The terms “director” and “company officer” are defined broadly in the Corporations Act to cover both appointed directors as well as “shadow” directors and “de facto” directors. In 2016, the position of a director as a “shadow” director became contentious in relation to Clive Palmer's position in Queensland Nickel Pty Ltd where the administrators released a report implicating the then Federal MP as “shadow” director to the company and thereby potentially liable for the debts arising from trading while insolvent. The statutory definitions are set out in the following table. [6.150]
Term Director (s 9)
Definition Means: • a person appointed to the position of director or alternate director;
• •
• •
Officer (of a corporation) (s 9)
de facto director a person who acts in the position, but is called something else or who has not been validly appointed
Comment The Corporations Act imposes duties on directors (including de facto and shadow directors). The definition of a director also includes those people who actually exercise the powers of a director but are not appointed as directors. Otherwise the duties could easily be avoided by appointing someone as a “puppet”.
shadow director a person in accordance with whose directions the directors are accustomed to act.
Means a director, secretary, shadow officer (as in ASIC v Adler, see [11.100]) and certain people appointed to insolvent corporations.
The CLERP 9 Act added a new definition of officer applying to an officer of an entity other than a corporation, such as a partnership; deleted the former definition of executive officer in s 9; and repealed s 82A (a slightly different definition of officer). These changes were designed to remove anomalies in the former definitions and to clarify the people who have duties and obligations under the Act.
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TABLE 6.1 Important statutory definitions
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Term Senior manager (s 9)
Definition Means a person (other than a director or secretary of a corporation, a partner in a partnership or a trustee of a trust) who makes or participates in making decisions that affect the whole or a substantial part of the business, or has the capacity to affect significantly its financial standing.
Comment This definition, introduced by the CLERP 9 Act defines a new subclass of officer (replacing the former definition of executive officer).
These definitions attempt to codify the existing case law on deciding when someone is acting as a director – that is, as a person involved in top level management, rather than as acting as an expert, professional adviser or as an employee: see DCT v Austin (1998) 28 ACSR 565 and compare Natcomp Technology Australia Pty Ltd v Graiche (2001) 19 ACLC 1,117. Other, non-statutory, expressions commonly used are summarised in the next table. [6.160] TABLE 6.2 Other non-statutory “director” terminology Term Nominee director
Executive director
Non-executive director
Managing director
Alternate director
Definition Person appointed on the understanding that he or she will represent the interests of a particular person or group. A director who is both on the board of directors and a full-time employee of the company. A part-time director of the company who is not an employee. A person to whom a board of directors may delegate its functions (eg, s 198C). A person appointed by a director to act in her or his place for a period of time (eg, s 201K).
Comment Eg, a director appointed to represent the interests of the parent company. Executive directors of one company are often “nonexecutive” directors of another. Also referred to, somewhat loosely, as an “independent director”. A managing director is also an executive director. May also be an executive or non-executive director.
Appointment of directors General .......................................................................................................................................................................
The main provisions in the Corporations Act dealing with appointment, rotation, resignation or removal of directors are in Pt 2D.3. Many of these provisions are replaceable rules, meaning that they can be modified or excluded by the company's own constitution. Section 201A prescribes the minimum number of directors a company may have.
[6.170]
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SECTION 201A Minimum number of directors Proprietary companies (1)
A proprietary company must have at least 1 director. That director must ordinarily reside in Australia. Public companies
(2)
A public company must have at least 3 directors (not counting alternate directors). At least 2 directors must ordinarily reside in Australia.
[6.180] TABLE 6.3 Who can appoint a director?
Existing directors
Section Section 201G –a replaceable rule. Pursuant to: • s 201H; or
•
s 201K (power to appoint an alternate director); or
•
s 201J (power to appoint a managing director) (all replaceable rules).
Personal representative or trustee Section 201F. of a director in a one-person company
Comment The normal method of appointing directors. Section 201H is available to fill a casual vacancy, eg, due to the resignation of a director part way through the director's term. Appointment must be subsequently confirmed by the general meeting. Time limits apply. Only applicable where director dies or becomes mentally incapable of managing the company.
The initial members usually appoint the company's first director or directors. The internal rules of a company may also provide for the appointment of a managing director (for example, see replaceable rule s 198C) and a company secretary. A public company must have at least one secretary but this is now optional for a proprietary company: s 204A(1). [6.190] TABLE 6.4 Restrictions on appointments Issue Age Consent Insolvency
Restriction Must be over 18 years old.* The person must consent to appointment as a director. Can't manage a corporation (whether as a director or in some other position) if an insolvent under administration.
Section s 201B(1) s 201D ss 201B(2); 206B(3) and 206B(4) – unless obtaining leave of the Court under s 206G
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Appointor General meeting (ordinary resolution)
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Issue Prior convictions
Restriction Same as if insolvent, where person has been convicted: • of an offence connected with the management etc of a company under the Corporations Act (eg Pt 2D.1) or other Australian laws; or
•
Section ss 201B(2), 206B(1) and 206B(2) – for a period of five years after conviction/release from prison unless leave of the Court under s 206G has been obtained
of serious fraud.
Always check the company's constitution, as it may impose additional restrictions on eligibility – for instance, a director might be required to hold a certain number of shares prior to their appointment.
Company secretary Every public company must have at least one company secretary, at least one of whom must ordinarily reside in Australia: s 204A(2). However, the appointment of a company secretary is now optional for a proprietary company: s 204A(1). Today, the company secretary of a large public company is the company's senior administrative officer and has significant responsibilities and powers: see Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711. There is no definition of “secretary” in the Corporations Act but the duties imposed on directors and officers by Pt 2D.1 are specifically stated to apply to the secretary of a company: s 179. The nature of the secretary's duties varies from company to company, but the Corporations Act imposes certain responsibilities on the secretary, particularly in relation to lodgment of notices and returns with ASIC: see s 188(1). In Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 company secretaries were said to be “chief administrative officers” of companies who have a large compliance role under the Corporations Act, see, for example, s 188. In particular, secretaries have the power to enter into contracts for the company's administration, however they have “no authority to participate in the management of the company's affairs” at [76]. The internal rules may also provide for certain matters to be dealt with by the secretary, including witnessing the affixing of the company's common seal (if any). [6.200]
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Defective appointments If the formal requirements imposed by the Corporations Act and the internal rules, with respect to the appointment and qualification of directors and company secretaries, are not complied with, their acts will still be valid. See s 201M: [6.210]
SECTION 201M Effectiveness of acts by directors (1)
An act done by a director or secretary is effective even if their appointment, or the continuance of their appointment, is invalid because the company or director did not comply with the company’s constitution (if any) or any provision of this Act.
(2)
Subsection (1) does not deal with the question whether an effective act by a director: (a) binds the company in its dealings with other people; or (b)
makes the company liable to another person.
Section 204E similarly validates the acts of a company secretary who was improperly appointed. In so far as the validation of these acts affects outsiders, consider also s 129(3).
Remuneration of directors Regulation of remuneration ....................................................................................................................................................................... [6.220] Directors are in a fiduciary relationship with the company and, as a consequence, they are not entitled to any remuneration from the company unless it is specifically provided for in the company's internal rules. The internal rules normally provide members with the power to fix the remuneration of directors: for example, s 202A, a replaceable rule, and s 202C for single director/shareholder companies. The remuneration of executive directors may be significant, especially in large public companies, because they are also full-time employees. However, non-executive directors do not typically receive significant salaries to act in their non-executive capacity. The internal rules may also provide for the board of directors to appoint a managing director and allow the board to fix that person's salary: s 201J, replaceable rule.
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Note: The kinds of acts that this section validates are those that are only legally effective if the person doing them is a director (for example, calling a meeting of the company’s members or signing a document to be lodged with ASIC or minutes of a meeting). Sections 128-130 contain rules about the assumptions people are entitled to make when dealing with a company and its officers.
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Additional points to note are: • the disclosure requirements in Pts 2D.2, 2D.3 and 2D.5, which apply to both public and proprietary companies, and s 300A and further changes made by the CLERP 9 Act, which only apply to publicly listed companies; • excessive remuneration may constitute oppressive or unfair conduct under Pt 2F.1 and/or a breach of directors' duties; and • in relation to public companies, regard must also be had to Ch 2E which deals with related party transactions. Recent developments on directors’ remuneration ....................................................................................................................................................................... [6.230] Following the onset of the GFC, the Productivity Commission commissioned a report on Australia's director and executive remuneration framework. The Productivity Commission delivered its final report on 4 January 2010 (Australian Government, Productivity Commission, “Executive Remuneration in Australia”, Report No 49 (2009)), in which it made a number of recommendations that were designed to reform and strengthen Australia's remuneration framework. One of the proposed reforms was to provide shareholders with the ability to reject termination benefits to directors or company officers that were considered to be excessive. Other proposed reforms included:
• ASX listing rules be amended to prohibit executives in the ASX top 300 listed companies from sitting or voting on their own remuneration committees; • Disclosure by institutional investors on how they voted on remuneration reports; • Two strikes and re-election resolution process: If there is a 25% or greater no vote on adopting a remuneration report then reporting obligations will be triggered on how concerns can be addressed; • Disallow non-chair proxies from “cherry picking” the proxies they exercise, by requiring that any directed proxies that are not voted will automatically default to the Chair; and • Director or executive to repay to the company any bonuses which were based upon financial information that subsequently turned out to be materially misstated. On 27 June 2011, the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth) received Royal Assent. The Amendment Act was introduced to implement a number of the recommendations made by the Productivity Commission. These amendments to the Corporations Act included a “two strikes and re-election” process in
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relation to the non-binding shareholder vote on the remuneration report. The “first strike” will ordinarily occur where shareholders vote on a company's remuneration report and the company receives a “no” vote of 25% or more. The “second strike” occurs where a company's subsequent remuneration report receives a “no” vote of 25% or more. Where this occurs, a “spill resolution” will need to be put before the members at the AGM to decide whether the directors will stand for re-election. If the spill resolution is approved by the members and receives 50% or more of the eligible votes cast, another meeting of the company's shareholders known as a “spill meeting” must be held within 90 days. Another important amendment that was introduced included the use and engagement of remuneration consultants. The recent amendments to the Corporations Act provide that a company's engagement of a remuneration committee must be approved by the board or remuneration committee. The remuneration consultant must report to non-executive directors or the remuneration committee. The remuneration consultant and the board must also make separate declarations that the recommendation on remuneration is free from undue influence. Disclosure obligations .......................................................................................................................................................................
The disclosure requirements and limitations on directors' remuneration are set out in Pt 2D.2 – “Restrictions on Indemnities, Insurance and Termination Payments” and Pt 2D.5 – “Public Information about Directors and Secretaries”. These provisions are intended to provide some protection for creditors and members from potential abuses by directors of the control they have over the management of a company's affairs. Directors' obligations include: • a general duty of disclosure in relation to matters affecting the company's compliance with s 205B (discussed below) and Ch 6 (Takeovers) of the Corporations Act (ss 205C, 205F); • members' approval of benefits is required prior to payment to directors of retirement benefits that exceed certain permitted thresholds (Pt 2D.2); • the disclosure requirements in s 300A (as amended and expanded by the CLERP 9 Act) which require public companies incorporated in Australia and listed on the ASX to include detailed information about directors' and company executives' remuneration in a remuneration report which is a separate and clearly identified section of the annual directors' report, and for a non-binding shareholder vote on this report at the AGM; • preparation of a statement, if requested by at least 100 members in a company or members who are entitled to vote with at least 5% of the votes
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[6.240]
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attaching to shares in the company, detailing the total emoluments and benefits paid to each of the directors of the company (s 202B); and • disclosure of their personal details (names, date and place of birth and addresses) and any changes to these details to the company, so that the company can lodge the required information with ASIC: ss 201L, 205B, 205C. • In recent times, there have been calls for greater disclosure of corporate debt by reporting entities. The use of margin loans by directors for the purpose of purchasing shares in their respective companies has become more prevalent and market volatility has increased when the directors of the companies have been margin called and forced to sell their shares. The result has led to significant falls on the share market, which in turn has exposed shareholders to losses on their investment. Further, a number of listed companies have increased their reliance on off-balance sheet financing to fund their expansion plans. Following the global credit crisis in 2008, borrowers, including listed companies, have been forced to refinance their outstanding liabilities. As the article below reports, the difficulty encountered by some borrowing entities to refinance their loan portfolios has undermined investor confidence.
Resignation or removal of directors General points .......................................................................................................................................................................
A director can resign or be removed from her or his position. A company's internal rules or the director's employment contract will specify the method of resignation or removal. For example: [6.250]
• s 203A, a replaceable rule, requires a director to give written notice of her or his resignation to the company; and • s 203C, a replaceable rule, permits a proprietary company to remove a director by passing an ordinary resolution at a company meeting. The company's constitution may also specify the method and duration of appointment of new directors, as well as specifying procedures for the removal of directors. Removal of directors – public companies ....................................................................................................................................................................... [6.260] Under s 203D, directors of public companies may be removed by an ordinary resolution regardless of what is stated in the constitution: see Allied Mining & Processing Ltd v Boldbow Pty Ltd (2002) 169 FLR 369. Compare this with a proprietary company, which may have a constitution that can make it
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more difficult to remove a director. Unlike a proprietary company director, a director of a public company cannot be removed by the other directors: s 203E. The public company must normally give two months' notice of the company meeting at which the resolution to remove a director will be voted on: s 203D(2). Under s 203D(3) the company must provide the director with a copy of the notice of removal as soon as is practicable. The director is entitled to put her or his case to the members at the meeting. This can be achieved either by circulating a written statement (s 203D(4)(a)) or by speaking to the motion at the meeting: s 203D(4)(b). Alteration of constitution .......................................................................................................................................................................
• the director is an executive director who has a separate contract of employment with the company; or • it can be shown that the alteration is invalid (see Gambotto v WCP Ltd (1995) 182 CLR 432) or oppressive: Pt 2F.1. These are the only actions which may enable a director to be reinstated, unless he or she were subsequently voted back in. The contract created under s 140(1)(b) would not enable a director in the above situation to seek compensation. The contract created by the constitution is subject to the statutory power to alter the constitution: Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927] 2 KB 9. A complication arises where a director's separate employment contract is subject to changes in the company's internal rules. In such a case, the director's contract can change along with any changes to the internal rules. A prudent director would require, at least, that the contract was subject to the company's internal rules as they existed at the time the contract was entered into.
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[6.270] Directors may hold their positions under the terms of the company's constitution – for example, “X is to hold office for 10 years from the date of appointment”. If the company wants to remove a director in these circumstances, unless it is a public company (in which case s 203D will override the constitutional provision), it is first necessary to alter the constitution by a special resolution of the company: s 136(2). If alteration or deletion of such a provision occurs, the director will lose her or his position and have no recourse to compensation unless:
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Disqualification from office General .......................................................................................................................................................................
A director's tenure may be terminated early in any of the circumstances set out in Pt 2D.6 “Disqualification from Managing Corporations”. Both ASIC and the court have broad powers to disqualify directors. It is an offence for a person who is disqualified from managing a corporation to participate subsequently in the management of a corporation without being granted leave to do so by ASIC or the court: ss 206F(5), 206G. Note s 206A: [6.280]
SECTION 206A Disqualified person not to manage corporations (1)
A person who is disqualified from managing corporations under this Part commits an offence if: (a)
they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(b)
they exercise the capacity to affect corporation’s financial standing; or
(c)
they communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation: (i) knowing that the directors are accustomed to act in accordance with the person’s instructions or wishes; or (ii)
significantly
the
intending that the directors will act in accordance with those instructions or wishes. Note: Under section 1274AA, ASIC is required to keep a record of persons disqualified from managing corporations. …
(1B)
(2)
It is a defence to a contravention of subsection (1) if the person had permission to manage the corporation under either section 206F or 206G and their conduct was within the terms of that permission. Note: A defendant bears an evidential burden in relation to the matters in subsection (1B), see subsection 13.3(3) of the Criminal Code. A person ceases to be a director, alternate director or a secretary of a company if: (a)
the person becomes disqualified corporations under this Part; and
from
managing
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they are not given permission to manage the corporation under section 206F or 206G.
Note: If a person ceases to be a director, alternate director or a secretary under subsection (2) the company must notify ASIC (see subsection 205B(1)).
Most of the statutory grounds for disqualification from managing corporations involve situations where a director or officer of a company has been disqualified by the court or ASIC as outlined in the following paragraphs. Apart from these grounds, a company's internal rules may specify additional grounds for vacation of office, such as continued absence from board meetings. Disqualification by court .......................................................................................................................................................................
The court may prohibit a person from being a director or from otherwise being involved in managing a company if, for example, that person: [6.290]
• is a director or officer of a company which has repeatedly breached the Corporations Act (s 206E);
• was involved in the management of two or more companies which, in the last seven years, have gone into liquidation or other external administration arrangements (s 206D); or • has breached a civil penalty provision: s 206C. A person needs the court's permission to be a director after he or she has been convicted of certain offences (such as serious fraud or contravention of certain provisions of the Corporations Act) or if he or she (in a personal capacity) has been unable to pay his or her debts and is an undischarged bankrupt or has entered into an arrangement or composition with creditors: s 206B. These sections can be very powerful. For example, executive directors convicted of improperly using company information (s 184(3)) will, under s 206B, be unable to “manage” a company for five years (unless the court gives permission) and will commit an offence if they do so: s 206A (see Table 6.4 at [6.190]). This could effectively mean that their livelihood is taken away, in addition to any other criminal or civil consequences that flow from their breach of duty. The civil penalty provisions have traditionally been described as protective rather than punitive: see the summary of the relevant legal principles by Lindgren J in Adams v ASIC (2003) 46 ACSR 68. However, the majority judgment (6-1) of the High Court of Australia in Rich v ASIC (2004) 220 CLR 129 doubted the utility of this classification and stated clearly that a disqualification order imposed a “penalty” on the director concerned.
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• has breached the Corporations Act repeatedly in their position as company officer (s 206E);
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The force of these provisions has been illustrated by three important judgments (two of which were affirmed on appeal): • the disqualification of Rodney Adler for 20 years and Ray Williams for 10 years (both former directors of HIH Ltd) for breaches of directors' duties and the rules regulating financial assistance (ASIC v Adler (2002) 168 FLR 253, largely affirmed Adler v ASIC (2003) 179 FLR 1); • the disqualification of John Elliott and other directors of the Water Wheel group of companies for breach of the insolvent trading provisions (ASIC v Plymin (2003) 175 FLR 124, affirmed Elliott v ASIC (2004) 10 VR 369); and • the disqualification of Steve Vizard for breach of directors' duties (ASIC v Vizard (2005) 145 FCR 57). On the matter of sentencing for breach of fiduciary, an interesting case study is Director of Public Prosecutions (Cth) v Northcote [2014] NSWCCA 26. The case involved an appeal from a purported manifestly inadequate sentencing of director who pled guilty to s 184(2). Garling J of the NSW Court of Criminal Appeal held that the principal offence against s 184(2) of the Corporations Act, involves “a high level of seriousness of the objective criminality. Mr Northcote personally profited by over $1 M from a deliberate premeditated course of conduct which extended over a lengthy period of time during which, on many occasions, he was in breach of his director's duties” at [para 120, p 29]. Garling J said the offence committed was as “at the higher end of the range for this offence” at [para 121, p 29]. His Honour added that in such a case, “nothing less than a term of full-time imprisonment served in custody is appropriate to reflect the nature and circumstances of the offence, and a penalty of such a severity as is appropriate to the offence” at [para 127, p 30]. The sentences of the District Court of NSW were quashed and, inter alia, on the s 182(2) offence the court sentenced the respondent to 3 years and 6 months. The emphatic view to such offences was evident in Garling J's statement “I do not discount having proper and due regard to the strong subjective circumstances involving Mr Northcote, but like so many other white collar crime offenders, these have less importance than they might in other circumstances” at [para 127, p 30]. Disqualification by ASIC .......................................................................................................................................................................
Section 206F allows ASIC to serve a notice on a director or officer disqualifying them from managing a corporation for up to five years if:
[6.300]
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• the person has been a director or officer of two or more liquidated companies in the last seven years which, on liquidation, were unable to pay their unsecured creditors more than 50 cents in the dollar (as notified to ASIC by a liquidator's report under s 533(1)); • ASIC has already served a notice on the person requiring them to “show cause” why ASIC should not disqualify them from managing a company; and • the person has been given an opportunity to “show cause” and ASIC is satisfied that it is nevertheless appropriate to disqualify them from managing a company.
Access to information General law provides that directors are entitled to inspect company documents to enable them to discharge their fiduciary and statutory duties properly. The Corporations Act also gives directors important, additional statutory rights of access to company information: • s 290(1) gives directors an unqualified right of access to the whole of the company's financial records at all reasonable times and s 290(2) allows directors to apply to the court for an order authorising a person to inspect those records on their behalf: Fox v Gadsden Pty Ltd (2003) 46 ACSR 713. Any rights under s 290 are automatically lost once a director is removed from office: see Ansons Pty Ltd v Merlex Corporation Pty Ltd (2001) 162 FLR 443 and Arkin v Tridon Australia Pty Ltd (2002) 43 ACSR 610. This section may assist directors who are being prevented from properly discharging their duties because fellow directors or managers are keeping them in the dark; and • s 198F gives directors and former directors a right to inspect company books (excluding financial records) for the purpose of legal proceedings, that is, when a director is suing or being sued by the company. This right continues for seven years after a person ceases to be a director: s 198F(2). • This section is intended to ensure that directors are able to gain access to company documents that might be vital for the success of any legal proceedings by or against them. This right only applies to legal proceedings brought in the name of the director (not to proceedings in the name of the company) and is limited to company books that are material to the proceedings: see Stewart v Normandy NFM Ltd (2000) 18 ACLC 814 and Hardcastle v Advanced Mining Technologies Pty Ltd [2001] FCA 1846.
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[6.310]
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• Note the case of Oswal v Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) [2013] FCAFC 9 in relation to access of certain books and records of a corporation and its parent after the appointment of receivers and managers. The case involved an in-depth discussion on statutory rights to inspect documents ss 198F, 290, 420, 421, and 1303; and common-law rights.
Summary of legislation on personal liability of directors for corporate fault The explanatory memorandum of the Personal Liability for Corporate Fault Reform Act 2012 (Cth) states that it “aims to harmonise the imposition of personal criminal liability for corporate fault across Australian jurisdictions”. Further, it aims to: [6.320]
• remove personal criminal liability for corporate fault where such liability is not justified; • remove the burden of proof on defendants to establish a defence to a charge; • replace personal criminal liability for corporate fault with civil liability where a noncriminal penalty is appropriate; • where criminal liability is justified, to make clear the circumstances where such liability would apply. Examples of amendment: Section 188 – removed the criminal penalty, replacing it with civil penalty of up to $3000, with the possible extension to $200,000 for serious matters, matters which materially prejudice the interests or ability to pay creditors of the corporation. Section 601FC – removed the criminal liability for contravention of this section and changed penalty to a civil penalty provision.
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[6.330]
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Management of Companies.)
Practice Questions ...................................................................................................................................... 1.
List the powers of the board of directors. What is the position of a sole director/shareholder?
2.
What is the statutory definition of a director? What are the differences between the definition of a director and the definition of an officer?
3.
When might a person be held to be a shadow or de facto director or officer?
4.
Who can be a director?
5.
Briefly describe the role of: • an executive director;
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Figure 6.1: Key issues summary ....................................................................................................
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• a non-executive director; • the Chair; • an audit committee; and • an alternate director. 6.
List the people who are automatically disqualified from acting as directors.
7.
How may directors be removed or forced to vacate their office?
8.
What are the duties of a company secretary? Do all companies have to appoint a company secretary?
Essay Questions ...................................................................................................................................... 1.
In light of recent share market volatility and problems with disclosure of corporate debt by listed entities, do corporate governance frameworks need to be revised and strengthened? Should disclosure requirements be subjected to more stringent regulation?
2.
Have the CLERP 9 reforms ensuring auditor independence gone far enough? Are there any circumstances where auditor independence may be compromised without repercussion under the Corporations Act?
Problems for Discussion ...................................................................................................................................... 1.
Mr Shifty, Ms Avoider and Mr Marginal call to make an appointment with your firm, Fees Ruthless, solicitors. You have been asked to establish their new company (No-Tax Agents Pty Ltd). You advise them not to bother with their own constitution, but instead to rely on the replaceable rules in the Corporations Act. Advise who should be appointed as directors of their company in view of the following information: (a) Mr Shifty states that he does not want to be appointed a director or secretary. He suggests instead that: • his family company be appointed as a director; and • the company not have a company secretary; (b)
Ms Avoider is currently unavailable for meetings as she has five months still to serve for her last conviction for falsifying company accounts;
(c)
Mr Marginal is 72 years old and has Alzheimer's disease. A trustee has been appointed to administer his estate.
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2.
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Assume that Mr Shifty's family company subsequently goes into liquidation. In her report to ASIC, the liquidator states that the secured creditors have been repaid in full, but the unsecured creditors will not receive more than 20 cents in the dollar. The liquidator does not find any evidence of wrongdoing on the part of Mr Shifty or any of his fellow directors. What (if any) ramifications does this have for Mr Shifty, assuming that ASIC's records show that Mr Shifty has, over the last nine months, had a similar track record with two other small, proprietary companies? Assume that, in view of all of these events, the parties agree that the directors of No-Tax Agents Pty Ltd should be Ms Avoider's mother (Mrs Evader) and Mr Marginal's trustee (Ms Ethical). The shareholdings are as follows: Ms Avoider Mr Shifty Ms Ethical (as trustee for Mr Marginal)
20 x $1.00 shares 60 x $1.00 shares 20 x $1.00 shares 100
The company commences its taxation advice business. Mr Shifty visits the company's business office on an almost daily basis, and has recently told both directors that they must provide free tax advice from now on to Wink Wink Pty Ltd, a client of the company which operates a State-wide chain of secondhand electrical appliance stores. Mr Shifty is a majority shareholder in Wink Wink. The directors of No-Tax Agents Pty Ltd are very worried about Mr Shifty's request. The company's business is doing very well at present and Wink Wink is their largest client. If they provide free advice to Wink Wink, revenues will drop significantly. Both directors are somewhat intimidated by Mr Shifty. They do not want to upset him, particularly because he is the company's majority shareholder, and also because his elder son, Sam, is a close personal friend of Ms Avoider. (a) Advise the directors. (b)
4.
Does Mr Shifty run any risk if the directors act on his advice (both on this issue and on some other matters), and the company subsequently becomes insolvent?
In view of his difficulties with Mrs Evader and Ms Ethical, Mr Shifty wants to appoint his son, Sam, as a director and company secretary of No-Tax Agents with a view to Sam eventually becoming the managing
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3.
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director. Sam is 25 years old and is presently studying for a business degree in the United States. Ms Avoider supports this appointment but Ms Ethical is strongly opposed to it. Mr Shifty would like to remove Ms Ethical from the board. In order to ensure that he has full control over any future appointments to the board he wants the company to adopt a constitution providing that a person can only be appointed as a director with his consent. (a) How can Sam be appointed as a director and company secretary of No-Tax Agents? Are there any legal barriers to this appointment? (b)
How can Ms Ethical be removed from the board?
(c)
Advise Mr Shifty about the proposed constitution for the company.
Guide to Problem Solving ...................................................................................................................................... The issues that arise out of this Topic will often occur in the broader context of a member's rights and remedies. Division of powers
Which is the proper organ to decide the particular issue? (a)
(b)
Is power expressly conferred by the Corporations Act or the ASX Listing Rules? For example, power to alter the constitution is conferred on the general meeting: s 136(2). Is power expressly conferred by the internal rules? For example, s 198A, a replaceable rule, vests power to manage the business in the board of directors – is the issue one for management to decide? If so, shareholders have no right to give directions or interfere. But shareholders may remove the directors (see below) or, if appropriate, seek other remedies (for example, oppression action under Pt 2F.1).
(c)
Note: A shareholder (or other party) who is able to direct the board may fall within the definition of “director” (s 9); namely, as a shadow director. Liability as a director may then arise as an issue. If there is no express power, is it a situation where residual power rests with the general meeting? • if so, the board is unable to act; • the general meeting can ratify a breach by directors; and
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• members can challenge directors' actions by statutory derivative action. Appointment of director or secretary
(a)
Have technical requirements been complied with? – s 201A – number/residency; – ss 201B(1)-201C – age (18 or over, under 72 if a public company while s 201C remains in force); – ss 201D, 204C – consent prior to appointment; – s 201E – (public companies only); – ss 201B(2), 206B – prior convictions for offences or fraud; and – requirements in internal rules – eg, as to who can appoint directors.
(b)
If not validly appointed: – consider whether ss 201M or 204E validate any acts done while purporting to act as a director or secretary; – section 1322(4) may also assist, but remember it is not the defective appointment which is being validated. It is the acts done by those persons; and – if a contract with an outsider is in question: see s 129 assumptions.
Removal of directors
(a)
Removal under the Corporations Act or internal rules. Directors of a public company can be removed under s 203D. Directors of a proprietary company may be removed through provisions in the internal rules – for example, s 203C, a replaceable rule.
(b)
Removal (or prohibition from appointment) can also occur because of: s 201B(2); s 206A; s 206B; s 206C; s 206D; s 206E; and s 206F. Removal through alteration of the internal rules.
(c)
Directors given office under the constitution can be removed if the constitution is altered in accordance with s 136(2). For example, delete the provision relating to the office and pass a resolution to remove the director. Consequences of removal. The director, once removed, cannot be reinstated except, possibly, under s 232(1)(c) (unless he or she is subsequently voted back in).
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– also, check the internal rules;
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Alternatively, the removal may not take effect if it involves an alteration of the constitution which is subsequently held to be invalid. (Prior to removal, an injunction should be considered.) If there is a separate contract of employment, the director may be entitled to damages for breach of the employment contract, but not for breach of the constitution (because a company has the right to alter its constitution): see Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9; and Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701. The issue can become a complicated question of construction, both of the internal rules and the employment contract: Carrier Australasia Ltd v Hunt (1939) 61 CLR 534.
Further Reading ...................................................................................................................................... Ablen D, “Remunerating “Fairly and Responsibly” – the “Principles of Good Corporate Governance and Best Practice Recommendations” of the ASX Corporate Governance Council” (2003) 25 Sydney Law Review 555 Agardy P “Who Wants to be a Deemed Director?” (2004) 12 Insolvency Law Journal 104 Austin RP, Ford H and Ramsay I Company Directors: Principles of Law and Corporate Governance (LexisNexis Butterworths, 2005) Chs 1, 2, 3 and 4 Austin RP and Ramsay I Ford's Principles of Corporations Law (16th ed, LexisNexis, 2014) [7.030]-[7.367], [7.600]-[7.650] and [15.020]-[15.100] Australian Government, HIH Royal Commission, “The Failure of HIH Insurance Volume 1: A Corporate Collapse and Its Lessons” (Justice Owen, April 2003) Australian Government, Commonwealth Treasury, “Financial Reporting by Unlisted Public Companies (Discussion Paper” (June 2007) available at http://www.treasury.gov.au Australian Government, Corporations and Markets Advisory Committee, “Directors' and Officers' Insurance (Report” (June 2004) available at http:// www.camac.gov.au Australian Government, Corporations and Markets Advisory Committee, “The Social Responsibility of Corporations (Report” (December 2006) available at http://www.camac.gov.au Australian Securities Exchange Corporate Governance Council, Corporate Governance Principles and Recommendations with 2010 Amendments (2nd ed, June 2010) ASX Corporate Governance Council available at http:// www.asx.com.au Baxt B “Corporate Governance – Is this the Answer to Corporate Failures?” (2003) 29 Mon LR 234
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Cassidy A and Chapple L “Australia's Corporate Disclosure Regime: Lessons from the US Model” (2003) 15 AJCL 81 Collier B “Identification of De Facto and Shadow Directors Easier Said than Done” (2001) 19 C&SLJ 340 Defina A, Harris TC and Ramsay IM “What is Reasonable Remuneration for Corporate Officers? An Empirical Investigation into the Relationship between Pay and Performance in the Largest Australian Companies” (1994) 12 C&SLJ 341 Buckley R “Shareholder Challenges to Executive Remuneration” (2000) 74 ALJ 576 Du Plessis J “Some Peculiarities Regarding the Removal of Company Directors” (1999) 27 ABLR 6 Du Plessis J and McConvill J “Removal of Company Directors in a Climate of Corporate Collapses” (2003) 31 ABLR 251 Hill JG ““What Reward have Ye?” Disclosure of Director and Executive Remuneration in Australia” (1996) 14 C&SLJ 232 Hill JG, and Yablon CM “Corporate Governance and Executive Remuneration: Rediscovering Managerial Positional Conflict” (2002) 25 UNSWLJ 294 Hill JG “Regulatory Responses to Global Corporate Scandals” (2005) 23 Wisconsin International Law Journal 367 Hill JG “Regulating Executive Remuneration: International Developments in the Post-Scandal Era” (2006) 3 European Company Law 64 Hobson MD “The Law of Shadow Directorships” (1998) 10 Bond Law Review 184 Kang H, Cheng MM and Gray SJ “Corporate Governance and Board Composition: Diversity and Independence of Australian Boards” (2007) 15 Corporate Governance: An International Review 194 Kyrou E “Directors' Duties, Defences, Indemnities, Access to Board Papers and D&O Insurance Post CLERPA” (2000) 18 C&SLJ 555 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, [13.1.05]-[13.1.80] Luck KM “The End of History for Corporate Governance or Just Another Moment in Time” (2001) 19 C&SLJ 305 Noble T “Former Directors' Rights to Inspect Company Books: Catch 22?” (2001) 19 C&SLJ 290 Ramsay I (ed) Corporate Governance and the Duties of Company Directors (Centre for Corporate Law and Securities Regulation, 1997) Spencer T “Talking about Social Responsibility: Liability for Misleading and Deceptive Statements in Corporate Codes of Conduct” (2003) 29 Mon LR 297
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Stapledon GP and Lawrence J “Board Composition, Structure and Independence in Australia's Largest Listed Companies” (1997) 21 MULR 150 von Nessen P “Corporate Governance in Australia: Converging with International Developments” (2003) 15 AJCL 189 Note, McConvill J and Bingham J “Comply or Comply: The Illusion of Voluntary Corporate Governance in Australia” (2004) 22 C&SLJ 208 Note, Stapledon G and Webster J “Directors' Duties and Corporate Governance” (2003) 21 C&SLJ 134
CHAPTER 7 .......................................................................................................
Corporate Liability: Contract, Tort and Crime Useful Websites ..................................................................... 183 Recent Developments ............................................................ 184 Aim ......................................................................................... 184 Related Topics ....................................................................... 184 Principles ............................................................................... 184 Contract – overview ...................................................................... 185 General requirements ................................................................... 186 How does a company execute a contract? .......................................... 187 Statutory assumptions – ss 128-129 .................................................. 191 Usual (implied actual) authority of company officers ............................. 200 Defects in appointment ................................................................. 202 Indoor management rule ............................................................... 203 Contracts – conclusion .................................................................. 204 Tort – overview ........................................................................... 205 Criminal law – overview ................................................................ 205
Corporate liability for War Crimes .................................................... 210 Mentor: Test your Knowledge ............................................... 210 Practice Questions ................................................................. 210 Problems for Discussion ........................................................ 211 Essay Topics .......................................................................... 213 Guide to Problem Solving ...................................................... 214 Further Reading ..................................................................... 217
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for websites on the Topic of Corporate Liability: Contract, Tort and Crime.)
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Civil and criminal penalties under the Corporations Act ......................... 209
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Recent Developments ...................................................................................................................................... Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103 BNY Trust Company of Australia Ltd v Banksia Finance and Leasing Co Pty Ltd [2013] NSWSC 1776 Eden Energy Ltd v Drivetrain USA Inc [2012] WASC 192 Correa v Whittingham (No 3) [2012] NSWSC 526 Australia and New Zealand Banking Ltd v Frenmast Pty Ltd [2013] NSWCA 459 Personal Liability for Corporate Fault Reform Act 2012 (Cth)
Aim ...................................................................................................................................... At the end of this topic you should know: • how companies can be liable in contract, with particular reference to ss 128-130; and • how companies can be liable in crime and tort under: – the organic theory; or – vicarious liability.
Related Topics ...................................................................................................................................... Chapter 5 Internal Rules; Chapter 11 Directors' Duties – Part 1 Duty of Care, Skill and Diligence; Chapter 12 Directors' Duties – Part 2 Good Faith and Proper Purpose
PRINCIPLES This Topic looks at how liability can be imposed on the company (as distinct from its officers or members) in contract, tort and crime. [7.10]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Key CATSI provisions: Part 3–5—Corporation powers and how they are exercised, in particular Division 99 (99-1—Agent exercising a corporation's power to make contracts etc.); Part 3–6—Assumptions people dealing with Aboriginal and Torres Strait Islander corporations are entitled to make, in particular Division 104 (assumption provisions); and Part 3–8—Service on Aboriginal and Torres Strait Islander corporation.
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An example of where an Indigenous company CEO was in breach of the civil provisions and the criminal code was in the former chief executive officer of the North Australian Aboriginal Family Violence Legal Services Aboriginal Corporation (NAAFVLS), Ms Veronica Cubillo. Extract from the ORIC's website: http://oric.gov.au/publications/media-release/former-darwin-ceocommitted-stand-trial-nt-supreme-court.
.................................................................................................................. MR1415-08 – Former Darwin CEO committed to stand trial in NT Supreme Court
The former chief executive officer of the North Australian Aboriginal Family Violence Legal Services Aboriginal Corporation (NAAFVLS), Ms Veronica Cubillo, has today been committed for trial in the Northern Territory Supreme Court on 11 charges. NAAFVLS is based in Darwin in the Northern Territory and provides legal services and assistance to the victims of family violence and sexual assault in 20 Aboriginal communities in the Northern Territory. The charges were brought under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act) and the Criminal Code (NT) by the Registrar of Indigenous Corporations, Anthony Beven. Ms Cubillo was originally charged with four charges under the CATSI Act and eight under the Criminal Code. She has been committed on revised charges six under the CATSI Act and five under the Criminal Code.
Background: For further information on this case see the Registrar’s media release of 24 October 2013 (MR1314-11).
Contract – overview Liability of companies for contracts that have purportedly been entered into on their behalf, has long been a vexed issue. Most of the cases involve actions by financial institutions against companies for enforcement of security/loan agreements entered into by a director of the company. The company will argue that it is not bound by the agreement on the basis that the director acted without proper authority. Even if the “correct” signature(s) are on the document, the company will argue that the director (or other agent) had no “substantive” authority to enter the agreement on the company's behalf: see [7.110]. [7.20]
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The charges relate to Ms Cubillo misusing NAAFVLS’ funds and forging documents to obtain financial benefits for herself totalling $9,574.50. One charge alleges Ms Cubillo was intentionally dishonest and failed to exercise her powers and duties for a proper purpose in relation to the use of funds that were granted to NAAFVLS following a funding application she submitted to a private company for $10,000.
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There are many competing policy issues, which are important to bear in mind when you try to reconcile the cases: need for commercial certainty (ie, that contracts will be enforceable) fairness to outsiders who have dealt with the company in good faith
V
need to protect members and creditors from unauthorised acts of company officers members' right to have the company's internal rules complied with
This is an area where company law principles overlap with the laws relating to agency and contract. This Topic highlights some of the issues peculiar to companies. Although the company is a separate legal entity, it needs people (its agents) to act on its behalf. Under the general law, the company will only be liable where a person or an “organ” of the company (for example, the board) has the authority to enter into the contract on the company's behalf or where the company has approved or “ratified” an act or contract that has been done or made without proper authority – this ratifying can be as straightforward as using the goods that are subject to the contract. General law principles of authority are discussed at [7.50] and [7.170]-[7.210]. Authority can also be established under statutory assumptions: ss 128 – 129 of the Corporations Act 2001 (Cth) (Corporations Act). This Topic focuses mainly on the statutory assumptions.
General requirements Before considering the statutory assumptions, there are certain general requirements that need to be satisfied. A contract will not be binding if:
[7.30]
• it is contrary to the general law – for example, against public policy; • it is contrary to a provision of the Corporations Act which makes such a transaction either: – void (for example, s 588FP): a security interest in favour of a company officer which the officer as a secured party purports to enforce within six months of its creation without leave of the court (NB: Prior to 30 January 2012 this was provided for by s 267 and referred to “charges”); or
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– voidable at the option of the company and the company exercises that option (for example, s 588FF(1)). A liquidator (who stands “in the shoes” of the company) can, by obtaining a court order, have certain types of “unfair” or “uncommercial” contracts declared unenforceable (see Chapter 24); • it was not, at the time it was entered into, for the benefit of the company, and the other party to the transaction knew that the directors were acting contrary to the company's interests – it may be that in these circumstances the transaction can be avoided by the company (see ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd (recs & mgrs apptd) [1991] 2 Qd R 360); or • it was made at a time when the company was insolvent or on the verge of insolvency, and this was known to the other party – the company cannot act in disregard of the interest of its creditors and such contracts may be set aside: see the Qintex case (above); Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Walker v Wimborne (1976) 137 CLR 1; Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50; Lyford v Commonwealth Bank of Australia (1995) 13 ACLC 900; Addstead Pty Ltd (in liq) v Liddan Pty Ltd (1997) 70 SASR 21. Also, if the contract is outside the company's capacity (that is, if its execution would breach objects or restrictions in the company's constitution) and the contract has not been executed by both parties, it may be possible to obtain a general law injunction to prevent its execution: see [5.260].
How does a company execute a contract? A company can either execute a contract:
• directly – by one of its “organs” (for example, the board of directors or the members in general meeting) who are seen as the directing mind and will of the company; or • indirectly – by one of its agents (such as a director, manager, or company secretary) acting on its behalf and with its authority. There are two kinds of authority: • actual authority, that can be either: – express – stated orally or written (for example, in the internal rules or in a resolution of the board of directors); or – implied – either as authority usually associated with that kind of position (for example, the position of managing director carries with it certain implied powers, see [7.200]), or on the basis of “acquiescence” by the company (in condoning unauthorised transactions purportedly entered into on its behalf); and
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[7.40]
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• apparent (sometimes also referred to as “ostensible”) authority – where the company has “held out” or represented that a particular person has authority to act on its behalf. General law agency principles .......................................................................................................................................................................
It should be noted that a person dealing with a company (an outsider) will rarely perceive the distinctions between the types of authority just mentioned, particularly the distinction between implied actual authority and apparent authority. What is really being relied upon is the appearance of authority. That is why the statutory assumptions that an outsider is entitled to make when dealing with a company (ss 128 – 130) have become so important. They assist outsiders with enforcement of contracts that might otherwise fail because the company, or its agent, has failed to comply with the company's internal rules, or has acted in breach of its powers or duties. Also relevant to general law principles of agency, is the general law assumption called the “indoor management rule”: see [7.230]. This assumption was developed by the courts before the statutory assumptions were introduced. The indoor management rule is more limited in operation than the statutory assumptions and has virtually been replaced by ss 128 – 129. However, the indoor management rule may still assist an outsider in situations that fall outside the scope of ss 128 – 129, or in respect of contracts executed prior to the introduction of the statutory assumptions: see [7.230]-[7.240]. Also, the indoor management rule will continue to be relevant to non-corporate businesses: see Chapters 2 and 25. [7.50]
Statutory provisions ....................................................................................................................................................................... [7.60]
Section 126 deals with the powers of agents.
SECTION 126 Agent exercising a company’s power to make contracts (1)
A company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company. The power may be exercised without using a common seal.
(2)
This section does not affect the operation of a law that requires a particular procedure to be complied with in relation to the contract.
Section 127 deals with the manner in which documents can be executed by a company. The importance executing a document in accordance with s 127
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was highlighted in Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103 where a contract was executed without the signature of another party to the agreement. In such a case, it was held that the offer was not properly executed therefore removing the potential for reliance on s 129(5) or (6) at [89]. However, the mere fact that the document did not specifically state that it had been executed in accordance with s 127 does not extinguish reliance on s 129. In BNY Trust Company of Australia Ltd v Banksia Finance and Leasing Co Pty Ltd [2013] NSWSC 1776, Hall J held that “provided the execution in relation to such a company complies with s 127(1)(c) there is no requirement for there to be a statement made to the effect that the document was executed pursuant to s 127 of the Act” at [72]. See also Australia and New Zealand Banking Ltd v Frenmast Pty Ltd [2013] NSWCA 459.
SECTION 127 Execution of documents (including deeds) by the company itself (1)
A company may execute a document without using a common seal if the document is signed by: (a) 2 directors of the company; or (b)
a director and a company secretary of the company; or
(c)
for a proprietary company that has a sole director who is also the sole company secretary – that director.
(2)
A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by: (a)
2 directors of the company; or
(b)
a director and a company secretary of the company; or
(c)
for a proprietary company that has a sole director who is also the sole company secretary – that director.
Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(6) for dealings in relation to the company. (3)
A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2).
(4)
This section does not limit the ways in which a company may execute a document (including a deed).
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Note: If a company executes a document in this way, people will be able to rely on the assumption in subsection 129(5) for dealings in relation to the company.
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[7.70] Figure 7.1: Summary – execution of documents ....................................................................................................
[7.75] Figure 7.2: Example of a typical execution clause on a proxy* form ....................................................................................................
Some points to note: 1.
If the contract needs to be executed as a deed, then it must state that it is a deed and be executed in the manner described in s 127(1), (2): see [7.60].
2.
Section 127 is not a replaceable rule: see Chapter 5. Thus, compliance with these methods of execution will be binding even if, for example, the company's constitution states that it must be the managing director and the company secretary who sign. In Myers v Aquarell Pty Ltd (in liq)
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[2000] VSC 429, at the time of the transaction, the company's sole director/secretary had witnessed the fixing of its common seal to a mortgage in accordance with s 127(2)(c). Gillard J held the company was bound, even though its constitution required the company to have at least two directors and stated that at least one director and the company secretary must witness the fixing of the seal. Similarly, in LK Bros Pty Ltd v Collins [2004] QSC 026, Chesterman J held that a contract executed without seal by the company which was signed twice by the same person who was both its de facto managing director and the company secretary was executed in accordance with s 127(1)(b). 3.
The internal rules can authorise additional methods by virtue of s 127(4).
4.
A company is no longer required to have a common seal: s 123(1).
Statutory assumptions – ss 128-129 If the general requirements are met (see [7.30]) and the contract has been executed in the correct manner (see [7.40]-[7.60]), the contract will be binding unless:
[7.80]
• the agent lacked express or implied actual authority or apparent authority to enter into the contract on the company's behalf – that is, lacked (substantive) authority under general law principles; and
agent had authority
→
agent did not have authority
→
binding (s 129 assumptions may provide evidentiary assistance) may still be binding as a result of the operation of s 129
Even if an agent has authority on the basis of general law agency principles, the assumptions in s 129 can still be of assistance. Under s 128(1) – (2) a person dealing with a company is “entitled” to make certain assumptions in relation to those dealings whether or not that person actually made them: Lyford v Media Portfolio Ltd (1989) 7 ACLC 271 and see dicta by Osborn J in Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 at [112]. From an evidentiary point of view, it is easier to rely on the assumptions than to adduce proof of these matters.
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• the statutory assumptions in s 129 do not assist. To clarify:
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Who can rely on the assumptions? .......................................................................................................................................................................
Section 128 provides that a person may rely on the assumptions in relation to “dealings” with a company.
[7.90]
SECTION 128(1)-(2) Entitlement to make assumptions (1)
A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.
(2)
A person is entitled to make the assumptions in section 129 in relation to dealings with another person who has, or purports to have, directly or indirectly acquired title to property from a company. The company and the other person are not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect.
Thus, a person may make the assumptions in s 129 in relation to “dealings” with a company (s 128(1)) or “dealings” with another person who has directly or indirectly acquired property from a company: s 128(2). The company will not be able to assert otherwise in any “proceedings”: s 128(1), (2). The term “dealings” has been given a wide interpretation. It includes: • a single transaction – Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 at 307, Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703 per Studdert J, affirmed in Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722; and • pre-contractual negotiations – for example, Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 9 ACLC 324 per Ormiston J. If there is a purported contract between company A and B and a question arises about the execution of that contract by company A, only B can plead reliance on the assumptions in s 129. A third party (that is, a person/company that is not a party to these dealings with company A) cannot rely on the statutory assumptions. However, the third party may be able to rely on the general law “indoor management rule”: see [7.230]-[7.240] and Australian Capital Television Pty Ltd v Minister for Transport & Communications (1989) 7 ACLC 525.
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The assumptions ....................................................................................................................................................................... [7.100]
The assumptions are set out in s 129.
SECTION 129 Assumptions that can be made under section 128 Constitution and replaceable rules complied with (1)
A person may assume that the company’s constitution (if any), and any provisions of this Act that apply to the company as replaceable rules, have been complied with. Director or company secretary
(2)
A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company: (a)
has been duly appointed; and
(b)
has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.
Officer or agent (3)
A person may assume that anyone who is held out by the company to be an officer or agent of the company: (a)
has been duly appointed; and
(b)
has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company.
A person may assume that the officers and agents of the company properly perform their duties to the company. Document duly executed without seal
(5)
A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices. Document duly executed with seal
(6)
A person may assume that a document has been duly executed by the company if: (a) the company’s common seal appears to have been fixed to the document in accordance with subsection 127(2); and (b)
the fixing of the common seal appears to have been witnessed in accordance with that subsection.
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Proper performance of duties (4)
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For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices. Officer or agent with authority to warrant that document is genuine or true copy (7)
A person may assume that an officer or agent of the company who has authority to issue a document or a certified copy of a document on its behalf also has authority to warrant that the document is genuine or is a true copy.
(8)
Without limiting the generality of this section, the assumptions that may be made under this section apply for the purposes of this section.
The provisions contained in s 129(2)(b) and (3)(b) can be seen as statutory assumptions based on particular examples of implied and apparent authority. For the purposes of s 129(3), the “holding out” has to be done by the company. In Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 9 ACLC 324 (upheld on appeal in Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279; (1991) 10 ACLC 253), this was held to embody the general law requirement that the holding out must be by someone with actual authority (either express or implied) to do so as an organ of the company, such as the board of directors: see [7.40] and see also National Australia Bank Ltd v Perkins (1999) 17 ACLC 1,665, Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 and Vero Insurance Ltd v Kassem [2010] NSWSC 838. For the purposes of s 129(5) and (6), reliance can also be made on the assumptions about who is a director or secretary under s 129(2), or who is held out as an officer or agent under s 129(3). The assumptions can be used cumulatively: s 129(8); see Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335. Execution of contracts: s 129(5)-(6)
The operation of s 129(5) – (6) is more contentious. Section 129(5) was introduced in 1998 to reflect the fact that a common seal is now optional (s 127). In Vero Insurance Ltd v Kassem [2010] NSWSC 838 the plaintiff could not rely on the s 129(5) assumption for a proxy form because it was not executed in accordance with s 127(1). The majority of cases on the statutory assumptions have been about contracts executed under seal, relying on s 129(6) and its predecessors (s 164(3)(e) and, before 1 January 1991, s 68A(3)(e)). In Myers v Aquarell Pty Ltd (in liq) [2000] VSC 429 (see [7.75]) Gillard J at [73]-[75] held that a person was entitled to assume that the mortgage was duly executed under s 129(6) because it appeared to be executed in accordance with s 127(2). [7.110]
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Some commentators argue that the assumptions contained in s 129(5) and (6) are limited to assisting an outsider in establishing due execution (formal authority). But these assumptions do not enable an outsider to enforce a contract where the transaction itself was entered into without the company's authority (substantive authority). The argument is that substantive authority is a separate matter that must be established either by the use of general law principles of authority (actual or apparent authority), or by use of statutory assumptions other than s 129(5) – (6): for example, s 129(2) – (3). The analysis in the case law is inconsistent – some judges appear to have considered both formal and substantive authority, but others have not: see the article by Ramsay, Stapledon and Fong referred to in the Further Reading for this Topic. It is likely that this issue will remain topical because financial institutions have a keen interest in this area. The dilemma they face is what representations can they rely on? and what independent searches and enquiries should they make? Exceptions .......................................................................................................................................................................
People having dealings with companies can rely on these assumptions, whether or not they actually made them, and even if an officer of the company is acting fraudulently, unless “they knew or suspected that the assumption was incorrect”: s 128(3) and (4). Where there is such close association between the parties and the parties were “intimately involved” in the business dealings, such close association could satisfy s 128(4) of the Corporations Act, that is, the person “knew or suspected that the assumption was incorrect”. In Eden Energy Ltd v Drivetrain USA Inc [2012] WASC 192, Corboy J noted that “constructive knowledge” as found under the second limb of Barnes v Addy (1874) LR 9 Ch App 244, is not relevant to the application of s 128(4) at [90]. His Honour applied the principles laid out in Ford's Principles of Corporations Law and outlined that “actual knowledge is required and constructive knowledge is not actual knowledge” at [83]. Conduct, statements, facts and circumstances should be used to determine if a person knew or suspected that the person lacked authority. This may involve the “hypothetical reasonable person in the same position”, drawing upon the established facts to conclude if the reasonable person would have known or been suspicious. However, this is a matter for determination by a court as an individual may deny such knowledge or suspicion leaving the matter ultimately to the judicial discretion on which evidence is preferred at [84]-[85]. A similar position was also taken in Australia and New Zealand Banking Ltd v Frenmast Pty Ltd [2013] NSWCA 459 where the court found that the person did have ostensible or actual authority to make
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[7.120]
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communications on the half of the various entities due to a relatively long association with the bank in question where the person had been the primary point of contact. In Correa v Whittingham (No 3) [2012] NSWSC 526, a board sought to appoint an administrator. The company's constitution stipulated that there must be a minimum of seven board members and at meetings, a quorum of four. The board had a total of four members when a decision was made to appoint an administrator, Mr Whittingham. The minutes of the meeting did not record the names of attendees, nor the date time or location of the meeting. The resolution itself did not specify a date under which it would have effect. Two board members signed the appointment, but only one director signed the minutes. Notification to Mr Whittingham of the appointment was signed by only one director. The court heard evidence from other administrators on the process which a diligent administrator undertakes when offered an appointment. One administrator suggested that the first thing which should be undertaken is a search of the company constitution to ensure that the appointment is valid. Further, the plaintiff suggested that an ASIC search which Mr Whittingham undertook would have disclosed the issues with the number of board members appointed and, inter alia, that the minutes appointing Mr Whittingham was procedurally irregular and problematic. The NSW Supreme Court found that Mr Whittingham “could and probably should” have enquired of the company's other directors and the circumstances of his appointment. However, the court also found that Mr Whittingham did seek legal advice and “sought to confirm the circumstances surrounding his appointment” with one of the directors. His Honour, Black J, continued that even if these matters were sufficient to put Mr Whittingham on inquiry, they are inadequate to (at [59]): establish that he suspected, still less that he knew, that his appointment did not comply with that Constitution. Had Mr Whittingham known or suspected that matter, it would have been a simple matter for him to seek validation of his appointment by the court and there is no obvious reason why he would not have done so. Even if Mr Whittingham was on inquiry as to the validity of his appointment, this is not sufficient, in the absence of requisite knowledge or suspicion, to deprive Mr Whittingham of the ability to rely on the statutory assumptions under ss 128 and 129.
In addition, his Honour found that under s 128 the appointment of an administrator is sufficient to satisfy “dealings” at [41]–[42].
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SECTION 128(3)-(4) (3)
The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings.
(4)
A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect.
Application of law to pre-1 July 1998 contracts .......................................................................................................................................................................
The statutory assumptions in ss 128 – 129 discussed above (see [7.100]-[7.110]) only apply to contracts executed after 1 July 1998. Contracts executed prior to 1 July 1998 are governed by the provision (if any) that applied on the date the contract was executed: Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146. Contracts executed between 1984 and 1 July 1998 are governed by the predecessor to s 129 – namely s 164(3) and, before 1 January 1991, s 68A(3). There have been several important cases on these former provisions. Remember, even though many of these cases are relatively recent, they concern contracts executed before 1 July 1998 and so have been decided on the basis of the former wording. The assumptions contained in the former sections are essentially the same as those in s 129, but the exceptions are different. Section 128(4) refers to “knew or suspected”. The former section referred to “actual knowledge” and a “connection or relationship” such that the person “ought to know” that the assumption was incorrect. The different wording must be kept in mind when the cases are considered. The exception in the former s 164(4)(b) (where there is a connection or relationship with the company such that the outsider “ought” to have known that the assumption was incorrect) was interpreted broadly in several decisions: Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557 on appeal Bank of New Zealand v Fiberi Pty Ltd (1993) 12 ACLC 48 and the High Court refused leave to appeal, Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 232; Sixty-Fourth Throne Pty Ltd v Macquarie Bank (1996) 130 FLR 411; and Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd (1996) 14 ACLC 679. In the Fiberi decision, Kirby P went so far as to equate the words “ought to know” with the general law concept of “put on inquiry”: see [7.230]. The other judges in Fiberi (Priestly and Clarke JJA) reached the same conclusion on the facts, but drew a distinction between the general law and
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[7.130]
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statutory terminology. (The view of Priestley JA in Fiberi was preferred by Hansen J in Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16.) Prior to these decisions, the general law exceptions were considered to be wider (that is, less favourable to the outsider) than those contained in the former statutory provision: Northside Developments (above) and Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703; affirmed Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722. Post-1 July 1998 .......................................................................................................................................................................
There has been considerable debate about how ss 128 and 129 should operate: see articles by Hammond, Loxton and Chapple and the Note in the Further Reading for this Topic. In the absence of any relevant cases on these provisions (apart from Myers v Aquarell Pty Ltd (in liq) [2000] VSC 429; LK Bros Pty Ltd v Collins [2004] QSC 026 (see [7.75] and [7.110]) and Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 in which these issues were not directly relevant) this debate is likely to continue. The question arises, therefore, as to the relevance of the case law on the pre-1 July 1998 provisions. There are two possibilities: [7.140]
1.
these cases are only relevant when applying the pre-1 July 1998 provisions (that is, dealings with a company between that date and 1984); or
2.
they will be considered by the court when construing the word “suspected” in s 128(4). One aid to interpretation is the Explanatory Memorandum to the Company Law Review Act 1998 (Cth) (at [8.7]). It states: This objective test [ie, the new words “knew or suspected”] is stricter [ie, more favourable to outsiders] than the current law [ie, former s 164] and makes it clear that the common law “put on inquiry” test has no application to the statutory provisions: see Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48, 14 ACSR 736.
There is a view that the cases on the pre-1 July 1998 wording will not be of assistance in interpreting s 128(4): see Austin and Ramsay, [13.300] in the Further Reading for this Topic. Those cases will be important for any pre-1 July dealings, but given the uncertainty about the interpretation of the wording of ss 128 – 129, they must be treated with caution before they can be relied on for guidance on dealings post-1 July 1998. Justice Gray in Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335 suggested that s 128(4) places the burden on the company to establish the person's subjective knowledge or suspicion that the s 129
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assumptions relied on were incorrect. This interpretation may be criticised because it encourages banks and others to “don blinkers” when faced with warning signs: see Lipton, Herzberg and Welsh, [5.375] in the Further Reading for this Topic. There are other points to note about the current s 128(4) wording: • the word “suspect” is used elsewhere in the Corporations Act (for example, s 588G) and other legislation, so guidance may be obtained from cases on other areas – for example, Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 in which the High Court of Australia considered the meaning of “knew or had reason to suspect” in the context of s 95(4) of the Bankruptcy Act 1924 (Cth); see also Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 at [118] per Osborn J; • the current provision applies the same test of knowledge or suspicion to anyone who seeks to rely on the assumptions regardless of whether they are connected with or related to the company; • the burden of proof would seem to be on the company – in other words, the company must prove that the person seeking to rely on the assumption knew or suspected otherwise*;
• actual knowledge is tested subjectively, but can include certain knowledge that is inferred by the court from the surrounding circumstances – for example, if X (who is seeking to rely on the assumptions) denies knowing that Y was not appointed as a director, the court, in reaching its decision on whether X is telling the truth or not, can consider X's conduct as well as what X claims to have known or not known. The court can draw inferences from the outsiders' conduct.* *This was also the position under the pre-1 July 1998 wording. Analysis of cases
The following table summarises the results of the main cases on the pre-1 July 1998 wording. [7.150]
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• the relevant time to consider is the time when the person entered into the transaction – if they subsequently found out about the irregularity, it does not prevent them relying on the assumption*; and
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[7.160] TABLE 7.1 Analysis of pre-1 July 1998 cases Tests
Glass And Mirrors 1 Yes Yes Yes Yes
Brick And Pipe 2 Yes Yes Yes Yes
Fleetwood Starr 3 Yes N/A Yes Yes
Fiberi 4
SixtyFourth Throne 5 No No No Yes
Pyramid 6
Koorootang 7
s 164(3)(b)*? No No N/C s 164(3)(c)#? No No N/C s 164(3)(e)+? No No N/C Did lender (or No Yes Yes solicitor) do company search? Did exceptions No No No N/A Yes Yes Yes apply? Lender successful? Yes Yes Yes No No No No * now see s 129(2) # now see s 129(3) + now see s 129(6) N/A not applicable on the facts N/C not considered in the judgment 1 Australia & New Zealand Banking Group Ltd v Australian Glass & Mirrors Pty Ltd (1991) 9 ACLC 702 2 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 9 ACLC 324 3 Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703 4 Bank of New Zealand v Fiberi Pty Ltd (1993) 12 ACLC 48 5 Sixty-Fourth Throne Pty Ltd v Macquarie Bank (1996) 130 FLR 411 6 Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd (1996) 14 ACLC 679 7 Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16
If you look at the last line of the table (“Lender successful?”), you will notice that the pre-Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557 cases seem to indicate that outsiders will be able to use the statutory assumptions successfully where they have, at least, conducted a company search prior to executing the contract. However, the post-Fiberi cases (all of which are decisions at first instance) seem to indicate a harder line on outsiders. None of the lenders were successful even where they or their solicitors had searched. The Explanatory Memorandum (see [7.140]) gives some indication that this trend prompted the changes to the wording of the exceptions in 1998. But remember, because of changes to the wording of the exceptions, the cases on the former section may not be a useful guide for contracts executed post-1 July 1998: see [7.140].
Usual (implied actual) authority of company officers The scope of the usual (implied actual) authority of certain company officers, whether or not these officers are also directors is relevant both to the general law agency principles and s 129: see NCR Australia Pty Ltd v Credit Connection Pty Ltd (in liq) [2004] NSWSC 1 at [130]-[146] where Austin J discussed the extent of the apparent authority of the “national credit manager” [7.170]
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of a company. Some of the assumptions in s 129 refer to the “authority” of an officer or agent or to the “duties customarily exercised or preformed by a director or company secretary”. Individual directors .......................................................................................................................................................................
Under the usual form of internal rules, an individual director does not have any actual or apparent authority to act on the company's behalf: Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146; Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 9 ACLC 324; on appeal Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 10 ACLC 253 and Perkins v National Australia Bank Ltd (1999) 30 ACSR 256; affirmed in National Australia Bank Ltd v Perkins (1999) 17 ACLC 1,665. Directors usually only have authority when acting collectively as a board. An individual director could have authority if: [7.180]
• he or she were expressly authorised by the internal rules, the board or a duly executed power of attorney (express actual authority); or
• he or she were “held out” by the company to have such authority – that is, given apparent authority or an assumption of such authority can be made under s 129(3). Note: The position of the Chair may be slightly different from other directors acting individually. From the particular circumstances of the company, it may be arguable that the Chair has greater authority. Sole director companies [7.190] If the sole director is also the sole shareholder, then s 198E(1) (which is not a replaceable rule, see [6.60]) has the effect of conferring all the company's powers on that director. If the director is not also the sole shareholder, then the actual authority of the director may be limited by the company's constitution. But the usual or implied actual authority of a sole director in that situation may still be wider than her or his express actual authority.
Managing directors [7.200] Most of the cases concern contracts entered into by a managing director or a person who purports to act as a managing director. A company
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• the board knows that the director has purportedly been acting on the company's behalf (without authority) and has “acquiesced” in the director's actions (see Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 and Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (above) (implied actual authority)); or
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may never have appointed a managing director, but an individual director may be acting as a “de facto” managing director with the acquiescence of the other members of the board: see [7.180]. Managing directors are rarely the “organ” of the company, although the internal rules might make them so. Usually, managing directors are appointed by the board of directors, which means that their authority is delegated to them by the board. Section 201J, a replaceable rule, gives the board power to appoint a managing director. The directors can confer on a managing director any powers that the directors can themselves exercise: s 198C, a replaceable rule. Even if the directors do not specify the powers conferred, a managing director has implied powers and authority deriving from the office held: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549; Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72; Re Tummon Investments Pty Ltd (in liq) (1993) 11 ACLC 1139 and LK Bros Pty Ltd v Collins [2004] QSC 026. Generally, a managing director has usual (implied actual) authority to do all such acts as are necessary to carry on the company's business in the ordinary way. While this gives a managing director wide powers over the company's day-to-day activities, it would not extend to more “critical decisions” such as selling the company's main undertaking or winding up the company: Re Qintex Ltd (No 2) (1990) 8 ACLC 811. Company secretaries .......................................................................................................................................................................
Generally, a company secretary will have usual (implied actual) authority from the office he or she holds to look after the administrative side of the company's affairs. It is not certain, however, whether that authority extends to the signing of contracts for the sale or purchase of goods. It is necessary to look at the nature of the company and what is normally done by a secretary within that kind of company. For example, the secretary of a large, publicly listed company may have fairly considerable powers in areas dealing with administrative matters such as employing staff: Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 and Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146. [7.210]
Defects in appointment Even if there is some defect in appointment, a managing director's or other directors' acts are still valid according to s 201M, if they are within the scope of what is normally done by a managing director or director, respectively: see s 201M extracted at [6.210] and Chapter 6. An example of a defect in appointment would be a board purporting to make an appointment [7.220]
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when it lacked a quorum. However, there is a difference between a defect in appointment and no appointment at all. If no attempt has been made to appoint a person as managing director (or director), then that is not a mere defect, and the acts of a person purporting to hold that office are not authorised: Morris v Kanssen [1946] AC 459. Section 201M would not validate acts in those circumstances, although s 129(3) may still assist a person attempting to enforce a contract with the company.
Indoor management rule [7.230] Under the general law, if an outsider entered into a contract with a person who purported to act for the company but who had no proper authority, the contract was (unless ratified) voidable at the company's option. This was considered a harsh consequence for outsiders (such as creditors) who had dealt with the company in good faith, and who had no means of establishing that all the necessary internal approvals and requirements had been satisfied. To overcome this problem, the general law developed the “indoor management rule”: Royal British Bank v Turquand (1856) 119 ER 886. The indoor management rule has been stated by the High Court in Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 at 154 per Mason CJ as:
A person will not be acting “in good faith” (and therefore, will not be able to rely on the rule) if they knew or were “put on inquiry” that the acts were not regular: Northside. The indoor management rule is embodied in the statutory assumptions that have been contained in the Corporations Act since 1984: now s 129(1). However, the exceptions to the statutory assumptions are worded differently to the general law exceptions: see [7.120]-[7.140]. Continued role for the indoor management rule .......................................................................................................................................................................
Under the general law the indoor management rule will continue to be relevant to companies for: [7.240]
• actions by third parties (see [7.90]) – Australian Capital Television Pty Ltd v Minister for Transport & Communications (1989) 7 ACLC 525;
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persons dealing with a company in good faith may assume that acts within its constitution and powers have been duly performed and are not bound to inquire whether acts of internal management have been regular…
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• pre-1984 dealings – Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 which was decided on general law principles as no statutory assumptions existed at the time the relevant contract was executed; and • dealings with any corporation that is not a “company” within the definition in s 9, such as a building society or a credit union. Constructive notice ....................................................................................................................................................................... [7.250] Under the general law there was a doctrine of “constructive notice” that was relevant to both the issue of ultra vires (see Chapter 5) and principles of agency – that is, it affected both a company's capacity and the authority of its agents. Put simply, an outsider dealing with a company was deemed to have notice of all the company's public documents (the leading case was Ernest v Nicholls (1857) 6 HL Cas 401). Clearly this doctrine was a counter-balance to the indoor management rule. The doctrine of constructive notice shifted the onus back to the outsider. Section 130 (and its predecessors) represents a change of this policy – it abolishes the general law doctrine of “constructive notice”. The policy balance on this point is now clearly in favour of the outsider.
SECTION 130 Information available to the public from ASIC does not constitute constructive notice A person is not taken to have information about a company merely because the information is available to the public from ASIC.
Contracts – conclusion Even if the general requirements at [7.30] are satisfied, a contract will not be binding on a company if it is entered into by an organ or agent of the company without authority. However, even when, in reality, authority does not exist and the contract has not been ratified by the company, authority may be assumed to exist by either:
[7.260]
• the operation of general law agency principles of implied actual and apparent authority; or • the statutory assumptions contained in ss 129, 128(3) and (4). An outsider will not be entitled to rely on any statutory assumption that they “knew or suspected” was incorrect: s 128(4). There are also certain limited
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situations where the general law indoor management rule will continue to assist outsiders in their dealings with companies.
Tort – overview Torts are civil wrongs. The main aim of the law of torts is to shift the financial burden for the loss from the victim to the “person” (natural or corporate) whose activity caused the damage. There are two theories of liability for torts – the organic theory and vicarious liability. The liability may arise under general law or there may be an express statutory provision which needs to be interpreted. [7.270]
Organic theory .......................................................................................................................................................................
The organic theory (or “primary liability”) says that a company is liable where the people who act for the company and who commit a tort are acting as the organ of the company. The “organ” means the “brain”, that is, “the directing mind and will” of the company. (Note, this point was also considered in the contract case of Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 10 ACLC 253.) Under the organic theory the important thing is to discover who is the “directing mind” of the company. If the directing mind has committed a wrong, the company will be liable: Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705.
[7.280]
Vicarious liability [7.290] In most tort cases, the courts do not look for a directing mind. Rather, the company's liability is “vicarious”. Vicarious liability means liability for the acts of others. For example, employers are liable for the acts of their employees who commit wrongs within the scope of their employment. If an employee or agent commits a wrong within the scope of her or his employment, the company will be liable. Similarly, damages in favour of a company can be reduced on the grounds of contributory negligence by the company, where directors or management were negligent: Daniels v Anderson (1995) 37 NSWLR 438. Section 128(3) (see [7.120]) codifies the general law regarding vicarious liability of companies for fraudulent acts of their agents and employees. Such fraudulent acts will not absolve a company from liability.
Criminal law – overview [7.300] In criminal law, people are not usually liable for their acts unless they have a guilty mind (mens rea) – that is, an intention to do something wrong
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(knowing it was unlawful). How then can a company ever be criminally liable as it does not have a mind, let alone a guilty one? There are two ways in which the law has attempted to overcome this problem. Companies can be criminally liable, as they can in tort, under either the organic theory or vicarious liability. Again, there may be an express statutory provision which imposes liability on either of these bases. Organic theory .......................................................................................................................................................................
Again, under the organic theory the question is, “Who is the directing mind and will of the company?” If the directing mind and will committed the offence, the company is liable because its “brain” committed the crime. The leading case is Tesco Supermarkets Ltd v Nattrass [1972] AC 153. See also S & Y Investments (No 2) Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1986) 44 NTR 14.
[7.310]
Tesco Supermarkets v Nattrass [7.313] Tesco Supermarkets Ltd v Nattrass [1972] AC 153 (House of Lords) FACTS: Tesco Supermarkets (one of the largest supermarket chains in England) advertised Radiant washing powder on special at a reduced price of 2/11 rather than the normal price of 3/11. The reduced price was marked on the packets and displayed in posters in the shop window. A Tesco shop ran out of the packets marked with the special price and a shop assistant restocked the shelves with packets marked at the normal 3/11 price. The assistant did not tell the store manager of this and did not remove the poster which advertised Radiant soap powder on special at 2/11. A pensioner saw the poster but could only find packets marked at the higher price. When he took it to the cash register he was told that the shop had run out of the specially marked packets and he had to pay 3/11. He complained to the relevant authority and the company was fined £25 and costs for breaching the Trade Descriptions Act 1968 (UK) which prohibits any misleading statements about the price at which goods are being offered. Tesco’s appeal ultimately went to the House of Lords. ARGUMENT: Tesco sought to rely on the defence in s 24(1) of the Trade Descriptions Act 1968 (UK) that the offence was committed by another person (the shop assistant) and Tesco itself had taken all reasonable precautions and exercised due diligence to avoid the commission of an offence by the company or any person under its control. There was no doubt that the shop assistant had breached the Act, but could it be said that in these circumstances the company itself was liable? Was the shop assistant or the store manager acting “as” the company? DECISION: The House of Lords upheld Tesco’s appeal and held that here the shop assistant and the store manager were not acting “as” the company. In the leading judgment Lord Reid held that for the company to be liable the person acting must have been the “directing mind or will” of the company (quoting from an earlier judgment of Lord Denning). Lord Reid continued at 171:
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cont. Normally the board of directors, the managing director and perhaps other superior officers of a company carry out the functions of management and speak and act as the company. Their subordinates do not. They carry out orders from above and it can make no difference whether they are given some measure of discretion. But the board of directors may delegate some part of their functions of management giving to their delegate full discretion to act independently of instructions from them. I see no difficulty in holding that they have thereby put such a delegate in their place so that within the scope of the delegation he can act as the company: [1972] AC 153 AT 168. The board of Tesco had set up a “chain of command” from individual store managers through district and regional supervisors. However, the company itself remained in control and had not delegated any part of its functions or responsibilities so that the acts of the shop assistant or the store manager could not be said to be those of the company itself.
However, in Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 13 ACLC 3,245 the Privy Council (on appeal from the New Zealand Court of Appeal) imposed liability on the company for failure to notify a particular share acquisition, even though the employee who had the relevant knowledge was not the company's “directing mind and will”. The Privy Council said that a contrary view would frustrate the policy of the Corporations Act by encouraging the delegation of tasks without proper monitoring: see also AAPT Ltd v Cable & Wireless Optus Ltd (1999) 17 ACLC 974. [7.316]
Statutory attribution of liability
The Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 13 ACLC 3,245 case aside, there are some instances where general law principles regarding attribution of liability to a company have produced what Parliament has regarded as overly lenient results. Consequently, statutes sometimes include provisions which achieve the same result as the court did in the Meridian and AAPT Ltd v Cable & Wireless Optus Ltd (1999) 17 ACLC 974 cases. Namely, they widen the liability of a company by imputing to it the mental state of employees or agents, not just those who are the “directing mind and will”. For an example of such a provision see s 769B(3) where the state of mind of a director, employee or agent is used to establish the “intention” – the state of mind – of the company: see also [7.350]. Remember, such a provision is not imposing vicarious liability (that is, where the criminal act is that of the employee, but the employer is made liable). Instead, the provision is deeming the wrong committed by the employee to be the wrong of the company.
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[7.320]
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Vicarious liability .......................................................................................................................................................................
Vicarious liability is a stricter form of liability. It occurs with laws dealing with such areas as food, drugs, liquor licensing, occupational health and safety, and environmental protection – areas where society wants to punish the wrongdoer without having to prove the wrongdoer had the intention to cause harm. Under statutes that create “strict liability” offences, the prosecution will not have to prove a guilty mind. Usually, no defence is available once the unlawful act is proved: see Mousell Bros Ltd v London & North Western Railway Co [1917] 2 KB 836; and Lloyd v Grace Smith & Co [1912] AC 716. Where a mens rea element is required to establish an offence companies can generally expect to avoid liability: see Presidential Security Services of Australia Pty Ltd v Brilley [2008] NSWCA 204. The imposition of liability in this way is another method used by the legislature to overcome the difficulties of attributing to an artificial legal entity liability that requires proof of a guilty mind. The other method – a deeming provision that imputes the state of mind of employees to the company – was discussed under the organic theory: see [7.280], [7.310].
[7.330]
Criminal Code Act .......................................................................................................................................................................
The Criminal Code Act 1995 (Cth) codifies the law and overcomes the difficulties, under general law principles, of imposing criminal liability on a corporation. Section 3 provides that the Schedule to the Criminal Code Act 1995 (Cth) contains the Criminal Code. It contains the general principles of criminal responsibility that are intended eventually to apply uniformly throughout Australia. The Criminal Code was proclaimed on 1 January 1997 and, since December 2001, has applied to all offences under Commonwealth legislation, unless expressly excluded as, for example, by ss 769A and 769B of the Corporations Act: see [7.350]. All Commonwealth criminal legislation has been amended to give effect to these general principles. The intention is that this model will also be adopted by the States. The Criminal Law Officers Committee of the Standing Committee of Attorneys-General, “General Principles of Criminal Responsibility” Final Report (December 1992) states (at 109) that the aim of the Criminal Code is to:
[7.340]
develop a scheme of corporate criminal responsibility which as nearly as possible, adapted personal criminal responsibility to fit the modern corporation…
The Criminal Code provides express, statutory attribution of criminal liability to corporations in relation to any offence created by Commonwealth laws (including the Corporations Act). Under the Criminal Code:
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• bodies corporate may be found guilty of offences punishable by imprisonment (even though a company cannot be imprisoned) – fines can be imposed for such offences (Criminal Code, s 12.1(2)); • the physical element of an offence is to be attributed to a corporate principal where the offence is committed by an employee, agent or officer acting within the actual or apparent scope of her or his employment (Criminal Code, s 12.2); • there are rules for attributing “fault” to a corporation: – the “corporate culture” may be such that fault can be attributed – if “the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision” (Criminal Code, s 12.3(2)(d)); – the corporation can be liable where it has “expressly, tacitly or impliedly authorised or permitted the commission of the offence” (Criminal Code, s 12.3(1)); and – if an element of negligence is required, this can be attributed even where no single act of an individual employee, agent or officer amounts to negligence – the corporation can be liable if the conduct of its employees, agents or officers viewed as a whole was negligent: Criminal Code, s 12.4(2).
Civil and criminal penalties under the Corporations Act Various sections of the Corporations Act impose:
• civil penalties on companies – that is, fines and banning orders; and • criminal penalties on companies – the fine for a company convicted of such an offence can be as high as five times the maximum for an individual: s 1312. In some instances the penalty is imposed because the company is vicariously liable for acts of its directors, employees or agents. In other instances the penalty is imposed on “the company” itself even though the actions at fault will necessarily be those of its directors, employees or agents. For example, s 769B(1) deems certain conduct by directors, employees or agents of the company (relating to financial services and products, Chapter 22) to be conduct engaged in by the company. This is not vicarious liability but an example of organic/primary liability. Part 9.4 deals with offences generally and Sch 3 to the Corporations Act sets out the penalty, pecuniary or otherwise, for each offence.
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[7.350]
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Self-incrimination .......................................................................................................................................................................
Companies are denied the right to silence in criminal proceedings and cannot claim the right to privilege against self-incrimination or exposure to civil penalty: s 1316A and Environment Protection Authority v Caltex Refining Co Pty Ltd (1993) 178 CLR 477.
[7.360]
Corporate liability for War Crimes While there is a lack of prosecutions against corporations for international war crimes, in 2013 Swiss prosecutors investigated a Swiss gold-refining company, Argor-Heraeus SA, for pillaging Congolese gold during time of war which accordingly funded Hilter's was machine. The significance of this case is well summarised by James G Steward in Turn to Corporate Criminal Liability for International Crimes: Transcending the Alien Tort Statute, The, 47 N.Y.U. J. Int'l L. & Pol. 121, 206 (2014-2015):
[7.370]
On a more global level, the Argor-Heraeus case is one of the first criminal cases involving corporate responsibility for international crimes, and the first time that a company has ever faced criminal scrutiny for pillaging natural resources from war zones. So, beyond the significance of pillage for the extractive industry, there is a sense that Argor-Heraeus opens Pandora's box–a set of undiscovered relationships between commerce, atrocity, corporate criminal liability and international criminal law waiting to be mapped. No matter how this particular investigation plays out, the very fact of a formal investigation confirms the plausibility of these cases, sounding the beginnings of a brave new turn in thinking about global corporate accountability.
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the topic of Corporate Liability: Contract, Tort and Crime.)
Practice Questions ...................................................................................................................................... 1.
Describe the two ways in which a company may enter into a written contract.
2.
If a company has a common seal, does it have to use the common seal whenever it executes a contract?
3.
Why was the company in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72 not bound by the contract? Does the current statutory provision overcome this decision? Give reasons.
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4.
Assume that a person who appears on ASIC records as a director, and whom everyone (including the company) thought was validly appointed as a director, is not, in fact, validly appointed. (The notice requirements for the convening of the board of directors' meeting at which she was appointed were not complied with.) Does this fact alone invalidate a contract signed by her in the capacity of director?
5.
Does the Criminal Code Act 1995 (Cth) alter the result in Tesco Supermarkets Ltd v Nattrass Ltd [1972] AC 153?
6.
When an employee sells a defective product that causes harm is the employer company or the employee liable for the damage?
Problems for Discussion ...................................................................................................................................... Munchkins Pty Ltd (Munchkins) operates three children's clothing shops in Tasmania. On 8 August 2007, Sarah was appointed to the position of Managing Director of Munchkins for a period of two years. A return was lodged with ASIC indicating her appointment as a director on that date. Sarah was not formally reappointed after 8 August 2009, but she has continued to act as Managing Director. No return was lodged following the expiration of her period of office. The terms of Sarah's appointment, which were set out in a contract between her and Munchkins, included a restriction to the effect that she was not to commit the company to borrowing transactions in excess of $20,000. Any such transaction was to remain subject to the approval of the board of directors. On 20 December 2010 Sarah, purportedly acting on behalf of Munchkins, signed a loan contract with Costello Bank, pursuant to which the Bank agreed to lend the company $30,000 in order to establish a eucalypt plantation. The transaction was not referred to the Board. The Bank was not aware of either: • the contents of Sarah's contract, or • the return lodged by Munchkins at the time of Sarah's appointment. The Board has since discovered the loan contract and has stopped all repayments on the loan. The Bank has called in the loan and is suing Munchkins for the principal together with all outstanding interest. (a) What do you think the outcome of this case will be? (b) (c)
What do you think the outcome of this case should be? Would the outcome of this case be different if:
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(i)
the loan was for refurbishment of two of Munchkins' clothing shops; and
(ii)
the bank's loan officer knew Sarah had fallen out of favour with the board and was negotiating a new job?
Alan and Bill are the only shareholders and directors of Sailaway Pty Ltd (Sailaway) which distributes and sells yachting clothing and equipment. As well as a warehouse and attached shop, Sailaway owns a large block of waterfront land which it uses for storage. Alan is also the chairman and majority shareholder of Broadacres Pty Ltd (Broadacres) which buys rural land for subdivision into hobby farms. Broadacres needs to borrow $1.5 million to fund its latest purchase. It already has a large overdraft and has no unencumbered assets to use as security for another loan. Alan organised a loan of $1.5 million to Broadacres from ABC Finance Ltd (ABC Finance) on the basis that Sailaway would guarantee the loan by executing a mortgage over its waterfront land. Alan signed the mortgage documents as a director of Sailaway and forged Bill's signature as the other signatory. Tom, the local manager of ABC Finance, had been involved in earlier dealings with Sailaway and knew that its business did not include property development. However, Tom was away at the time the documents and the transactions were organised by a relieving manager who did not ask any questions about Sailaway's involvement. Broadacres is now in financial difficulties and has defaulted on the loan from ABC Finance. ABC Finance is seeking to enforce its rights under the mortgage against Sailaway. Advise Sailaway whether it is bound by the mortgage.
3.
Brett and his wife Dina are the only shareholders and directors of BD Pty Ltd (BD) which owns a service station. BD employs Brett as manager of the service station. One night Brett shot and badly injured an intruder who was attempting to steal the week's takings. Brett has been charged with attempted murder. Could BD also be charged with a criminal offence and, if so, on what basis?
4.
Harry, Jim and Ken are the directors of HJK Pty Ltd (HJK). Although Ken has never been formally appointed by the board as managing director, he has been running the day-to-day operations of the company since it was registered 10 years ago with the knowledge and acquiescence of the other directors, Harry and Jim. Last month, without telling either Harry or Jim, Ken signed a contract agreeing to buy a new computer system for HJK. Harry and Jim think that HJK cannot afford to buy a new computer system at this time and do not
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want to go ahead with the purchase. Advise Harry and Jim whether HJK will be bound by the contract to buy the new computer system. 5.
Computer Paper Works Ltd has one company secretary, Vincent. The company has been a consistent advertiser on Channel 51, a private television broadcaster. This advertising contract was originally signed by Vincent and he organises new advertising via emails to Channel 51. Vincent has been given free rein with much of the contracting for Computer Paper Works. Vincent enters a contract for sponsorship by the company of his football team in the national competition. The sponsorship amounts to $100,000 for each of the next three seasons. The board has not discussed this and when they find out they are amazed at the size of the company's commitment. Channel 51 have not been paid by the company for the advertising conducted last month during prime time. Upon reviewing their contract with Computer Paper Works Ltd, the in-house legal counsel for Channel 51 notices that only Vincent's signature appears. The Channel makes it a policy of ensuring that a director signs company advertising contracts with them.
Essay Topics ...................................................................................................................................... 1.
“If the contract bears the signatures of two people who are, in fact, directors of the company, the contract will be binding.” (a) Assuming that the general requirements discussed at [7.30] are met, is this statement accurate in the light of ss 127-130? Discuss with regard to your interpretation of the sections and case law. (b)
Would it make any difference if the signatures appeared next to an impression of the company's common seal? Should it make a difference?
2.
Do you think the “organic” theory of corporate liability is outdated?
3.
“Corporate culture” is a requirement in the Criminal Code but is it too easily avoided by superficial means?
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Advise Vincent whether he is liable for any of these contracts. Could Computer Paper Works avoid the sponsorship contract if they had a company policy of requiring all amounts of expenditure over $50,000 to have board approval?
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Guide to Problem Solving ...................................................................................................................................... Is the company bound in contract?
These are the main questions to ask. (a)
Are there any general factors which could invalidate the contract? (See [7.30].) – was the company insolvent (or near insolvency) at the time the contract was executed? – did the outsider know that the directors were not acting in the best interests of the company? – was the contract in breach of the Corporations Act?
(b)
Have the formalities of execution been complied with? (See ss 126-127, internal rules and general law. How has the contract been executed?) – has the contract been signed by an agent (s 126)? – was it executed without the seal (s 127(1))? – was it executed under the company's common seal (s 127(2))? – was it executed under power of attorney (a deed)?
(c)
If signed by an agent, was the contract executed with authority under general law principles? – express: check board resolutions, employment contract, power of attorney, internal rules; – implied (usual): determine powers and functions implied from position held (for example, was the act within the usual powers of a managing director?) (note s 129(2)(b) and (3)(b)); – apparent: do the facts show that: • the agent was “held out” as having the requisite authority by the company, or a person with actual authority to do so, either by words or conduct (note s 129(3))? • the outsider relied on that representation when entering the contract?
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If it was executed with authority, the assumptions in s 129 (as noted above) may still be of evidentiary assistance. (d)
If the agent lacked the requisite authority, can the statutory assumptions in s 129 be relied upon so that the contract still binds the company? In deciding if the assumptions can be relied upon consider: – who is entitled to rely on the assumptions (s 128); – whether “dealings” has been interpreted broadly. In deciding which of the assumptions may assist, the manner in which the contract has been executed (see (b) above) will be relevant. Even if there is an assumption that would assist, always check that the exceptions do not apply. Did the outsider: – know; or – suspect, the assumption was incorrect at the time they entered into the contract: s 129(4)? Note: pre-1998 cases relied on a different wording and will probably not be of assistance in interpreting s 129(4) wording: see [7.120]-[7.150].
(e)
If s 129 is not applicable, does the general law indoor management rule assist? It only applies in a few, very limited situations (such as reliance on the contract by a third party and pre-1984 dealings).
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The assumption can be made even if the agent acts fraudulently: s 129(3).
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Figure 7.3: Is the contract binding? ....................................................................................................
Liability of company in tort or crime
1.
Explain the problem under the general law of imposing liability on the company.
2.
Refer to the two theories generally, and point out in what circumstances each is likely to apply: – “directing mind and will” – when a defence of no intent is available (organic theory); or – strict liability – where public policy issues are concerned and intent is irrelevant (vicarious liability).
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3.
Carefully consider the wording of the relevant section (if any) and analyse the facts under each theory. Is there an express, statutory provision that attributes liability? (For criminal offences, consider the provisions in the Criminal Code, below.)
4.
Conclude, showing which theory is more likely to apply and why, with what result. Cases: – organic theory (tort) – Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705; – organic theory (crime) – Tesco Supermarkets Ltd v Nattrass [1972] AC 153; and – vicarious liability – Mousell Bros Ltd v London & North Western Railway Co [1917] 2 KB 836 and Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 13 ACLC 3,245.
5.
For criminal offences, consider the provisions in the Criminal Code for attribution of liability. For example, is negligence an element of the crime? Was the “corporate culture” one that failed to require compliance with the relevant provision?
Austin RP and Ramsay I Ford's Principles of Corporations Law 16th ed, LexisNexis, 2014, Chs 13, 14 and 16 Capuano A, “Catching the Leprechaun: Company Liability and the Case for a Benefit Test in Organic Attribution” (2010) 24 AJCL 177 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 5 Contract
Bristow A and Roins G “To Seal or not to Seal” (FindLaw Australia, January 2003), http://www.findlaw.com.au/articles/1302/to-seal-or-not-toseal.aspx viewed 6 September 2012 Chapple L and Lipton P Corporate Authority and Dealings with Officers and Agents (CCH Australia Limited and Centre for Corporate Law and Securities Regulation, University of Melbourne, 2002) Edwards R “The Application of the Statutory Internal Management Rule to Cheques” (2000) 18 C&SLJ 242 Hammond C ““Put Upon Inquiry” Has Been Put to Rest Under Section 128(4) of the Corporations Law, But Have Third Parties Dealing
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Further Reading ......................................................................................................................................
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With Companies Been Placed in a Stronger Position? – A Question of Statutory Interpretation” (1998) 16 C&SLJ 562 Law L and Pascoe J “Financiers and Corporate Borrowers: Protection Versus Liability” (2000) 11 AJCL 219 Loxton D “One Step Forward, One Step Back: The Effect of Corporate Law Reform on Procedures in Dealing with Companies Borrowing or Giving Guarantees” (1999) 10 Journal of Banking and Finance Law & Practice 24 Ramsay I M, Stapledon G P and Fong K “Affixing of the Company Seal and the Effect of the Statutory Assumptions in the Corporations Act” (1999) 10 Journal of Banking and Finance Law & Practice 38 Hardingham S “Sections 128-129 of the Corporations Act: Allocating Risk of Loss for Unauthorised Corporate Contracts” (2004) 22 C&SLJ 559 Tort
Goldring J “Making Corporate Officials Personally Liable for Statutory Torts” (1994) 4 AJCL 376 Grantham R “Attributing Responsibility to Corporate Entities: a Doctrinal Approach” (2001) 19 C&SLJ 168 Criminal law
Acquaah-Gaisie G “Enhancing Corporate Accountability in Australia” (2000) 11 AJCL 139 Andrew D “The New Commonwealth Criminal Code” (1995) 69 LIJ 908 Brand V “Legislating for Moral Propriety in Corporations? The Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999” (2000) 18 C&SLJ 476 Clough J and Mulhern C The Prosecution of Corporations (Oxford University Press, 2002) Edwards R “Corporate Killers” (2001) 13 AJCL 231 Fisse B Howard's Criminal Law 5th ed, The Law Book Company, 1990 Hill J “Corporate Criminal Liability in Australia: an Evolving Corporate Governance Technique?” [2003] Journal of Business Law 1 Hodges C “Manslaughter by Corporations The UK Law Commission Proposals” (1994) 22 APLR 81 Jefferson M “Recent Developments in Corporate Criminal Responsibility” (1995) 16 Company Lawyer 146 Le Mire S “Document Destruction and Corporate Culture: A Victorian Initiative” (2006) 19 AJCL 304 Liberman J and Clough J “Corporations that Kill: the Criminal Liability of Tobacco Manufacturers” (2002) 26 Criminal Law Journal 223 Neal D “Corporate Manslaughter” (1996) 70 Law Institute Journal (Vic) 39
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Robert-Tissot SP “A Fresh Insight into the Corporate Criminal Mind: Meridian Global Funds Management Asia Ltd v The Securities Commission” (1996) 17 Company Lawyer 99 Rose A “1995 Australian Criminal Code Act: Corporate Criminal Provisions” (1995) 6 Criminal Law Forum 129 Toy P “The New Rules for Corporate Criminal Responsibility” (FindLaw Australia, December 2002), http://www.findlaw.com.au/articles/1149/thenew-rules-for-corporate-criminal-responsibilit.aspx last viewed 6 September 2012 Wheelwright K, “Goodbye Directing Mind and Will, Hello Management Failure: A Brief Critique of Some New Models of Corporate Criminal Liability” (2006) 19 AJCL 287 Woolf J “The Criminal Code Act 1995 (Cth) – Towards a Realist Vision of Corporate Criminal Liability” (1997) 21 Criminal Law Journal 257
CHAPTER 8
.......................................................................................................
Promoters and Pre-registration Contracts Useful Websites ..................................................................... 221 Recent Developments ............................................................ 221 Aim ......................................................................................... 221 Related Topics ....................................................................... 222 Principles ............................................................................... 222 Promoters and their duties ............................................................. 222 Remedies for breach of promoters’ duties .......................................... 224 Pre-registration contracts .............................................................. 226 Mentor: Test your Knowledge ............................................... 230 Practice Questions ................................................................. 230 Problem for Discussion .......................................................... 230 Guide to Problem Solving ...................................................... 231 Further Reading ..................................................................... 233
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for websites on the Topic of Promoters and Pre-registration Contracts.)
B J McAdam Pty Ltd v Jax Tyres Pty Ltd (No 3) [2012] FCA 1438 Rafferty v Madgwicks [2012] FCAFC 37
Aim ...................................................................................................................................... At the end of this topic you should: • understand what is meant by the word “promoter” in different contexts; • know the duties of promoters to the company being formed and the company's remedies for breach of those duties; and • understand why pre-registration contracts are regulated by the Corporations Act.
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Recent Developments ......................................................................................................................................
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Related Topics ...................................................................................................................................... Chapter 14 Members' Rights and Remedies; Chapter 21 Fundraising
PRINCIPLES This Topic deals with problems associated with the formation of companies. Promoters (the people who are involved in setting up a company) may take advantage of their position through contracts or arrangements to benefit themselves. Therefore, the law imposes duties on them to disclose their interests. Other problems may arise where contracts have been entered into (purportedly) on behalf of a company, but before that company has legally been formed – that is, prior to its registration. The law has to resolve the questions of validity and enforceability of such contracts because one party (the not-yet-registered company) is not in existence at the time of contracting and, indeed, may never come into existence. [8.10]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
There are no specific provisions in the CATSI Act dealing with promoters' liability and pre-registration contracts. However Part 2-5—Effects of Registration, Part 3-5—Corporations powers and how they are exercised, and Part 4-4—Protection of members' interest are relevant, amongst other provisions.
Promoters and their duties Who are promoters? .......................................................................................................................................................................
In general terms, promoters are the people who establish the company. The Corporations Act 2001 (Cth) (Corporations Act) does not define “promoter” so it is necessary to rely on the principles established by case law: see, for example, Tracy v Mandalay Pty Ltd (1953) 88 CLR 215, Twycross v Grant (1877) 2 CPD 469 and, Aequitas Ltd v AEFC Leasing Pty Ltd (2001) 19 ACLC 1,006. The principles established in the cases above provide for the following points:
[8.20]
• both the people who actively participate in starting the company, and those who actively participate in raising equity for the company after it has been registered but before an independent board has been appointed, will be promoters (Aequitas Ltd v AEFC Leasing Pty Ltd (2001) 19 ACLC 1,006);
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• people who take only a passive role in forming the company may still be promoters if they know of the plans and have agreed to share in the profits (Tracy v Mandalay Pty Ltd (1953) 88 CLR 215; Aequitas Ltd v AEFC Leasing Pty Ltd (2001) 19 ACLC 1,006); • those acting merely in a professional capacity to register the company on behalf of a promoter are not themselves promoters – for example, solicitors and accountants who do the “paper work” but take no further part in the business plans; and • companies may be promoters: Parra Wirra Gold & Bismuth Mining Syndicate No Liability v Mather (1934) 51 CLR 582. What are the duties of promoters? .......................................................................................................................................................................
Promoters automatically stand in a “fiduciary relationship” with the company being formed: Aequitas Ltd v AEFC Leasing Pty Ltd (2001) 19 ACLC 1,006. A fiduciary relationship arises in situations where one party (the “principal”) is entitled to expect that the “fiduciary” will act in the principal's best interests, putting the interests of the principal ahead of their own or any other party's interests. Other examples of fiduciary relationships are trusteebeneficiary and director-company: see Chapters 11, 12 and 13. This duty to serve another's interest brings with it: [8.30]
• the obligation to avoid any potential for personal gain by the fiduciary; and
To whom must promoters make disclosure? .......................................................................................................................................................................
The leading cases on promoters' duties of disclosure are Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 and Gluckstein v Barnes [1900] AC 240 (House of Lords). From these cases it is clear that promoters must make full disclosure to an independent board of directors. However this can be impracticable in certain situations, such as in the case of small proprietary companies like Salomon's. In Salomon v Salomon & Co Ltd
[8.40]
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• the need to keep the principal fully informed. Thus, a strict duty is imposed on a fiduciary not to make secret profits. For example, it would be easy for the promoters to sell their own assets, such as land, to the company at an inflated price. Promoters are subject to an equitable duty to disclose any interest they have in any contract with the company, and any interest from which they may make a profit. Once all the information is available, it is up to the potential investors to decide whether to invest. People are free to make their own bad bargains as long as they are given all the facts.
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[1897] AC 22 no-one doubted that the business had been sold at an over-valuation but, as all the shareholders (that is, Salomon's family) knew about it and acquiesced to the deal, there was no breach of duty. Hence, an alternative to making full disclosure to an independent board of directors is to make full disclosure to the existing or potential members as a whole: see Aequitas Ltd v AEFC Leasing Pty Ltd (2001) 19 ACLC 1,006. If the option of disclosure by the second method is open to promoters it will be found: • in the constitution; • in a disclosure document (where the provisions in Ch 6D apply because “outside” investors are being approached; or • in another format, provided all those who are, or who become, members are aware of the effect of the promoters' transactions. Partial disclosure, or disclosure to just a few associates, is insufficient. It must be full and explicit, either to an independent board of directors or to all the existing or potential members of the company.
Remedies for breach of promoters’ duties General law .......................................................................................................................................................................
The main remedy available is rescission, by which the company gets its money back and the asset is returned to the promoter: Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218. Rescission is only available if:
[8.50]
• the company has not affirmed the contract (that is, taken up any benefit under the contract) – for example, if the contract was to purchase land and building works have not started on the land; • the parties can be restored to their original positions (that is, restitution is possible) – for example, it is not possible if the goods have already been used by the company; and • there has been no undue delay and no innocent third party has acquired any interest in the property. If the company elects not to rescind the contract, it cannot recover the secret profit made by the promoter unless the undisclosed profit can be construed as separate from the contract price: Tracy v Mandalay Pty Ltd (1953) 88 CLR 215; Aequitas Ltd v AEFC Leasing Pty Ltd (2001) 19 ACLC 1,006. For example, in Gluckstein v Barnes [1900] AC 240 the undisclosed £20,000 profit arose by way of discount on the mortgage over the property which was purchased from the vendor by the promoters. As this profit was separate from the (disclosed) profit made by the promoters on the sale of the property by them to the company, the court ordered that it be disgorged even though the company had not rescinded the purchase.
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Where there has been a fraudulent misrepresentation by the promoters, the remedy is the same as in contract; that is, the contract can be rescinded and damages claimed as well: Re Leeds and Hanley Theatres of Varieties Ltd (No 1) [1902] 2 Ch 809. In certain circumstances where the promoter has acted for personal gain instead of for the company, the court may order that property acquired by the promoter and/or any profits made by the promoter on the sale of the property to the company, be held in trust on behalf of the company. Notes [8.60]
1.
A breach of duty by a promoter is a wrong done to the subsequently registered company. It is the company which must sue. If the promoters are in control of the company, the members may be able to bring a statutory derivative action on the company's behalf under Pt 2F.1A.
2.
Even though the general law duties of promoters are similar to the general law duties of directors (because they both stand in a fiduciary relationship with the company), these promoters' duties shouldn't be confused with the statutory duties of directors and other officers under Pt 2D.1: see Chapters 11, 12 and 13. A promoter is not, at the time of the potential breach, an “officer” of the company within the definition contained in s 9. Once the company is registered, a person who “promoted” its formation may act as an “officer” (whether formally appointed as a “director” or not: s 9), but it is only from that time onwards that the duties imposed by Pt 2D.1 apply.
Statute .......................................................................................................................................................................
Promoters can be liable for untrue statements or non-disclosures in prospectuses or other disclosure documents under s 728. Investors who suffer loss through reliance upon the prospectus can seek compensation: s 729. In certain circumstances, promoters of failed companies may also be liable to liquidators under s 588FH. The definition of “related entity” (s 9) includes a promoter. Promoters of companies that list with the ASX are subject to Ch 9 of the ASX Listing Rules which places restrictions on the transfer of shares issued to them before the company was listed. Any promotion and set-up expenses incurred before registration can be paid out of the company's assets: s 122.
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[8.70]
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[8.80] Figure 8.1: Summary – timeline of promoters’ duties ....................................................................................................
Pre-registration contracts Context .......................................................................................................................................................................
Pre-registration contracts (formerly called “pre-incorporation” contracts) are contracts entered into by a person on behalf of a company that is yet to be registered under s 119. (These people are usually promoters but may not always be: Bay v Illawarra Stationery Supplies (1986) 4 ACLC 429.) Pre-registration contracts are now fairly uncommon. People will usually acquire a “shelf” company and this means that although the company has not traded before (that is, it is on the “shelf”), it is already registered. It can, therefore, immediately enter into contracts in its own right (that is, as a separate entity). Furthermore, as registration is a much more immediate procedure with online access, this results in fewer occasions when a contract will be entered before registration has occurred.
[8.90]
[8.100] Figure 8.2: Example 1 ....................................................................................................
However, if the company is not yet registered, there will be a problem with contracts purportedly entered into on its behalf or for its benefit. There is
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no separate legal entity in existence and, therefore, there is no capacity to enter into contracts at all. The key dates to check are the date of company registration and the date of the contract. [8.110] Figure 8.3: Example 2 ....................................................................................................
Statutory intervention ....................................................................................................................................................................... [8.120] In order to overcome difficulties that existed with the general law relating to enforcement of contracts made on behalf of yet-to-be-formed companies, ss 131 – 133 were enacted. These sections replace the general law (on pre-registration contracts) (s 133) and set out the rights and liabilities of the contracting parties: see Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd (2004) 51 ACSR 147 where Barrett J explains the effect and operation of s 131. These sections allow the company to ratify any purported contract entered into while it was not in existence, that is, prior to its registration: s 119. Ratification can be oral, written or by conduct and has the effect of creating a binding contract on the terms of the original purported contract. Note s 131(1) – (2):
Contracts before registration (1)
If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract: (a)
within the time agreed to by the parties to the contract; or
(b)
if there is no agreed time – within a reasonable time after the contract is entered into.
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SECTION 131(1)-(2)
228
(2)
CORPORATIONS LAW: IN PRINCIPLE
The person is liable to pay damages to each other party to the pre-registration contract if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it: (a) within the time agreed to by the parties to the contract; or (b)
if there is no agreed time – within a reasonable time after the contract is entered into.
The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the party if the company had ratified the contract and then did not perform it at all.
Effect of ratification .......................................................................................................................................................................
If the company ratifies the contract within the requisite period, each party has the normal rights under contract law to sue for breach – the company “becomes bound by the contract and entitled to its benefit”: s 131(1). Ratification of a contract is the act of adopting the contract and can include verbal acceptance or use of the goods that were the subject of the contract. However, if the company subsequently breaches the contract, the court may still order the person who entered into the contract on the company's behalf to pay damages to the other party: s 131(4). In other words, promoters might find themselves liable personally for the company's breach. The reason for this is to prevent promoters effectively avoiding obligations under the contract by having it ratified by a company with insufficient assets. In B J McAdam Pty Ltd v Jax Tyres Pty Ltd (No 3) [2012] FCA 1438, Peram J held that to enliven s 131, the identity of the party/s who entered into the agreement on behalf of the ″putative ratifiers″ (future entities) must be shown. This case reaffirms the position in Commissioner of State Revenue v Viewbank Properties [2004] VSC 127: section 131 requires that the party entering into the contract is to act “openly and avowedly on behalf of another” namely, the future corporation. [8.130]
No ratification ....................................................................................................................................................................... [8.140] What happens if the company is not registered or if the company fails to ratify the contract within the relevant period – that is, the time agreed to by the parties or, if there is no agreed time, within a reasonable time after the making of the contract? Under s 131(2), the other party has a right of recovery against any person who purported to enter into the contract on the company's behalf. The
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amount recoverable is the same as that which would have been awarded as damages if the contract had been ratified, but had then been breached by the company: s 131(2). If the company has been registered it may have to repay some or all of this amount to the person who entered into the contract on its behalf. See s 131(3)(c), but note that the person has no right of indemnity against the company: s 132(2). This is the reverse situation of s 131(4) – that is, the court may take into account the possibility that the company has insufficient assets and may order the person who purported to act on its behalf to pay. With regard to the amount of damages awarded and their apportionment, the court has a broad discretion under s 131(3) to “do anything that it considers appropriate in the circumstances”. The provisions will also apply where a person purports to enter into a contract as agent of a company believing it exists when in fact it does not. Implied ratification .......................................................................................................................................................................
In Rafferty v Madgwicks [2012] FCAFC 37, Kenny, Stone and Logan JJ reaffirmed the position in Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd (2005) 55 ACSR 1 at [81]-[83], [86]-[90] in relation to implied ratification. The Federal Court held that once a promoter entered into an agreement on behalf of a future entity for purposes of a prospective business opportunity and the future entity was subsequently incorporated, by virtue of s 131, the future entity was bound to fulfil the obligations under the agreement. Importantly, actions of the future entity post incorporation in implementing parts of the agreement, demonstrated its implied ratification of the agreement at [143].
[8.145]
Ability to avoid liability [8.150] Under s 132, people who have purported to enter into contracts on behalf of companies prior to registration can exclude themselves from liability if they obtain a signed release from the other party. By virtue of contract law principles, another way personal liability can be avoided is where the company and the other party enter into a new contract in place of the pre-registration contract. The new contract is called a novation. Section 131 contemplates novations by referring to contracts entered into as “a substitute for” the pre-registration contract: s 131(2) – (3).
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.......................................................................................................................................................................
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[8.160] TABLE 8.1 Summary – statutory provisions for pre-registration contracts Contract entered into before company registered Company never registered
Section
Effect of provision
ss 131(2), 132
Person who entered into the contract is liable for damages Person who entered into contract is liable for damages but court may order company to be partly or wholly responsible for the damages and/or to transfer any property it received because of contract Company bound by pre-registration contract. But if company fails to perform the contract, person who entered into contract may be liable for damages
Company subsequently registered but contract not ratified within specified/reasonable time
ss 131(2), (3), 132
Company subsequently registered and contract ratified within specified/ reasonable time
ss 131(1), (4), 132
Mentor: Test your Knowledge ...................................................................................................................................... (See http://www.legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Promoters and Pre-registration Contracts.)
Practice Questions ...................................................................................................................................... 1.
What is the principle demonstrated in: (a) Tracy v Mandalay Pty Ltd (1953) 88 CLR 215? (b)
Gluckstein v Barnes [1900] AC 240?
(c)
Aequitas Ltd v AEFC Leasing Pty Ltd (2001) 19 ACLC 1,006?
2.
Summarise the potential liabilities of a promoter.
3.
There is a sign in the local café that the business is for urgent sale. You want to make an immediate offer. You have decided that, rather than purchase the business directly, it would be preferable for a proprietary limited company to make the purchase. How can you ensure that a company structure is used given the tight time frame?
Problem for Discussion ...................................................................................................................................... Company A (which markets computer software) and company B (which runs a computer training college) enter into an agreement to form a new company, company C. Company C is to provide onsite computer training for retail businesses that use company A's software. Shirley (a director of company A) and Laverne (a director of company B) are authorised by the boards of
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directors of their respective companies to, as a matter of urgency, take whatever steps are necessary to form company C and to secure training contracts on its behalf. Shirley and Laverne instruct solicitors to register a company. More quickly than they anticipate, they manage to attract a large training job from company Y. Purportedly on behalf of company C, they execute a contract with company Y. They have told the company Y representatives that company C is not yet registered. The parties agree to include a clause that provides that if company C (or a company reasonably identifiable with it) is not registered within two months of the date of the contract, then company Y can rescind the contract. Consider these facts in the light of each of the following scenarios and questions. 1.
Assume company C is registered a month after the contract is executed. What steps must Shirley and Laverne take to ensure that: – the contract with company Y is binding on company C; and
2.
Assume company C is not registered within the two-month period. What remedies does company Y have and against whom?
3.
Assume Shirley and Laverne do procure the registration of company C. Company A, company B and two individuals, C and D, become its shareholders. Shirley and Laverne organise the transfer of assets from their own company, company SL, to company C at grossly inflated values. Company C becomes insolvent and a liquidator is appointed. Once registered, neither Shirley nor Laverne have taken any role in the management of company C. Despite this, what remedies might the liquidator still pursue against Shirley and Laverne?
Guide to Problem Solving ...................................................................................................................................... Generally, see timelines at [8.80], [8.100] and [8.110]. Breach of promoters’ duties
(a)
Establish that the relevant people are promoters using Tracy v Mandalay Pty Ltd (1953) 88 CLR 215, Twycross v Grant (1877) 2 CPD 469 and Aequitas Ltd v AEFC Leasing Pty Ltd (2001) 19 ACLC 1,006.
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– neither of them is personally liable for the actions of company C under the contract.
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(b)
Outline the duties of promoters (preferably showing you understand why the law imposes these duties). Refer to Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 and Gluckstein v Barnes [1900] AC 240.
(c)
Show how, on the facts given, the promoters have breached their general law duties (for example, “They made disclosure of facts A and B but not fact C which is a material fact because …” etc).
(d)
Discuss the remedies available (rescission, damages, constructive trust) and conclude which would be most likely to succeed. (Show that you understand how the new statutory derivative action affects this issue. Remember that if a liquidator has been appointed, the liquidator stands “in the shoes of the company” and can, therefore, bring an action on the company's behalf.)
(e)
Consider whether any statutory remedies apply and who, under the relevant provision, has standing to seek the remedy. Therefore consider: – whether a prospectus or any other disclosure document been issued; – if the company later becomes insolvent, are there any transactions that a liquidator may be able to challenge?
Company wants pre-registration contract to go ahead
(a)
Check whether the company was registered at the time the contract was entered into: see timelines at [8.100] and [8.110]. If it was not registered, outline that no ratification was possible under the general law but note that ss 131-133 provide an exclusive code: s 133.
(b)
Discuss and apply s 131(1): – is the company now registered: s 119? – have the members ratified the contract? – did the registration and ratification occur within the time specified in the contract or, if no time was specified, within a “reasonable time”?
(c)
If appropriate, note that the person who purported to enter into the contract on the company's behalf may still be liable if the company fails to perform the ratified pre-registration contract: s 131(4).
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Outsider wants pre-registration contract to go ahead
(a)
Check whether the company was registered at time the contract was entered into: see timelines at [8.100] and [8.110]. If it was not registered, mention the general law difficulties (often there was no recourse). Note that ss 131-133 now provide an exclusive code: s 133.
(b)
Under s 131, however, the outsider can take action against any person who purported to execute the contract on behalf of, or for the benefit of, the company: – where the company is not registered or is not registered within the requisite time – consider s 131(2); – where the company is registered within the requisite time, but the contract is not ratified or is not ratified within the requisite time – consider s 131(2)-(3); – where the company is registered and the contract is ratified within the requisite time but subsequently breached – consider s 131(1), (4); and – check that the outsider has not signed any document (for example, a letter) releasing the person who may otherwise be liable under s 131 from liability: see s 132.
(c)
If the company is registered but the contract is not ratified or substituted, the company may be ordered to pay some or all of the damages and/or transfer the property it has received. Apportionment of liability is at the discretion of the court: s 131(3).
Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis, 2014, [5.265]-[5.340] and [15.200]-[15.400] Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 6 Bugden D “Management Rights: Are Developers Promoters?” (1996) 26 Queensland Law Society Journal 281 Courtney W “Failed Pre-registration contracts and the Statutory Remedy” (2007) 25 C&SLJ 226 Estey W “Pre-incorporation Contracts: The Fog is Finally Lifting” (1999) 33 Canadian Business Law Journal 3 Hambrook JP “Pre-incorporation Contracts and the National Companies Code: What does Section 81 Really Mean?” (1982) 8 Adelaide Law Review 119
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Further Reading ......................................................................................................................................
CHAPTER 9 .......................................................................................................
Membership Useful Websites ..................................................................... 235 Recent Developments ............................................................ 235 Aim ......................................................................................... 236 Related Topics ....................................................................... 236 Principles ............................................................................... 236 Becoming a member .................................................................... 237 What is the nature of a share? ......................................................... 239 Ceasing to be a member ................................................................ 240 Register of members .................................................................... 241 Disclosure of interests .................................................................. 247 Substantial shareholders ............................................................... 247 Transfer of shares ........................................................................ 248 Restrictions on the transfer of shares ................................................ 251 Mentor: Test your Knowledge ............................................... 252 Practice Questions ................................................................. 252 Problems for Discussion ........................................................ 253 Guide to Problem Solving ...................................................... 254 Further Reading ..................................................................... 255
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for websites on the Topic of Membership.)
Taylor (Trustee) Re Kwok v Goldana Investments Pty Ltd (Receivers and Managers appointed) (No 2) [2015] FCA 947 Corporations Amendment (No 1) Act 2010 (Cth) Australian Securities and Investments Commission v Wellington Capital Ltd [2012] FCA 1140
Chapter 9
Recent Developments ......................................................................................................................................
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Aim ...................................................................................................................................... At the end of this topic you should know: • how a person becomes a member; • the significance of the register of members; • the requirements for disclosure of interests in shares; • how shares are transferred; and • how a member ceases to be a member.
Related Topics ...................................................................................................................................... Chapter 5 Internal Rules; Chapter 14 Members' Rights and Remedies; Chapter 22 Financial Services, Products and Markets; Chapter 23 Takeovers
PRINCIPLES Generally, members are the shareholders of a company. The words are often used interchangeably. However, strictly speaking, they are not synonymous because, in companies limited by guarantee, no shares are issued. The Corporations Act 2001 (Cth) (Corporations Act) prescribes that every company must have at least one member: s 114. A proprietary company is allowed to have a maximum of 50 non-employee members: s 113. There is no maximum for a public company. A company may be a shareholder (member) of another company. However, the Corporations Act imposes restrictions on a company acquiring its own shares, and acquiring control over its own shares, or, if it is a subsidiary of another company, shares in its holding company: Pt 2J.2, see Chapter 18. Persons under 18 years of age may be members of a company and will sometimes have their shares held on trust.
[9.10]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Part 1-2 Division 6-15; Chapter 4—Membership and Observers; Chapter 12—Transfer of registration, deregistration and unclaimed property of the CATSI Act. On the matter of membership and participation of women on the board of directors, Indigenous corporations have a more balanced inclusion of women than mainstream corporations. Extract from the ORIC's website:
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http://www.oric.gov.au/publications/media-release/women-leadway-aboriginal-and-torres-strait-islander-corporations.
.................................................................................................................. MR1314-08 – Women lead the way in Aboriginal and Torres Strait Islander corporations
The Registrar of Indigenous Corporations, Anthony Beven, has today released his fifth report on the top 500 Aboriginal and Torres Strait Islander corporations. The report covers the 2011–12 financial year and looks at the overall income, geographic distribution and sectoral information of the 500 highest earning corporations registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act). The report is based on data supplied to the Registrar by Aboriginal and Torres Strait Islander corporations in their audited financial statements and general reports. Some of the key findings of this year’s report include: • Women continue to play a dominant role in the governance of corporations. The representation of women on the board of directors stood at 54.9 per cent, an increase of 2.1 per cent since 2007–08. • The gender composition on boards varies depending on a corporation’s income, geographic location and sector in which the corporation operates. … “The report clearly shows that Aboriginal and Torres Strait Islander corporations are leading the way in terms of gender equality. Also the emerging picture in terms of growth in income and employment is very encouraging with both exceeding 10 per cent in 2011–12,” Mr Beven said.
Becoming a member It is important to know whether a person is a member of a company or not for various reasons such as entitlement to vote, entitlement to dividends, liability for calls on partly paid shares or the capacity to bring a statutory derivative action or an action in oppression: see Chapter 14. Section 231 defines who is a member of a company.
SECTION 231 Membership of a company A person is a member of a company if they: (a)
are a member of the company on its registration; or
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[9.20]
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(b)
agree to become a member of the company after its registration and their name is entered on the register of members; or
(c)
become a member of the company under section 167 (membership arising from conversion of a company from one limited by guarantee to one limited by shares).
A person who is specified (with that person's consent) as a proposed member in a company's application for registration becomes a member of the company on its registration: s 120(1). In relation to s 231(b), note that a person may agree to become a member after the company is registered either because they have: • taken up qualification shares (as a director, if this required by a company's internal rules); • applied for and received an allotment (issue) of shares; • accepted a transfer of shares – for example, bought the shares from an existing shareholder; • received the shares by transmission on the death, incapacity or bankruptcy of a member; • exercised an option over shares (see [16.240]); or • converted convertible notes into shares: see [20.90]. In Australian Securities and Investments Commission v Wellington Capital Ltd [2012] FCA 1140, it was held that unit holders may become members where an authorised in specie transfer of shares has occurred. In such a case, unit holders must have consented to the constitution/scheme when they applied to become unit holders and therefore, the unit holders are deemed to have consented, consistent with s 231, to becoming members of the company at [63]. Restrictions on who can be a member .......................................................................................................................................................................
A company's internal rules can impose restrictions on who is eligible for membership. Many proprietary companies have restrictions on transfers of shares because, for example, the existing (family) members want to limit who may become involved in the business. For public companies listed on the ASX (Australian Securities Exchange), the ASX Listing Rules prohibit any such restrictions. This is to ensure that our securities market can compete globally. Despite this, the internal rules can place restrictions upon a particular class of shares in the company, for example in Ricegrowers Limited trading as SunRice there are A Class Shares, which may only be issued to active rice growers and B Class Shares, which can be held by active rice growers and individuals who have been rice growers in the
[9.30]
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past: see https://www.sunrice.com.au/corporate/policies-anddocumentation – its constitution can be found as a pdf from the “corporate governance” page.
What is the nature of a share? [9.40]
A share in a company is personal property. Note s 1070A(1) – (2):
SECTION 1070A(1)-(2) Nature of shares and certain other interests in a company or registered scheme (1)
A share, other interest of a member in a company or interest of a person in a registered scheme: (a) (b)
is personal property; and is transferable or transmissible as provided by: (i) the company’s, or scheme’s, constitution; or (ii)
(2)
the operating rules of a prescribed CS facility[*] if they are applicable; and
(c) is capable of devolution by will or by operation of law. Paragraph (1)(c) has effect subject to: (a) in the case of a company: (i) the company’s constitution (if any); and (ii)
any replaceable rules that apply to the company; and
(iii) (b)
the operating rules of a prescribed CS facility[*] if they apply to the share or interest; and in the case of a scheme: (i) the scheme’s constitution; and (ii)
the operating rules of a prescribed CS facility[*] if they apply to the interest.
* that is, for listed companies or schemes – CS stands for clearing and settlement facility
What does “personal property” mean in this context? There have been several interpretations given in the case law: for example, Borland's Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279; and Gambotto v WCP Ltd (1995) 182 CLR 432. Some points to note:
• a share represents an interest in the company and includes the rights and obligations set out in the company's internal rules and the Corporations Act; and
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• in legal terminology, a share is a form of intangible property called a “chose [thing] in action”;
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• a share is an interest of a shareholder in a company measured by a sum of money, but does not confer on the shareholder a proprietary interest in the assets of the company: see Chapter 4.
Ceasing to be a member Companies with a share capital .......................................................................................................................................................................
A person (including a company, see s 9) ceases to be a member of a company with a share capital:
[9.50]
• by selling all their shares in the company and the company registering the transfer; • through having all their shares bought back by the company and the transfer to the company being registered (see Chapter 18); • when all their shares are cancelled following a selective reduction of capital under ss 256B and 256C (see [18.150]); • when all their shares are transferred involuntarily pursuant to a scheme of arrangement (see [24.480]), or the compulsory acquisition provisions (see Chapter 23), or a lien provision in the company's internal rules on partly paid shares, and the transfer is registered; • if the company is deregistered by ASIC; • upon death or bankruptcy – legal ownership of the shares passes by transmission to the deceased members' personal representative or the trustee in bankruptcy, who may or may not choose to become registered as a member (s 1071B(5) – (10)); or • following forfeiture for non-payment of calls. Companies limited by guarantee .......................................................................................................................................................................
A person (including a company) ceases to be a member of a company limited by guarantee:
[9.60]
• when they resign, or their membership is terminated, in accordance with the company's internal rules; • if the company is deregistered by ASIC; or • upon death or bankruptcy: see [9.50].
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Register of members Maintenance and inspection of registers .......................................................................................................................................................................
All companies (and registered managed investment schemes: see Chapter 22) must keep a register of their members which contains certain prescribed information: ss 168 and 169. The register must be kept at the company's registered office or its principal place of business. Alternatively, the register may be kept at a place (such as an accounting firm) where maintenance of registers is carried out, or another place approved by ASIC: s 172. The register may be kept electronically: s 1306. In addition to the right to inspect under s 173(1), a corresponding right is also found in s 1300 which requires a company to make the books available for inspection. Section 1300(3) enables the requestor to copy the register which means the person can make copies of or take extracts from the books. It should be noted that both these provisions are strict liability clauses should the company fail or refuse these requests.
[9.70]
Court’s power to create a register
In the case of Taylor (Trustee) Re Kwok v Goldana Investments Pty Ltd (Receivers and Managers appointed) (No 2) [2015] FCA 947, the Federal Court affirmed the decision in Re Mogul Stud Pty Ltd [2012] NSWSC 1639 that the court has a power at general law to create a register. Wigney J, interpreted s 175 of the Corporations Act broadly as a beneficial provision and “considered s 175 against the background of the general law power to rectify a register which would appear to be sufficiently broad to enable a register to be created where the original has been destroyed or cannot be located” at [18]. [9.72]
Fee to inspect a register
Registers may be inspected by members free of charge; others may have to pay a fee: s 173. Since 2010 companies have had the ability to prevent people from getting copies of the register unless they satisfy a “proper purpose” access test: s 173(3), (3A). In AXA Asia Pacific Holdings Ltd v Direct Share Purchasing Corp Pty Ltd [2009] FCAFC 15 it was held that the fee charged must be a reasonable amount and must not exceed the marginal cost to the company of providing the copy. The Federal Court held that in interpreting under s 173(3) as to the prescribed fee reference can be made to the Corporations Regulations 1.1.01. In that case, AXA provided the register on CD-ROM for a fee of $17,195.39. AXA submitted that the fee was based on the fact that AXA subcontracted the service to maintain its own register and fee of $17,195.39 was the cost accrued to AXA for accessing its register under the agreement with the subcontracted service provider. The Federal
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[9.74]
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Court held that reasonableness in relation to the fee was to be determined with reference to the cost to the subcontracted service provider in producing the copy of the register. Pursuant to Corporations Regulations 1.1.01 and schedule 4, item 3(b), the prescribed amount that can be charged to access the register kept on a computer is a reasonable that does not exceed the marginal cost to the company of providing a copy. In this case the Full Federal Court held that the “reasonable charge” was $250 as that would represent the marginal cost to the AXA and not $17,195.39. AXA was ordered to pay Direct Share Purchasing $16, 945.39, being the difference between the $17,195.39 fee paid and $250 and court costs. The fact that the subcontracted service provider actually charged AXA such an exorbitant fee and the fact that the service provider charged a similar fee to other clients was irrelevant. This case reflects the fact that courts are willing to look at the actual marginal cost and not an inflated fee negotiated under agreements which deter third parties from accessing copies of their register. Protecting shareholders/members from predatory behaviour
There are generally two competing interests when accessing the register. On the one hand there is the public right to know identity of the company shareholders (s 173(1)) and then there is the right of shareholder to have their privacy protected. The use of registers, without company approval, for predatory purposes, for instance to generate mailing lists for purposes other than the sending of information relevant to the shares is prohibited under s 177: see O'Brien v Sporting Shooters Association of Australia (Vic) [1999] 3 VR 251; Westgold Resources NL v Precious Metals Australia Ltd (2002) 171 FLR 20. In the case of IMF (Australia) Ltd v Sons of Gwalia Ltd (Administrator Appointed) (2005) 143 FCR 274, the prohibition for use or disclosure of information from the register in s 177(1) and the exception to the prohibition in s 177(1A) which permits the use of information in certain defined ways was examined. This case involved the funder of litigation (IMF) asserting that the ability to use information contained in a share register should be permitted in circumstances where it is relevant to any action that may be taken arising out of the acquisition, holding or disposal of the interests recorded in the register. However the efforts to contact shareholders who have disposed of their shares about proposed legal proceedings could be viewed as soliciting services for purposes of a prospective class action, especially since there is no longer “holding of interests” since the very interests in the shares in question has been disposed of. Moore J held that (at [13]-[15]): [9.76]
The purpose of the amendment [s 177(1A)] was to protect privacy, and in my opinion, the construction of the section should give primacy to that
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object. It is consistent with the approach to confine the field of operation of the exception to that marked out by the ordinary and natural meaning of the words used. The information must have relevance, in that sense, to the act of holding the interest or to the exercise of relevant rights. In the present case, the proposed conduct is not, in my opinion, relevant to the holding of an interest or the exercise of rights attaching to them… The proposed litigation has no bearing, even indirectly, on whether the shareholders will or will not hold shares in Sons of Gwalia Ltd…. While participation in the proposed litigation may depend on a person being a shareholder in the Company and involves the exercise of rights… they are not rights attaching to shares. There is not the necessary and direct connection between the right and the shareholding.
An object of the Act is to create rights for compensation for shareholders and other persons who suffer damage as a result of contraventions of the Act. Accordingly, s 177(1) may not inhibit use of information in order to communicate with members concerning their potential rights, as shareholders, to bring or join in an action against a company for relief against oppression or to bring or intervene in a statutory derivative action. Such a use could be characterised as being for the purpose of communicating with a shareholder about a subject that is connected with the fact that that person holds the shares in respect of which the person is registered. It might also be characterised as being for the purpose of communicating about a subject that is connected with the exercise of rights attaching to such shares. However, it does not follow that a communication about the circumstances in which a person agreed to acquire shares in, or to become a member of, a company can be characterised as being connected with the fact that that person holds the shares, in respect of which the person is registered, or with the exercise of rights attaching to such shares. The use of information in the Register contemplated by IMF is to send an invitation to participate in the Proceedings, which are for the prosecution of claims against the Company and its directors bearing upon, connected with, or pertinent to, the purchase by members of shares in the Company. Such Proceedings have nothing to do with the holding of, or the exercise of rights attaching to, shares in the Company. It may be that becoming the holder of shares in the Company was an essential step in the cause of action, in that it was the parting with the price paid for the acquisition of the shares that gave rise to any loss or damage suffered by a member. It is the acquisition of shares that gave rise to the possible Claims. The shares could be sold and might already have been sold. That would have crystallised the loss or damage. That is to say, the Claims exist whether or not shares in the Company are held by a person.
Essentially, the majority of the Federal Court found against the proposed use of information from the company's register.
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Emmett J held that (at [63]-[64]):
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Amendments to the Corporations Act and Corporations Regulations from December 2010–September 2012 on inspection of the register and “improper purpose” test
The Act deals with a number of amendments, however, those relating to s 173 and 177 are an attempt to reduce access to company registers by persons who want to use the information for an improper purpose. The purpose of the amendment was evident in the second reading speech on 29 December 2010 by Mr Bradbury MP, where he stated:
[9.78]
this Bill will ensure that vulnerable or less sophisticated shareholders are protected from individuals or businesses that seek to profit by purchasing their shares for less than their value.
This reflects the balancing aspects of good corporate governance, such as the unfettered access to company registers with privacy and protection of those shareholders. See supplementary explanatory memorandum, p 24-25. Restrictions on the use of the information are contained within s 177(1AA) (which operates retrospectively). These restrictions which can lead to an improper purpose are illustrated in the Corporations Regulations 2001 reg 2C.1.03 to include soliciting donations, soliciting by “stockbrokers” or share brokers' (s 923B), information regarding personal wealth, making an offer that satisfies s 1019D(1)(a) – (d) (unsolicited offers to purchase financial products off-market) and making an invitation to make an offer which satisfies s 1019D(1)(a) – (d). These are in line with the intent to protect shareholders. The Corporate Governance Institute highlighted in the Corporate Governance Guide of 2014 that further amendments to the Corporations Regulations in 2012 dealt with the anomaly in relation to off market solicitation to residents outside Australia. With the 2012 amendments it is now an “improper purpose to make an unsolicited offer to purchase financial products off market regardless of the jurisdiction in which the offer is made or received”. In addition, the amendment of s 173(3A) provides an application process under which the applicant must: state the purpose for which the information is sought; declare that the information is not sought for a prescribed purpose and; that the application complies with reg 2C.1.04, namely that the application contains the name and address of the applicant. It should be noted that producing an application which is false or misleading falls within the Criminal Code Act 1995 (Cth), ss 137.1 and 137.2. Combined with s 177(1AA), a person must not use or disclose information from a register if that information is to be, or is likely to be used for a prohibited purpose. Further, amendments were made to s 173(1), the “right to inspect” whereby if a register is kept on a computer then “the person inspects the register by computer”. The Supplementary Explanatory Memorandum [p 37-39] highlights the increased use of computers in record-keeping and the
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high cost of producing “hard copies” of company registers when most applicants would prefer “softcopies” and ultimately end up destroying any “hardcopy” produced. Resources on good governance suggest that the “softcopy” of the register should not be provided in a static format, such as PDF. Instead, consistent with reg 12.8.06, a “delimited text file” for use on a “commercially available spreadsheet or database application” should be provided on CD-ROM or a USB memory device. Correction of registers .......................................................................................................................................................................
Application can be made to the court to correct the register where mistakes have occurred: s 175, and see McLaughlin v Daily Telegraph Newspaper Co (No 2) (1904) 1 CLR 243; Bothranch Pty Ltd v Monitronix Ltd (1989) 7 ACLC 443.
[9.80]
SECTION 175(1)-(2) Correction of registers (1)
A company or registered scheme or a person aggrieved may apply to the Court to have a register kept by the company or scheme under this Part corrected.
(2)
If the Court orders the company or scheme to correct the register, it may also order the company or scheme to compensate a party to the application for loss or damage suffered.
Consider the following case. Carew-Reid v The Public Trustee [9.85] Carew-Reid v The Public Trustee (1996) 14 ACLC 1106 (Supreme Court of Western Australia)
DECISION: The Supreme Court of Western Australia held that other existing shareholders in the company had standing to apply for rectification of the register because the transfer of the shares breached their pre-emptive right under the company’s constitution. “A registration of a transfer that has been effected in breach of the pre-emption rights in the [internal rules] is void”: at 1,108.
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FACTS: A shareholder wanted to sell his shares in a company. The company’s constitution gave other shareholders a right of pre-emption: see Chapter 16. If none of the existing shareholders wished to purchase the shares, the directors then had power to transfer the shares to any person they selected. The directors resolved to transfer the shares to outsiders without first offering them to the other shareholders. These transfers were registered.
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Significance of the register of members .......................................................................................................................................................................
In the absence of evidence to the contrary, the register of members is proof of the matters contained therein: s 176. This is important in circumstances where members are either denying they are members (for example, to escape being a contributory), or asserting they are members (for example, to obtain dividends).
[9.90]
Role in oppression cases
Registration is often an issue in oppression actions: see Chapter 14. As a general rule, it appears that a person's name has to be on the register for that person to be regarded as a “member” (s 231, see [9.20]) and, therefore, able to bring an action under Pt 2F.1. Normally, purchasers of shares are not “members” until the transfers are registered even though they are the beneficial owners of the shares: Niord Pty Ltd v Adelaide Petroleum NL (1990) 54 SASR 87; Leaney v Olmstead Pty Ltd (1994) 51 FCR 240; Titlow v Intercapital Group (Australia) Pty Ltd (1996) 65 FCR 449. However, in exceptional cases, registration as a member may not always be conclusive for these purposes. In Re Independent Quarries Pty Ltd (1993) 12 ACLC 159 the company had issued a share certificate in the purchaser's name stating that the purchaser was the registered holder of the shares. The Queensland Supreme Court held that the purchaser was entitled to apply for a remedy under the predecessor of Pt 2F.1 despite its name not being shown on the register. In this case, the directors were unable to register the transfer or correct the share register because access to the share register was controlled by a rival faction in the company. In these circumstances the court was also prepared to correct the register retrospectively. In Titlow v Intercapital Group (Australia) Pty Ltd (1996) 65 FCR 449, Lehane J distinguished Independent Quarries as being a decision on “extremely unusual facts” (at 452) and applied the general principle that only a person whose name was entered on a company's register was capable of bringing oppression proceedings and that the register should not be altered to include the applicant's name. If there is doubt about whether the person aggrieved can be regarded as a “member” for the purposes of Pt 2F.1, an action for correction of the register (s 175, discussed at [9.80]) should be brought concurrently with, or before, pleading a claim under Pt 2F.1. See Titlow v Intercapital Group (Australia) Pty Ltd (1996) 65 FCR 449 at 451. [9.100]
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Disclosure of interests [9.110] Members of companies may hold shares as trustees in order to obtain tax benefits or to conceal the true identity of the beneficial owner. Under s 1072H, transferees of unlisted companies who are not the beneficial owners of the shares must notify the company that the shares are held non-beneficially. Unlisted companies must then note this fact on their register of members: s 169(5A). Trustees of shares in a proprietary company who hold the shares on behalf of another company must notify the company within one month of commencing to hold the shares: s 1072E(11). A failure to do so is an offence of 10 penalty units. Trustees who hold shares in other situations – that is, on behalf of individuals or companies other than in proprietary companies – may request the company to show their holding on the register as being on trust: s 1072E(9). Listed public companies, the responsible entity of a listed managed investment scheme (see Chapter 22) and ASIC may obtain information about the “true” ownership of shares in the company or interests in the scheme under Pt 6C.2. This is to complement the Corporations Act requirement to disclose substantial shareholdings: see [9.120]. Any member of the company or scheme may request ASIC to exercise this power to obtain information and, unless it would be unreasonable, ASIC must comply with the request: s 672A(2).
Substantial shareholders [9.120]
A person who acquires or ceases to have a substantial holding in:
• a company listed on any prescribed financial market such as the Australian securities exchange; or • a listed registered managed investment scheme (see Chapter 22); must disclose the detailed information prescribed by the Corporations Act to: • the company;
• the relevant market operator [eg, the ASX] within two business days after he or she becomes aware of the information or by 9.30 am on the next trading day of the relevant financial market if there is a takeover bid: s 671B.
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• the responsible entity of the scheme (in the case of a managed investment scheme); and
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A person has a “substantial holding” if that person or their associates (as defined by s 9) is entitled to (the technical term is “has a relevant interest in”: see Chapter 23) more than 5% of the total number of votes attached to voting shares: s 9. A person must also give full particulars of any change that is greater than 1% (whether it is an increase or a decrease) in a substantial holding or if that person makes a takeover bid: s 671B and Chapter 23. These provisions are intended to ensure that companies are informed about the identity of large shareholders and the extent of and movements in their holdings. This information may give the company the first indication of a possible takeover bid. Another reason is that directors and shareholders can find out who has sufficient voting power to influence decisions made by the company, especially power to block a special resolution.
Transfer of shares Under s 1070A (see [9.40]), shares are transferable in the manner provided by the constitution or, if the company is a listed company, the ASX Listing Rules or operating rules of a prescribed CS facility. If the company has not adopted a constitution, the following replaceable rules will be relevant: [9.130]
• ss 1072A, 1072B, 1072D – transmission of shares on death, bankruptcy or mental incapacity; • s 1072F – registration of transfers; and • s 1072G – additional discretion for directors of proprietary companies to refuse to register a transfer of shares: see [9.180]. Unlisted shares .......................................................................................................................................................................
Section 1071B deals with shares that are not listed on the ASX or a prescribed CS facility. Before a transfer of (unlisted) shares can be registered by the company, a proper instrument of transfer must be delivered to it: s 1071B(2). This requirement is to ensure that stamp duty is paid on the transfer. The rate at which stamp duty is levied is determined by the State or Territory in which the company was registered. For example in South Australia the transfer, either by way of sale or gift, of shares in a company that is not quoted on a recognised stock exchange is subject to stamp duty on the market value of the shares or consideration, whichever is greater. The rate of stamp duty charged is $0.60 cents per $100 or part of $100. See http://www.revenuesa.sa.gov.au/ taxes-and-duties/stamp-duties/calculators/stamp-duty-on-share-transfers. [9.140]
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A contract for the sale of shares is like a contract for the sale of land. It is not completed until certain documents are exchanged and the transactions registered. With land, the new proprietor's name must be entered on the Register of Titles. With shares, the new member's name must be entered on the company's register: s 1072F(1). This occurs after the transfer and share certificate have been lodged, any fees payable on registration have been paid and the directors have been given any further information they required to establish the right of the person to make the transfer. Once the transfer has been registered, the (unlisted) company will issue a share certificate to the transferee. Listed shares ....................................................................................................................................................................... [9.150] If the company is listed on an Australian stock exchange, a simplified procedure for the transfer of shares is available under s 1075A and Ch 8 of the ASX Listing Rules. (It is common for the conveyance of marketable securities quoted on a recognised stock exchange to be exempt from stamp duty.) In essence, the system relies on “brokers” (see Chapter 21) guaranteeing the good title of the transferor. If a transfer is made through a broker, a flat fee or commission will be charged. The rates vary depending on the advice or services provided by the broker, ranging from about $10 for a small transaction (through an internet or telephone broker which does not provide advice) to commission of between 1% and 2.5% for traditional brokers who provide advice to investors.
ASX Trade [9.160] “ASX Trade” is an electronic screen-based trading system which enables each broker to trade in the quiet of her or his own office using a computer terminal. Orders are entered into the “ASX Trade” system and transmitted to the market via the ASX's host computer. Other brokers can then see via their terminals and respond. Orders are executed on a price and time priority basis. Suppose a client wishes to buy 1,000 BHP Billiton shares. The broker will check BHP Billiton on the screen and note the quoted selling offer is, say, $31.00 and the buying bid, $30.98. Alongside each bid is a number which identifies each broker. The client's broker could complete a trade by offering to buy at $31.00 and the details of the sale would be automatically recorded. If the offer is only $30.99, however, that offer replaces the one at $30.98. A seller might be prepared to sell at that price and if so, that bid replaces the $31.00 and the sale is completed. If more than one buyer or seller quotes the same price, priority goes to the earliest bid. Buyers and sellers
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are free to make offers at any price with all bids shown in the respective buy and sell queues in ascending and descending order respectively. CHESS .......................................................................................................................................................................
“CHESS” is the acronym for Clearing House Electronic Subregister System. CHESS is an electronic settlement and transfer system used by brokers and other institutional investors. It has two major functions: to facilitate the settlement and clearing of trades in shares and to provide an electronic subregister for shares in ASX listed companies. All holdings and transfers of shares in listed companies are recorded electronically. This system provides electronic transfer of securities within the time frame of T+3 (third business day after trade date) and guarantees payment and delivery. The T+3 settlement timeframe is the norm for most major securities markets worldwide. Instead of share certificates, shareholders in a listed company receive a “holding statement” (similar to a bank statement) when there is any change in their shareholding in the company. Each shareholder is issued either:
[9.170]
• a “Security Holder Reference Number” (SRN); or • a “Holder Identification Number” (HIN), as verification of ownership of their shares. This number resembles a PIN and must be quoted whenever a shareholder buys or sells shares or other securities in the company. A SRN is issued by the company issuing the securities and is generally used by people who own securities in relatively few companies. An HIN is more convenient for people who own securities in a large number of companies or who actively trade in them. If a holder of securities enters into an arrangement with a broker or financial adviser for their securities to be held on the broker or financial adviser's own electronic subregister, the holder is issued with an HIN covering all that person's holdings. Investors should protect their HIN or SRN in the same way as they protect a PIN for a credit or ATM card. The strict compliance rules that brokers must follow when dealing with new clients are an additional protection against fraud. If an investor suffers loss because of a fraudulent transfer of securities he or she may be able make a claim against the National Guarantee Fund operated by the ASX.
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Restrictions on the transfer of shares Refusal to register .......................................................................................................................................................................
Although shares are personal property and as such are transferable by the shareholder (s 1070A(1), see [9.40]), a company's internal rules may give directors the right to refuse to register a transfer of shares: for example, see the replaceable rules in ss 1072F – 1072G. Any discretion to refuse registration must be exercised in good faith for the benefit of the company, and not for any other purpose: Re Smith & Fawcett Ltd [1942] Ch 304; see Chapter 12. Under s 1071F, anyone refused registration may apply to the court and if the court believes the directors have refused or failed to register “without just cause”, the court can make an order as it sees fit, as in the following illustration. [9.180]
Waters v Winmardun [9.183] Waters v Winmardun Pty Ltd (1990) 9 ACLC 238 (Supreme Court of Victoria) FACTS: A shareholder in a family company executed a deed of arrangement assigning all his property, including his shares in the company, to his trustee in bankruptcy. The company’s internal rules gave the directors an absolute discretion to refuse to register any transfer of shares. The directors (who were the shareholder’s parents) refused to register the transmission of the shares to the trustee.
[9.186] If the internal rules do not require the directors to give their reasons, it is often very difficult for a plaintiff to prove “without just cause”. Arguably, the directors are merely exercising their discretion. Nevertheless, if a reason can be discovered on the facts, s 1071F overrides the discretion and allows for judicial scrutiny. In Roberts v Coussens (1991) 25 NSWLR 171, although the constitution gave the directors an absolute discretion, the court found that the refusal to register was based purely on a desire to choose a compatible co-shareholder and this was held not to be just cause. Compare Ashton Millson Investments Ltd v Colonial Ltd (2001) 162 FLR 145 where the directors' refusal to register a transfer of less than a marketable parcel of shares in a listed public company was made in compliance with the company's constitution and the relevant stock exchange rules, and was held to be for just cause. Directors should not delay in considering whether to refuse registration or not. Under s 1071E, a company which refuses registration is required to send notice of the refusal to the transferee within two months of the date on which the transfer was lodged. Breach of this provision is an offence of 10
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DECISION: The Court held that the directors’ refusal to register the transmission was without just cause and ordered them to register the transfer.
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penalty units and may, under general law, also result in the company losing the right to deny registration. In Re Swaledale Cleaners Ltd [1968] 1 WLR 1710, the constitution gave the directors a discretion to refuse registration. The Court of Appeal held that the directors must exercise their discretion within a reasonable time and, if it was not so exercised, the right to deny registration lapsed. Winding up situations .......................................................................................................................................................................
Generally, any transfer of shares must be made before the commencement of winding up. Where winding up is by court order, any purported transfer after winding up commences is void (s 468(1)), although the transfer can be validated by the court: s 468(3). Where the winding up is voluntary, any transfer of shares is void unless it is made with the sanction of the liquidator or the court: s 493A.
[9.190]
Mentor: Test your Knowledge ...................................................................................................................................... (See http://www.legal.thomsonreuters.com.au/browse/mentor multiple choice questions and answers on the Topic of Membership.)
for
Practice Questions ...................................................................................................................................... 1.
What rights does ownership of a share give the holder?
2.
Trace the steps for the transfer of shares in a company listed on the ASX. Describe what must be done by: • the transferee; • the transferor; • the broker; and • the company. Include the costs of the transaction to both the transferee and the transferor.
3.
What would constitute “just cause” for the refusal to register a transfer of shares?
4.
When will the court order the members' register to be corrected? Give examples.
5.
Alice was left 7% of the ordinary shares in XYZ Ltd by her aunt. XYZ Ltd is a public company listed on the ASX. Yesterday, those shares were registered in Alice's name. What are Alice's obligations under Pt 6C.2 of the Corporations Act?
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Problems for Discussion ...................................................................................................................................... 1.
Foters Ltd (Foters) is a company listed on the ASX. The company has 10 million shares on issue. Jock Snoz currently holds 400,000 shares in Foters and has asked his broker to buy 400,000 more. Suppose that Jock's broker is able to obtain only 250,000 shares immediately on his behalf. (a) What are Jock's obligations, if any? (b)
2.
Suppose the broker is able to complete the buy order a week later. Does Jock have any further obligations? Explain.
Roseneath Pty Ltd (Roseneath) has the following provision in its constitution: The right of the members to transfer shares in the Company is restricted in that the directors may at any time in their absolute discretion decline to register any transfer of shares.
Stephen is in financial difficulty. He approaches his cousin, Julia, and asks if she is interested in purchasing his shareholding of 2,000 shares in Roseneath. Julia pays $4,000 to Stephen and a duly executed and stamped transfer is forwarded to Roseneath with a request for registration. The board of directors refuse to register the transfer and promptly send Julia notice to this effect. The notice gives no reasons for their decision. Stephen's other cousin, Jack, was at the board meeting in his capacity as company secretary. He says that the board were concerned that “Julia is an interfering, emotional female”. 3.
Abigail is an expert computer hacker. She has managed to obtain the security holder reference number (SRN) of a person who had several thousand shares in a public company. Abigail then sold these shares through an online broker representing herself as the true holder of the shares and convinced her bank to pay the cheque for the price into her account even though she was not the payee named in it. Abigail then disappeared with the proceeds. (a) Who will bear the loss if Abigail cannot be apprehended – the online broker she used, the shareholder whose name was used or some other person? Explain. (b)
Outline the changes that will probably be made to the company's electronic register as a result of Abigail's activities.
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Does Julia have any remedy under the Corporations Act?
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Guide to Problem Solving ...................................................................................................................................... Correction of the register
1.
Application may be made to the court for correction of the register: s 175. • Often such an application will be made prior to, or concurrently, with an oppression action under Pt 2F.1: see Chapter 14.
2.
The person requesting correction must show he or she has some legal or equitable claim – for example, that their name was wrongly omitted or included: Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1.
3.
Where the company has issued a share certificate to a person other than the true owner (and altered the register) the true owner is entitled to have the register corrected: Re Bahia and San Francisco Rail Co Ltd (1868) LR 3 QB 584; and Daily Telegraph Newspaper Co v Cohen (1905) 5 SR (NSW) 520.
Refusal to register a transfer of shares
1.
The transferee may apply to the court where the directors refuse to register a transfer of shares: s 1071F.
2.
If the refusal to register was “without just cause” the court may order registration or make any other order it thinks fit.
3.
The burden of proof for showing lack of just cause lies with the plaintiff, although once a prima facie case is made out, the burden shifts to the directors: Roberts v Coussens (1991) 25 NSWLR 171.
4.
Where no reasons for refusal are required by the company's internal rules (and none are given), the plaintiff may have difficulty showing lack of just cause. Compare Roberts v Coussens with Re Smith and Fawcett Ltd [1942] 1 All ER 542; Berry v Tottenham Hotspur Football Athletic Co Ltd [1935] Ch 718; and Ashton Millson Investments Ltd v Colonial Ltd (2001) 162 FLR 145.
5.
Where the internal rules require a board resolution for refusal, the resolution must be passed for refusal to be effective: Moodie v W&J Shepherd (Bookbinders) Ltd [1949] 2 All ER 1044.
6.
If a company refuses to register a transfer, notice of refusal must be sent to the transferee within two months: s 1071E. If the discretion is not exercised within this period, the company may also lose the right to refuse registration: Re Swaledale Cleaners Ltd [1968] 1 WLR 1710.
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Further Reading ......................................................................................................................................
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Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis, 2014, [6.390]-[6.460] and Ch 21 Australian Securities Exchange, “ASX settlement and the role of CHESS” available at: http://www.asx.com.au/services/settlement/asx-settlement/ how-settlement-works.htm Australian Securities Exchange, “Overview of CHESS” available at: http://www.asx.com.au/education/download-brochures.htm Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 9 and [18.20]-[18.40] Rees S “Rectification of the Share Register – Damage and Compensation” (1990) 8 C&SLJ 149
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Meetings Useful Websites ..................................................................... 257 Recent Developments ............................................................ 257 Aim ......................................................................................... 258 Related Topics ....................................................................... 258 Principles ............................................................................... 258 Board meetings ........................................................................... 259 Single director companies ............................................................. 261 Members’ meetings ..................................................................... 262 Single member companies ............................................................ 273 Notice to members ...................................................................... 274 Resolutions ................................................................................ 277 Quorum at members’ meetings ....................................................... 279 Conduct of members’ meetings ...................................................... 280 Voting rights and procedures at members’ meetings ............................ 280 Irregularities ............................................................................... 283 Mentor: Test your Knowledge ............................................... 284 Practice Questions ................................................................. 284 Problems for Discussion ........................................................ 285 Guide to Problem Solving ...................................................... 287 Further Reading ..................................................................... 288
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for websites on the Topic of Meetings.)
Recent Developments ...................................................................................................................................... Corporations Amendment (improving accountability on Director and executive remuneration) Act 2011 (Cth) Northwest Capital Management v Westate Capital Ltd [2012] WASC 121 Woolworths Ltd v GetUp Ltd [2012] FCA 726
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Mortimer v Proto Resources & Investments Ltd [2015] FCA 654 MDA National Ltd v Medical Defence Australia Ltd [2014] FCA 954 Re Consolidated Media Holdings Ltd [2012] FCA 1186 Re Marengo Mining Ltd (No 2) [2012] FCA 1498 Re David Jones Ltd [2014] FCA 530
Aim ...................................................................................................................................... At the end of this topic you should know: • the procedures for meetings of the board of directors; • the types of members' meetings, their purposes, and when and how they are called; • the types of resolutions and their legal requirements; • what is meant by a quorum and how it operates; and • how voting takes place.
Related Topics ...................................................................................................................................... Chapter 5 Internal Rules; Chapter 6 Management of Companies; Chapter 17 Classes of Shares
PRINCIPLES In solvent companies there are two important groups who hold meetings. Directors hold board meetings and members meet in general or class meetings. This Topic looks at the purpose of the meetings, the way in which they are convened, and their procedures. Part 2G of the Corporations Act 2001 (Cth) (Corporations Act) contains the provisions which relate to both directors' meetings (Pt 2G.1) and members' meetings (Pt 2G.2), including the relevant replaceable rules: see Chapter 5. [10.10]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Part 1-2 Division 6-20; Chapter 5—Meetings of the CATSI Act. Similar to Corporations Act 2001 (Cth), the CATSI Act has similar provisions on the company resolutions which include general meeting resolutions, special resolutions and circulating resolutions. A recent case where the Registrar of ORIC called for a general meeting for the members was in relation to the Yindjibarndi Aboriginal Corporation
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RNTBC (YAC). Extract from the ORIC's website: http:// www.oric.gov.au/publications/media-release/registrar-calls-generalmeeting-yindjibarndi.
.................................................................................................................. MR1516-17 – Registrar calls general meeting for Yindjibarndi
The Registrar of Indigenous Corporations, Anthony Beven, has called a general meeting for the members of Yindjibarndi Aboriginal Corporation RNTBC (YAC). The Registrar’s decision follows the judgment handed down by Justice Le Miere in the Supreme Court of Western Australia on 9 March 2016. In Sandy v Yindjibarndi Aboriginal Corporation RNTBC Justice Le Miere found that the corporation does not currently have any directors. Justice Le Miere found that the corporation’s former directors’ terms expired at the annual general meeting (AGM) held on 30 November 2015. That meeting was unable to appoint new directors as no directors were able to secure the support of 75 per cent of the members as required by YAC’s rule book. Without directors the corporation has been unable to call a new meeting and hold another election for directors. The Registrar has therefore exercised his powers and called the meeting of the corporation’s members. The general meeting will be held on 19 April 2016 at the 50 Cent Hall in Roebourne (2 Sholl Street) and will be chaired by the Registrar. YAC holds and manages the native title interests of the Yindjibarndi people. The Registrar has also used his powers to amend the rule book of YAC to replace the requirement for resolutions (other than special resolutions) to be approved by 75 per cent of the voting members with the more usual requirement for only a majority of voting members. The Registrar has also proposed a number of other changes to YAC’s rule book and they will be put to a vote of the members at the meeting on 19 April 2016.
Board meetings Meetings of directors can be very informal, but for a “meeting” to have taken place, the directors must show evidence that they have been given notice of the meeting and have concurred in any action taken: see Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 912. This “concurrence” can be by meeting together or, if the internal rules permit, by circulating a written resolution (sometimes referred to as “flying minutes”). Such a procedure is provided for by, for example, the replaceable rule in s 248A. With the authority of either the constitution or the replaceable rule in s 201K, a director may appoint a substitute (alternate) to act in her or his stead [10.20]
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and they will attend meetings. This may be useful, for example, while a director is away on holidays. For public companies, the directors (in their annual report to members) must give details about the number of board meetings and any meetings of committees of the board held during the year and their attendance at those meetings: s 300(10). Proceedings of directors' meetings are governed primarily by the internal rules, and also: • s 191, which requires a director of either a public or a proprietary company to give the other directors notice of any material personal interest in a matter relating to the affairs of the company (see Chapter 13); • s 195, which restricts the right of directors of public companies who have a material personal interest in a matter being considered by the board to be present or vote at the board meeting (see Chapter 13); • s 251A, which requires minute books to be kept and signed, recording proceedings and resolutions of directors' meetings, resolutions passed by directors without a meeting and declarations made by the sole director of a proprietary company that has only one director; and • s 248D, which deals with the use of technology.
SECTION 248D Use of technology A directors’ meeting may be called or held using any technology consented to by all the directors. The consent may be a standing one. A director may only withdraw their consent within a reasonable period before the meeting.
In the absence of a provision to the contrary in the internal rules, general law principles require that: • each director is entitled to notice of a board meeting even if they are overseas, provided they can be contacted; and • the notice does not need to specify what business is to be conducted. Relevant replaceable rules .......................................................................................................................................................................
The relevant replaceable rules that apply (unless the company has adopted a constitution that provides otherwise) are: [10.30]
• s 248A – directors may pass a resolution without a directors' meeting being held if all the directors entitled to vote on the resolution sign a document containing a statement that they are in favour of the resolution set out in
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the document (as long as the wording of the statement and the resolution is identical, directors may sign separate copies of the document); • s 248C – any director can call a directors' meeting by giving reasonable notice to each of the other directors (the notice does not have to be in writing); • s 248E – the directors must elect a director to chair their meetings (referred to in the legislation as “the chair”); • s 248F – unless the directors determine otherwise, a quorum (the minimum number required to be present before the meeting can proceed) is two directors who must be present at all times during the meeting; and • s 248G – resolutions must be passed by a majority of directors entitled to vote on the resolution (any director prevented from voting on the particular resolution under, for example, s 195, is not included in the number required for a majority). If necessary, the chair has a casting vote.
Single director companies [10.40] In relation to single director proprietary companies, s 248B applies – this is not a replaceable rule.
SECTION 248B Resolutions and declarations of 1 director proprietary companies Resolutions (1)
The director of a proprietary company that has only 1 director may pass a resolution by recording it and signing the record. Declarations
(2)
The director of a proprietary company that has only 1 director may make a declaration by recording it and signing the record. Recording and signing the declaration satisfies any requirement in this Act that the declaration be made at a directors’ meeting.
Note 1: For directors’ declarations, see ss 295 and 494. Note 2: Passage of a resolution or the making of a declaration under this section must be recorded in the company’s minute books (see s 251A).
The following flowchart is intended to provide an overview of the key provisions in relation to board meetings.
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[10.50] Figure 10.1: Issues – directors’ meetings ....................................................................................................
Members’ meetings [10.60] The provisions that relate to members' meetings are contained in Pt 2G.2. There are three types of members' meetings – the annual general meeting, general meetings and class meetings.
Annual general meeting (AGM) .......................................................................................................................................................................
Only public companies with more than one member must hold an AGM. For the first AGM, 18 months after registration is the timeframe allowed in which to hold the meeting: s 250N(1). Thereafter, the AGM must be held once every calendar year within five months of the end of the company's financial year: s 250N. ASIC can extend this time and grant [10.70]
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exemptions: ss 250P, 250PAA. Public companies with only one member are not required to hold an AGM: s 250N(4). A proprietary company may have a constitution requiring it to hold an AGM. In any event, an AGM would seem to be good practice for any proprietary company that has members who do not participate in the trading operations. If a meeting is difficult to organise (for example, members are in different States), then s 249A (circulating members' resolutions) or s 249S (use of technology at members' meetings, see [10.260]) may assist. Matters considered at an AGM
Section 250R(1) sets out the matters that may be considered by an AGM even if these matters are not referred to in the notice of meeting. These matters are considered to be the “ordinary business” of an AGM. [10.80]
SECTION 250R Business of AGM (1)
The business of an AGM may include any of the following, even if not referred to in the notice of meeting: (a) the consideration of the annual financial report, directors’ report and auditor’s report; (b)
the election of directors;
(c)
the appointment of the auditor;
(d)
the fixing of the auditor’s remuneration.
Advisory resolution for adoption of remuneration report (2)
(3)
At a listed company’s AGM, a resolution that the remuneration report be adopted must be put to the vote. Note: Under [paragraph] 249L(2)(a), the notice of the AGM must inform members that this resolution will be put at the AGM. The vote on the resolution is advisory only and does not bind the directors or the company.
Background to reform in executives’ remuneration and s 250R
Following the Global Financial Crisis in 2007-2008, there was concern over manipulation of remuneration by company directors and executives. The Productivity Commission was given the task in 2009 to undertake a public inquiry into the regulatory framework around remuneration of directors and executives of companies regulated under the Corporations Act. In particular, the Commission considered: [10.85]
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• trends in director and executive remuneration in Australia and internationally; • the effectiveness of the existing framework for the oversight, accountability and transparency of director and executive remuneration practices; • the role of institutional and retail shareholders in the development, setting, reporting and consideration of remuneration practices; • any mechanisms that would better align the interests of boards and executives with those of shareholders and the wider community; • the effectiveness of the international responses to remuneration issues arising from the global financial crisis (see http://www.pc.gov.au/inquiries/completed/executive-remuneration). The report by the Commission was released by the Australian Government in January 2010 found that further reforms were required on Australia's remuneration framework, despite it being “highly ranked internationally”. Part of these measures related to the ability of shareholders to “control” remuneration of executives. Remuneration reports must be presented at the company's AGM (s 250R) and this report must be put to the vote. If this vote receives a no vote of 25% or more, the first “strike” has been breached. The vote at this point is not binding. If, the following year, the remuneration report also receives no vote of more than 25% then a “spill motion” can be triggered. This allows the board of directors to be re-elected, if the shareholders so permit. If this bill resolution is passed by a majority of more than 50%, then a spill meeting, held within 90 days, will allow shareholders the opportunity to vote on the re-election of directors. The amendments also attempt to remove the ability of executives and related parties from voting on the remuneration report (s 250R(4)). It should be noted, that the chair is still able to exercise proxies as clarified in Corporations Amendment (Proxy Voting) Act 2012. The onus is on the directors of a public company to call the AGM and present the reports outlined in s 250R(1)(a): s 317. It is also common practice for directors' remuneration to be considered at the AGM: for example, s 202A, a replaceable rule. All listed public companies must submit the remuneration report (setting out the remuneration to be paid to directors and the five highest paid company executives or senior managers) to the AGM and a resolution that this report be adopted must be voted on by the meeting: s 250R(2). The notice of meeting must inform members that this resolution will be put at the AGM: s 249L(2)(a) (extracted at [10.210]). Section 250SA (extracted at [10.90]) requires the chair to allow members a reasonable opportunity to ask questions about, or make comments on, the
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remuneration report. However, the vote on the remuneration report is only an advisory vote and does not bind the directors or the company: s 250R(3). The constitution may provide that other matters must be considered at the AGM – for example, if the company is a not-for-profit company limited by guarantee (which must be a public company), the constitution may provide for membership fees to be fixed at the AGM. Subject to certain notice requirements, it is also possible for members to propose resolutions to be considered: see [10.240]. The notice of meeting need not refer to the matters outlined in s 250R(1) (“ordinary business”), but it must specify any other “special business”. An example can be found at http://www.aluminalimited.com/uploads/briefcase/ 2011/ASX%20announcement%20201011%20Notice%20of%20Meeting.pdf. Conduct and questions [10.90] The AGM gives members of a company an opportunity to ask the directors questions about the management of the company and, if the company's auditor or a representative is present, a similar opportunity to ask questions about the audit and other relevant matters. Note ss 250S(1), 250SA and 250T(1):
SECTIONS 250S(1), 250SA and 250T(1) 250S Questions and comments by members on company management at AGM (1)
The chair of an AGM must allow a reasonable opportunity for the members as a whole at the meeting to ask questions about or make comments on the management of the company.
… 250SA Listed company – remuneration report At a listed company’s AGM, the chair must allow a reasonable opportunity for the members as a whole to ask questions about, or make comments on, the remuneration report. This section does not limit section 250S. 250T Questions by members of auditors at AGM (1)
If the company’s auditor or their representative is at the meeting, the chair of an AGM must: (a) allow a reasonable opportunity for the members as a whole at the meeting to ask the auditor or the auditor’s representative questions relevant to: (i)
the conduct of the audit; and
(ii)
the preparation and content of the auditor’s report; and
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(b)
(iii)
the accounting policies adopted by the company in relation to the preparation of the financial statements; and
(iv)
the independence of the auditor in relation to the conduct of the audit; and
allow a reasonable opportunity for the auditor or their representative to answer written questions submitted to the auditor under section 250PA.
… [Notes to these sections not extracted.]
The above subsections are strict liability offences and attract a penalty of 5 penalty units. In recent times hundreds, or even thousands, of shareholders have attended the AGMs of some large public companies when controversial proposals are being considered. Often the debate is heated and shareholders ask searching questions about the company's policies and management, especially matters such as directors' remuneration (see [10.80]) and financial statements. Section 250T was amended to increase the rights of shareholders to ask the auditor or their representative questions about auditing and accounting issues. The auditor of a listed public company or a suitably qualified representative of the audit team must attend the company's AGM or face a penalty of 10 penalty units: s 250RA. Members of a listed company who are entitled to vote also have the right to submit written questions to the auditor about the content of the audit report or the conduct of the audit: s 250PA. The Australian Shareholders' Association (ASA) and the Australian Institute of Company Directors issued a “Code of Best Practice” for the conduct of AGMs (September 1994). CASAC's (now CAMAC) “Shareholder Participation in the Modern Listed Public Company: the Final Report”, which was published in June 2000 also made recommendations about calling and conducting general meetings. For more details see the Lipton-Herzberg website at http://www.lipton-herzberg.com.au/law_reform.htm. General meetings .......................................................................................................................................................................
Apart from the AGM, sometimes other general meetings will be held. In practice, these are usually referred to as “extraordinary” general meetings (although this term is not used in the Corporations Act). [10.100]
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Matters considered at general meetings [10.110] In most companies general management powers are vested in the board of directors. However, there are certain situations where powers are granted to the members in general meeting by the Corporations Act, the general law, the company's internal rules or (if applicable) the ASX Listing Rules. These are discussed in more detail in Chapter 6.
Who can call a general meeting? [10.120]
General meetings of a company can be called by:
• the board of directors; • a director – see the replaceable rule in s 249C, or, in the case of a listed company, s 249CA which is not a replaceable rule and applies despite anything in the constitution; • the board of directors on the written request of the members – s 249D (see [10.130]). See Woolworths Ltd v GetUp Ltd [2012] FCA 726; Mortimer v Proto Resources & Investments Ltd [2015] FCA 654; • the members themselves – s 249F (see [10.140]); or • the court – s 249G (see [10.150]). See Northwest Capital Management v Westate Capital Ltd [2012] WASC 121. All members' meetings must be held for a “proper purpose”: s 249Q and see Howard v Mechtler (1999) 17 ACLC 632; NRMA Ltd v Snodgrass (2001) 37 ACSR 382 (Windeyer J); NRMA Ltd v Snodgrass (2001) 52 NSWLR 383 (CA NSW); NRMA Ltd v Scandrett (2002) 171 FLR 232; and Bisan Ltd v Cellante (2002) 173 FLR 310. All members' meetings must be held at a “reasonable time and place”: s 249R and see Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 extracted below. Coombs v Dynasty; on appeal Dynasty v Coombs [10.125] Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60; on appeal Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 (Federal Court) FACTS: Coombs was a minority shareholder in a proprietary company controlled by the Thomas family. Over some years, the relationship between the shareholders broke down and Coombs eventually sought a remedy under the predecessor to Pt 2F.1: see Chapter 14. One of his complaints concerned the holding of the 1991 annual general meeting. The company’s registered office was in the Northern Territory, but its 1991 annual general meeting was held on Christmas Eve at Hamilton Island on the Barrier Reef. Coombs lived in Alice Springs. DECISION: The court upheld his claim of oppression. As part of its decision, the court found that the holding of the 1991 meeting “at a time and place where members are unlikely to be able to attend is tantamount to not holding a meeting at all”: at 92.
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cont. Note: The decision in Coombs was made on the basis of the general law which s 249R is regarded as enacting.
Directors call a general meeting at the request of the members
Section 249D allows members holding at least 5% of the voting shares or a minimum of 100 members (regardless of the number of shares they hold) to request the directors to call a general meeting. There was a failed attempt by the government in 2005-6 to change this by removal of the “100-member rule”, leaving the right of members with 5% of the votes to request the directors to call a meeting unchanged: see below. Note ss 249D – 249E: [10.130]
SECTIONS 249D-249E 249D Calling of general meeting by directors when requested by members (1)
(1A)
The directors of a company must call and arrange to hold a general meeting on the request of: (a)
members with at least 5% of the votes that may be cast at the general meeting; or
(b)
at least 100 members who are entitled to vote at the general meeting.
The regulations may prescribe a different number of members for the purposes of the application of paragraph (1)(b) to: (a)
a particular company; or
(b)
a particular class of company.
Without limiting this, the regulations may specify the number as a percentage of the total number of members of the company. (2) The request must: (a) be in writing; and (b)
state any resolution to be proposed at the meeting; and
(c)
be signed by the members making the request; and
(d)
be given to the company.
(3)-(4) … (5)
The directors must call the meeting within 21 days after the request is given to the company. The meeting is to be held not later than 2 months after the request is given to the company.
249E Failure of directors to call general meeting (1)
Members with more than 50% of the votes of all of the members who make a request under section 249D may call and arrange to hold a general meeting if the directors do not do so within 21 days after the request is given to the company.
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(2)
The meeting must be called in the same way – so far as is possible – in which general meetings of the company may be called. The meeting must be held not later than 3 months after the request is given to the company.
(3)
To call the meeting the members requesting the meeting may ask the company under section 173 for a copy of the register of members. Despite paragraph 173(3)(b), the company must give the members the copy of the register without charge.
(4)
The company must pay the reasonable expenses the members incurred because the directors failed to call and arrange to hold the meeting.
(4A)
…
(5)
The company may recover the amount of the expenses from the directors. However, a director is not liable for the amount if they prove that they took all reasonable steps to cause the directors to comply with section 249D. The directors who are liable are jointly and individually liable for the amount. If a director who is liable for the amount does not reimburse the company, the company must deduct the amount from any sum payable as fees to, or remuneration of, the director.
Some general points on member-convened meetings: • a request by a member under s 249D must be for a “bona fide” purpose not, for example, to harass the company and its directors (see Humes Ltd v Unity APA Ltd (No 1) [1987] VR 467; Re Ariadne Australia Ltd [1991] 2 Qd R 377; and s 249Q); • members cannot request a meeting where the purpose is to deal with a matter which is within the province of the directors (see NRMA v Parker (1986) 6 NSWLR 517); • however, members may request a meeting where the purpose is to propose an amendment to the constitution, which, if passed, would have the effect of restricting the directors' powers (see NRMA Ltd v Snodgrass (2001) 37 ACSR 382 (Windeyer J); NRMA Ltd v Snodgrass (2001) 52 NSWLR 383 (CA NSW); NRMA v Parkin (2004) 49 ACSR 386 (Campbell J); NRMA v Parkin (2004) 60 NSWLR 224 (CA NSW)); and • a company's constitution may allow a smaller number to request a meeting than under s 249D, but it cannot make it more difficult – in other words, s 249D is a minimum statutory right. There has been considerable controversy over s 249D(1), namely the number of members required to request the directors to convene a meeting. In recent years a small number of shareholders with small holdings in large public companies have successfully used the power in s 249D(1)(b) to force several public companies to hold extraordinary general meetings to consider
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certain environmental issues. Many of these shareholders held only one share in the company and together they represented only a tiny proportion of both shareholders and issued share capital, and the resolutions they proposed were overwhelmingly defeated. Similarly, dissident members of the NRMA (the motorists' road service organisation in New South Wales) have also used s 249D(1) on numerous occasions to request the directors to call a general meeting to consider contentious issues, including proposed amendments to the NRMA's constitution (see above) by adding provisions designed to protect the working conditions of the road service patrol employees and the appointment and removal of directors: see NRMA v Spragg (2001) 161 FLR 243; NRMA v Snodgrass (2002) 42 ACSR 371; NRMA v Bradley (2002) 42 ACSR 616; NRMA Ltd v Scandrett (2002) 171 FLR 232; NRMA v Parkin (2004) 49 ACSR 386 (Campbell J); NRMA v Parkin (2004) 60 NSWLR 224 (CA NSW); see also Turnbull v NRMA (2004) 186 FLR 360. In several of these cases, the NRMA applied successfully to the Supreme Court for an order under s 1322(4) (see [10.300]) extending the time for the calling of the meeting so that the proposed resolutions could instead be considered at the company's annual general meeting (so avoiding the estimated $1.4 million cost of holding an extraordinary general meeting): see NRMA v Spragg (2001) 161 FLR 243; NRMA v Snodgrass (2002) 42 ACSR 371; NRMA v Bradley (2002) 42 ACSR 616. However, a similar application was rejected by the Full Federal Court in Re NRMA Association Ltd [2003] FCAFC 206: see also ASIC v NRMA (2002) 43 ACSR 451; and DVT Holdings Ltd v Bigshop.com.au Ltd (2002) 42 ACSR 378. The use of s 249D has been a contentious issue. The desirability of allowing shareholders the right to bring their concerns to a meeting must be balanced against the fact that the holding of a shareholders' meeting of a large, public company involves considerable cost to the company (and, indirectly, to the other shareholders). The 100 member rule has been criticised because it confers disproportionate influence on very small groups of shareholders by enabling them to require companies to hold special meetings on particular issues. It also fails to recognise substantial differences in the size of companies and it is out of step with comparative laws in other countries. Despite this there has been no change to the legislation as proposed in 2005.
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Members call a general meeting
In addition to having the power to request the directors to call a general meeting, members holding at least 5% of the voting shares may also call a general meeting themselves. [10.140]
SECTION 249F Calling of general meetings by members (1)
Members with at least 5% of the votes that may be cast at a general meeting of the company may call, and arrange to hold, a general meeting. The members calling the meeting must pay the expenses of calling and holding the meeting.
(2)
The meeting must be called in the same way – so far as is possible – in which general meetings of the company may be called.
(3)
…
The main difference between a meeting called by the members under s 249F and a meeting requested by the members under s 249D, is that under s 249F, the members (rather than the company) must bear the costs associated with the meeting. In a company with a large number of members, these costs would be considerable and would operate as a major practical hurdle. Section s 249F is not a replaceable rule. The right of members with the requisite percentage of votes to call a meeting cannot be displaced by the majority adopting a constitution which provides otherwise. A Victorian case illustrates the difficulties which may arise in calculating the required percentage of voting power: see Bisan Ltd v Cellante (2002) 173 FLR 310. For the meaning of “call” see Beck v Tuckey Pty Ltd (2004) 49 ACSR 555 at [46] where it was suggested the word may refer to “the whole process of convening the meeting and bringing together the members”. Court calls a general meeting
If there is no other way in which a meeting can be called, a director or a member who is entitled to vote may apply to the court for an order calling a meeting. Note s 249G:
[10.150]
SECTION 249G Calling of meetings of members by the Court (1) (2)
The Court may order a meeting of the company’s members to be called if it is impracticable to call the meeting in any other way. The Court may make the order on application by: (a)
any director; or
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(b)
any member who would be entitled to vote at the meeting.
Note: For the directions the Court may give for calling, holding or conducting a meeting it has ordered be called, see s 1319.
The court will require compelling reasons for it to exercise its discretion to call the meeting: see Beck v Tuckey Pty Ltd (2004) 49 ACSR 555; and Gratton v Carlton Football Club Ltd (2004) 187 FLR 25. Examples where the court has ordered such a meeting be called include Re Totex-Adon Pty Ltd [1980] 1 NSWLR 605 and Fiore v Carlton Football Club Ltd (2002) 21 ACLC 145. Another illustration is Re Noel Tedman Holdings Pty Ltd [1967] Qd R 561. Re Noel Tedman Holdings [10.155] Re Noel Tedman Holdings Pty Ltd [1967] Qd R 561 (Supreme Court of Queensland) FACTS: A husband and wife were the only shareholders and directors of a family company. They were both killed in a car accident. The company’s constitution provided that the directors had to approve any transfer of shares by a shareholder’s legal personal representative to the beneficiaries named in a will. The company had no directors and no members who could call a general meeting to elect directors. The legal personal representatives applied to the court for an order under the predecessor of s 249G convening a general meeting. DECISION: The Court made the order requested.
Class meetings .......................................................................................................................................................................
A class meeting is where a subset of the members meet. The subset will have certain rights in common – for example, if preference shares have been issued, the classes would be: (1) preference shareholders; and (2) ordinary shareholders. Where a company's shares are divided into different classes, or there are different membership rights attached to different shares, the Corporations Act may require class meetings to be held. Examples are: any variation of existing class rights (Pt 2F.2; see Chapter 17); and schemes of arrangement (s 411): see [24.480]. The general provisions about the conduct of members' meetings (see [10.260]-[10.290]) will apply to class meetings unless the Corporations Act or the internal rules provide otherwise. [10.160]
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Single member companies As with single director companies, single member companies can pass resolutions without holding a “meeting”. If the company is a single member and single director company, then it is possible to rely on both ss 248B (see [10.40]) and 249B. [10.170]
SECTION 249B Resolutions of 1 member companies (1)
A company that has only 1 member may pass a resolution by the member recording it and signing the record.
(2)
If this Act requires information or a document relating to the resolution to be lodged with ASIC, that requirement is satisfied by lodging the information or document with the resolution that is passed.
Note 1: A body corporate representative may sign such a resolution (see s 250D). Note 2: Passage of a resolution under this section must be recorded in the company’s minute books (see s 251A).
Thus, the distinction between ordinary and special resolutions (see [10.220][10.230]) and the requirements for notice, are not relevant to single member companies.
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[10.180] Figure 10.2: Types of members’ meetings ....................................................................................................
Notice to members Generally, at least 21 days' notice of the meeting (or longer if required by the company's constitution) must be given to the members unless all the members (for an AGM), or members with at least 95% of the votes for any other general meeting, agree to shorter notice pursuant to s 249H(2): s 249H(1). If the company is a listed public company, then 28 days' notice must be given: s 249HA. A copy of the notice of meeting must be given individually to each member who is entitled to vote at the meeting, to each director and the [10.190]
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company's auditor (if any): ss 249J(1), 249K (a failure to do so for the latter is a strict liability offence with a penalty of 5 penalty units). How notice is given ....................................................................................................................................................................... [10.200] The manner in which notice can be given to a member is prescribed by s 249J(3) – (5). It is no longer necessary for a company to send a hard copy of a notice if a member consents to being notified (by a nominated electronic means) that access to notices of meeting is available on the company's website (by a nominated access means). In MDA National Ltd v Medical Defence Australia Ltd [2014] FCA 954 the Federal Court held that notification of costs for some 30,000 members can be via electronic communications. In this case, his honour, Yates J held that s 249J is satisfied where a link is provided for the member to download the relevant documents. See also Re Consolidated Media Holdings Ltd [2012] FCA 1186; Re Marengo Mining Ltd (No 2) [2012] FCA 1498; Re David Jones Ltd [2014] FCA 530.
SECTION 249J(3)-(5) Notice of meetings of members to members and directors How notice is given (3) A company may give the notice of meeting to a member: (a) personally; or (b)
by sending it by post to the address for the member in the register of members or the alternative address (if any) nominated by the member; or
(c)
by sending it to the fax number or electronic address (if any) nominated by the member; or
(ca)
by sending it to the member by other electronic means (if any) nominated by the member; or
(cb)
by notifying the subsection (3A); or
(d)
by any other means that the company’s constitution (if any) permits.
member
in
accordance
with
Note: A defect in the notice given may not invalidate a meeting (see s 1322). (3A) If the member nominates: (a)
(b)
an electronic means (the nominated notification means) by which the member may be notified that notices of meeting are available: and an electronic means (the nominated access means) the
member may use to access notices of meeting; the company may give the member notice of the meeting by notifying the member (using the nominated notification means):
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(c)
that the notice of meeting is available; and
(d)
how the member may use the nominated access means to access the notice of meeting.
This subsection does not limit subsection (3). When notice by post or fax is given (replaceable rule – see section 135) (4)
A notice of meeting sent by post is taken to be given 3 days after it is posted. A notice of meeting sent by fax, or other electronic means, is taken to be given on the business day after it is sent. When notice under paragraph (3)(cb) is given (replaceable rule – see section 135)
(5)
A notice of meeting given to a member under paragraph (3)(cb) is taken to be given on the business day after the day on which the member is notified that the notice of meeting is available.
Contents of the notice ....................................................................................................................................................................... [10.210]
The contents of the notice are prescribed by s 249L.
SECTION 249L Contents of notice of meetings of members (1) A notice of a meeting of a company’s members must: (a) set out the place, date and time for the meeting (and, if the meeting is to be held in 2 or more places, the technology that will be used to facilitate this); and (b)
state the general nature of the meeting’s business; and
(c)
if a special resolution is to be proposed at the meeting – set out an intention to propose the special resolution and state the resolution; and
(d)
if a member is entitled to appoint a proxy – contain a statement setting out the following information: (i) that the member has a right to appoint a proxy; (ii)
whether or not the proxy needs to be a member of the company;
(iii)
that a member who is entitled to cast 2 or more votes may appoint 2 proxies and may specify the proportion or number of votes each proxy is appointed to exercise.
Note: There may be other requirements for disclosure to members. (2) The notice of the AGM of a listed company must also: (a)
inform members that the resolution referred to in subsection 250R(2) (resolution on remuneration report) will be put at the AGM; and
(b)
if at the previous AGM at least 25% of the votes cast on a resolution that the remuneration report be adopted were
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against adoption of the report (but the same was not the case at the AGM before that): (i) explain the circumstances in which subsection 250V(1) would apply; and (ii)
inform members that the resolution described in subsection 250V(1) as the spill resolution will be put to the AGM if that subsection applies.
Note: Subsection 250R(2) requires a resolution to adopt a remuneration report for a listed company to be put to the vote at the company’s AGM. (3) The information included in the notice of meeting must be worded and presented in a clear, concise and effective manner.
In Fraser v NRMA Ltd (1995) 55 FCR 452 at 453, it was stated that directors have a fiduciary duty to provide the members with such material information as will fully and fairly inform members of what is to be considered at the meeting and for which their proxy may be sought … such as will enable members to judge whether to attend the meeting and vote for or against the proposal or whether to leave the matter to be determined by the majority attending and voting at the meeting
The directors also have a duty to ensure that the information provided is presented in a way which can be understood by an ordinary shareholder who reads the documents quickly. A notice that could only be understood by an experienced business person is likely to be considered to be misleading and deceptive: see Deveraux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 4 ACLC 12 and Fraser v NRMA Ltd (1995) 55 FCR 452. This duty is reinforced by s 249L(2) and (3).
Resolutions Ordinary resolutions .......................................................................................................................................................................
Ordinary resolutions are motions passed by a majority (that is, at least 50%) of those members present and entitled to vote. Note: it is 50% of those members present (either in person or by proxy) and voting at the meeting rather than 50% of all members on the company's register. Indeed, for most large listed public company meetings, this represents a small percentage of the total number of members because most small shareholders do not attend the meeting or lodge proxies. The company's internal rules and/or the Corporations Act will specify when an ordinary resolution of members is required. One example where an ordinary resolution is required by the Corporations Act is an equal capital reduction: see Chapter 18. Ordinary resolutions for the removal of a director [10.220]
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of a public company (s 203D) or for the removal of an auditor (s 329) and, in some circumstances, for the appointment of a replacement director (s 203D) require extra notice, namely: • at least 21 days' notice of the meeting to the members (s 249H(3) – (4)) – shorter notice under s 249H(2) is not permitted; and • notice of “intention to move” such a resolution must be given to the company at least two months before the meeting is held. However, if the company calls the meeting after the notice of intention is given, the meeting can pass the resolution even if the meeting is held less than two months after the notice of intention was given (assuming that the members still received at least 21 days' notice of the meeting): ss 203D(2) and 329(1A). Special resolutions ....................................................................................................................................................................... [10.230]
“Special resolution” is defined in s 9.
DICTIONARY SECTION 9 (ABRIDGED) “special resolution” means: (a) in relation to a company, a resolution: (i) of which notice as set out in paragraph 249L(1)(c) has been given; and (ii)
that has been passed by at least 75% of the votes cast by members entitled to vote on the resolution; …
As with ordinary resolutions, note that the majority of 75% is not of all members, only of: • those who are entitled to vote – there may be some members who have no voting rights, or only limited voting rights (this is sometimes the case with preference shares); and • those votes actually cast – that is, of those members who bother to attend (either in person, or by completing and lodging a written proxy) and vote at the meeting. If a special resolution is to be proposed at a meeting, this intention and the terms of the resolution must be stated in the notice of meeting: s 249L(1)(c), see [10.210]. The effect of this requirement is to ensure that members are given at least 21 days' notice (s 249H, see [10.190]) and 28 days in the case of a listed public company: s 249HA. Matters that are required by the Corporations Act to be decided by special resolution include adoption or alteration of a constitution, selective capital reduction, and voluntary winding
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up. Again, the company's internal rules may specify other instances that require approval by a special resolution of members. Member-initiated resolutions ....................................................................................................................................................................... [10.240] Members may propose either ordinary or special resolutions at any general meeting (including the AGM) of the company. To be able to put any resolution, a minimum of 100 members must consent or the member(s) must control at least 5% of the votes: s 249N(1). If the company receives notice of a resolution from the member(s), the resolution must be put at the next general meeting of the company that occurs more than two months after the notice is received: s 249O(1). The proposing member(s) can request the company to distribute an explanatory statement (no longer than 1,000 words) with the notice of meeting (s 249P), as long as the statement is not defamatory: see NRMA v Snodgrass (2002) 170 FLR 175 and an interesting example can be found at http://www.maynereport.com/articles/2009/11/26-13056351.html where Senator Nick Xenophon's s 249P statement appears at the end of the Woolworths Ltd 2009 AGM notice with a reply from the company's chair.
Quorum at members’ meetings Unless the company's constitution provides otherwise, a quorum (that is, the minimum number required to be present before a meeting can proceed) is two members who must be present at all times during the meeting: s 249T(1). (Remember, a single member company passes a resolution by recording and signing the resolution: s 249B.) For the purposes of determining if a member is “present”, note s 249T(2) (or any different provision in the company's constitution). [10.250]
SECTION 249T(2) Quorum (replaceable rule – see section 135) (2)
In determining whether a quorum is present, count individuals attending as proxies or body corporate representatives. However, if a member has appointed more than 1 proxy or representative, count only 1 of them. If an individual is attending both as a member and as a proxy or body corporate representative, count them only once.
Note 1: For rights to appoint proxies, see s 249X. Note 2: For body corporate representatives, see s 250D.
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Section 249T(3) – (4) (which are replaceable rules) provide that, unless a quorum is present within 30 minutes of the time specified for the meeting, no business is to be transacted and the meeting must be adjourned. If no quorum is present within 30 minutes after the time for the resumed meeting, the meeting is dissolved. Companies choosing to have their own internal rules may have adopted a version of Table A which provides for an adjournment of one week to the same time and place. In circumstances where a quorum cannot be achieved, the court has power under s 249G to order a meeting and to validate the proceedings: see Re Totex-Adon Pty Ltd [1980] 1 NSWLR 605.
Conduct of members’ meetings As with the conduct of directors' meetings, technology may be used. Note s 249S:
[10.260]
SECTION 249S Technology A company may hold a meeting of its members at 2 or more venues using any technology that gives the members as a whole a reasonable opportunity to participate. Note: See s 1322 for the consequences of a member not being given a reasonable opportunity to participate.
Greater use of technology, particularly electronic communications (see [10.20] and [10.200]) has the potential to increase and improve shareholder participation at meetings. The same rules requiring a company to keep minute books recording the proceedings and resolutions passed at a meeting and resolutions passed without a meeting, apply to both directors' meetings and members' meetings: s 251A and see [10.20].
Voting rights and procedures at members’ meetings [10.270]
(a)
Votes cast by members at meetings may be counted in two ways:
“a show of hands” – one vote for each person entitled to vote who is actually present at the meeting; or
(b)
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“a poll” where each share carries one vote – this, therefore, involves counting any proxy votes the company has received prior to the meeting and enables a shareholder who holds more than one share to vote different ways on the one resolution.
Different rights to vote at members' meetings may attach to different classes of shares. It is a replaceable rule that, subject to those different rights, each member has one vote on a show of hands and on a poll has one vote for each share held: s 250E and ss 254A(2) and 254B (preference shares). In certain circumstances members have a right to demand a poll: ss 250K – 250L (not replaceable rules) and s 250M (a replaceable rule). Generally, a member can demand a poll on any resolution. Five or more voting members, or 5% of members with voting rights, or the chair can demand a poll: s 250L(1). A constitution can make it easier, but not harder, for a poll to be called: s 250L(2). Proxies and body corporate representatives ....................................................................................................................................................................... [10.280] A proxy is a person who is appointed by a member as an agent to attend and vote on her or his behalf at a members' meeting. Because a company cannot itself physically attend a meeting, there are provisions which enable a company that is a member of another company to appoint a representative, or, a proxy, to act on its behalf: s 249X(1A). The rules on who can be a proxy and a body corporate representative and how they can be appointed are contained in ss 249X – 250D. These provisions encourage the use of electronic means to send company information to members and to provide a procedure for electronic authentication of the appointment of a proxy. From 2011 ss 250BB – 250BD now deals with the manner in which a proxy vote can be made if the appointment specifies a way to vote, when the vote transfers to the chair from a non-chair proxy and when the vote concerns remuneration of key management personnel.
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[10.290] Figure 10.3: Issues – members’ meetings ....................................................................................................
RRs = replaceable rules (see Chapter 5) * These sections are replaceable rules ** Section 249X is a replaceable rule for proprietary companies but is a mandatory rule for public companies Note that s 249X (who can appoint a proxy) is a replaceable rule for proprietary companies, but is mandatory for public companies. For an example of a Proxy Form go to. http://www.aluminalimited.com/uploads/ briefcase/2012/2012%20AWC%20Proxy%20form%20-%20final.pdf.
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Irregularities Statutory provision ....................................................................................................................................................................... [10.300] Procedural and minor irregularities, such as lack of a quorum, insufficient notice of directors' or members' meetings or lack of opportunity to participate in a meeting being held at two or more venues, do not necessarily invalidate meetings or other proceedings: s 1322. Under s 1322(2) – (3B) the court will only interfere and invalidate a meeting or proceeding if an irregularity has caused or is likely to cause “substantial injustice” which cannot be remedied by any order of the court: see Chew Investment Australia Pty Ltd v General Corporation of Australia Ltd (1987) 6 ACLC 87; Re Vanfox Pty Ltd [1995] 2 Qd R 445; Australian Innovation Ltd v Petrovsky (1996) 21 FCR 218 (noting that s 1322 is equivalent to s 539 of the Companies (Victoria) Code 1981); Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53; Whitehouse v Capital Radio Network Pty Ltd (2004)13 Tas R 27; Re Chinese Cultural Club Limited (2004) 183 FLR 33 and Cordiant Communications (Australia) Pty Ltd v Communications Group Holdings Pty Ltd (2005) 194 FLR 322. Section 1322(4) goes further and allows “any interested person” to apply to the court for an order validating irregularities generally, not just procedural irregularities: see, for example, Jordan v Avram (1997) 141 FLR 275 (extracted below); DCT v Portinex Pty Ltd (2000) 34 ACSR 391 at 402; NRMA v Spragg (2001) 161 FLR 243; NRMA v Snodgrass (2002) 42 ACSR 371; Nagler v H Volski & Co Pty Ltd (in liq) (No 2) (2001) 20 ACLC 431; NRMA v Bradley (2002) 42 ACSR 616; Re NRMA Association Ltd; Lavercombe v Auscott Ltd (2006) 202 FLR 390.
Jordan v Avram [10.305] Jordan v Avram (1997) 141 FLR 275 (Supreme Court of Victoria) FACTS: Two families each had 50% of the shares in a company that ran a hotel. They had entered into a shareholders’ agreement giving each family the right to appoint two directors to the company. Two members of one family were appointed directors pursuant to this agreement. However, the appointments were invalid because the procedures set out in the company’s constitution had not been followed. The family sought a declaration under s 1322(4) that the appointment was not invalid, even though it was not in accordance with the constitution. DECISION: the Court held that it had jurisdiction under s 1322(4) to make an order declaring an act to be valid even though the act was not in accordance with the company’s constitution. The subsection “covers irregularities, errors and mistakes of a general nature and is expressed in very wide language”: at 275. In this case the Court held that the applicants had acted honestly in appointing the directors and made the declaration sought.
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General law principle .......................................................................................................................................................................
The general law doctrine of unanimous consent (also known as “the Duomatic principle”) can also provide assistance in instances where meeting formalities have not been complied with. In general terms, the doctrine provides that where all the members (who are entitled to attend and vote) have expressly or impliedly waived those formalities, the decisions taken by them will be binding: see Re Duomatic Ltd [1969] 2 Ch 365, and, for Australian authority, Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477. There are limits to the operation of the doctrine, the most important of which is that the members' assent must have been based on full knowledge: Herrman v Simon (1990) 8 ACLC 1,094. In some situations the members may be trying to avoid the consequences of the decision, arguing that because the formalities were not followed the decision does not bind them. [10.310]
Mentor: Test your Knowledge ...................................................................................................................................... (See http://www.legal.thomsonreuters.com.au/browse/mentor multiple choice questions and answers on the Topic of Meetings.)
for
Practice Questions ...................................................................................................................................... 1.
Outline the circumstances under which members may call a meeting.
2.
Explain why the operation of s 249D(1) and (1A) has been so contentious. How do you think the regulations should prescribe the number of members who may require the directors to call a general meeting? Give your reasons.
3.
Suppose a resolution is passed at a general meeting without a quorum being present. If a member disagreed with the resolution, what could he or she do about it?
4.
Can directors hold their meetings by way of: • a conference telephone call; or • email? Can members' hold their meetings in this way? In what ways do you think technology could make it easier for shareholders (especially small shareholders) to participate in meetings?
5.
(a)
Examine the Alumina Limited Notice of Annual General Meeting at http://www.aluminalimited.com/agm-2012 and answer the following questions: (i) Under what section was the meeting called?
(ii)
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What kind of resolutions would have been required for resolutions to approve: (A) election of directors; and (B) (C)
(b)
10
if an amendment was planned for the constitution; and the grant of the performance right? (i) What majority would have been required for these resolutions to be duly passed? (ii)
What period of notice to the members was necessary and has it been given?
(iii)
What is a proxy? How would a person have appointed a valid proxy for this meeting?
(iv)
If the member was another company, how would that company have voted at the meeting?
(v)
How would voting have been conducted at the meeting?
Examine the Alumina Limited Proxy Form at http:// www.aluminalimited.com/uploads/briefcase/2012/ 2012%20AWC%20Proxy%20form%20-%20final.pdf and explain what kind of resolutions would have been required for resolutions to approve each of the agenda Items 2-5.
Problems for Discussion ...................................................................................................................................... 1.
(a)
Huong and Byron are shareholders in HBP Ltd (HBP), a large, listed company. Between them they hold 400 ordinary shares. They are unhappy with HBP's environmental record. At the annual general meeting, Byron asks the board two questions on HBP's mining operations. He considers the answers given to be totally inadequate. He wants to ask further questions about HBP's offshore drilling operations. Is the Chair obliged to allow Byron time to ask these questions?
(b)
Toby is also a shareholder in HBP Ltd. Two weeks before the AGM he submitted a list of detailed written questions to the auditor about the content of the auditor's report to be considered at the AGM. At the AGM the auditor was represented by a very junior employee who provided brief oral answers to the written questions submitted by Toby. The Chair of the meeting then
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refused to allow Toby to ask any further questions. Have either the Chair of the meeting or the auditor breached the Corporations Act?
2.
(c)
After the AGM, Huong, Byron, Toby and 96 other small shareholders in HBP who have similar views decide to campaign to force HBP to alter its environmental policy. Huong and Byron each transfer one share in HBP to their friends Tran and Shelley so that the group now numbers more than 100. They then request the directors of HBP to call an extraordinary general meeting to consider a resolution proposing major changes to HBP's environmental policies. Advise HBP Ltd. How would your answer be different if the changes being considered by the government were in force before the AGM?
(a)
Viroserve Ltd (Viroserve) has recently acquired 48% of Aztec Ltd (Aztec) following a partial takeover bid. Viroserve would like to replace the existing directors of Aztec but the board refuses to call a meeting. Advise Viroserve Ltd.
(b)
Suppose a meeting is eventually called and resolutions put to dismiss the existing directors. On the show of hands, Viroserve is outvoted. When Aztec calls for a poll, however, the Chair refuses the request and continues with the meeting.
Discuss Viroserve's rights in this matter. 3.
Will, Chris and Mark are the only shareholders and directors of Maya Pty Ltd. Mark holds 28% of the shares and his cousins Will and Chris (who are brothers) each hold 36%. Recently, the relationship between Mark and his cousins broke down. Mark has moved to outback Western Australia and is no longer actively involved in the company's management. Will and Chris called a general meeting to be held at Will's beach house at Noosa on Good Friday at which they proposed a resolution to remove Mark from the board. The notice of meeting was sent to Mark but was delayed in the post and did not reach him until the week before Easter. At this late stage he was unable to book a plane ticket from Western Australia to Noosa so could not attend the meeting. Advise Mark.
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Guide to Problem Solving ...................................................................................................................................... The following issues may arise as discrete issues or, more often, among many issues in a problem concerned with the rights of a disgruntled member: see Chapter 14. Who may call a general meeting?
(a)
The board of directors may call a meeting.
(b)
Any director may call a meeting if: • the replaceable rule in s 249C applies; or • the company has a constitution which gives a director this right; or • the company is a listed company: s 249CA (for a listed company, this right cannot be displaced by the constitution).
(c)
The directors may be requested to call a meeting by the member(s) who hold 5% or more of the voting shares, or 100 members, subject to any regulations made under s 249D(1A): see [10.130]. Note that the advantage of members requesting directors to convene a meeting is that the costs of the meeting are met by the company. Compare this with s 249F if the members convene a meeting.
(d)
The directors must call the meeting within 21 days after the members' request is given to the company and the meeting must be held within two months of the request: s 249D(5).
(e)
The request must be in good faith in the interests of the company (Humes Ltd v Unity APA Ltd (No 1) [1987] VR 467) and the subject matter must not be within the directors' province: NRMA v Parker (1986) 6 NSWLR 517. Note that the meeting must be for “a proper purpose”: s 249Q.
(f)
If the directors fail to hold the meeting within the required time, the members who made the request (or those of their number who hold at least 50% of those members' voting rights) may do so: s 249E(1).
(g)
The court, where it is impracticable to convene a general meeting in any other way, may convene it: s 249G. See Re Totex-Adon Pty Ltd [1980] 1 NSWLR 605; Fiore v Carlton Football Club Ltd (2002) 21 ACLC 145; Beck v Tuckey Pty Ltd (2004) 49 ACSR 555; and Gratton v Carlton Football Club Ltd (2004) 187 FLR 25.
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The member(s) who hold 5% of the voting shares may convene a meeting: s 249F. (Note, this is not a replaceable rule so the right cannot be displaced by a constitution.) If this option is used, the members calling the meeting bear the expense.
Irregularities in procedure
(a)
Is there a “procedural irregularity”? Examples are: • absence of quorum; • deficiency of notice (time given, whether actually received, etc); and • failure to call a poll.
(b)
Has a “substantial injustice” been caused? The court will only invalidate proceedings where a substantial injustice has been caused: s 1322(2). See Chew Investment Australia Pty Ltd v General Corporation of Australia Ltd (1987) 6 ACLC 87; Bell Resources Ltd v Turnbridge Pty Ltd (No 2) (1988) 6 ACLC 970; Re Vanfox Pty Ltd [1995] 2 Qd R 445; Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53; Whitehouse v Capital Radio Network Pty Ltd (2004) 13 Tas R 27; Re Chinese Cultural Club Limited (2004) 183 FLR 33; and Jordan v Avram (1997) 16 ACLC 867: see [10.300].
(c)
Note that s 1322(4) applies to irregularities generally, not just to procedural irregularities. See Jordan v Avram (1997) 15 ACLC 1620 (see [10.300]); DCT v Portinex Pty Ltd (2000) 156 FLR 453; 34 ACSR 391 at 402; NRMA v Spragg (2001) 161 FLR 243; NRMA v Snodgrass (2002) 42 ACSR 371; Nagler v H Volski & Co Pty Ltd (in liq) (No 2) (2001) 20 ACLC 431; NRMA v Bradley (2002) 42 ACSR 616; Re NRMA Association Ltd [2003] FCAFC 206; and Cordiant Communications (Australia) Pty Ltd v Communications Group Holdings Pty Ltd (2005) 194 FLR 322.
Further Reading ...................................................................................................................................... Bateman G Company Meetings: What You Need to Know Butterworths, 2001 Bonollo F “Electronic Meetings” (2002) 14 Australian Journal of Corporate Law 95 Boros E “Corporations Online” (2001) 19 C&SLJ 492 Boros E “The Online Corporation: Electronic Corporate Communications Discussion Paper” (1999) ASIC and the Centre for Corporate Law and
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Securities Regulation at the University of Melbourne, http:// www.law.unimelb.edu.au/__data/assets/pdf_file/0005/1710257/146online1.pdf Boros E “Virtual Shareholder Meetings: Who Decides How Companies Make Decisions?” (2004) 28 MULR 265 Darvas P “Section 249D and the “Activist” Shareholder: Court Jester or Conscience of the Corporation?” (2002) 20 C&SLJ 390 Duffy M “Shareholder Democracy or Shareholder Plutocracy? Corporate Governance and the Plight of Small Shareholders” (2002) 25 UNSWLJ 434 Hocking J “Shareholder Participation in the Modern Company and the Square Root Rule” [2001] Butterworths Corporations Law Bulletin [20] Lipton P Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 14 and [12.100]-[12.140] Magner E Joske's Law and Procedure at Meetings in Australia 11th ed, Thomson Reuters, 2012 McConvill J “Electronic Proxies and the Corporations Act” (2002) 20 C&SLJ 141 McConvill J “The Obligation of Proxies to Vote as Directed: The Present State of Play and the Need for a Resolution” (2003) 21 C&SLJ 262 Pathak N & Lauritsen H “A Shareholder's Right to Call General Meetings – A Sharp Sword for the Disgruntled Shareholder or Just a Blunt Instrument” (2005) 23 C&SLJ 283 Shand MW “The Postponement by the Directors of Meetings Convened by a Member Under s 249F of the Corporations Law” (2001) 19 C&SLJ 160 Simmonds R “Why Must We Meet? Thinking about Why Shareholders' Meetings are Required” (2001) 19 C&SLJ 506
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Directors’ Duties – Part 1 Duty of Care, Skill and Diligence Useful Websites ..................................................................... 291 Recent Developments ............................................................ 292 Aim ......................................................................................... 292 Related Topics ....................................................................... 292 Principles ............................................................................... 292 Introduction ............................................................................... 292 Overview of directors’ duties .......................................................... 295 Who must perform the duties? ........................................................ 300 Proposals for reform: Extend directors’ duties to other persons? ............. 301
To whom are the duties owed? ....................................................... 302 Legal consequences of breaching duties ............................................ 302
Duty of care, skill and diligence ....................................................... 312
The scope of the duty of care .......................................................... 315 Issues affecting the duty of care ...................................................... 335 The statutory business judgment rule ............................................... 344
Duty to prevent insolvent trading ..................................................... 351 Consequences of contravening s 588G .............................................. 355
Mentor: Test your Knowledge ............................................... 359 Practice Questions ................................................................. 359 Essay Questions .................................................................... 360 Problems for Discussion ........................................................ 360 Guide to Problem Solving ...................................................... 363 Further Reading ..................................................................... 363
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Directors' Duties – Part 1.)
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Recent Developments ...................................................................................................................................... Supreme Court
Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 Federal Court of Australia
Australian Securities and Investments Commission v Healey [2011] FCA 717 Australian Securities and Investments Commission v Mariner Corporation Ltd [2015] FCA 589 High Court of Australia
Australian Securities and Investments Commission v Hellicar [2012] HCA 17 Shafron v Australian Securities and Investments Commission [2012] HCA 18 Fortescue Metals Group Ltd v Australian Securities and Investment Commission [2012] HCA 39
Aim ...................................................................................................................................... At the end of this Topic you should know: • the duties imposed on directors by the general law and by the Corporations Act 2001 (Cth); • the remedial consequences which result when directors breach these duties; • the conduct expected of directors under the duty of care, skill and diligence; • the conduct expected of directors under the duty to prevent insolvent trading; and • the overlap between the last two duties.
Related Topics ...................................................................................................................................... Chapter 6 Management of Companies; Chapter 12 Directors' Duties – Part 2 Good Faith and Proper Purpose; Chapter 13 Directors' Duties – Part 3 Conflict of Interest and Disclosure; Chapter 14 Members' Rights and Remedies
PRINCIPLES Introduction Chapters 11 and 12 discuss directors' duties and the legal consequences which flow from their breach. As you will soon see, these duties [11.10]
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1.
the duties of care, skill and diligence (Chapter 11);
2.
the duties of good faith and proper purpose (Chapter 12);
3.
the duties to avoid conflicts of interest and to provide proper disclosure: Chapter 13.
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Part 6-4 - Duties and powers of directors and other officers and employees Division 265-1 Care and diligence – civil obligation only; Part 6-11 Division 531 –Insolvent trading of the CATSI Act. An example of a case where the duty of care, skill and diligence of an officer of the company was emphasised was in relation to Kempsey Medical Service. Extract from the ORIC's website: http://www.oric.gov.au/publications/media-release/landmarkdecision-against-former-ceo-kempsey-medical-service.
.................................................................................................................. MR1213-16 – Landmark decision against former CEO of Kempsey Medical Service
In a landmark case the Registrar of Indigenous Corporations, Mr Anthony Beven, has today noted the judgment handed down by Justice Emmett in the Federal Court in Sydney against Mr Gerald Hoskins, former CEO of the Durri Aboriginal Corporation Medical Service (Durri). In his judgment Justice Emmett made declarations that Mr Hoskins had contravened several civil penalty provisions of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act). Justice Emmett found that Mr Hoskins had not exercised due care and diligence, had not acted in good faith in the best interests of Durri and had improperly used his position as the CEO of Durri to gain an advantage for himself and another. Mr Hoskins had arranged bonus payments to himself in 2010 and 2011 totalling $202,312; charged expenses of a personal nature to his corporate credit card and approved personal payments to a related party of Durri. Durri is a not-for-profit corporation that provides essential primary and secondary health services to Aboriginal people in the Kempsey region of New South Wales. Justice Emmett ordered that Mr Hoskins be disqualified from managing an Aboriginal and Torres Strait Islander corporation for a period of 15 years. This is the first time that orders have been made by the Federal Court to disqualify an officer from managing Aboriginal and Torres Strait Islander corporations. Mr Hoskins was also ordered to pay a pecuniary penalty of $100,000 to the Commonwealth and the costs of the Registrar.
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can also apply to other officers, apart from directors, involved in the management of the company. The duties fall into three broad categories:
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MR1213-16 – Landmark decision against former CEO of Kempsey Medical Service cont. “This is a very important decision,” Mr Beven said. “It sends a very clear message that officers must always act in the best interests of their corporation and its members, not their own.” “When the conduct of corporation officers doesn’t meet the required standard I will take prompt action to protect the interests of corporations and the important services they deliver.” The Registrar maintains a publicly available register of people who are disqualified from managing Aboriginal and Torres Strait Islander corporations. It is available on the Registrar’s website http:// www.oric.gov.au. Mr Hoskins will be the first person listed on the register. In another case concerning the Bunurong Land Council, the Federal Court in Melbourne made banning orders against four directors for breach of duty of care and diligence. Extract from the ORIC’s website: http://www.oric.gov.au/publications/media-release/federal-courtbans-former-bunurong-directors
.................................................................................................................. MR1415-29 – Federal Court bans former Bunurong directors The Federal Court in Melbourne has today made banning orders against four former directors of the Bunurong Land Council (Aboriginal Corporation) in proceedings brought by the Registrar of Indigenous Corporations, Mr Anthony Beven. Justice Gordon found that the four former directors, Sonia Murray, Mervyn Brown, Leonie Dickson and Verna Nichols, had breached their duties as directors under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act). They were also found to have failed to meet their obligation to ensure the corporation kept proper books and records. The Bunurong Land Council (Aboriginal Corporation) was incorporated on 30 June 2000 and provides Aboriginal cultural heritage services on a fee for service basis in the outer suburbs of Melbourne. Ms Murray had sole responsibility for the day-to-day management of the corporation from 2002 until January 2014, when the Registrar placed the corporation into special administration. Justice Gordon made declarations that the directors had failed to put in place policies and practices to control and monitor the activities of Ms Murray in relation to invoicing and money handling. As a result Ms Murray intermingled the corporation’s money with money in her own personal bank accounts. The inadequate records of the corporation meant the special administrator appointed in January 2014 was unable to properly identify the source and destination of large sums of money. Ms Murray admitted that between September 2008 and January 2014 she deposited $924 000 into the corporation’s bank account and withdrew more than $929 000 from it but did not keep any record of who provided the money or to whom it was paid.
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Before 2014 the Bunurong Land Council (Aboriginal Corporation) had failed to comply with its meeting obligations–holding no annual general meetings for 10 years and only one directors’ meeting in five years. The corporation also failed to pay GST to the Australian Taxation Office in the financial years from 2010 to 2013 and subsequently incurred interest charges of $23 000. Justice Gordon declared that each of the former directors breached sections 265-1(1) and 363-1(1) of the CATSI Act and that in addition Ms Murray also breached section 265-10(1). Justice Gordon ordered that Ms Murray be disqualified from managing an Aboriginal or Torres Strait Islander corporation for seven years, pay a fine of $25 000 and pay compensation of $7717.98 to the Bunurong Land Council (Aboriginal Corporation). Mr Brown and Ms Nichols were both disqualified for three years and ordered to pay a fine of $10 000. Ms Dickson was disqualified for three years and ordered to pay a fine of $5000. “The Bunurong Land Council was treated by Ms Murray as her own personal business and the other directors failed to take even basic steps to monitor what Ms Murray did and to ensure the corporation met its record keeping, meeting and taxation obligations,” said Mr Beven. “The former directors failed the Bunurong people and have demonstrated that they are not appropriate to be directors of an Aboriginal or Torres Strait Islander corporation.”
Overview of directors’ duties Reason for directors’ duties .......................................................................................................................................................................
Directors' duties exist to protect shareholders from the risk of directors causing harm to the company, including any of its property or assets as well as its reputation. The risk arises because the internal rules of most companies (for example, s 198A of the Corporations Act 2001 (Cth) (Corporations Act) – a replaceable rule) vest the power to control and manage the company's property and affairs in the board of directors. Shareholders are vulnerable to harms such as:
[11.20]
• fraud – directors taking assets, opportunities or information belonging to the company and using it for their own personal advantage; and • mismanagement – directors risking loss or devaluation of the company's property through incompetence and poor decision making. This can also include other company officers or even company employees who mismanage company resources.
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MR1415-29 – Federal Court bans former Bunurong directors cont.
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[11.30] Figure 11.1: Balancing directors’ functions ....................................................................................................
While directors' duties reduce the temptations and/or risk of fraud or mismanagement, they also create tension between the commercial and legal expectations of directors. Commercial expectations focus on the financial performance of the company. They dictate that directors, from time to time, make decisions which involve some risk of commercial failure. Directors' duties can act as a restraint on risk taking. They discourage directors from making decisions without considering whether those decisions satisfy their duties as directors. A balance is needed between the two concerns. Debate
Community concerns about the corporate collapses of the 1980s (such as Qintex, Tricontinental and the National Safety Council) led to law reforms imposing more stringent legal duties on directors. During the 1990s some commentators argued that the balance was weighted too much in favour of legal compliance, at the expense of company performance. The introduction of a statutory business judgment rule, and other reforms put in place by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act) in March 2000, were intended to redress that perceived imbalance. Despite these reforms, the corporate collapses have continued into the 2000s (for example, HIH and One.Tel). The fate of HIH led to the Commonwealth government establishing a Royal Commission to inquire into the circumstances of its collapse. The recommendations made in the Report of the HIH Royal Commission formed a major part of the reforms made by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9 Act) that came into force on 1 July 2004: see [1.130]. Following [11.40]
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the HIH Royal Commission, the Corporations and Markets Advisory Committee (CAMAC) released a discussion paper (May 2005) and “Corporate Duties Below Board Level Report” (April 2006). In the Report, CAMAC makes a number of wide-ranging recommendations, including the recommendation to extend the present directors' duties (including the duty of good faith under s 180) beyond directors and company officers to “any other person who takes part, or is concerned, in the management of that corporation”: CAMAC “Corporate Duties Below Board Level Report” (April 2006), Recommendation 1. To date, the recommendation has not been enacted in the Corporations Act. The debate about the extent of legal regulation of companies reflects a concern that people who are most well-informed about their legal responsibilities may become reluctant to take on the role of a director for fear of personal liability. Indeed, in a recent article published in the Australian Financial Review a number of Australia's leading directors have called on the new Labor government to reform the Corporations Act with the aim of extending the business judgment rule defence for directors. Experience also suggests that the imposition of more rigorous legal duties will not necessarily be more effective in protecting shareholders from the harms outlined at [11.20] and will not automatically result in the reduction of the number of corporate failures. A related problem is that it is difficult to have clearly defined directors' duties because of the diverse nature of companies – what may be expected of a non-executive director of a large, public, listed company can be irrelevant or inappropriate for a sole director of a small family business. Directors of different sized companies may also have different levels of skill and experience: see generally Farrar J Corporate Governance Theories, Principles and Practice (3rd ed, OUP, 2008).
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[11.45] Figure 11.2: Overview of duties of directors ....................................................................................................
Why directors owe duties of loyalty and good faith .......................................................................................................................................................................
Directors owe duties of good faith and loyalty because they are in a “fiduciary relationship” with their company: Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193. A precise definition of a fiduciary relationship does not presently exist. A useful starting point for the essential elements of what constitutes a fiduciary relationship was provided by the High [11.50]
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Court of Australia in the case of Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 68. The High Court stated that a fiduciary relationship arises when: “one person is obliged, or undertakes, to act in relation to a particular matter in the interests of another and is entrusted with the power to affect those interests in a legal and practical sense”, [and where there is a] “…special vulnerability of those whose interests are entrusted to the power of another”
Thus, in broad terms, a fiduciary relationship exists: • where a person (in this case, a director) is appointed to or assumes to act; • for the benefit of another person (that is, the company – in most circumstances this means the general body of members); or • in circumstances where the appointment gives the appointed person powers which could be exercised to the detriment of the other person (in this case, the company). Outline of duties of loyalty and good faith .......................................................................................................................................................................
As fiduciaries, directors must show special qualities of good faith, fairness and loyalty when they exercise the discretions and powers of their office. They cannot take advantage of their position of trust to benefit themselves at the company's expense, except with the company's full knowledge and consent. The duties of good faith and loyalty can be broken down into four overlapping subduties which will be discussed in further detail in Chapters 12 and 13. They are: [11.60]
• the duty to act in good faith in the interests of the company as a whole; • the duty to exercise one's powers for proper purposes as opposed to improper or collateral purposes; • the duty not to fetter one's discretion; and • the duty to avoid actual or potential conflicts between one's personal interests and those of the company. Outline of duties of care, skill and diligence .......................................................................................................................................................................
The second group of duties owed by directors comprises the duties of care, skill and diligence. They are discussed in detail later in this Topic. There are two subduties: [11.70]
• the duty to exercise reasonable care, skill and diligence in the performance of the functions and the exercise of the powers which form part of the director's office; and • the duty to prevent insolvent trading by the company.
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The duty of care, skill and diligence owed by directors is analogous to the duty of care owed by all people in the exercise of their profession, trade or other employment. However, for directors, this duty is now balanced by the statutory business judgment rule. The duty to prevent insolvent trading can be viewed as a specialised application of the broader duty of care and diligence.
Who must perform the duties? Source of duties .......................................................................................................................................................................
The duties of good faith and loyalty, and care, skill and diligence arise under:
[11.80]
• the general law; and • Pt 2D.1 of the Corporations Act. The language used to describe those duties in Pt 2D.1 differs from the language used by case law to describe the general law duties. Despite these differences, the general law and statutory duties are very similar. Directors and Officers .......................................................................................................................................................................
This Topic and Chapters 12 and 13 discuss the duties of good faith and loyalty, care, skill and diligence and avoidance of conflicts of interest as they apply to directors. It is important to realise that the duties may also apply to other officers of a corporation. The duties in Pt 2D.1 are owed by “directors, secretaries, other officers and employees of a corporation”: s 179(1). In relation to non-executive directors, in Morley v ASIC (2010) 81 ACSR 285; [2010] NSW CA 331, the court found a breach of s 180(1) for failing to advise the board of the requirement to disclose pertinent material to the ASX in relation to the fund to compensate asbestos victims. The terms “director” and “officer” are defined in s 9 to include “shadow” and “de facto” directors and officers. [11.90]
SECTION 9 (ABRIDGED) DICTIONARY “Officer” of a corporation means: (a) (b)
a director or secretary of the corporation; or a person: (i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
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(ii)
who has the capacity to affect significantly the corporation’s financial standing; or
(iii)
in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attached to the person’s professional capacity or their business relationship with the directors or the corporation); or
(c)
a receiver, or receiver and manager, of the property of the corporation; or
(d)
an administrator of the corporation; or
(e)
an administrator of a deed of company arrangement executed by the corporation; or
(f)
a liquidator of the corporation; or
(g)
a trustee or other person administering a compromise arrangement between the corporation and someone else.
or
Note: Section 201B contains rules about who is a director of a corporation.
Like the definition of director, the definition of officer includes any person who makes decisions affecting the corporation's business or on whose instructions the board is accustomed to act. It does not matter whether or not the person is a director of the corporation or the person's job description or title suggests that he or she is involved in management. In ASIC v Adler (2002) 168 FLR 253 at [75] Santow J held that Rodney Adler was an “officer” of HIHC (a wholly owned subsidiary of HIH), even though he had not been appointed as a director or secretary of HIHC. Adler was a director of HIH and, as such, he was a person who made or participated in making decisions affecting the whole or a substantial part of the business of HIHC (s 9(b)(i)) and also had the capacity to affect significantly HIHC's financial standing (s 9(b)(ii)).
Proposals for reform: Extend directors’ duties to other persons? Following the HIH Royal Commission, CAMAC in its “Corporate Duties Below Board Level Report” (April 2006) recommended that the current directors' duties (including the duty to act in good faith under s 180) be extended beyond directors and company officers to “any other person who takes part, or is concerned, in the management of that corporation”: CAMAC, “Report on Corporate Duties Below Board Level” (April 2006), Recommendation 1. CAMAC also recommended that the duties under ss 181, 182, 183 and 184 (see Chapters 12 and 13) should also be similarly extended: Recommendations 1, 2, 7 and 8. [11.100]
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CAMAC claims that extending directors' duties beyond directors and company officers is justified and consistent with the HIH Royal Commission's findings namely, that “all general duties imposed by Ch 2D of the Corporations Act should be imposed on directors, secretaries and the wider class of personnel encompassed within the functional definition [defined by reference to a person's role in a corporation, rather than by that person's formal status].” CAMAC's functional approach of extending duties to a wider class of individuals involved in undertaking managerial functions and responsibilities is reflected in the nature of the modern corporation, where employees and even contractors may undertake day-to-day management functions. Moreover, the modern concept of “management” has moved beyond traditional and conventional roles, where company boards are less involved in day-to-day management and greater reliance is placed on delegates and intermediate executives to undertake management functions. To date, the recommendations made by CAMAC have not been enacted in the Corporations Act.
To whom are the duties owed? Directors do not owe their duties to individual members: Percival v Wright [1902] 2 Ch 421. Instead, the duties are owed to the company as a whole: Mills v Mills (1938) 60 CLR 150. However, recent cases concerning the duties of good faith and loyalty have eroded this principle by, in some special circumstances, extending the duties to members, creditors and beneficiaries of trusts. [11.110]
Legal consequences of breaching duties Outline ....................................................................................................................................................................... [11.120] The consequences for directors and officers who breach their duties depend on:
• the particular duty breached; • the person who takes action in relation to the breach of duty; and • the sanctions imposed by the court for breach of duty. Particular duties breached .......................................................................................................................................................................
A legal action against a director for breach of her or his duties may be brought under either: [11.130]
• the general law; or
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• both (that is, a director may be sued for breach of both general law and statutory duties in the same proceeding). Evidence of a breach of a statutory duty is probably sufficient in most circumstances to prove a simultaneous breach of the equivalent general law duty. It is, therefore, quite common for a director to be sued under the Corporations Act and alternatively under the general law for breaches of directors' and fiduciary duties. Person taking action ....................................................................................................................................................................... [11.140]
A director who breaches her or his duties may be sued by:
• the company; • a liquidator, whilst acting on behalf of the company; • a creditor, but only in the special circumstances discussed later in this Chapter and in Chapter 12; • a shareholder; and • ASIC. An observation .......................................................................................................................................................................
Can misleading and deceptive statements made to the ASX in contravention of s 1041H(1) trigger a contravention of s 180(1)?
The Court held in Australian Securities & Investments Commission v Citrofresh International Ltd (No 2) (2010) 77 ACSR 69 (Liability Decision), where misleading and deceptive statements are made to the ASX in contravention of s 1041H(1), in “appropriate circumstances” will trigger a contravention of s 180(1). “Appropriate circumstances” may be where the company has been placed in jeopardy due to a contravention of the Corporations Act with little or no “countervailing potential benefit of any significance to the company”. Such jeopardy covers share price fluctuations, legal proceedings due to contraventions of the CA, the imposition of civil penalties under the CA and the loss of reputation in relation to such proceedings. See also Australian Securities & Investments Commission v Maxwell [2006] NSWSC 1052; Australian Securities & Investments Commission v Warrenmang Ltd [2007] FCA 973. Expected standard of “lay” directors is to apply “a considerable amount of skill and care” especially when in the position
[11.145]
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• Pt 2D.1 of the Corporations Act; or
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of Managing Director and CEO. Reliance on “external advisors” only relevant where those advisers are experts in the subject matter of the statements. Summary
Citrofresh International Ltd under the direction of the second defendant, Managing Director and CEO, Ravi Narain, caused two letters to be sent to the Australian Stock Exchange company announcements office. ASIC alleged those letters were “misleading and deceptive in a number of respects and contained misrepresentations”, in contravention of s 1041H(1). The statements related to the company's development of a product/s which would “now offer a global solution to reduce and eventually stop the spread of [HIV]”, “provide a nonhazardous, non-toxic and effective solution that deal [sic] with emergency disease control and prevention”, “market a range of ‘barrier protection’ products to be used in the first instance for Men's Health (post intercourse spray or lotion)”, “postcoital application will act as an ‘invisible condom’ for the prevention of STDs” and “postcoital application will have a significant impact on reducing transmission of HIV…”. This was the rehearing of an earlier case (Australian Securities & Investments Commission v Citrofresh International (2007) 164 FCR 333), in which, Goldberg J found that “the statements in the letters were not statements in relation to a financial product or service causing s 1041H to be inapplicable, as there must be some ostensible connection or relationship on the face of the conduct” with the financial product or service. Goldberg J further found that Narain did not contravene s 1041H as he was not personally liable for sending the letters to the ASX. ASIC appealed the decision to the full court (Australian Securities & Investments Commission v Narain (2008) 169 FCR 211) which allowed the appeal, finding that the letters which contained the statements related to shares in Citrofresh therefore making them “in relation to a financial product or service” and that Narain was personally liable for their publication. The full court remitted the matter to the primary judge to determine if the content of the letters was misleading and if a contravention of s 1041H had occurred, was there are also a contravention of s 180. Expert evidence was led that the statements were not backed up by scientific evidence. Goldberg J found that the letters were “misleading and deceptive” due to the “nondisclosure” inter alia that further testing was necessary before such statements could be made. The court held that Narain contravened s 1041H(1) and that he caused Citrofresh to make the same contravention. On determining whether misleading statements would result in a contravention of s 180(1), Goldberg J stated that “not every misleading
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statement made by a director on behalf of a company results in a contravention of s 180(1)” (see also Australian Securities & Investments Commission v Warrenmang Ltd [2007] FCA 973). “Much depends on the degree and extent of the misleading nature of the statement and its falsity.” Both ASIC and Narain sought to rely on [110] from Australian Securities & Investments Commission v Maxwell [2006] NSWSC 1052: Generally speaking, therefore, ss 180, 181 and 182 do not provide a backdoor method for visiting, on company directors, accessorial civil liability for contraventions of the corporations act in respect of which provision is not otherwise made. This is all the moreso since the Corporations Act makes provision for the circumstances in which there is to be accessorial civil liability. Whether there were in this case breaches of the directors duties – and, in particular, of their duty of care and diligence – depends upon an analysis of whether and to what extent the corporation's interests were jeopardised, and if they were, whether the risks obviously outweighed any potential countervailing benefits, and whether there were reasonable steps which could have been taken to avoid them.
ASIC argued that exposing Citrofresh to a contravention of s 1041H and the jeopardy the company was placed in following the misleading statements were actions that “failed to exercise a degree of care and diligence that a reasonable person acting as a managing director and chief executive officer” would have exercised. Narain argued that the above paragraph demonstrates that courts should not use ss 180 – 182 as a mechanism to expose directors to civil penalties which would normally not be available in relation to a contravention of s 1041H. The court disagreed with Narain, finding instead that Citrofresh was placed in jeopardy because of the misleading statements and there was no “countervailing potential benefit of any significance to the company in him so doing”. Goldberg J again quoted Brereton J in Maxwell [104]: There are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the act, and it may no doubt be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant…
Narain also submitted that; his actions were not taken for personal gain; he sought advice and assistance from external advisors; he sought a trading halt on the ASX as soon as he observed the “market reaction” to the statements; he did not act dishonestly; and that he was not a professional director, instead having a background in abalone processing.
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The court found that the “external advisors” from which Narain had sought advice were not “experts” with technical or scientific qualifications or experience on which could be relied upon when making the statements. The “external advisors” were experienced in corporate structures, business strategies, marketing et cetera, making it unreasonable to rely on them for scientific or technical matters. Instead, the court found that Narain should have exercised “a considerable amount of skill and care” which required him to have “an active participation in the drafting”, also heightened by his position as both Managing Director and CEO. His background in abalone processing did not excuse him from applying “the appropriate degree of skill and care required of a company director”. Narain was found to have contravened ss 1041H(1) and 180(1). Matters in relation to s 1317G (pecuniary penalty) and s 206C(1) (disqualification) were heard at a later date. Sanctions for breach .......................................................................................................................................................................
Both the general law and the Corporations Act provide for the court to make orders against a director committing a breach of a directors' duty. These orders are of two broad kinds: [11.150]
• remedies; and • penalties. Remedies, as the name suggests, are court orders whose object is to correct or remedy the state of affairs caused by the breach of duty. Penalties are orders made by the court or administrative orders made by ASIC (for example, a management banning order under s 206F) whose object is to punish or penalise the person committing the breach. Penalties can only be ordered in relation to breach of statutory duties. In order to strengthen the enforcement of the legislation, the CLERP 9 Act introduced new provisions to protect “whistleblowers” (such as officers or employees of a company) who report breaches, or suspected breaches, of the Corporations Act to ASIC, from victimisation by the company: see Pt 9.4AAA. Remedies – general law and statute ....................................................................................................................................................................... [11.160] The tables below summarise the general law and statutory remedies available to companies who sue directors for breach of directors' duties under the general law and/or the Corporations Act – note, these remedies are sometimes described as civil remedies, that is, non-criminal. In relation to the general law duties, you will see that the remedies depend on whether the duty breached derives from equity or common law principles. The duties of loyalty
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and good faith derive from principles of equity, so only equitable remedies are available if those duties are breached. The general law duty of care, skill and diligence derives from both equity and common law principles: Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 680 per Ipp J (other judges agreeing). If that duty is breached, a choice can be made between equitable and common law remedies. [11.170] TABLE 11.1 Remedies for breaches of general law duties Remedy Common law damages
Definition Compensation for breach of: • duty of care, skill and diligence
•
other duties where breach involves fraud.
Equitable compensation or damages
Similar to common law damages but for duties deriving from equitable principles.
Account of profits (equity)
Where company suffers no loss but directors make profits – order to disgorge profits made from breach. Getting out of an unfavourable contract, where director has undisclosed interest in contract.
Rescission* (common law and equity)
Case Examples Daniels v Anderson (1995) 37 NSWLR 438
Declaration of trust Court order returning property (equity) acquired by director in breach of duty to company. Court declares that the director holds the property as trustee for the company. Termination Termination of director's contract of employment where breach amounts to serious misconduct.
Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508; O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262; Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421; on appeal Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 Cook v Deeks [1916] 1 AC 554; Guinness plc v Saunders (1990) 8 ACLC 3061
* A company's right to rescind a contract might be lost if an outsider (that is, a party independent of the company and the director) is also a party to the contract.
[11.180] TABLE 11.2 Remedies for breaches of statutory duties Remedy Injunctions and damages Compensation
Requirements Contravention or suspected contravention of Corporations Act
Corporations Act s 1324 – action can be brought by any person “affected by contravention”
• Under insolvent trading (see below)
• s 588M – action by liquidator
•
•
In relation to an alleged breach of civil penalty provisions in Corporations Act
s 1317H: action by company or liquidator
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Remedy Court examination of director and remedial orders
Requirements Directors suspected of fraud and/or breaches of duties
Corporations Act • ss 596A, 596B or 597 – court examination at request of liquidator or other eligible applicant
• Oppression remedies/winding up
Where no action taken against directors by company despite breaches of Pt 2D.1
s 598 – remedial orders
• Pt 2F.1 – oppression action shareholders bring action
•
s 461(1) – winding up
Penalties – under statute only
Penalties can be ordered against a director who breaches her or his statutory duties: ss 180 – 183 and 588G. There are two kinds of penalties available, depending on the circumstances in which the breach took place: [11.190]
• civil penalties; and • criminal penalties. Civil penalties
Civil penalties can be imposed against a director who breaches the abovementioned statutory duties. For this reason, the statutory duties are called civil penalty provisions. The types of civil penalties are described in the following table. Note: only ASIC can bring civil penalty cases against directors. A director can be subject to an application by ASIC seeking the imposition of civil penalties and can be sued for remedies by the company or others in relation to the same breach of statutory duty. These are civil proceedings but because the orders that may be made (disqualification or a pecuniary penalty) involve the imposition of a “penalty”, a defendant may claim privilege in response to an application for discovery of documents: Rich v ASIC (2004) 220 CLR 129. Since the proceedings for civil penalties are civil in nature, the burden of proof required is that of the civil standard – the balance of probabilities – and the double jeopardy rule (that defendants cannot be tried twice for the same offence) does not apply. However, the Crown may also bring criminal proceedings against a person for conduct that is substantially the same as conduct in respect of which orders had already been made for contravention of a civil penalty provision: s 1317P; and see Adler v DPP (Cth) (2004) 149 A Crim R 378. If the Director of Public Prosecutions is of the view that criminal proceedings are warranted against a director or company officer, the burden of proof is that of the criminal standard – that is, beyond a reasonable doubt – and the double jeopardy rule will apply. Two recent decisions from the Supreme Court of Victoria have found directors to be in breach of their duties, following investigations from ASIC. The first related to the involvement of the former managing director of AWB [11.200]
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Limited and the latter, the Chief Financial Officer of AWB Limited. In both instances the Court found that managing director and the CFO had contravened s 180(1) of the Corporations Act.
...................................................................................................................... Former AWB Managing Director Found to have Breached his Duties ASIC Media Release 12-191MR, 9 August 2012
The Supreme Court of Victoria today ordered that Andrew Alexander Lindberg, the former Managing Director of AWB Limited (AWB), pay a pecuniary penalty of $100,000 and be disqualified from managing corporations until 14 September 2014 after finding that he breached his duties as a director of AWB. In May 2012 Mr Lindberg admitted to four contraventions of section 180(1) of the Corporations Act 2001 arising from AWB’s supply of wheat to Iraq under the United Nations Oil-for-Food Programme and subsequent inquiries conducted by AWB in relation to that supply (refer: 12-109MR). The penalties imposed by the Court reflect the joint submission made by ASIC and Mr Lindberg as to the appropriate penalty for the admitted contraventions. Handing down his decision this morning, Justice Robson said that the contraventions did not involve deliberate wrongful acts, dishonesty or any moral turpitude but that Mr Lindberg had nonetheless “failed to perform his duties as a reasonable director or officer would in his situation”. ASIC Chairman Greg Medcraft said the outcome today is a reminder of the requirements for proper corporate governance. “Good corporate governance requires executive directors to make adequate enquiries in relation to matters before them and properly inform the Board,” Mr Medcraft said. © Australian Securities & Investments Commission. Reproduced with permission.
...................................................................................................................... Former AWB Chief Financial Officer Found to have Breached Duties ASIC Media Release 12-192MR, 10 August 2012 ASIC notes the decision of Justice Robson of the Supreme Court of Victoria in the matter of Paul John Ingleby, the former Chief Financial Officer of AWB Limited (AWB). Justice Robson found that Mr Ingelby had contravened section 180(1) of the Corporations Act 2001 (Corporations Act) and ordered that he be disqualified from managing corporations until 31 December 2012 and pay a pecuniary penalty of $10,000. Both ASIC and Mr Ingleby had recommended penalties of a disqualification of 15 months and a pecuniary penalty of $40,000. In June 2012, Mr Ingleby admitted contravening the Corporations Act by failing to act upon information available to him to ascertain whether or not inland transport fees were ultimately paid to the government of Iraq arising from AWB’s supply of wheat to Iraq under the United Nations Oil-for-Food Programme (see 12-126MR). © Australian Securities & Investments Commission. Reproduced with permission.
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[11.210] TABLE 11.3 Penalties for breach of civil penalty provisions Type of Orders Management banning order
Pecuniary penalty up to $200,000
Pay compensation to corporation
Requirements • Civil penalty contravention.
•
Order to be made if satisfied that disqualification is justified.
• Civil penalty contravention.
•
Order only to be made where contravention materially prejudices the interests of the corporation, its members, its ability to pay its creditors, or is serious.
Loss is suffered because of contravention of civil penalty provision.
Corporations Act ss 206C, 1317E; see also ASC v Donovan (1998) 28 ACSR 583; ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1); and ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369) ss 1317E and 1317G; see also ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1); and ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369)
s 1317H; see also ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1); and ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369)
The effectiveness of these penalties is clearly illustrated in the following case. ASIC v Adler (largely affirmed on appeal Adler v ASIC) [11.215] ASIC v Adler (2002) 168 FLR 253 (NSWSC) (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1)
FACTS: On 15 June 2000, HIH Casualty & General Insurance Limited (HIHC), a wholly owned subsidiary of HIH Insurance Limited (HIH), advanced $10 million to Pacific Eagle Equity Pty Ltd (PEE), a newly registered company controlled by Rodney Adler. Adler was a non-executive director of HIH (but not a director of HIHC). The advance was supposed to be used in making profitable investments for HIHC. This payment was made at Adler’s request and organised by Williams (the CEO of HIH) and Fodera (the finance controller) without any documentation and without the knowledge of the other directors of HIH. During the next two weeks PEE bought $3.9 million worth of shares in HIH on the stockmarket. In early July 2000, Australian Equities Unit Trust (AEUT) was formed with PEE as its trustee. In August and September 2000 AEUT bought shares in unlisted technology and internet companies from Adler Corporation (controlled by Rodney Adler and his wife) resulting in a loss of $3.8 million. Later in 2000 AEUT made unsecured loans of more than $2 million without adequate documentation to companies and funds associated with Adler: see diagram of the facts at [12.540]. After the collapse of HIH, ASIC brought civil penalty proceedings against Adler, Williams and Fodera alleging breaches of directors’ duties, including: • s 180(1) (duty of care and diligence); • s 181 (duty to act in good faith and for a proper purpose: see Chapter 12); and
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• ss 182 – 183 (improper use of position and improper use of information: see Chapter 13). Other allegations included: • contravention of the provisions regulating related party transactions (Ch 2E): see • Chapter 13; and • contravention of the provisions regulating financial assistance (Pt 2J.3). DECISION: ASIC’s application was successful and Santow J made the following orders: • Disqualification: Adler was banned from acting as a director of a company for 20 years and Williams was banned for 10 years. • Pecuniary penalties: Adler
$450,000
Adler Corporation
$450,000
Williams
$250,000
Fodera
$5,000
• Compensation to HIHC Adler, Williams and Adler Corporation were ordered to pay HIHC total compensation of $7,986,402. (Appeals by Adler and Williams were largely unsuccessful: see Adler v ASIC (2003) 179 FLR 1.)
Another illustration is ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369) in which the former directors of the Water Wheel group of companies (including well known businessman, John Elliott) were ordered to pay pecuniary penalties, compensation to the companies and were disqualified from acting as a director for varying terms for breach of the insolvent trading provisions: s 588G. Criminal penalties
In the most serious cases, the Crown may bring criminal charges against directors, regardless of the fact that civil penalty orders have already been made in respect of substantially the same conduct that is the subject of the criminal charges: s 1317P. In Adler v DPP (Cth) (2004) 149 A Crim R 378 Rodney Adler argued unsuccessfully that criminal proceedings against him should be permanently stayed as an abuse of process because he had already been punished for the same conduct in the civil penalty proceedings: see ASIC v Adler (2002) 168 FLR 253. The New South Wales Court of Criminal Appeal held that launching the criminal prosecution was not an abuse of process, noting that the criminal offences differed in important respects to the causes of action in the civil proceedings (leave to appeal to the High Court [11.220]
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from this decision was refused on 10 December 2004). Criminal penalties can be imposed against a director or company officer who breaches ss 184 or 588G(3) in the circumstances described in the next table. In Kwok v The Queen (2007) 64 ACSR 307, the New South Wales Court of Criminal Appeal imposed a sentence of 18 months periodic detention for a breach of directors' duties under s 184 of the Corporations Act. In sentencing the defendant director the Court reaffirmed that the purpose of sentencing was to provide both general and personal deterrence for intentionally breaching directors' duties. In relation to the element of “dishonesty” in s 184 the Court of Criminal Appeal in Kwok applied the reasoning of the High Court in Peters v The Queen (1998) 192 CLR 493 at 504, where the High Court stated that the meaning of “dishonesty” is to be determined according to the ordinary notions of what the community would regard as dishonest, judged by a jury who decide by reference to “the standards of ordinary decent people.” [11.230] TABLE 11.4 Criminal penalties Directors' Duty s 184(1)
Breach of Duty Required yes
s 184(2)
yes
s 184(3)
yes
s 588G(3)
yes
Additional Element Recklessly or intentionally dishonestly failing to act in good faith and for a proper purpose. Dishonestly and intentionally or recklessly misusing position. Dishonestly and intentionally or recklessly misusing information. Dishonestly failing to prevent insolvent trading.
Duty of care, skill and diligence Description of duty .......................................................................................................................................................................
You will recall that a director owes the company a duty to exercise reasonable care and skill in the performance of the functions and the exercise of the powers of a director: Daniels v Anderson (1995) 37 NSWLR 438 at 501 per Clarke and Sheller JJA. The director's duty of care arises under: [11.240]
• the director's contract of employment (if any); • the general law; and • s 180(1) of the Corporations Act.
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.......................................................................................................................................................................
An executive director is a director employed by a company under a contract of service. A non-executive director does not normally have a contract with the company. Typically, an executive director is a full-time employee of the company and is generally involved in the day-to-day management of the company. A non-executive director is not generally employed full time by the company and is instead required to provide an independent view in board meetings. A term of the executive director's employment contract will be a requirement that the director, as an employee of the company, exercise the care, skill and diligence expected of a person who occupies that position. The term will either be expressly agreed to or implied by operation of law: Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555; Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 287-288; ASIC v Adler (2002) 168 FLR 253 at 347 [372(5)]; ASIC v Vines (2003) 182 FLR 405. [11.250]
General law (common law and equitable) duties ....................................................................................................................................................................... [11.260]
A director owes a duty of care, skill and diligence:
• under the law of tort (part of the common law); and • in equity. There is no substantial difference between the equitable and common law duties: Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 at 435. Evidence which proves that a director breached her or his common law duty of care should also be sufficient to prove a simultaneous breach of the equitable duty of care. However, the distinction between common law and equitable duties remains important because the remedies available for breach of the two duties differ. Statutory duty ....................................................................................................................................................................... [11.270]
The statutory duty of care and diligence is set out in s 180(1).
SECTION 180(1) Care and diligence – civil obligation only Care and diligence – directors and other officers A director or other officer of a corporation must exercise their powers and
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discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a)
were a director or officer of a corporation in the corporation’s circumstances; and
(b)
occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Note: This subsection is a civil penalty provision (see s 1317E).
Section 180(1) uses the words “care and diligence” rather than the “care, skill and diligence” formula of the general law. Under s 180(1), the standard of care required by a director or officer is assessed by reference to: • the company's circumstances; • the position and responsibilities of the director or officer within the company; and • the experience of the director or officer in question. The requirement under s 180(1) that a director or officer must exercise their powers in accordance with that of a reasonable person has ordinarily imposed an objective standard for the director or company officer to satisfy. Despite differences of expression, the duties of care imposed by s 180(1) and by the general law are similar. It appears that the requirement of “care and diligence” in s 180(1) assumes or implies a requirement of skill as well: Vrisakis v ASC (1993) 9 WAR 395 at 172 per Malcolm CJ, cited with approval in Daniels v Anderson (1995) 37 NSWLR 438 at 500 per Clarke and Sheller JJA; and South Australia v Clark (1996) 66 SASR 199 at 1,035-1,036; see also ASC v Donovan (1998) 28 ACSR 583; Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577; ASIC v Adler (2002) 168 FLR 253 at [372]-[375]; ASIC v Rich (2003) 174 FLR 128 at [40]-[43]; ASIC v Vines (2003) 48 ACSR 282 at [20]-[21]; and ASIC v Australian Investors Forum (No 2) (2005) 53 ACSR 305. For the purposes of this Topic, “care”, “skill” and “diligence” will be treated as overlapping requirements applying to both the general law and statutory duties of care. Overlap between general law and statutory duties .......................................................................................................................................................................
While the duties of care owed by directors under general law and s 180(1) are substantially similar in meaning and effect, there are some differences between them. The main differences are summarised in the following table. [11.280]
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TABLE 11.5 General law versus statutory duties of care Factors Who owes duty Content of duty
Breach of duty
Consequences of breach
General Law (Common Law and Corporations Act (s 180(1)) Equity) Owed by directors and senior executive Owed by directors and officers (s 9 – officers. “officer”). Duty to act with care and skill. Duty to act with care and diligence. Recent cases indicate that this also implies a requirement of skill, so the content of the duties is the same. There must be evidence of: Evidence of a breach of duty is sufficient. • a breach of duty and Don't have to prove that the breach • damage suffered by the company. caused damage to the company but a case where there is no damage would be very rare. Differences in measure of compensa• Civil penalties if proceedings tion between common law (damages) brought by ASIC. and equity (compensation or account of profits). • No criminal penalties for breach, cf other duties
•
General law remedies available to the company.
The scope of the duty of care General .......................................................................................................................................................................
To determine whether a director has complied with or breached her or his duty of care, it is necessary to compare the director's actual conduct against the standard of conduct expected of the director by the director's duty of care. If the director's conduct is either the same as or above the standard required by the law, no breach of duty has taken place. Where the director's conduct falls short of the required standard, a breach of duty occurs and serious consequences may result. [11.300]
Leading Australian authority on duty of care .......................................................................................................................................................................
The leading Australian case is AWA Ltd v Daniels (generally referred to as “the AWA case”). The New South Wales Court of Appeal re-examined the requisite standard of care for the duty of care, skill and diligence in the case of Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1. Recently, the High Court applied the duty in the context of an ASX announcement that was deemed to be misleading and approved by the board of James Hardie Ltd: Australian Securities & Investments Commission v Hellicar [2012] HCA 17. All three decisions are discussed below. [11.310]
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[11.290]
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AWA Ltd v Daniels; on appeal Daniels v Anderson [11.312] AWA Ltd v Daniels (1992) 10 ACLC 933; on appeal Daniels v Anderson (1995) 37 NSWLR 438 (New South Wales Supreme Court and Court of Appeal) FACTS: AWA Ltd (AWA) lost nearly $50 million as a result of foreign exchange (FX) transactions. The board of directors had decided to go into FX trading to protect the company against fluctuations in foreign currency between the time that it placed orders with overseas suppliers and the date the product was delivered and paid for. The board laid down the general policy to be followed and appointed Koval to manage these operations. Figures given to the board indicated that the FX trading was very profitable. However, these figures did not show the company’s real exposure to possible losses and did not reveal that substantial losses had already occurred and had been concealed by Koval. AWA’s management had failed to implement the policy laid down by the board requiring proper internal records and control mechanisms. Koval was operating without supervision and was able to conceal the true position from the board for more than two years. During this time, AWA’s auditors conducted two audits (Daniels was the responsible partner) but neither the figures given to the board nor the auditors’ reports disclosed the true picture. The evidence showed that Daniels was aware of the defects in AWA’s system of internal controls but, although he mentioned this to the CEO (who was also the Chairman) and to senior management, this warning was not passed on to the board. After the true position finally became apparent, AWA sued the auditors for negligence on the basis of their failure to bring the defects in the internal control systems to the board’s attention. The auditors denied liability and claimed that AWA had been contributorily negligent. The auditors also alleged that both the full-time executive director, Hooke (who was chairman and managing director), and the non-executive directors had been negligent. DECISION: Both Rogers CJ, at first instance, and the Court of Appeal held that the auditors had been negligent and AWA (and Hooke) was contributorily negligent. Both rejected the claims of negligence against the non-executive directors and held that they had not breached their duty of care, skill and diligence to the company. However, the majority judgment in the Court of Appeal (Clarke and Sheller JJA) adopted a more rigorous approach, imposing more stringent standards on directors than Rogers CJ at first instance.
Vines v ASIC [11.314] Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1 (New South Wales Court of Appeal) FACTS: Vines was the Chief Financial Officer of GIO Australia Holdings Ltd (“GIO”), a company listed on the ASX. On 25 August 1998, a hostile takeover bid for the shares in GIO was announced by AMP Ltd. In response to the takeover announcement and as required by the Corporations Act, GIO prepared a Part B statement which included a profit forecast for the GIO group for the year 1998-1999 of $250 million. The profit forecast for the
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group included a profit forecast for a subsdiary of GIO, GIO Reinsurance, of $80 million. Vines was responsible for the profit forecasts included in the Part B statement which was published on 16 December 1998. GIO Reinsurance had earlier been exposed to significant claims as a result of hurricanes in the Gulf of Mexico. The claims had commenced in September 1998, a month before the hostile takeover was announced and almost three months before the Part B statement was released to the market. It was alleged by ASIC that Vines had contravened the statutory duty of care, skill and diligence under the Corporations Act as a result of publishing an improbable profit forecast. ASIC alleged that Vines had contravened the statutory duty of care, skill and diligence under the Corporations Act on seven occasions: (1) Profit Forecast of 9 November tabled by Vines at a Directors Meeting of GIO; (2) Media Release issued by GIO on 17 November 1998 and the CFO’s report tabled at a board meeting on 17 November 1998; (3) Email dated 22 November 1998 sent by Vines to members of Due Dilligence Committee which allegedly contained the $80 million profit forecast for GIO Reinsurance; (4) Management Sign Off of a Draft Part B statement, which included the $80 million profit forecast and signed by Vines on 8 December 1998; (5) Advice provided by Vines to the Due Diligence Committee on 8 December 1998, confirming profit forecasts; (6) Advice provided to the Auditor confirming profit forecasts and signed by Vines; and (7) Conduct after 8 December 1998 when no correction was made to the profit forecast in the Part B statement, despite AMP announcing an increased bid for GIO. Vines denied the allegations made by ASIC and further argued an honesty defence based on the fact that he had acted honestly throughout and did not stand to gain personally from the alleged contraventions. DECISION: Austin J at trial held Vines had contravened the Corporations Act 11 times and was fined $100,000 and disqualified from acting as a director for three years: ASIC v Vines (2006) 58 ACSR 298. On appeal, the New South Wales Court of Appeal held Vines had contravened the Corporations Act on three occasions, namely, contravention involving: (4) Management Sign Off of a Draft Part B statement, which included the $80 million profit forecast and was signed by Vines on 8 December 1998; (5) Advice provided by Vines to the Due Diligence Committee on 8 December 1998, confirming profit forecasts; and (7) Conduct after 8 December 1998 when no correction was made to the profit forecast in the Part B statement, despite AMP announcing an increased bid for GIO. The New South Wales Court of Appeal was of the opinion that Vines breached the statutory duty of care, skill and diligence on the basis that “it was improbable GIO Reinsurance would achieve the $80 million profit forecast” and Vines “knew or ought to have known” of the improbability of the profit forecast. Vines was, therefore, under a duty to advise the Due Diligence Committee before executing the Management Sign Off that the the GIO Reinsurance profit forecast was improbable: Vines v ASIC (2007) 62 ACSR 1 at [429]-[430] per Spigelman CJ.
ASIC v Hellicar [11.316] Australian Securities & Investments Commission v Hellicar [2012] HCA 17 (High Court of Australia)
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FACTS: James Hardie Ltd was the holding company of a group companies involved in the manufacture and sale of products containing asbestos. James Hardie was listed on the ASX. Two wholly owned subsidiaries of James Hardie Ltd were sued for personal injury suffered by customers who had come into contact with asbestos products. A new company, James Hardie Industries NV (“JHINV”), would later be incorporated in the Netherlands and that company would become the immediate holding company of James Hardie Ltd and the ultimate holding company of the James Hardie group of companies. On 15 February 2001, the board of James Hardie Ltd met to consider the separation of the two subsidiaries from the parent entity. At a board meeting called by directors of James Hardie Ltd the separation proposal along with the following ASX announcement were considered: ASX Announcement The Chairman tabled an announcement to the ASX whereby the Company explains the effect of the resolutions passed at this meeting and the terms of the Foundation (ASX Announcement). At the February board meeting it was resolved that:
(a) the Company approve the ASX Announcement; and (b) the ASX Announcement be executed by the Company and sent to the ASX. On 16 February 2001, James Hardie Ltd sent to the ASX a media release entitled “James Hardie Resolves its Asbestos Liability Favourably for Claimants and Shareholders” (“the final ASX announcement”). The document referred to the establishment of the Foundation stating: The Foundation [MRCF] has sufficient funds to meet all legitimate compensation claims anticipated from people injured by asbestos products that were manufactured in the past by two former subsidiaries of James Hardie Ltd. However, the Foundation did not have sufficient funds to meet all legitimate compensation claims which were reasonably anticipated in February 2001 from people injured by asbestos products that were manufactured in the past by the two subsidiary companies. ASIC alleged, among other things, that the directors, by approving the draft announcement, had breached their directors’ duties and had contravened s 180(1) of the Corporations Act. ASIC sought declarations of contravention, pecuniary penalties and orders disqualifying the respondents from managing corporations. AT TRIAL: Gzell J, found that the directors of James Hardie Ltd had breached their duties under s 180(1) of the Corporations Act and subsequently made declarations of contravention and other orders in respect of each of the directors. According to Gzell J, the directors had breached their duties with respect to the ASX announcement on the basis that the directors ought to have known that the announcement was misleading and had voted in favour of the resolution. In relation to the non-executive directors who were in physical attendance at the board meeting (Ms Hellicar and Messrs Willcox, Brown, Terry and O’Brien) Gzell J was of the opinion that all had breached s 180(1) by assenting to the resolution and approving the draft ASX announcement.
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In relation to the non-executive directors who participated in the meeting by telephone (Messrs Gillfillan and Koffel), Gzell J was of the view that they also had breached s 180(1) by failing either to request a copy or familiarise themselves with the contents of the ASX draft announcement or to abstain from voting in favour of the resolution. According to His Honour, the general counsel and company secretary of James Hardie Ltd (Mr Shafron) did not advise, but should have advised, the board that the ASX draft announcement “was expressed in too emphatic terms concerning the adequacy of Coy and Jsekarb’s funding to meet all legitimate present and future asbestos claims and in that respect it [the announcement] was false or misleading”. Failing to provide advice of this kind was a failure to discharge his duties to James Hardie Ltd with the degree of care and diligence that a reasonable person would exercise if he or she were an officer of a corporation. ON APPEAL TO THE COURT OF APPEAL: The directors of James Hardie Ltd appealed to the Court of Appeal against the declarations of contravention, pecuniary penalty orders and disqualification orders, and against the primary judge’s refusal to excuse the contravention. They submitted that the trial judge had erred and should not have found that the draft ASX announcement which ASIC alleged had been tabled and approved at the February board meeting had been either tabled or approved. The Court of Appeal concluded that ASIC did not establish at trial that the ASX draft announcement was tabled at the February board meeting or that the non-executive directors had approved that draft announcement. The Court of Appeal allowed the appeals by the directors. Finding in their favour the Court of Appeal set aside the declarations and orders made against each of the non-executive directors of James Hardie Ltd and ordered that ASIC’s proceedings against those parties be dismissed. ON APPEAL TO THE HIGH COURT: ASIC appealed the Court of Appeal’s decision, by special leave to the High Court. The High Court allowed the appeal and held that notwithstanding the inaccuracies in the board minutes, the minutes should stand as a contemporaneous and formal record of the actions of the directors at the board meeting. The High Court further held that ASIC’s decision in not calling a key witness which may have assisted the directors of James Hardie Ltd caused no procedural unfairness and there had not been miscarriage of justice warranting a new trial.
...................................................................................................................... Hardie Case Puts Boards on Notice
Malcolm Maiden, The Age, 4 May 2012
The High Court’s decision on the James Hardie case is not just a huge victory for the Australian Securities and Investments Commission. The court has backed ASIC in a way that re-arms all government regulators in civil court cases. It’s also a lighthouse decision for directors and boards. There’s no new precedents for them. But the confirmation of the NSW Supreme Court’s finding that Hardie directors breached their duties by approving the release of a stock exchange announcement that contained misleading information combines with last year’s Centro decision in the Federal Court to make it crystal clear directors must have a detailed understanding of their companies.
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Hardie Case Puts Boards on Notice cont. There are lessons for the chairmen of boards, too. Boards that comprise a suite of individual experts, which is most of them, have embedded risk: all directors need to be able to be competent in all matters that land on the boardroom table. Board papers need to be accurate and exhaustive, and they must be read, from top to bottom, and understood. Processes for putting information in front of directors must also be improved: the size of the directorial talent pool will be reduced by these changes, but they are essential. The Hardie case has been a marathon, and a little history is needed. Hardie decided in 2001 to legally relocate to the Netherlands, and leave behind a new and separately funded company, the Medical Research and Compensation Foundation, to meet future asbestos-related claims flowing from the days when it made and sold products that contained asbestos. Hardie’s board approved the split on February 15, 2001, and the following day told the stock exchange the new vehicle’s funding of $293 million was sufficient to meet the best estimate of future asbestos liabilities. The statement was not even close: by 2003 estimated liabilities had risen to more than $1.5 billion. ASIC launched its case against former directors and executives of Hardie in 2007, claiming they had breached their duties when they approved the draft of the stock exchange statement. Minutes of the board’s February meeting were tendered by ASIC. They had been approved by the board at its next meeting in April 2001, and recorded that a draft of the stock exchange announcement had been tabled and approved. A potential witness, David Robb, the lawyer who had supervised the preparation of the board minutes, was not called by ASIC, but the court rejected arguments the board had not reviewed and approved the draft statement, and found the directors had breached their duties by approving it. That decision was then overturned in the NSW Court of Appeal. It found ASIC owed a special duty of fairness when it ran court cases, and had breached it, fatally undermining its case, when it did not call Mr Robb. The High Court yesterday allowed ASIC’s appeal of the Court of Appeal’s decision. There was no basis for inferring Mr Robb might have given evidence favourable to the directors, it found, and no unfairness had been caused by ASIC’s decision not to call him. That’s a crucial finding for ASIC and other regulators who run civil cases, including the Australian Competition and Consumer Commission. Government agencies all have a “model litigant” duty to run fair legal actions. The High Court has, however, restored the status quo for that duty, and rejected the Appeals Court’s finding the duty extends to the calling of all material witnesses in cases government agencies run. It has, in effect, removed a handicap on ASIC as a litigant, and done so in a way that flows right through the system. All government agencies must be model litigants. But they can once again shape their witness lists without running the risk their cases will be torpedoed on appeal.
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For directors and non-executive directors in particular, the High Court case makes several things even clearer than they were after the Centro decision in June last year. In Centro, Federal Court judge John Middleton found directors had breached their duties in 2007 by signing off on accounts that failed to recognise Centro needed to repay billions of dollars of debt within a year - a task that defeated it after the global crisis erupted. The directors had not “understood and applied their minds” to the accounts, he said, adding that a board sat at the apex of a company and had the greatest responsibility to do so. The NSW Supreme Court decision on James Hardie that the High Court has resurrected goes further, by making clear directors need to not only be able to dissect company accounts, but be able to dissect and understand any complex corporate manoeuvre. In the case of Hardie, that required a detailed understanding of the actuarial assumptions behind reports the building group had commissioned into its asbestos liabilities, for example. The decisions impose very high standards on all directors. They need to have a range of skills, not just a specialty, and they must satisfy themselves their companies have processes in place to bring information before directors enabling them to sign off on a proposal with confidence. ASIC’s chairman, Greg Medcraft, correctly noted yesterday these requirements had always existed. Hardie makes them more explicit, however - and it’s now cast in stone.
Expected standard of conduct .......................................................................................................................................................................
Care
A director is bound to take reasonable care in the performance of her or his office: Daniels v Anderson (1995) 37 NSWLR 438 at 500; ASIC v Adler (2002) 168 FLR 253 at [372]. The requirement of “reasonable care” suggests that there is an objective standard of care which all directors are expected to meet regardless of the experience of the director or the size of the company involved. However, the standard should not be viewed as a wholly objective one. It may vary from case to case depending on: [11.320]
• the size and the business of the particular company; and • the experience, knowledge and/or skills that the director has or held out herself or himself as having at the time of appointment. These factors can affect the standard of care expected by both the director's general law and statutory duties of care: Daniels v Anderson (1995) 37 NSWLR 438 at 500; ASIC v Adler (2002) 168 FLR 253 at [372]. The words used in the
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statutory duty (s 180(1)) to indicate this are “reasonable person”, “director or officer of a corporation in the corporation's circumstances” and “occupied the office held by, and had the same responsibilities within the corporation”. The judgment of Austin J in ASIC v Rich (2003) 174 FLR 128 gives some guidance as to how these words are to be interpreted. In this case, the director in question (the non-executive chair of One.Tel) was a chartered accountant with considerable business experience. Austin J held (at [50]) that his “qualifications, experience and expertise, and his occupation of the position of ‘foundation’ director, chairman and chairman of the finance and audit committee, are all matters that make up or contribute to [his] responsibilities within the corporation”. Austin J re-examined the requisite standard of care required under the statutory duty in ASIC v Vines (2006) 58 ACSR 298 where his Honour stated at [1,094]: my view is that to hold that the legislature has lowered the statutory standard of care and diligence below the civil standard by rendering the statutory provision a civil penalty provisions would be inconsistent with the legislative history of [the statutory duty] and also with the present case law.
Austin J went on further to conclude at [1,096]: The case law since that time has proceeded on the basis that developments with respect to the general law standard of care and diligence of company directors and officers are relevant and highly persuasive, if not directly applicable, to the interpretation of the statutory standard. Daniels v Anderson (1995) 37 NSWLR 438, a case about the general law standard of care of company directors, has been applied at first instance in the statutory context. I referred to the principal authorities in ASIC v Vines (2003) 48 ACSR 322. Sitting at first instance, I would not be justified in holding that the location of the [statutory duty] in the civil penalty regime had the effect of setting the standard of care at a lower and less demanding level than the general law.
In Parker v Tucker; Re Purcom No 34 Pty Ltd (In Liq) [2010] FCA 263 the court found that, in line with Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; Daniels v Anderson (1995) 37 NSWLR 438, a duty of care and skill at common law and in equity is owed, and that a similar duty of care and diligence was owned under s 180, Sheahan v Verco (2001) 79 SASR; Daniels v Anderson (1995) 37 NSWLR 438; Australian Innovation Ltd v Petrovsky (1996) 21 FCR 218. The acts of the director in question should be assessed against “what an ordinary person, with the knowledge and experience of the defendant might be expected to have done in the circumstances if he or she was acting on their own behalf” Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; Australian Securities Commission v Gallagher (1993) 11 WA R 105. The standard of reasonable care is that of an “ordinary prudent person” as noted in The Equitable Fire Insurance Co [1925] 1 Ch 407. It was
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held that when assessing the standard under the Corporations Act, the Court must consider the “company circumstances and the director's position and responsibilities within the company”. In Purcom, the court found that where there was the potential for conflict of interest and duty, that “special vigilance” should have been applied. Recently, the High Court re-evaluated the standard for the duty of care in the case of Shafron v Australian Securities and Investments Commission [2012] HCA 18. The High Court makes some interesting observations concerning the application of the statutory duty to company officers including company secretaries. According to the High Court, the statutory duty contained under s 180(1) covers “responsibilities [that are] … not confined to statutory responsibilities; they include whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer.” The case is discussed below. Shafron v ASIC [11.325] Shafron v Australian Securities and Investments Commission [2012] HCA 18 (High Court of Australia) In August 1998, Mr Shafron was employed as “general counsel and company secretary” of James Hardie Industries Ltd (“JHIL”). He was appointed company secretary on 13 November 1998. Just over a year later, on 17 November 1999. The Court of Appeal found that Mr Shafron had contravened s 180(1) of the Corporations Act in two respects that are put in issue in this appeal. Both contraventions were contraventions by omission: failing to give certain advice, in the one case, to the chief executive officer (Mr Macdonald) or the board of JHIL and, in the other, to the board of James Hardie Ltd. Mr Shafron presented his appeal as raising three questions: (a)
In what respect or respects did the statutory definition of “officer” apply to him?
(b)
Having regard to the answer given to the first question: (i)
Did he fail to exercise the relevant standard of care by failing to advise either the chief executive officer or the board that the relevant information should be disclosed to the ASX?
(ii)
Did he fail to exercise the relevant standard of care by failing to advise the board that the relevant material did not take account of superimposed inflation but should have?
HELD: According to the High Court, the degree of care and diligence that is required by s 180(1) is fixed as an objective standard which is identified by reference to two relevant elements, namely the element identified in para (a): “the corporation’s circumstances”, and the element identified in para (b): the office and the responsibilities within the corporation that the officer in question occupied and had. No doubt, those responsibilities include any responsibility that is imposed on the officer by the applicable corporations legislation. But the responsibilities referred to in s 180(1) are not confined to statutory responsibilities; they include whatever
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cont. responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer.
Standard of care: Breach of directors’ duty vs contravention of civil penalty
The New South Wales Court of Appeal in ASIC v Vines (2007) 62 ACSR 1 drew a distinction between the requisite standard of care for breach of a directors' duty and a finding of contravention of a civil penalty provision. According to the New South Wales Court of Appeal, a court should take into account the severity of the consequences which flow from a finding of a [11.330]
“contravention” of a statutory provision, relative to the finding of a “breach” of a civil duty. A finding of contravention for a civil penalty provision under the Corporations Act may be more harmful to a director's reputation, relative to proof of breach of a directors' duty (at [143]-[144] per Spigelman CJ): the consequences that may flow from a finding of contravention of a civil penalty provision are of a different order of severity to the consequences that may flow from a successful action for breach of the civil duty of care by company directors or officers. Although such a contravention does not invoke, directly, the particular stigma of a finding of criminal conduct, nevertheless the consequences to an individual by way of penalty and or disqualification may be as severe as any likely criminal sentence, save for a term of imprisonment. The law of statutory interpretation requires this Court to have regard to these consequences Skill
Directors are expected to possess certain basic skills in relation to the financial statements and financial affairs of their companies. In Commonwealth Bank v Friedrich (1991) 9 ACLC 946 at 956, Tadgell J commented: [11.340]
In particular, the stage has been reached where a director is expected to be capable of understanding his company's affairs to the extent of actually reaching a reasonably informed opinion of its financial capacity … I think it follows that he is required by law to be capable of keeping abreast of the company's affairs, and sufficiently abreast of them to act appropriately if there are reasonable grounds to expect that the company will not be able to pay all its debts in due course and he has reasonable cause to expect it.
There is now no doubt that this is the position and all directors must comply with a “core, irreducible requirement of skill” involving “an objective test, such as ‘ordinary competence’ or ‘reasonable ability’”: DC of T v Clark (2003) 57 NSWLR 113 at [109] per Spigelman CJ; see ASIC v Vines (2003) 48 ACSR 282 at [36] per Austin J). The other skills expected of a director will depend on the circumstances of the director's appointment. A director need not bring any special qualifications to the job. For example, a director of a life
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insurance company need not be a doctor or an actuary. However, where a director does have such special skills, he or she will be expected to use them in relation to the affairs of the company: see ASIC v Rich (2003) 174 FLR 128. The director will be expected to exercise the degree of skill that may reasonably be expected of any director possessing the same level of knowledge, expertise or experience: Re City Equitable Fire Insurance Co Ltd [1925] Ch 407. Re City Equitable Fire Insurance [11.342] Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 (Civil Division of the Court of Appeal of England and Wales) FACTS: On a wind up application by the company’s liquidator, City Equitable Fire Insurance Ltd was wound up. In agreeing to wind up the company, the court found that City Equitable had lost over £1.2 million, which was largely caused by the deliberate fraud of the managing director. In an earlier proceeding, the managing director had been found guilty of defrauding the company and was sentenced to jail. The liquidator of the company decided to commence legal action against all of the other directors of City Equitable for negligence and breach of fiduciary duty in respect of the losses suffered by the company. DECISION: The Court held that the directors of the company, other than the managing director, had not breached their fiduciary duties. The losses suffered by the company were the direct outcome of the deliberate and systemic defrauding of the company’s accounts occasioned by the managing director. The other directors were not aware of the managing director’s actions, nor were the other directors reckless in their duty.
Recently, the Federal Court case Australian Securities and Investments Commission v Healey [2011] FCA 717 re-examined the requirements of the duty of care, skill and diligence for directors when reviewing the financial statements of the company they serve. [11.344]
ASIC v Healey [11.346] Australian Securities and Investments Commission v Healey [2011] FCA 717 (Federal Court of Australia) FACTS: The Australian Securities and Investments Commission made an application under ss 1317E, 1317G and 206C of the Corporations Act for declarations of contravention against the directors of Centro Properties Limited (CPL), Centro Property Trust (CPT) and Centro Retail Trust (CRT) in relation to ss 180(1), 601FD(3) and 344(1) of the Act and for orders that each of the defendant directors pay pecuniary penalties and be disqualified from managing corporations. The 2007 annual reports of Centro Properties Group (CNP) and Centro Retail Group (CER) failed to disclose significant matters. In the case of CNP, the report failed to disclose some $1.5 billion of short-term liabilities by classifying them as non-current liabilities, and failed to disclose guarantees of short-term liabilities of an associated company of about US$1.75 billion that had been given after the balance date. In the case of CER, the 2007
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cont. annual reports failed to disclose some $500 million of short-term liabilities that had been classified as non-current. The conduct relied on by ASIC in support of the orders requested by ASIC involved a number of allegations in relating to the approval of the consolidated financial statements of CPL, CPT and CRT for the financial year ending on 30 June 2007 at a board meeting attended by the defendant directors on 6 September 2007. DECISION: According to Middleton J: Notwithstanding that the directors were “intelligent, experienced and conscientious people … [and had acted honestly as directors] the directors failed to take all reasonable steps required of them, and acted in the performance of their duties as directors without exercising the degree of care and diligence the law requires of them.” In delivering her judgment in the case, Middleton J made a number of important observations concerning the requisite standard of care, skill and diligence required by directors generally: (1)
The Nature of the Proceedings [The proceedings were] “not about a mere technical oversight. The information not disclosed was a matter of significance to the assessment of the risks facing CNP and CER. Giving that information to shareholders and, for a listed company, the market, is one of the fundamental purposes of the requirements of the Act that financial statements and reports must be prepared and published. The importance of the financial statements is one of the fundamental reasons why the directors are required to approve them and resolve that they give a true and fair view.”
(2)
Certification of the financial reports by the directors as providing a “true and fair view” “In the light of the significance of the matters that they knew, they could not have, nor should they have, certified the truth and fairness of the financial statements, and published the annual reports in the absence of the disclosure of those significant matters. If they had understood and applied their minds to the financial statements and recognised the importance of their task, each director would have questioned each of the matters not disclosed. Each director, in reviewing financial statements, needed to enquire further into the matters revealed by those statements.”
(3)
The requirement for careful & diligent review of the financial statements “The central question in the proceeding has been whether directors of substantial publicly listed entities are required to apply their own minds to, and carry out a careful review of, the proposed financial statements and the proposed directors’ report, to determine that the information they contain is consistent with the director’s knowledge of the company’s affairs, and that they do not omit material matters known to them or material matters that should be known to them …” “No less is required by the objective duty of skill, competence and diligence in the understanding of the financial statements that are to be disclosed to the public as adopted and approved by the directors.” “No one suggests that a director should not personally read and
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(4)
consider the financial statements before that director approves or adopts such financial statements. A reading of the financial statements by the directors is not merely undertaken for the purposes of correcting typographical or grammatical errors or even immaterial errors of arithmetic. The reading of financial statements by a director is for a higher and more important purpose: to ensure, as far as possible and reasonable, that the information included therein is accurate. The scrutiny by the directors of the financial statements involves understanding their content. The director should then bring the information known or available to him or her in the normal discharge of the director’s responsibilities to the task of focussing upon the financial statements. These are the minimal steps a person in the position of any director would and should take before participating in the approval or adoption of the financial statements and their own directors’ reports.” What it means to be a director “A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of a company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors. This proceeding involves taking responsibility for documents effectively signed-off by, approved, or adopted by the directors. What is required is that such documents, before they are adopted by the directors, be read, understood and focussed upon by each director with the knowledge each director has or should have by virtue of his or her position as a director. I do not consider this requirement overburdens a director, or as argued before me, would cause the boardrooms of Australia to empty overnight. Directors are generally well remunerated and hold positions of prestige, and the office of director will continue to attract competent, diligence [sic] and intelligent people.”
(5)
Guidance, Monitoring & Understanding of the Financial Affairs of the Company “The case law indicates that there is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor. There is a responsibility to read, understand and focus upon the contents of those reports which the law imposes a responsibility upon each director to approve or adopt.” “All directors must carefully read and understand financial statements before they form the opinions which are to be expressed in the declaration required by s 295(4). Such a reading and understanding would require the director to consider whether the financial statements were consistent with his or her own knowledge of the company’s financial position. This accumulated knowledge arises from a number of responsibilities a director has in carrying out the role and function of a director. These include the following: a director should acquire at least a rudimentary understanding of the business of the corporation and become familiar with the fundamentals of the
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cont.
(6)
business in which the corporation is engaged; a director should keep informed about the activities of the corporation; whilst not required to have a detailed awareness of day-to-day activities, a director should monitor the corporate affairs and policies; a director should maintain familiarity with the financial status of the corporation by a regular review and understanding of financial statements; a director, whilst not an auditor, should still have a questioning mind.” An essential component of Corporate Governance
(7)
“A board should be established which enjoys the varied wisdom, experience and expertise of persons drawn from different commercial backgrounds. Even so, a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience or expertise. A director is not relieved of the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry, even outside the area of the director’s expertise. The words of Pollock J in the case of Francis v United Jersey Bank (1981) 432 A 2d 814, quoted with approval by Clarke and Sheller JJA in Daniels v Anderson (1995) 37 NSWLR 438, make it clear that more than a mere ‘going through the paces’ is required for directors. As Pollock J noted, a director is not an ornament, but an essential component of corporate governance.” Ability to Delegate
(8)
“Nothing I decide in this case should indicate that directors are required to have infinite knowledge or ability. Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an enquiring mind to the responsibilities placed upon him or her. Such a responsibility arises in this proceeding in adopting and approving the financial statements. Because of their nature and importance, the directors must understand and focus upon the content of financial statements, and if necessary, make further enquiries if matters revealed in these financial statements call for such enquiries.” Financial Literacy Requirement “The omissions in the financial statements the subject of this proceeding were matters that could have been seen as apparent without difficulty upon a focussing by each director, and upon a careful and diligent consideration of the financial statements. As I have said, the directors were intelligent and experienced men in the corporate world. Despite the efforts of the legal representatives for the directors in contending otherwise, the basic concepts and financial literacy required by the directors to be in a position to properly question the apparent errors in the financial statements were not complicated.”
Recently, the ASIC released a media release regarding the Federal Court of Australia's decision with Centro Properties Group and Centro Retail Group. The Federal Court's decision in Centro provides important guidance [11.348]
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to directors regarding the level of their communication to investors, especially when it involves key elements of the financial position of the company. The media release is reproduced below.
...................................................................................................................... Centro Civil Penalty Proceedings ASIC Media Release 11-188MR, 31 August 2011
The Federal Court today handed down its penalty decision against the 7 directors and former Chief Financial Officer of Centro Properties Group (CNP) and Centro Retail Group (CER). On 27 June 2011 the Court found that the 7 directors had breached their duties when they signed off on financial reports that failed to disclose significant matters. The former CFO had, at the outset of the trial, admitted he contravened the Corporations Act as alleged by ASIC. In the case of CNP, the report failed to disclose some $1.5 billion of short-term liabilities by classifying them as non-current liabilities, and failed to disclose guarantees of short-term liabilities of an associated company of about US$1.75 billion that had been given after the balance date. In the case of CER, the 2007 annual reports failed to disclose some $600 million of short-term liabilities that had been classified as non-current. In today’s judgment the Court refused the directors’ applications to be exonerated from their contraventions and made declarations that all directors and the CFO contravened the law. In addition the Court fined Mr Andrew Scott (the former Chief Executive Officer) $30,000, and disqualified Mr Nenna, the former CFO, from managing corporations for 2 years. The Court ordered the defendants to pay ASIC’s costs of the action. Middleton J observed in the course of extensive reasons for his decision that: … very much at the forefront of my consideration has been the issue of general deterrence … What the Court has attempted to do is to recognise the seriousness of the contraventions, but at the same time take into account the circumstances in which the contraventions occurred, the overall conduct of the defendants, and the impact of the penalties imposed on these particular defendants … ASIC believes the Centro decision provides important guidance and direction on corporate accountability of directors and management. The Court’s reasons for the penalty decision include the significant effect on and debate in the director community about the earlier liability judgment. The Court said it is important to appreciate that the liability judgment has attracted widespread publicity. The acts and omissions of the directors, as recorded in the liability judgment, have already been the subject of widespread public dissemination. The Court noted that the widespread public analysis and associated embarrassment and reputational damage for each of the directors meant that the need for the imposition of a disqualification order or pecuniary penalty for reasons of general deterrence is much less than it would otherwise be.
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Centro Civil Penalty Proceedings cont. Middleton J canvassed all the circumstances facing the directors and observed: … the appropriate course, which in my view will have a substantial impact on the non-executive directors, is to refuse the applications for relief from liability, and to make the declarations as sought by ASIC. I think this is sufficient to “send the message” to the community that the Court strongly disapproves of the conduct giving rise to the contraventions, but at the same time is appreciative of the circumstances of the non-executive directors, the circumstances leading to the contraventions, and subsequent events. ASIC Chairman Greg Medcraft said ASIC acted as it believed that the directors’ and officer’s behaviour did not meet the expectations of the law. “Directors in particular play an important gatekeeper role for our markets and they must not uncritically adopt the work of management on major issues for which they are responsible,” Mr Medcraft said. “The key elements of the financial position of the company are things directors should understand and be able to communicate accurately to the market.” In this context, Middleton J said: The information not disclosed was a matter of significance to the assessment of the risks facing CNP and CER. Giving that information to shareholders and the market is one of the fundamental purposes of the requirements of the Act that financial statements and reports must be prepared and published. The importance of the financial statements is one of the fundamental reasons why the directors are required to approve them and resolve that they give a true and fair view. Mr Medcraft added that ASIC was committed to taking on the big and difficult cases where appropriate. “We have a consistent approach to enforcing the law and, when we think it’s in the public interest, we will do so. The public would expect nothing less,” Mr Medcraft said. Background On 19 October 2009, ASIC commenced these proceedings against current and former officers of Centro (refer 09-202AD). On 27 June 2011, Justice Middleton handed down his liability decision (refer 11-125MR). © Australian Securities & Investments Commission. Reproduced with permission.
...................................................................................................................... ASIC Wins Case against Centro Directors
Leonie Wood, The Age, 27 June 2011
Update A Federal Court judge has strongly warned the corporate regulator to “consider carefully” what it does with a decision handed down
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this morning that found directors of the Centro property group breached their duties when they failed to notice multi-billion dollar errors in the property group’s accounts. Justice John Middleton said that in the reasons for his decision, which runs to 186 pages, he found the directors were “intelligent, experienced and conscientious” and that they relied on extensive advice and processes before approving erroneous financial statements in 2007. He also said that “there is no suggestion that the directors were dishonest”. The Australian Securities and Investments Commission will make submissions about penalties on August 1. The corporate regulator could ask the court to ban the directors from managing or serving as directors, financial penalties, or ask for simple declarations. Outside the court, a spokesman for the six non-executive directors said they were “disappointed” with the decision and would review the detail of the reasons. Former chief executive, Andrew Scott, declined to comment. Centro’s former chief financial officer, Romano Nenna, was not in court. He has already made certain admissions about ASIC’s allegations. Duties breached Justice Middleton this morning found the directors breached their duties when they approved financial statements for 2006-07 which did not disclose that Centro was required to repay billions of dollars of debt within a matter of months. The judge read 23 paragraphs of his decision in court today. He said the case was “not about a mere technical oversight” but that it went to the heart of whether directors of substantial publicly listed companies must “apply their minds” to their review of financial statements and the directors’ report in order to determine in the information is consistent with what they know and that it does not omit material matters. “The significant matters not disclosed [the short-term debt and postbalance date guarantees entered into by Centro] were well known to the directors, or if not well known to them, were matters that should have been well known to them,” the judge said. He said considering the significance of the matters that they knew “they could not have, nor should they have, certified the truth and fairness of the financial statements …” “If they had understood and applied their minds to the financial statements and recognised the importance of their task, each director would have questioned each of the matters not disclosed,” Justice Middleton said in his decisions. “Each director, in reviewing financial statements, needed to enquire further into the matters revealed by those statements.” He said what was required of directors was they read, understand and focus on the documents they approve “with the knowledge each director has or should have by virtue of his or her position as a director”.
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ASIC Wins Case against Centro Directors cont. “I do not consider this requirement overburdens a director, or as argued before me, was cause the boardrooms of Australia to empty overnight.” “Directors are generally well remunerated and hold positions of prestige, and the office of director will continue to attract competent, diligence [sic] and intelligent people.” ASIC will hold a press conference in Sydney responding to the decision. Centro Property Group shares, meanwhile, lost 0.3 of a cent, or 7.5 per cent, to 3.7 cents in recent trading, valuing the company at just $36 million. Centro Property shares peaked at just over $10 each in May 2007. Possible bans Eight of Centro’s current and former directors face possible bans and financial penalties following Justice Middleton’s findings. ASIC had claimed that the Centro directors fell short of the minimum standard of care expected from boardroom participants. Centro directors, however, argued that while a mistake was made on their watch, they were entitled to rely on the specialist knowledge and advice provided by Centro’s accounting managers and by its auditors, PricewaterhouseCoopers. They had claimed the regulator is trying to impose an impossibly high standard of perfection, one that would require every director to acquire a finely tuned knowledge of accounting standards and to understand how changes to those standards might affect figures in company accounts. Centro directors in late 2007 approved financial statements that indicated the company had no short-term debt, when in fact it needed to repay billions of dollars of debt within 12 months, including a $1.1 billion J.P. Morgan facility by December. $1.1 billion misinterpretation The $1.1 billion error apparently arose because an accounting standard for short-term debt had been wrongly interpreted. The error was detected after the publication of unaudited preliminary accounts in August, but the court heard it was not brought to the attention of directors before they approved the final version of the accounts in September. ASIC was suing Centro’s former chief executive, Andrew Scott; its former chairman, Brian Healey; current chairman, Paul Cooper; the former head of the audit committee, Sam Kavourakis; current non-executive director, Jim Hall; and former non-executive directors, Peter Wilkinson and Graham Goldie. Centro’s former finance director, Romano Nenna, has already admitted some of ASIC’s allegations. During a trial in April and May, the directors claimed they did all that could reasonably be expected. The court heard some of the directors did not read the final version of the financial statements or that they did not examine them in detail.
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It also heard that Centro’s final statements went through numerous changes. In final submissions during May, counsel for ASIC, Mark Derham, QC, told the court the regulator expected a level of “financial literacy” of directors, but not a working knowledge of accounting standards. The 2006-07 accounts also did not disclose that Centro, after June 30, had guaranteed about $1.75 billion of US dollar liabilities for an associated US company. When the share market in late 2007 learnt Centro was having difficulties refinancing its bank debt, the company’s share price plunged. It was not until early 2008 that Centro revealed it had understated its short-term liabilities by about $3 billion. Justice Middleton will later preside over a directions hearing for two class actions in which investors are suing Centro for losses incurred as a result of the failure to properly disclose the debts. The class actions are not due for trial until March 2012.
Diligence
The element of “diligence” requires directors to take reasonable steps to place themselves in a position to monitor and guide the management of the company: Daniels v Anderson (1995) 37 NSWLR 438 at 501. Diligence by a director includes: [11.350]
• attendance at all board meetings unless exceptional circumstances, such as illness, prevent attendance; • a basic understanding of the business of the company; • a continuing obligation to keep informed about and monitor the financial and general affairs of the company (ASIC v Adler (2002) 168 FLR 253 at [372(8)]; ASIC v Rich (2003) 174 FLR 128; and ASIC v Vines (2007) 62 ACSR 1); and • a continuing obligation to monitor any changes in the company's fortunes or conditions including any profit forecasts that may be adversely affected: ASIC v Vines (2007) 62 ACSR 1. In a recent High Court decision in Forrest v ASIC; Fortescue Metals Group Ltd v ASIC (2012) 247 CLR 486, the issue of whether a listed company and one of its directors had breached the continuous disclosure provisions and directors’ duties under the Corporations Act was examined in the context of public statements made by Fortescue to the Australian Securities Exchange.
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Forrest v ASIC; Fortescue Metals Group Ltd v ASIC [11.355] Forrest v ASIC; Fortescue Metals Group Ltd v ASIC (2012) 247 CLR 486 (High Court of Australia) FACTS: ASIC alleged that both Fortescue Ltd, a listed Australian company and Mr Forrest, the then CEO and Chairman of Fortescue Ltd contravened the Corporations Act during 2004 and 2005 when Fortescue gave information to the ASX about a proposed mining project in Western Australia called the Pilbara Iron Ore and Infrastructure Project. The project was to consist of a mine in the Pilbara region of Western Australia, a port at Port Hedland and a railway to connect the mine to the port. ASIC alleged that since the agreements were not enforceable under Australian law Fortescue had engaged in misleading or deceptive conduct by making announcements and publishing notices that were misleading or deceptive or likely to mislead or deceive. ASIC alleged that Fortescue contravened the continuous disclosure requirements of s 674. ASIC further alleged that Mr Forrest had contravened on each occasion s 180(1) for failing to exercise the requisite degree of care and diligence as required by s 180(1). ASIC based its actions on allegations that Fortescue made announcements that Fortescue had entered into binding agreements with China Railway Engineering Corporation (CREC), China Harbour Engineering Company (Group) (CHEC) and China Metallurgical Construction (Group) Corporation (CMCC). The Chinese entities were described as “three of the largest state owned companies in China”. The CREC agreement was signed on 6 August 2004, the CHEC agreement was signed on 1 October 2004 and the CMCC agreement was signed on 20 October 2004. Each agreement was headed “Framework Agreement”. Federal Court of Australia: At first instance in the Federal Court of Australia, Gilmour J dismissed ASIC’s claims. (See Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201). Full Court of Federal Court of Australia: ASIC then appealed to the Full Court of the Federal Court (Keane CJ, Emmett and Finkelstein JJ). The Full Court allowed the appeal and declarations of contravention of the Corporations Act were made. (See Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364). High Court of Australia: By special leave, Fortescue and Mr Forrest appealed to the High Court seeking the reinstatement of the orders made at first instance by the Federal Court of Australia. The High Court allowed the appeal and the consequential orders sought by Fortescue Ltd and Mr Forrest. According to the High Court the alleged statements were not misleading or deceptive or likely to mislead or deceive. Since the statements were not misleading or deceptive or likely to mislead or deceive, ASIC failed to demonstrate that Fortescue Ltd contravened the continuous disclosure requirements of s 674. Since there was no breach by Fortescue Ltd of either s 674 or s 1041H, the High Court was of the opinion that Mr Forrest had not failed to exercise his powers or discharge his duties as a director with the degree of care and diligence required by s 180(1).
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Figure 11.3: Summary of duty of care and skill ....................................................................................................
Issues affecting the duty of care Four currently contentious issues which impact on the way in which directors discharge their duty of care are: [11.370]
• differences in the functions of company boards; • differing responsibilities of executive and non-executive directors; • delegation of functions and reliance by directors on the performance of these functions by other people within the company; and • differences between entrepreneurial risk taking and failing to act with care.
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Differing board functions .......................................................................................................................................................................
The duty of care requires an understanding of the functions of a board of directors. Those functions may vary greatly depending on whether the company is a small family company, not-for-profit company or a large public company. Even within the public company context, there is debate about the functions of company boards. In AWA Ltd v Daniels (1992) 10 ACLC 933 at 1,013-5, Rogers CJ acknowledged that in large public companies, it is no longer possible for the board to make decisions about major policy issues and also manage the day-to-day activities of the company. The functions are divided up. The board sets the company's policies. The executive directors and senior management take responsibility for the day-to-day management of the company's business in accordance with board policies. However, on appeal, the majority judges (Clarke and Sheller JJA) downplayed the division of functions between the board and the management of a public company. They acknowledged that the size and business of a company can influence the functions discharged by its directors. However, they reasoned that the board of directors had to be viewed as the “apex of the structure of direction and management”. The duties of the directors still included acting collectively to manage the company: Daniels v Anderson (1995) 37 NSWLR 438 at 505. In its “Corporate Duties Below Board Level Report” (April 2006), CAMAC sought to redefine managerial functions by adopting a “functional” approach in defining a person's role in a corporation. CAMAC's attempt to define an individual by the function he or she performs rather than rely on the person's formal status within the company is designed to broaden the possible application of the Corporations Act and, in particular, directors' duties. CAMAC (at [3.2.1], quoting the HIH Royal Commission report) justifies its approach on the basis of the findings of the HIH Royal Commission: [11.380]
All the general duties imposed by Chapter 2D of the Corporations Act should be imposed on directors, secretaries and the wider class of personnel encompassed within the functional definition [defined by reference to a person's role in a corporation, rather than by that person's formal status … Both before and after the CLERP amendments it was accepted that there is a class of personnel upon whom the general duties of directors should also be imposed. In my opinion that class should not distinguish between employees and non-employees. Instead, it should be functionally defined. That is because it is increasingly common for a wide range of corporate functions to be performed by consultants or other contractors who are not strictly “employees”.
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Interestingly, trial judge (Gzell J) in the recent decision of Australian Securities and Investments Commission v Macdonald (No 11) (2009) 230 FLR 1 was of the view that non-executive directors could be made liable for breach of their directors' duties and in particular, s 180(1) by approving a misleading announcement even if the directors were not in physical attendance at the relevant board meeting. Executive vs non-executive directors .......................................................................................................................................................................
Outline
Executive directors are full-time employees, involved in the day-to-day management of the company. Non-executive directors have a part-time and intermittent involvement with the company. Can the same standard of care be expected of both executive and non-executive directors? There are competing points of view on this issue. Each is supported by case law. [11.390]
First viewpoint
The first viewpoint is that there is a difference between the standard of care expected of executive and non-executive directors. A higher standard of care can be expected of executive directors in a public company: see AWA Ltd v Daniels (1992) 10 ACLC 933 at 1,013-5 (Rogers CJ (Comm D)); Claremont Petroleum NL v Cummings (1992) 10 ACLC 1,685; ASC v Gallagher (1993) 11 WAR 105; Hurley v NCSC (1993) 11 ACLC 443; Vrisakis v ASC (1993) 9 WAR 395; Dempster v Mallina Holdings Ltd (1994) 13 WAR 124; Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187; ASIC v Adler (2002) 168 FLR 253 at [372]; and Australian Securities & Investments Commission v Hellicar [2012] HCA 17. [11.400]
Opposing view
The second viewpoint is that there is no significant difference in the standard of care expected of executive and non-executive directors. In Daniels v Anderson (1995) 37 NSWLR 438, the majority judges required a more rigorous standard of care to be adopted by all directors, whether executive or non-executive: see also Re Property Force Consultants Pty Ltd [1997] 1 Qd R 300; South Australia v Clark (1996) 66 SASR 199; Gamble & Mann v Hoffman (1997) 15 ACLC 1314; ASC v Donovan (1998) 28 ACSR 583; Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577; Sheahan v Verco (2001) 79 SASR 109; and Gold Ribbon (Accountants) P/L v Sheers (2005) 23 ACLC 1,288. [11.410]
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In Gold Ribbon (Accountants) P/L v Sheers a non-executive director was alleged to have breached his director's duty and fiduciary duty for failing to ensure that accepted lending standards were in place and exercised by Gold Ribbon, a company involved in providing unsecured loans to practising accountants. It was alleged by Gold Ribbon that the director's breach of duty caused the company to make five inappropriate loans which led to the borrowers defaulting and the company suffering financial losses. Proceedings were commenced with the aim of recovering from the directors the losses suffered by the company under the defaulting loans. At first instance, Muir J held (at [93]-[94]) that a non-executive director would be liable for breach of duty and could not delegate his responsibilities to others without appropriate checks on their competency: But the fact that some directors were in executive or managerial roles could not relieve the others of their continuous duties discussed earlier. Mr Dunn in particular, without properly assuring himself that the scheme had been properly structured, could not relieve himself of liability by leaving matters in the hands of the other directors or in the hands of Austide, the expertise of which had not been considered, let alone investigated, by him. Any delegation by a director of one of his functions as a director would not fulfil his duty if he did not believe on reasonable grounds that the persons to whom the duty was delegated had appropriate expertise and competence and were appropriate repositories of his trust
Importantly, Muir J in Gold Ribbon (at [90]-[91]) was of the view that all directors, whether they are executive or non-executive have a duty to use their skills and experience for the benefit of the company: A company is entitled to have all its directors attend to its affairs and to fulfil their respective duties as directors. General business experience and “knockabout commonsense” cannot, of themselves, in circumstances such as those under consideration, equip a director, in the absence of detailed advice based on a full appreciation of the facts, to understand fully the risks inherent in financing and the procedures and mechanisms best suited to overcoming them. As the only member of the board with appreciable experience in commercial lending, Mr Dunn had a duty to give the company the benefit of that experience and the expertise which accompanied it
On the issue of reviewing and familiarising oneself with company documentation Muir J in Gold Ribbon was equally forceful (at [97]): It was therefore incumbent on Mr Dunn to familiarise himself with this documentation, consider its adequacy and seek expert legal or other advice where appropriate. Mr Dunn did not act in this way. He did not obtain copies of these documents to peruse. Nor did he ensure that they had been settled or approved by lawyers with appropriate commercial expertise
On Appeal to the Queensland Court of Appeal Muir J's decision that the non-executive director's breach of duty had caused the losses suffered by Gold
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Ribbon was overturned: Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335. The Court of Appeal was of the opinion that the non-executive's breaches of duty did not cause the loss suffered by Gold Ribbon. Instead, “but for the absence of the loan assessment procedures involved in what his Honour found to be ‘acceptable lending practice’, the improvident loans would not have been made”: Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335 at [323] per Keane J. However, on the issue of breach of duty, Keane J in the Court of Appeal did not overturn Muir J's findings: Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335 at [326]. Responsibilities of the non-executive chair
The non-executive chair of a listed public company may be in a special position and have broader responsibilities requiring compliance with a more onerous standard of care than that applying to other non-executive directors. In ASIC v Rich (2003) 174 FLR 128 (part of the One.Tel litigation), Austin J held that Greaves, the non-executive chair of One.Tel, had a case to answer in respect of ASIC's claim that he had breached s 180(1). It is important to note that this case did not decide that Greaves had actually breached s 180(1), only the preliminary issue – that ASIC had an arguable case. ASIC argued that Greaves, who was a chartered accountant with substantial practical experience in listed public companies, had additional responsibilities that went beyond the purely procedural functions of chairing and running company meetings. Failure to discharge these could amount to a breach of s 180(1). The judge agreed and referred to earlier cases, in particular the judgment of Rogers CJ at first instance in the AWA Ltd v Daniels (1992) 10 ACLC 933, to support his conclusion. These proceedings were settled by agreement between ASIC and Greaves in September 2004, as a result of which: [11.420]
• Greaves admitted that he had contravened his duties as a non-executive director and was found liable to pay $20 million compensation to One.Tel; • he was prohibited from managing a corporation for four years; and • he was ordered to pay ASIC's costs of $350,000: ASIC v Rich (2004) 50 ACSR 500. Responsibilities of Chief Financial Officers
In ASIC v Vines (2003) 182 FLR 405 Austin J reviewed the role and responsibilities of chief financial officers in light of the statutory duty of care, skill and diligence. He was of the view that the role of chief financial officer encompasses the special skill that is brought to such an office (at 417-418):
[11.430]
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In the present case there is evidence that the position of chief financial officer is a recognised position in large corporations, such that there is identifiable specialised skill attaching to that office … Unless it emerges at the conclusion of the hearing that Mr Vines, though occupying a position designated “chief financial officer”, in fact occupied an idiosyncratic position not comparable with the usual or typical role of a chief financial officer, evidence of what a reasonably competent chief financial officer would do on stated assumptions is evidence relevant to the determination of the question whether Mr Vines breached his statutory duty of care and diligence
At trial, Austin J held that Vines, as Chief Financial Officer of GIO Holdings Australia Ltd, had contravened the Corporations Act 11 times and was fined $100,000 and disqualified from managing a corporation for three years: ASIC v Vines (2006) 58 ACSR 298. On appeal, the New South Wales Court of Appeal set aside five contraventions of the Corporations Act, reduced the fine imposed on Vines to $50,000 and set aside the disqualification order imposed by Austin J: ASIC v Vines (2007) 63 ACSR 505. Delegation and reliance .......................................................................................................................................................................
Why directors delegate
As the size, complexity and diversity of a company's business grows, it becomes necessary for its directors to: [11.440]
• delegate many of their powers and functions to executive directors, managers and experts such as auditors; and • trust and rely on those persons to perform those functions properly. To what extent can a director delegate and rely on others inside the company to do their job properly? Sections 198D, 190 and 189 are intended to resolve those uncertainties. ASIC v Adler (2002) 168 FLR 253 at [372] and [451] provides some guidance on the application of these provisions. Delegation permitted by internal rules
The internal rules of a company may expressly authorise a director to delegate functions to other officers within the company. For example, s 201K (a replaceable rule) permits directors to delegate functions to alternate directors. The same applies to companies who appoint a managing director: s 198C. [11.450]
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Delegation permitted by statute
Section 198D gives directors express authority to delegate their functions to other people in the corporation, subject to any contrary provisions in the company's constitution. This section is not a replaceable rule and applies to all companies. [11.460]
SECTION 198D Delegation (1)
(2) (3)
Unless the company’s constitution provides otherwise, directors of a company may delegate any of their powers to: (a)
a committee of directors; or
(b)
a director; or
(c)
an employee of the company; or
(d)
any other person.
the
Note: The delegation must be recorded in the company’s minute book (see s 251A). The delegate must exercise the powers delegated in accordance with any directions of the directors. The exercise of the power by the delegate is as effective as if the directors had exercised it.
Section 190 makes it clear that a director remains ultimately responsible for the acts of the delegate, except in circumstances where the director was able to rely on the exceptions set out in s 190(2).
SECTION 190 Responsibility for actions of delegate (1)
(2)
If the directors delegate a power under section 198D, a director is responsible for the exercise of the power by the delegate as if the power had been exercised by the directors themselves. A director is not responsible under subsection (1) if: (a)
the director believed on reasonable grounds at all times that the delegate would exercise the power in conformity with the duties imposed on directors of the company by this Act and the company’s constitution (if any); and
(b)
the director believed: (i)
on reasonable grounds; and
(ii)
in good faith; and
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(iii)
after making proper inquiry if the circumstances indicated the need for inquiry; that the delegate was reliable and competent in relation to the power delegated.
In ASIC v Adler (2002) 168 FLR 253 at [372(11)], [372(12)] and [451], Santow J set out some factors that may be important in deciding whether reasonable grounds for reliance existed in any particular case. These included: • the function delegated being one that may properly be left to the delegate; • the extent to which a director was, or given the facts, should have been, put on inquiry; • the relationship between the director and the delegate; • the risk involved in and the nature of the transaction; • the extent of steps taken by the director; and • possibly the position of the director (whether executive or non-executive). Santow J rejected Williams' claim that he was entitled to rely on Adler (who had a clear conflict of interest) and other officers of HIH to ensure that the transaction (the $10 million payment) was carried out in accordance with the approval process required by HIH's board. As Santow J said, “Mr Williams could not simply leave it to others to ensure the approval process was carried out”: ASIC v Adler (2002) 168 FLR 253 at [451]. Authority to rely
Section 189 expressly allows directors to rely on advice or information provided by employees, professional advisers, experts or other directors or officers when making decisions. [11.470]
SECTION 189 Reliance on information or advice provided by others If: (a)
a director relies on information, or professional or expert advice, given or prepared by: (i)
an employee of the corporation whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned; or
(ii)
a professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within the person’s professional or expert competence; or
(iii)
another director or officer in relation to matters within the director’s or officer’s authority; or
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(b)
a committee of directors on which the director did not serve in relation to matters within the committee’s authority; and the reliance was made: (i) in good faith; and (ii)
after making an independent assessment of the information or advice, having regard to the director’s knowledge of the corporation and the complexity of the structure and operations of the corporation; and
(c)
the reasonableness of the director’s reliance on the information or advice arises in proceedings brought to determine whether a director has performed a duty under this Part or an equivalent general law duty; the director’s reliance on the information or advice is taken to be reasonable unless the contrary is proved.
This section establishes a presumption that reliance by a director on information or professional or expert advice provided by others is reasonable if the director acted: • in good faith; and • after making an independent assessment of the information or advice, having regard to the director's knowledge of the corporation and the complexity of its structure and operations. This reliance rule aims to remove uncertainty raised as to the circumstances in which directors can rely on advice provided to them by other people within the company. The wording of s 189(b)(ii) has created some uncertainty by apparently imposing a more stringent obligation on a director who relies on information or advice, than that which applies when a power is delegated under s 190. Entrepreneurial risk taking .......................................................................................................................................................................
Directors must often make choices between two or more investment proposals or courses of action. One of the proposals may be more risky than the others because: [11.480]
• if successful, it will improve the company's financial fortunes; or • if a failure, it will cause the company to suffer financial losses. If the directors vote in favour of the risky investment proposal and it subsequently fails, does it mean that the directors have breached their duty of care? The prevailing view in the case law is: • risk taking is an inherent part of industry and commerce; • the mere fact that a director participates in a decision with a foreseeable risk of harm does not necessarily amount to a breach of the director's duty of care; and
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• judging whether directors have exercised the required degree of care in their decision making requires a comparison of the risk of harm to the company against the potential benefits that could reasonably be expected to accrue to the company from the proposal in question. See Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 765-766 and Daniels v Anderson (1995) 37 NSWLR 438 at 501-502. The statutory business judgment rule in s 180(2) is intended to confirm this view and to provide directors with a “safe harbour” against later allegations that they have breached their duty of care when a business decision turns out badly, as long as they have complied with all the requirements of the section.
The statutory business judgment rule The “business judgment rule” is an important element of company law in the United States. The Commonwealth Government drew on this experience in developing the Australian rule. Note s 180(2), (3): [11.490]
SECTION 180(2), (3) Business judgment rule (2)
A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they: (a) make the judgment in good faith for a proper purpose; and (b)
do not have a material personal interest in the subject matter of the judgment; and
(c)
inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d)
rationally believe that the judgment is in the best interests of the corporation.
The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence) – it does not operate in relation to duties under any other provision of this Act or under any other laws. (3) In this section: “business judgment” means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.
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The business judgment rule protects directors from personal liability for breaches of the statutory and general law duties of care, skill and diligence if they satisfy the requirements set out in s 180(2). The merits of their business judgments or decisions which satisfy these requirements will not be reviewable by the courts: Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483. Despite the shortcomings of the business judgment rule as interpreted and applied by the courts, the Commonwealth Government introduced the statutory business judgment rule to address the concerns that directors' duties, such as the duty of care, restrain directors from taking advantage of opportunities which involve responsible risk taking. Limitations to the statutory business judgment rule ....................................................................................................................................................................... [11.500] There are two important limitations to the scope of the statutory business judgment rule. First, it only applies to breaches of the statutory duty of care in s 180(1) or the equivalent equitable or common law duties, not to other directors' duties. Secondly, its operation is limited to “business judgments” that is, decisions (s 180(3)), made by directors:
• in good faith and for a proper purpose; • without a material personal interest in the matter; • on a properly informed basis; and • rationally believing that it is in the best interests of the company. These limitations mean that s 180(2) will not protect directors who have failed in their duty of care and diligence to monitor the operations of a company. Nor will it protect directors who have breached their duty to prevent insolvent trading: s 588G. Santow J held in ASIC v Adler (2002) 168 FLR 253 at [387(d)] and [453] that neither Adler nor Williams were able to rely on s 180(2) because it could not be shown that they had made a “business judgment” which was “made in good faith for a proper purpose” and “without a material personal interest”. The defendant's state of mind is also another important consideration a court will take into account when determining whether a defence under s 180(2) will succeed. In Gold Ribbon (Accountants) P/L v Sheers (2005) 23 ACLC 1,288, Muir J rejected a non-executive director's defence based on s 180(2) on the basis that the director did not make a judgment and did not “turn his mind to whether the judgment was in the best interests of the company”: at [106].
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Australian Securities and Investments Commission v Mariner Corporation Ltd [11.505] Australian Securities and Investments Commission v Mariner Corporation Ltd [2015] FCA 589
In this case, the business judgement rule (s 180(2)) has been successfully argued. Facts: The matter involved action against directors of Mariner for, inter alia, a contravention of s 1041H for misleading or deceptive conduct and representations in relation to an “off market” takeover bid which was announced in line with s 631(2)(b) and, if the directors were found to have contravened the Act, ASIC sought a declaration that the directors were also in contravention of s 180(1). In addition, ASIC sought a declaration of a contravention of s 180(1) independent of any other breaches of the Act. Mariner made an announcement on 25 June, in line with s 631(2)(b), that it intended to purchase shares in Austock, subject to 50% of the shareholders accepting the offer. There were in total, eight conditions to the offer, none of which related to advising that the offer was subject to finance. The announcement declared that 10.5 cents per share would be paid. ASIC alleged that the whole announcement gave rise to the inference that the offer was not subject to finance. ASIC further alleged that Mariner was reckless to whether it had adequate fronts or approved finance to pay for the expected three million dollar deal. Mariner had options to obtain finance, however, had not formally sought approval. However, it is apparent that Mariner did not expect the offer to be successful – it was said that the offer was “‘a low-risk bid … a toe in the water to put Austock in play’. The bid was intended to ‘shake the tree’” at [333]. ASIC contended that, by making the statement, Mariner were making a representation that they had secured the funds to pay for all of the shares at 1.5 cents at [429]–[430]. Decision: The court found that s 631(2)(b) did not create an obligation for Mariner to disclose the funding source in the announcement dated 25 June. It also found that the directors were not reckless as to whether or not Mariner had secured funds for the proposed offer. Instead, the court accepted that Mariner would have been able to obtain finance to fund the deal as Austock was substantially undervalued making it a very attractive offer. Mariner had already received interest from Arena and Morgan Stanley for Austock and were confident that they could meet any obligation under the 25 June offer at [343]. It was also held that there was no contravention of s 1041H as, in line with National Exchange Pty Ltd v ASIC (2004) 49 ACSR 369; Bodum v DKSH Australia Pty Ltd (2011) 280 ALR 639; [2011] FCAFC 98 [209]), that “[t]here is no proper basis to find that a not insignificant number of ordinary persons in the class or sub-class identified would have understood the 25 June announcement to convey the funding representation” at [343]. Further that the announcement did not convey “the funding representation” – that is that Mariner did not infer in its announcements that it had funds secured to pay for all shares in Austock at [437]. In addition, there was no legal requirement for Mariner to disclose its funding source should the offer be accepted at [342].
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However, Beach J did find that, by his own admission, one of the directors, Olney-Fraser, admitted to a minor error (of little or no consequence) of s 621(3). This error was fixed within a very short period of time and Beach J deemed that this risk was not one which was foreseeable when the offer was made. (See also “mere mistake” not covered in the case but canvassed in Centro and ASIC v Rich (2009) 236 FLR 1 at [7239]-[7342].) Furthermore, it was held that, despite ASIC’s assertions that s 180(1) could still apply “even if no actual contravention by Mariner had been established” by “engaging in conduct that might only have put Mariner in contravention [of the act]”, his Honour found that this was a “bootstraps argument” and that even if contravention of the act were a “reasonably foreseeable consequence of the failure to take reasonable care and exercise diligence” in connection with the offer and takeover, any such risks were outweighed by benefit. Arguments, such as the risk of the costs of investigation and litigation by the regulator, which ASIC has had some success with in the past, failed, even the loss of reputation and damage to the confidence in the management of Mariner failed. Since its enactment in previous Corporations Law in 2000 (Corporate Law Economic Reform Program Act 1999), the business judgement rule s 180(2) as not been successfully relied upon. Although in this case, it was largely unnecessary for Beach J to excuse the decision-making on the part of the directors under s 180(2) as there was no contravention of s 180(1), nevertheless, his Honour sought to address the business judgement rule in its application to this matter. As to the five requirements of which the director bears the onus of proving, his Honour found that; there was in fact a “business judgement” which was the initiation of a takeover bid; the judgement to initiate that takeover was made “in good faith for a proper purpose”; there was no material personal interest in the subject matter; the directors had informed “themselves of the subject matter of the judgement to the extent that they reasonably believed to be appropriate” ASIC v Rich; and finally, the belief held that the takeover bid was in the best interests of Mariner was a rational one and was believed by the directors. His honour found that Olney-Fraser (and Christie and Fletcher) had “satisfied the requisite elements of the business judgement rule and [are] entitled to its exculpatory operation” at [495], [542], [551], [561]. Furthermore, under s 189, Olney-Fraser was entitled to rely on the advice given by Minter Ellison, and the other directors were entitled to rely on the information provided by Olney-Fraser in relation to the takeover bid. All directors exercised their ordinary care in assessing the reasonableness of the advice and were not aware of any facts which would cause detriment to that reasonableness. This proceeding was ultimately dismissed as all of ASIC’s claims failed. Commentary suggests that ASIC may well appeal the decision.
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Proposals for reform: A new general defence? .......................................................................................................................................................................
In recent times there have been calls by some company directors for further reform of the business judgment rule. A number of directors of Australia's leading companies have called for an expansion of the business judgment rule to protect directors from Australian Securities Exchange (ASX) continuous disclosure rules. In March 2007, Treasury released a discussion paper calling for a review of civil and criminal sanctions in corporate law: “Review of Sanctions in Corporate Law” (March 2007). As part of its review, Treasury examined the Corporations and Financial Services Regulation Review (CFSR) support for the introduction of a general defence to replace the statutory business judgment rule contained in s 180(2). According to the CFSR, the introduction of a general defence would provide the “beneficial effect that a general protection would have on corporate decision making, by reducing the risk of liability where business decisions are made by directors that meet the proposed general criteria”. The CFSR proposal for the availability of a general defence for directors in relation to the core directors duties of good faith (s 181), care, skill and diligence (s 180), use of position (s 182), use of information (s 183) and the duty to avoid insolvent trading (s 588G) received widespread support from company directors. However, there were concerns expressed by investors and creditor groups that extending a general defence too far may in fact increase a director's appetite for risky conduct. [11.510]
...................................................................................................................... Directors Urge Overhaul of Corporate Law
Brett Clegg and Patrick Durkin, The Australian Financial Review, 10 March 2008 Australia’s top company directors are urging the Rudd Government to reform the corporations law to shield boards from legal action over possible breaches of disclosure and insolvent trading laws. In an exclusive round table with The Australian Financial Review, leading chairmen called for the government to introduce a new defence in the Corporations Act by extending the “business judgement rule”, which already offers limited protection for breaches of directors’ duties. Telstra chairman Donald McGauchie said reform was needed because directors’ indemnities were untested and had “a lot of holes in them”. “I think this legal clarification is something we all need to focus on,” Mr McGauchie said. “It may be necessary for government to give some consideration to how these things are going to be fairly managed.” The chairman of Suncorp and Tabcorp, John Story, who is also the chairman of the 22,000-member Australian Institute of Company Directors, said directors had been given a “pretty good hearing” by federal Treasury – which last year released a discussion paper on the issue – on the new defence.
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“What’s worrying directors or potential directors is the spectre of litigation, the associated reputational damage and the potential for ultimate financial ruin,” Mr Story said. The push for the new defence comes amid fears that the turmoil on equities markets could result in directors being exposed to lengthy and costly legal actions. Concerns have intensified after a string of high-profile corporate financial shocks at Centro Properties Group, MFS, Allco, ABC Learning Centres and others. Under the company directors’ proposal, the business judgement rule would provide directors with a “safe harbour” if they had had regard to all relevant considerations, had been motivated for the right reasons, had formed a rational decision and “done their jobs as directors”. The extended defence would also offer protection for directors from the contentious continuous disclosure laws. This is particularly relevant to directors in this market because the Australian Securities Exchange has declared the personal financial arrangements of directors – particularly whether they have entered margin loans over their shareholdings – must be revealed under continuous-disclosure laws. AGL Energy chairman Mark Johnson said the clarification of the law was desirable. “I doubt … 1 per cent [of directors] have actually really crossed the line here, but the existence of these laws means that a lot of them spend a whole lot of time worrying about that, rather than concentrating on value creation,” he said. But the push for a new defence is likely to be opposed by investor groups. “Good directors expect to be held accountable, it goes with the territory,” the deputy chairman of the Australian Shareholders Association, Stephen Matthews, said. “If directors act in good faith they have nothing to fear.” Mr Story said the obligations on directors were “onerous” and “of major concern” to directors. “Matters such as disclosure and insolvent trading – those provisions do not have the benefit of a business judgement rule.” He said that this had made it harder to attract business figures to take board seats. “Why would experienced senior executives who are leaving that phase of life, embark … onto a potentially very unfriendly world?” The proposal for reform may be considered by the federal Minister for Corporate Governance, Nick Sherry, who has identified a range of areas requiring review – including improving the relevance of financial and directors’ reports, and examining executive remuneration. Last week, federal Treasurer Wayne Swan flagged that the government was also considering legislative options to force traders to keep the marker better informed. His move came after the ASX and the Australian Securities and Investments Commission issued warnings to market participants reminding them of the rules related to short-selling, misleading rumours and the disclosure of stock lending.
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Directors Urge Overhaul of Corporate Law cont. The business judgement rule was added to the Corporation Act in the late 1990s. But it only operates with respect to directors’ duties under section 180 of the law – specifically, directors’ duty to exercise their power and discharge their duties with care and diligence. The rule does not operate in relation to duties under any other provisions of the act or other laws, such as the continuous-disclosure requirements. The push for an extended defence has the backing of some leading corporate counsel, who argue that a defence is necessary because of the imprecise nature of the continuous-disclosure requirements. The general counsel of Woodside Energy, Rob Cole, said he wrestled with ASX rule 3.1 – the obligation to keep the market fully informed – on a daily bases. “The fundamental difficulty with the [disclosure] rule … is that it combines an imprecise test, and that test needs to be applied in complex, fluid factual situations.” “It is a difficult test – it is not a technical test. But that is combined with the severity of an obligation to immediately disclose,” Mr Cole told the ASIC summer school last month. Over time it was inevitable that human beings would fail that test, particularly when it was going to be judged with the benefit of 20-20 hindsight by a court, he said. “There is a requirement to make snap decisions and human beings wrestle with that test,” Mr Cole said. “Systems are in place and counsels do their best, but then they have the guillotine of no defence.” A former chief general counsel at National Australia Bank, David Krasnostein, agreed it was a constant struggle to get disclosure right, timely and complete. “It is often easy to make disclosure, it is not so easy to make it complete and accurate, particularly in big organisations, global organisations [where] many parts are involved in gathering the facts, people are overseas, people are asleep.” But some corporate lawyers question whether the move is necessary, Clayton Utz partner Rod Halstead said a defence should not apply when the issue simply related to a question of timing. “Companies know they are required to act quickly and promptly and should have systems in place to enable them to do that.” Insolvency lawyers also questioned whether a broader defence was needed to protect directors from insolvent trading. Only one director has been jailed for insolvent trading, despite offence provisions being in place for more than 15 years. A partner at Blake Dawson, Ross McClymont, said many believed the insolvent trading provisions were “seen by some as a toothless tiger”. Neil Young, QC, said the case for stripping away the potential civil and criminal liability faced by directors had not been persuasively made and to do so would be premature.
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“It is difficult to see how we could require less of our directors,” he said during the keynote address to the ASIC summer school. “Directors’ actions can have a profound effect on the lives of a great number of people, be they shareholders, employees, creditors, or the public generally.”
Duty to prevent insolvent trading Introduction .......................................................................................................................................................................
A director has a duty to prevent a company from trading whilst insolvent. A company is insolvent if it cannot pay all its debts as and when they fall due: s 95A. The duty arises under s 588G. The insolvency aspects of s 588G are also discussed in Chapter 24. [11.520]
SECTION 588G Director’s duty to prevent insolvent trading by company (1) This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b)
the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c)
at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
(d)
that time is at or after the commencement of this Act.
… (2)
By failing to prevent the company from incurring the debt, the person contravenes this section if: (a)
the person is aware at that time that there are such grounds for so suspecting; or
(b)
a reasonable person in a like position in a company in the company’s circumstances would be so aware.
Note: This subsection is a civil penalty provision (see subs 1317E(1)).
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Requirements ....................................................................................................................................................................... [11.530]
A person engages in insolvent trading in breach of s 588G if: the person is a director of a company when the company incurs a debt AND the company is insolvent at the time of incurring the debt, or becomes insolvent by incurring the debt AND there are reasonable grounds for suspecting that the company was insolvent, or would become insolvent, at the time the debt was incurred AND the person is aware of such grounds, or a reasonable person in a like position in a company in the circumstances of that company, would be so aware AND the person fails to prevent the company from incurring the debt ↓ INSOLVENT TRADING Reasonable grounds for suspecting insolvency .......................................................................................................................................................................
There must be reasonable grounds for suspecting that the company was insolvent or that it would become insolvent upon the debt being incurred. The requirement that the grounds be “reasonable” ones indicates that the issue must be determined objectively: Credit Corporation Australia Pty Ltd v Atkins (1999) 17 ACLC 756; Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183. It requires an examination of the company's circumstances at the time when the debt was incurred from the viewpoint of an ordinary, competent director: Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR [11.540]
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Director’s state of mind .......................................................................................................................................................................
There will be no contravention of s 588G(2) unless the director was aware, or a reasonable person in a like position would have been aware, that there were reasonable grounds for suspecting insolvency. The language of s 588G(2)(b) is very similar to the language used in the statutory duty of care in s 180(1). It provides an objective test, with a “core, irreducible requirement of participation in management” yet enables the court to take account of any special expertise held by the individual director and the distribution of functions within the company: DC of T v Clark (2003) 57 NSWLR 113 at [108]-[110] per Spigelman CJ; see also [11.340]. A reasonable director is a person who would be able to understand what the company's financial reports and auditor's report show, as Tadgell J explained in Commonwealth Bank v Friedrich (1991) 9 ACLC 946. [11.550]
Overlap with general duty of care .......................................................................................................................................................................
A breach of s 588G may also give rise to a breach of the duty of care and diligence in s 180(1) and under the general law. If a director has not been sufficiently watchful of the company's financial position, so that the company continues to incur debts when it is likely it cannot repay them, it is arguable that the director was also not being “diligent” about the company's affairs. Section 588G can be viewed as a specific application of the duty of care, diligence and skill to the situation of insolvency. Cases decided under s 588G and its predecessor have influenced recent cases on that duty. This influence is in part responsible for the more rigorous standards of care now expected of directors by s 180(1) and the general law. The statutory business judgment rule does not apply to breaches of s 588G: see note to s 180(2), at [11.490]. However, under recent proposals for reform, Treasury in its discussion paper, “Review of Sanctions in Corporate Law” (March 2007), is currently examining the merits of providing a general defence to directors involved in companies that are found to be insolvent. There are of course, many arguments that can be made for and against whether a general defence should be provided to directors who are involved in companies that are insolvent. Ultimately it will be a question of deciding the correct balance between discouraging undesirable conduct and promoting responsible risk taking. [11.560]
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699; DC of T v Clark (2003) 57 NSWLR 113; ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369).
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Duties of Officers under s 601FD and the related Duty of Care Skill and Diligence .......................................................................................................................................................................
Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 involved purported contraventions of s 180, 208(1), 601FD(1)(f)(i) and (iv). Jackson and Goff were directors of “Agricultural Land Management” (“Agricultural”) which was the Responsible Entity (RE) of “Kalgoorlie Apartment Hotel Syndicate” (“Kalgoorlie Scheme”) (MIS). Agricultural sues in its capacity as the RE of the Kalgoorlie Scheme. Jackson also spent a period of time as the company Secretary of Agricultural and Goff was the Compliance Officer for the Kalgoorlie Scheme. Jackson is, and was at the time of the disputed land sale, a Director of Bunbury Centro, a related entity, (s 79) and Goff is and was at the time of the disputed land sale the company Secretary of Bunbury Centro. Both Bunbury Centro and Agricultural have the same parent company, Kareelya. The disputed land sale occurred when Bunbury Centro sold a Kalgoorlie property, to Agricultural so that Agricultural, as the RE for the Kalgoorlie Scheme could “acquire, develop and hold the Kalgoorlie property as a managed investment scheme for a period of 10 years following the acquisition” at [25]. The offer and acceptance for the property sale was signed on behalf of the vendors, Bunbury Centro, by Jackson and Goff and on behalf of the purchasers, Agricultural, by Jackson and Goff. The plaintiff pleaded that this sale was not in the best interests of Agricultural and alleged breaches of s 180, 181, 184, 601FD(1)(f)(i) and (iv), general law care skill and diligence. The court found that the property was in fact undervalued at the time of sale and therefore no contravention of the above sections and general law occurred in relation to the purchase price. However, Jackson and Goff admitted that they breached s 208 (s 601LC) as a contract was being entered into by Agricultural as the RE, with a related party Bunbury Centro, without member approval ss 217 – 227 or exception under ss 210 – 216. In addition, the Compliance Plan of the Kalgoorlie Scheme as updated on 20 May 2002 had not been followed. Clause 20 outlined the RE must “conduct appropriate due diligence” at [228], with a report prepared by the trust manager, on proposals to buy or sell real property of the Kalgoorlie Scheme, which must be presented at a directors meeting of the RE and tabled at a meeting of the compliance committee of the Kalgoorlie syndicate. Compliance committee reports can be dispensed with if the RE “determined that it would be in the best interest of investors to proceed with the purchase or sale” at [228]. Clause 27 states that when dealing with any related party, the compliance officer is to provide details of proposed transactions for review by
[11.565]
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the compliance committee which would sign off on all proposed transactions with a related party at [229]. A failure to adhere to the compliance plan of the MIS causes a breach of s 601FD(1)(f)(iv). In turn, this breach flows onto a contravention of s 601FD(1)(f)(i), and s 180(1) as they failed to take all steps that a reasonable person would take, if he were in the respective positions, to ensure that agricultural complied with s 208(1) at [250], [299]. Ultimately, this was found to be a contravention of s 601FD(3). It was also found that under s 79, Bunbury Centro was “knowingly concerned in” the above breaches as Jackson and Goff, as directors of both entities, had the relevant knowledge to be aware of the contravention of s 208(1), and by default the resulting contravention of s 601FD(3). The court found that a contravention of s 180(1) did not follow for Bunbury Centro as the provision does not extend to those who are “involved” at [288].
Consequences of contravening s 588G Civil remedies and civil penalties .......................................................................................................................................................................
Where a company has been placed in liquidation, the liquidator standing in the company's shoes can initiate actions against the directors for: [11.570]
• breach of the general law duties and/or statutory duties under Pt 2D.1; • breach of the duty under ss 588G – 588M(2), which gives the liquidator the right to recover loss or damage suffered by the company because of the breach. A creditor may also sue the directors provided that the liquidator consents to the creditor commencing such proceedings: s 588M(3). Section 588G is a civil penalty provision, contravention of which can lead to action by ASIC and, if a contravention is proved, the court may impose one of the civil penalties from Table 11.3 at [11.210]: see ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369). A defaulting director who is acting dishonestly commits an offence under s 588G(3) and, if convicted, will be liable to criminal penalties. Defences ....................................................................................................................................................................... [11.580] There are four defences available to directors who otherwise contravene s 588G. The first two defences refer to a director's “expectation” that the company is solvent, either based on their own knowledge or in reliance on someone else. It is clear that this requires a higher degree of certainty than “mere hope or possibility” or “suspecting”: Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 (see below); Tourprint
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International Ltd v Bott (1999) 17 ACLC 1,543; and Powell v Fryer (2001) 159 FLR 433. It also appears that it may not be easy for directors to make use of the defence that they expected that the company was solvent because they relied on information from “a competent and reliable person”: see Manpac Industries Pty Ltd v Ceccatini (2002) 20 ACLC 1,304; ASIC v Plymin (2003) 175 FLR 124 (affirmed on appeal Elliott v ASIC (2004) 10 VR 369). Similarly, a passive director's non-participation in the management of a company will not be accepted as a “good reason” why that director did not take part in the management of the company and will not constitute a defence under s 588H(4): Tourprint International Ltd v Bott (1999) 17 ACLC 1,543; DC of T v Clark (2003) 57 NSWLR 113. Metropolitan Fire Systems v Miller [11.590] Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 (Federal Court of Australia) FACTS: Metropolitan were the approved tenderers for the installation of fire systems and fire prevention equipment for Raydar Pty Ltd (Raydar). Raydar went into liquidation incurring debts of $49,549 to Metropolitan. Metropolitan commenced an action against the directors of Raydar, and sought declarations that the directors of Raydar, namely Miller and Lewis, breached s 588G of the Corporations Act by allowing the company to trade whilst insolvent. Metropolitan claimed compensation for the debt that was incurred, along with interest and a declaration that the directors had breached a civil penalty order. The directors, in turn, relied on the defences available to directors under s 588H of the Corporations Act. DECISION: 1.
The onus of proof for defences under s 588H rests on the director seeking to rely on them. The director must establish all of the elements of the defence on the balance of probabilities. The grounds on which the director forms the view as to the company’s solvency must be reasonable. This implies an objective consideration of the grounds viewed against all circumstances;
2.
The defences under s 588H require the director to “expect” solvency, which is a higher threshold test when compared with the “suspect” insolvency test under s 588G;
3.
A creditor cannot seek a civil penalty declaration, only ASIC or its delegate can apply to the court for such an order: s 1317EB.
The court rejected the defences put forward by the directors. The court was of the view that company was clearly insolvent at the time the debt was incurred to Metropolitan. The defences under s 588H were not available because the directors’ assessment concerning the solvency of the company was based on hope rather than reasonable expectations.
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A director may rely upon any one or more of four possible statutory defences in s 588H if: the director had reasonable grounds to expect, and did expect, that the company was solvent at the time and would remain solvent, even if it incurred the debt OR the director expected that the company was solvent, on the basis of information supplied to her or him by a subordinate, where the director believed on reasonable grounds that the subordinate was a competent and reliable person who was responsible for providing adequate information about the solvency of the company OR the director, because of illness or some other good reason, did not take part in the management of the company at the relevant time OR the director took all reasonable steps to prevent the company from incurring the debt ↓ NO INSOLVENT TRADING
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[11.600]
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[11.610] Figure 11.4: Summary of issues – directors’ duties of care and skill ....................................................................................................
Recent legislative reform – Personal Liability for Corporate Fault Reform Act 2012 (Cth) .......................................................................................................................................................................
This Act was made in response to reforms under the ″Council of Australian Governments National Partnership Agreement to Deliver a Seamless National Economy″. The reforms were intended to ″provide greater clarity and consistency in the way the COAG principles would apply″. The Act, more specifically, was intended to standardise corporate liability across jurisdictions and prevent situations where directors and corporate offices have been ″held personally liable for an act by a company in day-to-day business operations, over which they could not reasonably be expected to exercise control″. The second reading speech continues that the amendments ″are concerned with personal liability provisions that hold directors and other corporate offices criminally liable because an offence has been committed by the corporation. They are not concerned with circumstances where such
[11.620]
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officers may be held liable as a result of their personal involvement in the commission of an offence″. (Bernie Ripoll MP, Second reading speech 19 September 2012) The explanatory memorandum states that the legislative instrument ″aims to harmonise the imposition of personal criminal liability for corporate fault across Australian jurisdictions″. Further, it aims to: • remove personal criminal liability for corporate fault where such liability is not justified; • remove the burden of proof on defendants to establish a defence to a charge; • replace personal criminal liability for corporate fault with civil liability where a noncriminal penalty is appropriate; • where criminal liability is justified, to make clear the circumstances where such liability would apply. Examples of amendments: Section 188 – removed the criminal penalty, replacing it with civil penalty of up to $3000, with the possible extension to $200,000 for serious matters, matters which materially prejudice the interests or ability to pay creditors of the corporation. Section 601FC – removed the criminal liability for contravention of this section and changed penalty to a civil penalty provision.
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Directors' Duties – Part 1.)
Practice Questions ...................................................................................................................................... 1.
There is tension between the commercial and legal expectations of directors. Explain the causes of that tension.
2.
What are the differences between the penalties and the remedies available for breach of directors' statutory duties?
3.
When may directors be liable to criminal penalties for breach of their statutory duties?
4.
Describe the legal sources of the duty of care owed by directors.
5.
What is the relationship between the duty of care under s 180(1) and the duty to prevent insolvent trading under s 588G?
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6.
Are directors of public companies able to delegate some of their functions to, and/or to rely on information and advice from, senior executives?
7.
What is a business judgment rule? Why did the government introduce such a rule in the Corporations Act?
8.
Does a person who is the non-executive chair of a publicly listed company have broader responsibilities than other non-executive directors?
Essay Questions ...................................................................................................................................... 1.
Do you agree with CAMAC's recent proposals for reform calling for a “functional” approach in defining a person's role in a corporation?
2.
Should a general defence be introduced for all directors and company officers to replace the existing statutory business judgment rule under s 180(2)?
Problems for Discussion ...................................................................................................................................... 1.
In April 2011, Earl became the managing director of a newly registered company, Go-Carts Limited (Go-Carts). Go-Carts at that time controlled a chain of successful go-karting venues and was in a strong financial position. In December 2011, a liquidator was appointed to Go-Carts. An investigation of the affairs of Go-Carts by the liquidator disclosed a probable shortage of funds of over $3 million. Although there had been a steady increase in Go-Carts' sales of tickets into the go-karting venues from 2010 to 2011 (resulting in substantial trading profits), the liquidator reported the following: (a)
the purchase of a $4 million chateau in France with funds from Go-Carts which, upon resale, was only likely to realise $3 million – representing an expected net loss of $1 million;
(b)
the purchase of new motorised sweepers designed to collect litter on the go-karting tracks which, despite high hopes at the time and potentially large (labour) cost savings, subsequently proved to be unsuitable and had to be replaced at a net cost of over $800,000;
(c)
that $200,000 is due from Shrewd Advisers Ltd (Shrewd), Go-Carts' investment advisers, a company of which Earl is the governing director and majority shareholder. There is a
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guarantee by Shrewd in favour of Go-Carts for $100,000 but, given Shrewd's financial position, no more than $70,000 is likely to be recovered. Earl did not disclose his interest in Shrewd Pty Ltd to the Go-Carts Board, although they knew about it; and (d)
Earl had himself fraudulently misappropriated about $1 million to finance his extravagant lifestyle. Fraud charges against Earl are currently being heard by the county court. The directors of Go-Carts during the period 2009-2010 were: • Earl, as Managing Director and Chair; • Elisabeth Deal, a partner of a leading firm of chartered accountants; • Enid Patton, a highly regarded doctor who sits on several public company boards; • Eleanor Arnold, a public relations consultant and go-karting enthusiast. Eleanor was ill for much of 2008 and was unable to attend board meetings or take any part in the company's management.
The day-to-day management of Go-Carts was left to Earl. The non-executive directors conceived their role to be planning and policy-making. There is no evidence of wilful neglect or default by any of the non-executive directors, who were all deceived by Earl, as were the auditors. Advise the liquidator whether she should pursue any of the nonexecutive directors for compensation. 2.
Growfast Pty Ltd (Growfast) operates a wholesale nursery growing and selling garden plants. Sam, Peter and Rose are the only shareholders and directors. Sam manages the company's day-to-day operations. Peter, who left school at 14 and has no tertiary qualifications, is in charge of the nursery. Rose is a non-executive director who does not take an active part in the management or operations of the company. Until recently, Growfast has been very profitable. However, six months ago, a competing business opened nearby and since then Growfast's profits have dropped considerably. Sam thinks that Growfast should move to larger premises in a different area. Without consulting Peter or Rose he starts looking for new premises and he decides the first place he inspects is perfect, although the price is more than Growfast can comfortably afford. Sam does not think this will be a problem, because there is no competition nearby and he expects that
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profits will recover immediately. Sam calls a board meeting and tells Peter and Rose that moving will solve all the company's problems and that this property he has seen is absolutely perfect for Growfast. He says they will have to act quickly as there is another interested purchaser. Sam does not tell Peter and Rose that he only looked at this one property. He is so enthusiastic that both Peter and Rose agree to the proposal even though Rose is doubtful, feeling that they are being rushed into making a decision without being given time to consider other alternatives. Peter agrees to Sam's proposal without really understanding the financial implications. Growfast purchases the new premises but, because of continuing dry weather, its profits remain low. Rose is becoming worried about her obligations as a director, especially if Growfast's financial position deteriorates any further. (a) Advise Rose about: (i) her position in respect of any breaches of her general law or statutory duty of care and diligence as a director;
(b)
3.
(ii)
whether her decision to agree to the purchase of the new premises would be protected by s 180(2); and
(iii)
any possible liability for insolvent trading under s 588G if Growfast became insolvent.
Advise Peter as to his position in respect of any breaches of his duty of care and any possible liability for insolvent trading if Growfast becomes insolvent.
DEF Ltd was incorporated on January 2011 and was floated on the ASX in March 2011, having raised $20 million from investors. The company is primarily involved in mining and exploration activities in the Pilbara region of Western Australia. DEF Ltd have four directors: Apollo, Rocky, Drago and Clubber. Both Apollo and Rocky are executive directors. Rocky is the company's chief executive officer. Clubber is the company's chair. Drago is the company's chief financial officer. The company began exploration activities in July 2011. After drilling a number of sites, a geological survey was commissioned and the results from the mine wells were tested. The results from the survey reveal that the mining site has low levels of gold deposits and is considered to be uncommercial. The company has already spent $5 million. At a recent meeting, the board considers whether to abandon its mining activities and return the company's remaining capital back to its shareholders. Both Apollo and Rocky are eternal optimists and never know when to quit. They both argue that the
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company is on the verge of a major discovery and should continue with its exploration activities. Clubber and Drago are less optimistic and suggest that the company's remaining capital should be returned back to investors. To avoid another heated confrontation, they agree with Rocky and Apollo that the company should continue with its drilling program. At the completion of the drilling activities in 2012, all of the company's capital has been exhausted and there have been no major discoveries. (a) Have Apollo and Rocky breached their directors' duties? (b)
Do Apollo and Rocky have an arguable defence?
(c)
Has Clubber, as the company's chair, breached any duties?
(d)
Advise whether Drago, as the company's chief financial officer, breached any duties.
Guide to Problem Solving ...................................................................................................................................... Breach of directors’ duties of care
Figure 11.2 at [11.45] is a useful focus for problem solving. Begin by determining whether, on the facts, the question is principally about the honesty of the directors' actions, or whether the wisdom/prudence of their actions and decisions seems doubtful. Obviously, the question may include both types of breaches and actual or potential conflicts of interest may exist – you will then also need to refer to the guidelines for problem solving discussed in Chapter 13. Having determined the issue is about the wisdom or prudence of their decision making, use Figure 11.4 (see [11.610]) as a guide to the issues to be discussed and the structure of your answer. Also consider whether the statutory business judgment rule is likely to assist the directors in these circumstances.
Further Reading ...................................................................................................................................... Adams M “The Power of Penalties in Financial Services” [2004] Butterworths Corporations Law Bulletin (No 19), [536] Anderson H “Directors' Personal Liability to Creditors: Theory versus Tradition” (2003) 8 Deakin Law Review 209 Andrews N “If the Dog Catches the Mice: The Civil Settlement of Criminal Conduct under the Corporations Act and the Australian Securities and Investment Commission” (2003) 15 Australian Journal of Corporate Law 137
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Austin RP, Ford H and Ramsay I Company Directors: Principles of Law and Corporate Governance LexisNexis Butterworths, 2005, Chs 6 and 10 Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis, 2014 [8.010]-[8.060] and [20.080]-[20.160] Australian Government, Corporations and Markets Advisory Committee (CAMAC), “Social Responsibility of Corporations Report” (December 2006) available at http://www.camac.gov.au Australian Government, Corporations and Markets Advisory Committee (CAMAC), “Corporate Duties Below Board Level Report” (April 2006) available at http://www.camac.gov.au Australian Government, Commonwealth Treasury, “Review of Sanctions in Corporate Law” (March 2007) available at http://www.treasury.gov.au Awarde J and Byrne A “Special Responsibilities of the Chairman; ASIC v Rich” (2003) 8 Deakin Law Review 193 Blair MM “Directors' Duties in a Post-Enron World: Why Language Matters” (2003) (Fall) Wake Forest Law Review 885 Clarke A “The Business Judgment Rule: Good Corporate Governance or Not?” (2000) 12 Australian Journal of Corporate Law 85 DeMott D “Inside the Corporate Veil: The Character and Consequences of Executives' Duties” (2006) 19 Australian Journal of Corporate Law 251 DuPlessis J “Reverberations after the HIH and other Recent Australian Corporate Collapses: The Role of ASIC” (2003) 15 Australian Journal of Corporate Law 225 Farrar J Corporate Governance in Australia and New Zealand Oxford University Press, 2001 Farrar J Corporate Governance Theories, Principles and Practice 2nd ed, Oxford University Press, 2005 Harris J and Nehme M “An Analysis of the Vines Appeal” (2007) 25 C&SLJ 554 Josev T, “Tailoring Directors' Duties to “Contemporary Community Expectations”: New Directions for the Courts Post-ASIC v Rich” (2004) 22 C&SLJ 553 Keeves J S “Directors' Duties – ASIC v Rich – Landmark or Beacon?” (2004) 22 C&SLJ 181 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, [13.4.05]-[13.4.65] Middleton T “The Difficulties of Applying Civil Evidence and Procedure Rules in ASIC's Civil Penalty Proceedings under the Corporations Act” (2003) 21 C&SLJ 507
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Moodie G and Ramsay I “The Expansion of Civil Penalties under the Corporations Act” (2002) 30 ABLR 61
CHAPTER 12 .......................................................................................................
Useful Websites ..................................................................... 367 Recent Developments ............................................................ 367 Aim ......................................................................................... 368 Related Topics ....................................................................... 368 Principles ............................................................................... 368 Introduction ............................................................................... 368 Outline of duties of loyalty and good faith .......................................... 370 To whom are the duties owed? ....................................................... 371 Duty to act in good faith in the interests of the company ........................ 372 Duty to use powers for proper purposes ............................................ 376 Section 181 – Good faith and proper purpose ...................................... 381 Duty to retain discretions ............................................................... 382 Contravention of good faith and proper purpose .................................. 383 Mentor: Test your Knowledge ............................................... 384 Practice Questions ................................................................. 384 Essay Questions .................................................................... 384 Problems for Discussion ........................................................ 384 Further Reading ..................................................................... 386
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Directors' Duties – Part 2.)
Recent Developments ...................................................................................................................................... Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 Gerard Cassegrain & Co Pty Ltd (in liquidation) v Cassegrain [2013] NSWCA 455 Allco Funds Management v Trust Company (RE services) Ltd [2014] NSWSC 1251
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Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157 Barnes v Addy (1874) LR 9 Ch App 244
Aim ...................................................................................................................................... At the end of this topic you should know: • the conduct expected of directors under their duties of good faith and loyalty; • the overlap between the general law and statutory formulations of the duties of good faith and loyalty; • the requirements under the general law and the Corporations Act 2001 (Cth) for the duty of good faith and proper purpose; and • the statutory formulation of the duty to retain discretions.
Related Topics ...................................................................................................................................... Chapter 6 Management of Companies; Chapter 11 Directors' Duties – Part 1 Duty of Care, Skill and Diligence; Chapter 13 Directors' Duties – Part 3 Conflict of Interest and Disclosure; Chapter 14 Members' Rights and Remedies
PRINCIPLES Introduction This Chapter examines the duties of loyalty and good faith, the second of the two groups of legal duties of directors and company officers outlined at the start of Chapter 11. This Chapter assumes knowledge of and builds on the discussion in Chapter 11. It includes a discussion of two issues typically arising in connection with the duties of loyalty and good faith. They are: [12.10]
• directors' disclosure obligations under the general law and the Corporations Act 2001 (Cth) (Corporations Act); and • how a director can be excused from a breach of her or his directors' duties. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Part 6-4—Duties and powers of directors and other officers and employees, Division 265-5—Good faith- civil obligations, Division 265-25—Good faith,
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use of position and use of information–criminal offences, Division 26530—Interaction of sections 265-1 to 265-25 with other laws etc of the CATSI Act. An example of case where the Registrar of ORIC laid charges against a former native title director is in relation to the Githabul Nation Aboriginal Corporation RNTBC. Extract from the ORIC's website: http://www.oric.gov.au/publications/media-release/registrar-layscharges-against-former-native-title-director.
.................................................................................................................. MR1516-25 – Registrar lays charges against former native title director
An investigation by the Registrar of Indigenous Corporations, Anthony Beven, has led to charges against a former director of the Githabul Nation Aboriginal Corporation RNTBC. Mr Trevor John Close has been charged with three counts of dishonestly misusing his position as a corporation director to gain an advantage for himself. It is alleged that Mr Close used the proceeds of sale from a Githabul Nation native title property to pay the rent for his private home in Sydney. It is alleged that two rental payments were made by Mr Close from corporation funds in July 2013 and one in August 2013. Githabul Nation was incorporated in 2006 and is registered under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (CATSI Act). It was established to manage the native title rights and interests of the Githabul people of northern New South Wales. On 29 November 2007 the Federal Court made a consent determination recognising the Githabul people’s native title rights and interests over 1,120 square kilometres of national parks and state forests around Kyogle in northern New South Wales. As part of the Githabul native title consent process the New South Wales Government transferred 20 parcels of public land to Githabul Nation. The proceeds of sale that Mr Close is alleged to have misused were from the sale of one of the parcels of land. Mr Close was a director of the Githabul Nation Aboriginal Corporation RNTBC from May 2009 until July 2014, when the corporation was placed under special administration by the Registrar. The charges against Mr Close have been laid under section 26525(3)(a) of the CATSI Act. The section carries a maximum penalty of $340,000 or imprisonment for five years, or both, for two charges relating to the July 2013 payments and $360,000 or imprisonment for five years, or both, for one charge for the August 2013 payment. “Native title rights and interests must be held and used for the benefit of all traditional owners, not one individual,” said Mr Beven. “My office provides a range of services to native title bodies to improve their governance but will take action when there are failings in that governance.”
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MR1516-25 – Registrar lays charges against former native title director cont. Mr Close is due to appear before the Downing Centre Local Court on 2 August 2016. The Commonwealth Director of Public Prosecutions is prosecuting the matter.
Outline of duties of loyalty and good faith [12.20]
To refresh your memory, Figure 11.2 from Chapter 11 is repeated.
[12.30] Figure 12.1: Overview of duties of directors ....................................................................................................
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(a)
to act in good faith in the interests of the company;
(b)
to use powers for their proper purpose;
(c)
to retain discretionary powers; and
(d) to avoid actual and potential conflicts of interest and duty. The duties arise under the general law and under ss 181 – 184 of the Corporations Act. The language used to describe the duties in these sections may differ from the language used by judges in law reports to describe the general law duties. Despite these differences, the general law and statutory duties are similar. The duty to avoid conflicts of interest and duty gives rise to a number of disclosure obligations for directors under the general law and the Corporations Act. These obligations will be discussed later in Chapter 13.
To whom are the duties owed? According to Percival v Wright [1902] 2 Ch 421, the duties of loyalty and good faith are owed to the company, not to individual members. A number of developments have eroded this principle. Some examples are given in the following table. [12.40]
[12.50] TABLE 12.1 Extension of fiduciary duties Persons to Requirements Whom Duty May Also be Owed individual members In special circumstances, eg • where members dependent on info or advice given by directors; or
•
close relationship of confidence between members and directors
creditors
Duty arises where company is insolvent or nearing insolvency, but duty does not give creditors the right to sue directors for breach of duty
beneficiaries of trust
Where trust is managed by directors of company – beneficiary may be able to sue for breach of trust
Case Examples
Coleman v Myers [1977] 2 NZLR 225; Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 4 ACLC 711; Glavanics v Brunninghausen (1996) 14 ACLC 345; on appeal Brunninghausen v Glavanics (1999) 46 NSWLR 538 Walker v Wimborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Grove v Flavel (1986) 43 SASR 410; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425; Addstead Pty Ltd (in liq) v Liddan Pty Ltd (1997) 70 SASR 21; Spies v The Queen (2000) 201 CLR 603; Geneva Finance Ltd v Resource and Industry Ltd (2002) 169 FLR 152 Hurley v BGH Nominees Pty Ltd (No 2) (1984) 37 SASR 499; ASC v AS Nominees (1995) 62 FCR 504
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Directors owe duties of loyalty and good faith because they are in a fiduciary relationship with the companies on whose behalf they act. As the diagram illustrates, these duties can be divided into various categories:
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Persons to Requirements Whom Duty May Also be Owed employees Duty may be imposed by other laws dealing with labour, consumer or environmental protection
Case Examples
No case law or Corporations Act examples
Note: In March 2005 the Commonwealth Government asked CAMAC to examine the issue of directors' duties and whether the Corporations Act should be amended to require directors to take account of the interests of other stakeholders, including employees and customers.
Duty to act in good faith in the interests of the company Description of duty ....................................................................................................................................................................... [12.60] The duty to act in good faith in the interests of the company requires directors to act “bona fide [in good faith] in what they consider – not what the court may consider – is in the interests of the company”: Re Smith & Fawcett Ltd [1942] Ch 304 at 306 per Lord Greene MR. This quote reflects the two competing concerns in this area:
• the concern that directors must give proper consideration to the interests of the company in their dealings; and • the reluctance of courts to interfere with the internal management of companies by “second guessing” their management decisions. Source of duty ....................................................................................................................................................................... [12.70]
The duty arises under:
• the general law – in particular, from principles of equity collectively known as “fiduciary law”; and • ss 181 and 184 of the Corporations Act. Examples of breach of duty .......................................................................................................................................................................
Depending on the circumstances in which they take place, the following actions by directors may amount to a breach of the duty to act in good faith in the interests of the company: [12.80]
• controlling members treating company assets as if they are assets held in their own names; • providing personal benefits to directors or particular members; • undertaking transactions with directors or particular members on terms very favourable to them;
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• forgiving debts owed to the company by directors or particular members; or • transferring company assets to others in an attempt to avoid recovery by creditors or receivers. Scope of duty [12.90] The duty requires directors to act for the benefit of “the company as a whole”, not just the majority of members: Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286. It is often difficult to work out what this expression means in the context of a transaction or dealing undertaken by the company. In particular, which stakeholders can be considered to be part of “the company” for the purpose of this duty? Does it include:
• the members? • the creditors? • other companies within a group of companies? • employees and the community? Each will be briefly explored in the following paragraphs. Members
In Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 ACLC 154, Hodgson J, at first instance, said that the duty required directors to have regard for the interests of both: [12.100]
• the company as a commercial entity; and • the members of the company. This view is reinforced by Pt 2F.1 of the Corporations Act which provides remedies to members where the affairs of the company are conducted in a manner which is “contrary to the interests of the members as a whole”. Classes of shares
In companies with two or more classes of shares (for example, ordinary and preference shares), directors may make decisions which affect the different classes in different ways. One class of shares may benefit and the other suffer from the transaction. In those situations, the courts have focused on whether the decision was fair as between the different classes of members: see the discussion in Mills v Mills (1938) 60 CLR 150 at 164 per Latham CJ. [12.110]
Creditors [12.120] If the company is insolvent or nearing insolvency then “interests of the company” includes the interests of creditors (who are, in a sense, the
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“owners” of the company at that time). The directors must avoid action contrary to their interests. Refer to ANZ Executors & Trustee Co Ltd v Qintex Ltd (1990) 8 ACLC 791; Walker v Wimborne (1976) 137 CLR 1; Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Grove v Flavel (1986) 43 SASR 410; Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50; Lyford & Glenisia Investments Pty Ltd v Commonwealth Bank of Australia (1995) 13 ACLC 900; Addstead Pty Ltd (in liq) v Liddan Pty Ltd (1997) 70 SASR 21; Linton v Telnet Pty Ltd (1999) 17 ACLC 619; and Spies v The Queen (2000) 201 CLR 603. Section 588G reinforces the requirement that directors are to be mindful of creditor rights. However, while creditors have some limited statutory rights against directors for breach of s 588G, creditors have no right to sue directors for breach of their general law duties: Sycotex Pty Ltd v Baseler (1994) 51 FCR 425. Directors do not owe an independent duty to creditors which is enforceable by creditors: Spies v The Queen (2000) 201 CLR 603 at 1282; Geneva Finance Ltd v Resource and Industry Ltd (2002) 169 FLR 152. Corporate groups
The duty to act in good faith in the interests of a company also applies to dealings between companies in a corporate group, such as an inter-group loan or guarantee given by one company on behalf of another within the group. Prior to the introduction of s 187 in 2000, there was some uncertainty as to the interests that a director could take into account in this context.
[12.130]
• In Walker v Wimborne (1976) 137 CLR 1, the High Court of Australia held that the interests of the individual company to which the director was appointed were paramount, not the interests of the group of companies. To fulfil the duty, there must be evidence that the director considered the interests of the individual company, separate and alone from the interests of the group: see also ANZ Executors & Trustee Co Ltd v Qintex Ltd (1990) 8 ACLC 791; and Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50. • However, in Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62, a less stringent test was applied. The test applied was: whether an intelligent and honest person in the position of the directors could have reasonably believed that the transaction was for the benefit of the company as a separate entity. This test permits directors to have regard to group interests in addition to the interests of the separate entity. It has been applied in Australia in Farrow Finance Co Ltd (in liq) v Farrow Properties Pty Ltd (in liq)
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[1999] 1 VR 584 and Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd (2001) 38 ACSR 404 and in the context of creditors' interests in Linton v Telnet Pty Ltd (1999) 17 ACLC 619. Section 187 is intended to resolve these difficulties for directors of whollyowned subsidiaries by allowing them to make decisions which are in the best interests of the holding company, but not necessarily the best interests of the subsidiary. However, the difficulties remain for directors of partly owned subsidiaries.
SECTION 187 Directors of wholly-owned subsidiaries A director of a corporation that is a wholly-owned subsidiary of a body corporate is to be taken to act in good faith in the best interests of the subsidiary if: (a)
the constitution of the subsidiary expressly authorises the direction to act in the best interests of the holding company; and
(b)
the director acts in good faith in the best interests of the holding company; and
(c)
the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director’s act.
Nominee directors
Acting in the best interests of the company also raises a vexed issue for nominee directors – conflict can arise between the best interests of the company of which they are a director and the interests of the group or company (for example, a holding company) that has appointed them. Section 187 permits directors of wholly owned subsidiary companies, who were nominated by the holding companies, to have dual loyalties provided that they satisfy the requirements described at [12.130]. Difficult problems may still arise for other nominee directors including directors appointed to partly-owned subsidiaries: see Company and Securities Advisory Committee (CASAC, now CAMAC), “Corporate Groups Final Report” (2000), Ch 2. The present Australian view would seem to be that dual loyalty is possible but, in the event of an actual conflict, a nominee director's foremost duty is to the company of which he or she is a director: contrast Scottish Co-operative Wholesale Society Ltd v Meyer [1959] 3 AC 324 and Bennetts v Board of Fire Commissioners of New South Wales (1967) 87 WN (Pt 1) (NSW) 307, with Levin v Clark [1962] NSWR 686.
[12.140]
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Employees and the community
It was clearly established in Parke v Daily News Ltd [1962] Ch 927 that the interests of employees should not be considered by the directors ahead of the interests of the company as a whole. However, if the interests of current, as opposed to past, employees (for example, in industrial matters) can be regarded as affecting the interests of the company, then they could be taken into account. Corporate sponsorship and donations can also be justified in this way. A sponsorship deal may benefit the public but it also, indirectly, benefits the company by way of good public relations and advertising. [12.150]
Parke v Daily News [12.155] Parke v Daily News Ltd [1962] Ch 927 (Chancery Division of the High Court of England and Wales) FACTS: The Daily News Ltd was the owner of two newspapers. Both newspapers had declining sales and the board decided that it was in the best interests of the company to sell the newspapers to an external party. The board further decided to sell not only the intangible assets of the company, namely the mastheads, but also all plant and equipment. The sale of the newspaper business led to widespread job losses. Sympathetic to the past employees, the board decided to distribute the surplus funds from the sale of the business to the staff that were no longer employed by the Daily News. A minority shareholder objected to the distribution of the surplus proceeds to the past employees. DECISION: The board was not entitled to distribute the surplus proceeds from the sale of the business to its past employees because to do so would not be in the best interests of the company. This was especially the case with past employees who were no longer employed and therefore, did not provide any current or future benefit to the company.
Impact of company’s internal rules .......................................................................................................................................................................
The scope of the duty to act in good faith in the interests of the company may be affected by a company's internal rules – the company's constitution may permit directors to take account of a particular stakeholder's interests ahead of others: Berlei-Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150; and Japan Abrasive Materials Pty Ltd v Australian Fused Materials Pty Ltd (1998) 16 ACLC 1172. [12.160]
Duty to use powers for proper purposes Context ....................................................................................................................................................................... [12.170] The duty concerns how directors, in managing a company, exercise the powers given to them by their employment contract, the
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Description of duty .......................................................................................................................................................................
Directors are under a duty to the company to exercise their powers according to certain standards. As Dixon J said in Mills v Mills (1938) 60 CLR 150 at 180: [12.180]
Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power.
Source of duty ....................................................................................................................................................................... [12.190]
The duty arises under:
• fiduciary law, which is part of the general law; and • ss 181 and 184 of the Corporations Act. Determining whether breach of duty .......................................................................................................................................................................
The onus of establishing that the directors have acted improperly rests on the person(s) making the allegations: Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199. Courts adopt a two-step approach to determine whether there has been a breach of this duty: [12.200]
1. 2.
ascertain the nature of the power and the purpose(s) for which it was conferred (“the legal purpose” – there may be more than one); and
ascertain from the circumstances the actual purpose or reason for which the power was exercised by the directors. The court compares the actual purpose (Step 2) for the exercise of the power against the legal purpose(s) (Step 1). If the actual purpose for the exercise of the power is within the range of legal purpose(s), the directors have acted properly and discharged their duty. If the actual purpose is outside the legal purpose(s), a breach of duty will have taken place.
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company's internal rules and the Corporations Act: for example, s 198A, a replaceable rule listing powers of directors, and s 198C, a replaceable rule listing powers of managing directors. Depending on the particular company, directors' powers may include the power to hire employees, to refuse to register a transfer of shares, to acquire premises, to borrow money and to issue shares and debentures.
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Scope of duty .......................................................................................................................................................................
Legal purpose (Step 1) [12.210] The first step – ascertaining the intended purpose of the power – involves analysing the provision that confers the power. It is normally found in the internal rules of the company. The internal rules may limit the circumstances in which the power is to be exercised. The court interprets the power in light of any such restrictions and the other internal rules of the company. In the absence of any guidance from the internal rules, courts infer what the purpose of the power is from the type of company, its internal structure and activities.
Actual purpose (Step 2) [12.220] The second step is to ascertain the directors' actual reason or purpose for exercising the power. This requires the court to determine what the directors subjectively believed at the time they exercised the power. It can be very difficult for the court to ascertain this information. It must be shown that the substantive purpose of the directors was improper or collateral to their duties as directors. Honest or well-intended actions by directors do not prevent the court from finding that their conduct amounted to an improper use of their power: see Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187.
Multiple purposes
What if several purposes can be ascribed to the directors' actions? The rule seems to be that the mere presence of an improper purpose will not of itself make the directors' act invalid: Mills v Mills (1938) 60 CLR 150. If the substantive or dominant objective is improper, however, the act will be invalid: Mills v Mills at 186 per Dixon J. A gloss was added to this point in Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, to the effect that if there are a “number of significantly contributing causes”, you must ask whether, “but for” that impermissible purpose, the directors would not have exercised the power.
[12.230]
Example – power to allot shares
The most contentious power is the power to allot shares: s 124(1)(a). This issue often arises in the context of directors defending the company against a hostile takeover, or a battle for control of the company between existing members. Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 is a good illustration: see below. In Harlowe's Nominees
[12.240]
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Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483, the High Court said shares could be issued for purposes other than that of raising finance. In Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, for example, the Privy Council said of a power to issue shares, that it was impossible to say in advance what would be a proper or improper purpose. However, if the predominate purpose of the allotment of shares was to defeat a hostile takeover or to dilute the holdings of a particular shareholder the allotment would be invalid. Howard Smith v Ampol Petroleum [12.242] Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (House of Lords) FACTS: Ampol Petroleum Ltd owned 55% of the issued capital in RW Milller Ltd. RW Miller became a takeover target for Ampol when Ampol made a formal bid for the remaining issued capital of Miller. The bid was made public at the time Ampol made the announcement to the Australian Securities Exchange. Howard Smith Ltd, a rival company to Ampol, announced a counterbid for Miller. In attempting to resist Ampol’s takeover Miller’s board decided to allot 4.5 million additional shares. The allotment had the practical effect of reducing Ampol’s holding in Miller to 36.6%. Ampol challenged the validity of Miller’s share allotment, claiming that the allotment was principally designed to interfere with Ampol’s hostile takeover. Miller’s board, in turn, claimed that the allotment of shares was necessary to provide the company with additional capital. DECISION: The House of Lords decided that although the Miller board may have had honest intentions by issuing additional shares they had no power to make the allotment and it was therefore invalid. The allotment had the predominate effect of reducing Ampol’s majority holding and was designed to interfere with its attempted hostile takeover of Miller.
[12.244]
An allotment of shares may be invalid if:
• the shares were allotted with the aim of transferring control of a major company asset (Bailey v Mandala Private Hospital (1988) 6 ACLC 43); • the dominant purpose of the allotment was to preserve the position of the existing majority members, or to displace them (Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821; Pierce v Mills & Co [1920] 1 Ch 77 (see above); Ngurli Ltd v McCann (1953) 90 CLR 425; Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285); or • the purpose of the share issue was to make the rights of the existing members valueless and there is no other demonstrable benefit to the company: Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113.
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Kokotovich Constructions v Wallington [12.246] Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 (New South Wales Court of Appeal) FACTS: Mr K and Mrs W were the only shareholders and directors of Kokotovich Constructions Pty Ltd (KCPL) which was incorporated in 1972. At that time there was a close personal relationship between them. Mr K had three shares, one of which was a governing director’s share. Mrs W, who was the company secretary, had two shares. After the relationship between them broke down 20 years later, Mr K called an extraordinary general meeting which passed a special resolution removing Mrs W as director and company secretary. Mr K then called a second meeting which purported to allot a further 9,795 shares to his children, supposedly to raise funds for the company, although the evidence showed that no cash was ever paid for these shares. DECISION: The Court of Appeal agreed with the trial judge’s decision that the allotment had been made for an improper purpose and should be set aside. Its dominant purpose was to “dilute and devalue” Mrs W’s shares so that her proprietary rights in KCPL became virtually worthless. This was not a proper purpose.
Where the directors have not acted in self-interest but genuinely believe that the allotment was in the best interests of the company, even though the allotment does in some way affect who controls the company, the authorities are conflicting. The stricter approach taken by the Privy Council in Howard Smith Ltd can be contrasted with Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483, Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 and Pine Vale Investments Ltd v McDonnell & East Ltd (1983) 1 ACLC 1294. Clearly, where a company's assets are given away to a family company for no consideration the motive is improper: Bishopsgate Investment Management Ltd (in liq) v Maxwell (1993) 11 ACLC 3128.
[12.248]
The “Objective” test – the difference in application between directors acting for an improper purpose and directors not acting in the best interest of the company ....................................................................................................................................................................... [12.250] In Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157 the objective test was applied in determining whether directors had acted for an improper purpose, namely, advancing the interests of the banks above that of the company, shareholders and creditors. This appeal upheld the findings of the primary judge that the banks were liable under the first limb of Barnes v Addy (1874) LR 9 Ch App 244, however, in addition to being “knowing recipients”, the court went further finding that, consistent
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with the second limb of Barnes v Addy (1874) LR 9 Ch App 244, that the banks provided knowing assistance, therefore standing as constructive trustees at the time of the breach at [1123]. However, in determining whether the directors had acted in the best interests of the company there was some discussion as to whether the subjective or objective test applied. It appears that the consensus which can be drawn from the three judges discussions is that there are subjective and objective elements which must be considered by the court. That is, where a director has a subjective belief that he or she is acting in the best interests of the company and that subjective belief is unreasonable, then the objective test will apply. In that case, the directors had not acted in the best interests of the company as, at the time they entered into the loans, the directors knew or should have known that there were severe solvency issues and should have considered whether their actions would have prejudiced the interests of “non-bank” creditors. The recent decisions in Re Colorado Products Pty Ltd (in provisional liq) (2014) 101 ACSR 233 [2014] NSWSC 789; MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990 reaffirms the test of assessment of conduct carried out for an improper purpose is an objective one.
Section 181 – Good faith and proper purpose Description of duty .......................................................................................................................................................................
Section 181(1) deals with the statutory duty of good faith. The good faith statutory duty has been interpreted as being broadly equivalent to the general law duties to act in good faith, in the best interests of the company and for proper purposes. [12.255]
SECTION 181(1) Good faith – civil obligations Good faith – directors and other officers (1)
A director or other officer of a corporation must exercise their powers and discharge their duties: (a)
in good faith in the best interests of the corporation; and
(b)
for a proper purpose.
Note 1: This subsection is a civil penalty provision (see s 1317E). Note 2: Section 187 deals with the situation of directors of whollyowned subsidiaries. …
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Whether or not a director has complied with the standards required by s 181(1) is to be determined objectively. Subjective good faith or belief that a purpose is proper will not be enough: ASIC v Adler (2002) 168 FLR 253 at [738]-[740]. Section 184 imposes criminal penalties for breach of the duty to act in good faith and for a proper purpose when a director is “reckless” or “intentionally dishonest”: see also Table 11.4 at [11.230].
Duty to retain discretions Context .......................................................................................................................................................................
A company's internal rules give its directors many powers. These powers may also be thought of as discretions, in the sense that the directors have a discretion to determine if and when to exercise those powers. [12.260]
Definition of duty ....................................................................................................................................................................... [12.270] The general law imposes two duties on members of a board in respect of their discretions:
• a duty to exercise an active discretion; and • a duty to retain their discretions. Due to the first duty, directors cannot unthinkingly follow the directions of another person. Due to the second duty, directors cannot delegate their responsibilities or fetter the exercise of discretions without authority. There is no direct statutory equivalent of either duty, but their breach may also result in a simultaneous breach of the general law and statutory duties of care and diligence discussed in Chapter 11. Scope of duty to retain discretions .......................................................................................................................................................................
Directors may fetter their discretions by an agreement (written or oral) to vote in a certain way in relation to the exercise of their powers. Agreements of this kind risk breaching the duty to retain discretions: see the judgment of Barrett J in Re MIA Group Ltd (2004) 50 ACSR 29 at [16]. One example of such an agreement is where a nominee director agrees with their appointor to vote in a certain way. Thorby v Goldberg (1964) 112 CLR 597 provides that if the directors have entered into a contract on behalf of the company in the bona fide exercise of their powers, then they can validly agree in that contract to vote in favour of certain matters. [12.280]
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Limits on the duty .......................................................................................................................................................................
The scope of the duty to retain discretions may be limited by the company's internal rules. For example, those rules may permit the directors to: [12.290]
• appoint agents (such as employees) to carry out the board's policies; • delegate a matter to a committee of, say, senior management, as long as due consideration is given by the board to any report the committee provides (s 198D, a replaceable rule); and • act primarily in the interests of the person or company who nominated or appointed them. Sections 189 – 190 permit directors to delegate and rely on others. These provisions were outlined in Chapter 11. They may provide a defence to directors if sued for breach of their duty to retain discretions.
Contravention of good faith and proper purpose In Gerard Cassegrain & Co Pty Ltd (in liq) v Cassegrain [2013] NSWCA 455, it was held, inter alia, that no actual loss needs to be established for a contravention of s 181. [12.300]
Background .......................................................................................................................................................................
This case involved the directors Claude Cassegrain and Anthony Sarks transferring shares to Felicity Cassegrain (Claude's wife and Anthony's daughter) at an undervalued price and with the intention to deny creditors access to those assets. Clearly, such a transaction could not have been performed “in good faith for the best interests of the corporation”, nor for a “proper purpose”. This case was an appeal of Claude and Anthony and the appeal of Felicity against findings that Claude and Anthony breached ss 180, 181 and 182 of the Corporations Act. Claude and Anthony were not successful in their appeal, despite claims that the shares were not in fact undervalued. The court found that regardless of whether the shares were undervalued or not, the improper purpose behind the transfer still rendered them liable under s 181. [12.310]
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• delegate functions to a managing director (s 198C, a replaceable rule);
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Consequence of contravention of s 181 .......................................................................................................................................................................
In Allco Funds Management v Trust Company (RE services) Ltd [2014] NSWSC 1251, it was held that Companies may request a transaction to be held void where the party entered into the agreement with knowledge of the contravention of s 181. [12.320]
Mentor: Test your Knowledge ...................................................................................................................................... (See www.http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Directors' Duties – Part 2.)
Practice Questions ...................................................................................................................................... 1.
Explain what is a fiduciary and why directors are fiduciaries.
2.
Can a creditor sue a director of a company for breach of the duty to act bona fide in the interests of the company? Explain why/why not.
3.
What is the legal risk for a director of one company within a group of companies who makes management decisions on the basis of the best interests of the whole group of companies?
4.
What is meant by the duty to act in good faith, as required by s 181?
5.
Why is a director required to act for a proper purpose? What is meant by the phrase “proper purpose”?
Essay Questions ...................................................................................................................................... 1.
“The main problem with directors' duties is that the duties are owed to the company as a whole and not to any individual shareholder”. Do you agree with the above statement? If not, should directors owe their respective duties to individual shareholders?
2.
“To act in good faith and in the bests interests of the company requires directors to act in a manner which is consistent with the objectives of shareholders”. Do you agree with this statement? If not, why not?
Problems for Discussion ...................................................................................................................................... 1.
Petrotide Pty Ltd was incorporated in March 2012 for the purpose of handling waste management for the Albury-Wodonga region, as well as other regional centres. Currently the company has three directors – Sam, Phoenix and Vince – and five shareholders (including the three
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directors). The company has over 150 employees. Petrotide has a consitution which provides, inter alia, for the following:
Unexpectedly, Phoenix dies and his sole beneficiary, Mavis, attempts to transfer Phoenix's shareholding in Petrotide to herself. Upon application to register the transfer of shares, Petrotide informs Mavis that the board refuses to register her transfer. Mavis later discovers that Phoenix was not well liked for his aggressive pursuit of profit. Phoenix was also responsible for bringing controversial workplace arrangements to the company, which included the removal or reduction of leave entitlements from the company's employees. (a) Is the “Transfer of Shares” clause in Petrotide's constitution valid and legally enforceable?
2.
(b)
Can the directors of Petrotide refuse to register Mavis's transfer of shares?
(c)
Can Mavis challenge Petrotide's refusal to register her transfer of shares?
Citrus Ltd, a gold mining company listed on the ASX, is currently the subject of a hostile takeover from Anglo Brit Ltd. Prior to Anglo Brit's announcement, the market capitalisation of Citrus Ltd is currently $100 million and its pre-takeover share price is $1.00. Anglo Brit has offered $1.20 per share for Citrus, representing a 20% premium. The directors of Citrus Ltd devise an ingenious plan to defeat the takeover. The board manages to convince one of its directors, Mr Lang, to be provided with an interest-free loan worth $20 million. The loan was for the purpose of purchasing shares in Citrus Ltd in order to push up the company's share price. This will mean that Anglo Brit will have to offer more to the Citrus shareholders if they are to successfully take over the company. (a) Have the directors of Citrus Ltd breached their directors' duties (in particular duty to act for good faith in the best interests of the company and for a proper purpose) in relation to the loan that has been advanced to Lang? (b)
Can Anglo Brit Ltd take legal action against Citrus Ltd in relation to the latter's conduct and tactics concerning the hostile takeover?
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TRANSFER OF SHARES The directors of the company retain, in their absolute discretion, the ability to refuse to register a transfer of shares.
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Further Reading ...................................................................................................................................... Andrews N “If the Dog Catches the Mice: The Civil Settlement of Criminal Conduct under the Corporations Act and the Australian Securities and Investment Commission” (2003) 15 Australian Journal of Corporate Law 137 Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis, 2014, [8.065]-[8.300] and [8.355]–[8.420] Australian Government, Corporations and Markets Advisory Committee (CAMAC), “The Social Responsibility of Corporations Report” (December 2006) available at http://www.camac.gov.au Australian Government Corporations and Markets Advisory Committee, “Corporate Duties Below Board Level Report” (April 2006) available at http://www.camac.gov.au Australian Government, Commonwealth Treasury, “Review of Sanctions in Corporate Law” (March 2007) available at http://www.treasury.gov.au Awarde J and Byrne A “Special Responsibilities of the Chairman; ASIC v Rich” (2003) 8 Deakin Law Review 193 DuPlessis J “Reverberations after HIH and other Recent Corporate Collapses: the Role of ASIC” (2003) 15 Australian Journal of Corporate Law 225 Farrar J Corporate Governance Theories, Principles and Practice, 3rd ed, OUP, 2008 Keeves J S “Directors' Duties – ASIC v Rich – Landmark or Beacon?” (2004) 22 C&SLJ 181 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, [13.2.05]-[13.2.50]. Middleton T “The Difficulties of Applying Civil Evidence and Procedure Rules in ASIC's Civil Penalty Proceedings under the Corporations Act” (2003) 21 C&SLJ 507 Moodie G and Ramsay I, “The Expansion of Civil Penalties under the Corporations Act” (2002) 30 Australian Business Law Review 61 Note, “Tailoring Directors' Duties to “Contemporary Community Expectations”: New Directions for the Courts Post-ASIC v Rich” (2004) 22 C&SLJ 553
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Directors’ Duties – Part 3 Conflict of Interest and Disclosure Useful Websites ..................................................................... 387 Recent Developments ............................................................ 387 Aim ......................................................................................... 387
Principles ............................................................................... 388 Duty to avoid conflict of interests ..................................................... 388 Statutory duties – improper use of position or information ..................... 394 Remedies and consequences for breach of directors’ duties ................... 397 Disclosure of interests .................................................................. 402 Related party transactions .............................................................. 407 Exoneration and relief for breach of duty ........................................... 410 Mentor: Test your Knowledge ............................................... 416 Practice Questions ................................................................. 416 Essay Questions .................................................................... 416 Problems for Discussion ........................................................ 416 Guide to Problem Solving ...................................................... 419 Further Reading ..................................................................... 422
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Directors' Duties – Part 3 Conflict of Interest and Disclosure.)
Recent Developments ...................................................................................................................................... Hydrocool Pty Ltd v Hepburn (No 4) [2011] FCA 495 Krecichwost v The Queen [2012] NSWCCA 101
Aim ...................................................................................................................................... At the end of this topic you should know:
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Related Topics ....................................................................... 388
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• the requirements under the general law and the Corporations Act 2001 (Cth) for conflicts of interests; • the requirements under the general law and the Corporations Act 2001 (Cth) for disclosure of interests; • how directors may be excused from breaches of their duties; and • to what extent directors can be insured against personal liability.
Related Topics ...................................................................................................................................... Chapter 6 Management of Companies; Chapter 11 Directors' Duties – Part 1 Duty of Care, Skill and Diligence; Chapter 12 Directors' Duties – Part 2 Good Faith and Proper Purpose; Chapter 14 Members' Rights and Remedies
PRINCIPLES Duty to avoid conflict of interests Definition of duty .......................................................................................................................................................................
All fiduciaries, including directors, are under a duty to avoid actual or potential conflict of interest situations. The duty is a strict one. A director can be in breach even though the director acts honestly and does not stand to make a profit. A director can also be liable even if the company cannot proceed with the transaction in question. [13.10]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Part 6-4—Duties and powers of directors and other officers and employees, Division 265-10—Use of position-civil obligations Division 265-15—Use of position-civil obligations, Division 265-25—Good faith, use of position and use of information–criminal offences, Division 265-30—Interaction of sections 2651 to 265-25 with other laws etc., Division 268—Duties in relation to disclosure of, and voting on matters involving, material personal interests, Part 6-6—Member approval needed for related party benefit of the CATSI Act. The recent case concerning the former CEO of North Australian Aboriginal Family Violence Legal Service Aboriginal Corporation highlights, inter alia, misuse of position for personal financial benefits. Extract from the ORIC's website:
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http://www.oric.gov.au/publications/media-release/former-darwinceo-sentenced.
.................................................................................................................. ORICMR1415-35 – Former Darwin CEO sentenced
Ms Veronica Cubillo, the former CEO of the North Australian Aboriginal Family Violence Legal Service Aboriginal Corporation (NAAFVLS), has today been sentenced in the Northern Territory Supreme Court in Darwin.
Ms Cubillo was also ordered to repay $7,624.50 to NAAFVLS via the Registrar. In handing down the sentence, Justice Blokland said that Ms Cubillo had breached her position of trust as the CEO of an Aboriginal corporation and had not accepted responsibility for her actions. Ms Cubillo was found guilty by a jury on 23 April 2015 of 11 charges brought by the Registrar of Indigenous Corporations, Anthony Beven. Ten of the charges brought against Ms Cubillo related to her misusing her position and forging documents to obtain a personal financial benefit totalling $9,574.50. The eleventh charge related to Ms Cubillo intentionally and dishonestly failing to properly exercise her duties as the CEO. Ms Cubillo had directed that part of a $10,000 grant be used to fund an overseas trip to the Philippines. The funding had been provided to NAAFVLS by Imparja Television to run substance abuse workshops on Groote Eylandt. Anthony Beven said, “Ms Cubillo was the CEO of a not-for-profit corporation funded by government to assist the victims of domestic violence living in disadvantaged communities. While the amount of money involved was small, the breach of trust was significant”. “The sentence sends a strong message that it is unacceptable for the CEO of an Aboriginal corporation to use public funding meant for the most vulnerable in our community for their own personal benefit.” The matter was prosecuted by the Commonwealth Director of Public Prosecution.
Source of duty .......................................................................................................................................................................
The duty to avoid conflicts of interest arises under the general law, as part of fiduciary law. It is supplemented by the statutory duties under ss 182 – 184 of the Corporations Act 2001 (Cth) (Corporations Act). The duty gives rise to a number of disclosure obligations, including:
[13.20]
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Ms Cubillo was sentenced to three months imprisonment, backdated to 30 April 2015 when Ms Cubillo was first remanded in custody. After she is released Ms Cubillo will be required to serve five months in home detention.
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• the requirements in ss 191 – 194, 195, 205G (listed companies) and 200A – 200J (retirement payments); • Ch 2E (related party transactions); and • Pt 7.10, Div 3 (insider trading provisions). Listed public companies must also comply with the disclosure obligations in the ASX “Corporate Governance Principles and Recommendations with 2010 Amendments”. As well, companies are encouraged by industry associations (for example, the Investment and Financial Services Association (IFSA)) to “self-regulate” by adopting mechanisms for avoiding conflicts of interests, such as audit committees, codes of ethics and appointing more non-executive directors. Examples of conflict of interest .......................................................................................................................................................................
The conflict of interest issue is a very common one in practice. The following are some examples of situations where the issue of conflict of interest arises. They often overlap each other. [13.30]
Contracts with the company
A director may be in breach of duty by entering into a contract with the company of which he or she is a director. This breach of duty may also occur where the relationship is indirect – that is, where the director is a director or member of another company which enters into the contract: see Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488; and South Australia v Clark (1996) 66 SASR 199. The risk of breaching the duty to avoid conflicts of interest may be reduced by: [13.40]
• a provision in the constitution which authorises a director to have an interest in a contract with the company. The directors can thereby be absolved from a breach of this duty (Re Automotive & General Industries Ltd [1975] VR 454); or • the interested director making full and frank disclosure of their interest in any contract with the company (Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378; and Furs Ltd v Tomkies (1936) 54 CLR 583); and • the director abstaining from voting on the matter. Mere abstinence may not be sufficient in certain circumstances. The directors may also have an obligation to protect the company's interest – for example, by taking steps to prevent the transaction from going ahead: Permanent Building Society v McGee (1993) 11 ACSR 260; Fitzsimmons v The Queen (1997) 15 ACLC 666; and Duke Group Ltd (in liq) v Pilmer (1999) 73 SASR 64 (these issues
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were not relevant to the High Court appeal in this case: Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165). The provisions of the Corporations Act mentioned under the heading “Source of duty” are particularly relevant to contracts between a director (or person related to a director) and a company. These statutory provisions need to be complied with even if the contracts are permitted by the company's constitution. Personal profits arising from acting as director
Directors are under a duty not to make profits from their office. Because the opportunity exists for directors to take advantage of their privileged position, not only must they act in good faith, they must be seen to act in good faith. The leading case is Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378. Regal (Hastings) v Gulliver [13.53] Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 (House of Lords) FACTS: The directors of Regal (Hastings) Ltd (Regal) owned a cinema and wanted to buy the lease of two more cinemas in order to sell the whole operation as a going concern. Regal formed a subsidiary company for this purpose and the subsidiary was offered a lease of the cinemas on the condition that it increased its paid up capital. Regal could not afford to provide the full amount required so the remaining capital was contributed by four of Regal’s directors and two other people taking up shares in the subsidiary. Shortly afterwards, all the shares in both Regal and the subsidiary were sold for a very large profit. The new shareholders, who now controlled Regal, caused it to sue the directors and the others involved, claiming that they had to account for the profit they made from the sale of the shares. DECISION: The directors had acted honestly and the company had benefited from their actions (Regal did not have the money to take up all the shares itself), but the House of Lords still held that the four directors had breached their duty and had to give up all their profits to the company. The House of Lords said that the directors would have been protected if they had made full disclosure to a general meeting and the meeting had approved the transaction.
The end result in a case of this kind may be different today as the court has discretion under ss 1318 and 1317S, to excuse directors and officers from liability where they have acted honestly. [13.56]
Bribes and other undisclosed benefits
Directors are in breach of duty if they accept a bribe or secret commission in return for securing (or attempting to secure) a certain course of action: Boston Deep Sea Fishing & Ice Co v Ansell (1888) LR 39 Ch D 339; and [13.60]
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[13.50]
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CORPORATIONS LAW: IN PRINCIPLE
Furs Ltd v Tomkies (1936) 54 CLR 583. The company does not have to suffer any detriment for the director to be in breach. Misuse of company funds
Directors must use company funds for company business: TotexAdon Pty Ltd v Marco (1982) 1 ACLC 228. They must not mix the company's funds with their own. In Paul A Davies (Aust) Pty Ltd (in liq) v P A Davies [1983] 1 NSWLR 440, the directors partly financed a holiday resort in their own names from company funds. When the resort was sold, the court held that all the profit belonged to the company. [13.70]
Taking up a corporate opportunity [13.80] Directors are in breach of their duty if they take up opportunities which belong to the company. Any profit from such ventures must be given up to the company. The classic case is Cook v Deeks [1916] 1 AC 554. It seems that the courts generally take the view that, even if the company cannot or will not take up the opportunity, the director is precluded from doing so: see Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378; Green v Bestobell Industries Pty Ltd [1982] WAR 1; Marson Pty Ltd v Pressbank Pty Ltd [1990] 1 Qd R 264; Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239; and Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672.
Cook v Deeks [13.83] Cook v Deeks [1916] 1 AC 554 (Privy Council) FACTS: A successful railway construction company (Toronto) was owned equally by four shareholders who were also its directors. After completing a project for Canadian Pacific Railways (CPR) three of them started further negotiations with CPR for a new contract with the intention of excluding the fourth (Cook) altogether. The three formed a new company which was awarded the new contract. They then held a general meeting of Toronto and used their 75% majority to approve the sale of part of Toronto’s plant to their new company and to declare that Toronto had no interest in the new contract. DECISION: The Privy Council held that the three directors had breached their duty of loyalty to Toronto by taking up a corporate opportunity that belonged to Toronto. It upheld Cook’s claim that the other three directors and the new company held the contract for the benefit of Toronto and had to account to Toronto for any profits resulting from it.
Perhaps the way out for a director is to obtain express authorisation of what would otherwise be a breach, by making full disclosure to, and obtaining the consent of, a general meeting to the taking up of an opportunity rejected by the company. Compare the above cases with Queensland Mines Ltd v Hudson (1978) 18 ALR 1, the Canadian case of Peso Silver Mines Ltd v
[13.86]
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Cropper (1966) 58 DLR (2d) 1 and SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552, where directors were permitted to take up opportunities that had earlier been considered and rejected by the companies.
[13.90] Directors are not permitted to use confidential company information for their own benefit. What is meant by “confidential information” is discussed in Thomas Marshall (Exports) Ltd v Guinle [1978] 3 WLR 116. Sections 183 and 184(3) supplement the fiduciary duty regarding the use of confidential information and secret profits. These provisions also apply to employees and are, therefore, broader than the general law. In Australian Securities & Investments Commission v Vizard (2005) 145 FCR 57 the Federal Court held that Vizard, a non-executive director of Telstra Ltd, had contravened s 183 of the Corporations Act on three separate occasions. The Court was of the opinion that Vizard had used information acquired as a director of Telstra Ltd for the purposes of benefiting himself and his family. According to Finkelstein J, the contraventions were dishonest and were carefully concealed, and only discovered by chance.
Competing with the company [13.100] In general, fiduciaries must not compete with the person for whom they act. However, it seems that a person can be a non-executive director of two companies which are in competition, provided there is no other conflict of duty: Bell v Lever Bros [1932] AC 161. Where a person is engaged in special duties dealing with confidential information, there seems to be a stricter rule imposed. In Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 All ER 350 there was held to be a conflict and the director was in breach. The directors in Mordecai v Mordecai (1988) 12 NSWLR 58 closed down the company's business and set up a rival company. The court held that their aim was to benefit themselves at the expense of their nephew: see also On the Street Pty Ltd v Cott (1990) 101 FLR 234; Forkserve Pty Ltd v Jack and Aussie Forklift Repairs Pty Ltd (2001) 19 ACLC 299; and compare Southern Real Estate Pty Ltd v Dellow (2003) 87 SASR 1.
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Using confidential information
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Statutory duties – improper use of position or information Misuse of position ....................................................................................................................................................................... [13.110] Section 182 reinforces the general law principle that a person in a fiduciary position (that is, a position of trust) should not make any gain by virtue of that position.
SECTION 182 Use of position – civil obligations Use of position – directors, other officers and employees (1)
A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b)
cause detriment to the corporation.
Note: This subsection is a civil penalty provision (see s 1317E). …
Some case examples [13.120] In R v Donald [1993] 2 Qd R 680, Donald was the managing director of Ardina Pty Ltd (Ardina). He and his wife acquired two other companies which entered into contracts with Ardina. Invoices submitted by the other two companies were dealt with by Donald alone, instead of being approved in the usual manner. In some cases the invoices were false. The question arose as to whether a profit had to be earned for there to be “an advantage” gained. The court (applying the High Court decision of Chew v The Queen (1992) 173 CLR 626) held that payments made to a person (“person” here meaning Donald's other companies) as a consequence of the improper conduct of a company officer, can constitute the “gaining of an advantage”, even if the person is otherwise entitled to those payments. In Jeffree v NCSC [1990] WAR 183 a director sold all the company's business to another company which he controlled. The aim was to defeat the claims of a creditor. This was held to be an improper use of position. In ASIC v Adler (2002) 168 FLR 253 at [735] Santow J summarised the principles applicable to self-dealing and held that Adler, Williams and Fodera had misused their position by allowing the payment of the $10 million to go ahead without the knowledge of the Investment Committee or the board of HIH.
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Another illustration of improper use of position is Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421 (on appeal Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298), where a senior employee, who had gone into business for himself in competition with the company employing him and diverted business opportunities to his own business, was held to have breached s 182. Misuse of information .......................................................................................................................................................................
Section 183 supplements the general law fiduciary duty to avoid conflicts: see confidential information and secret profits.
SECTION 183 Use of information – civil obligations Use of information – directors, other officers and employees (1)
A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to: (a) gain an advantage for themselves or someone else; or (b)
cause detriment to the corporation.
Note 1: This duty continues after the person stops being an officer or employee of the corporation. Note 2: This subsection is a civil penalty provision (see s 1317E). …
This duty covers information of both a confidential and non-confidential nature. In McNamara v Flavel (1988) 13 ACLR 619, the director breached the provision (then s 229(3) of the Corporations Law) when he transferred a commercially valuable business name from a financially troubled company to a solvent company in which he had an interest. The court held that it was the manner in which the information was acquired that was important, rather than whether it was confidential. The expression “improperly use” refers to an abuse of power or the doing of an act which the officer or employee in question knows (or ought to know) that he or she has no authority to do: R v Byrnes (1995) 183 CLR 501; ASIC v Adler (2002) 168 FLR 253 at [567]-[577]. As to gaining an advantage from the information, in Marson Pty Ltd v Pressbank Pty Ltd [1990] 1 Qd R 264, Mr and Mrs Urban made improper use of information (that Pressbank was unable to go ahead with the purchase) to gain an advantage (a credit for $30,000) for themselves and their company. The Urbans were also found to be in breach of the provision (then s 232(2) of the Corporations Law). See also ASIC v Vizard (2005) 145 FCR 57.
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[13.130]
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Case law on breach of s 182 and s 183 .......................................................................................................................................................................
In Hydrocool Pty Ltd v Hepburn (No 4) [2011] FCA 495, it was held that an objective test is required to assess contravention of s 182. This case involved a director of Hydrocool using his position to set up a new company and using confidential information in that new company. Hydrocool alleged breaches of ss 182 and 183. A director, Hepburn, used his position to exert influence in the negotiations for the production of a special product (license agreement) for a joint-venture consortium. He used his influence over a director of the joint-venture, Richardson to attempt to secure an advantage, namely two years future employment for himself and the “engineers”, in addition, he knew that if the employment contracts went ahead, it would put financial pressure on Hydrocool, allowing the joint-venture consortium to purchase more shares in Hydrocool, granting Hepburn greater influence over Hydrocool. These actions were found to be a breach of s 182(1) and of Hepburn's fiduciary duty to Hydrocool. In the assessment of the contravention of s 183(1), the court found that Hepburn had also disclosed to Richardson that a large shareholder was due to dispose of its shareholding by a certain date. Hepburn was not authorised to disclose this information however he claimed that it was not confidential. The court found that whether the information was confidential or not did not matter (McNamara v Flavel (1988) 13 ACLR 619), particularly due to the fact that Hepburn disclosed this information to engender Richardson's confidence in him, to further exert his influence. Hepburn had obtained the information in his role as a director and should not have disclosed that information. He was found to be in breach of s 183(1). Hepburn also disclosed that Hydrocool did not have the funds to continue operating past a certain date. The court found that this was a relevant disclosure relating to information which the joint-venture was entitled to know. Hepburn also disclosed legal advice which Hydrocool had obtained on a heads of agreement which was being negotiated and disclosed the negotiations of the board in relation to the employment issue. Hepburn argued that this was a normal disclosure in commercial negotiations, however, the court found that Hepburn obtained this information in his role as director and had disclosed it to Richardson in his attempt to secure the employment contracts and to exert his influence over Richardson and, ultimately, Hydrocool. This was found to be another contravention of s 183(1). Hepburn also failed to avoid a conflict between his duties to Hydrocool and his own interests. He breached his fiduciary duties by undertaking
[13.135]
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“collective actions”, such as creating a “them and us attitude” between Hydrocool management and the employees, encouraging the employees to share information with Richardson and attempting to get the employees, as shareholders, to encourage a restructure of Hydrocool. In addition, Clarke, an engineer, who was the manager of research was also found to be in breach of 182(1), as he was knowingly involved in Hepburn's contravention of s 182(1) and thus contravened s 182(2). Hepburn and Clark sought exoneration under s 1318, however, were refused as it could not be said that they had both acted “honestly”.
Common law .......................................................................................................................................................................
The common law and equity developed a number of remedies to compensate successful plaintiff companies pursuing directors or company officers for breach of fiduciary duties including common law damages, equitable compensation, account of profits (see Cook v Deeks [1916] 1 AC 554 and Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378), rescission of contract, constructive trust and injunctions. [13.140]
Civil penalties ....................................................................................................................................................................... [13.150] Sections 180 – 183 are civil penalty provisions. Civil penalties were first introduced into the Corporations Law in 1993 as a result of recommendations that were made by the Senate Standing Committee on Legal and Constitutional Affairs (Cooney Committee). Previously, breaches of directors' duties and prohibitions against insolvent trading were subject to criminal sanctions. The Cooney Committee recommended civil sanctions for breaches of directors' duties on the basis that courts would be more willing to impose fines rather than terms of imprisonment, which were often deemed to be harsh relative to the contravention. Civil penalties also had the advantage of requiring a lower of standard of proof (balance of probabilities) relative to the criminal standard (beyond a reasonable doubt) and were not subject to the double jeopardy rule. The maximum penalty for a civil penalty order that a court can impose under s 1317G is $200,000 for each contravention. Section 1317L requires that an application by ASIC for a civil penalty order or a declaratory order requires the court to apply the rules of evidence and procedure for civil proceedings. There has been some debate as to the exact meaning of evidence and procedure for civil penalty proceedings brought by ASIC under the Corporations Act. In Rich v ASIC (2004) 220 CLR 129, the
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High Court determined that s 1317L requires a court to apply the law on privileges against penalties and forfeiture when hearing a matter involving a civil penalty or declaratory order. Rich v ASIC [13.155] Rich v ASIC (2004) 220 CLR 129 (High Court of Australia) FACTS: ASIC sought declarations and orders against directors of One.Tel Ltd, a listed company which was placed into liquidation. As part of the civil proceedings, ASIC sought an order that the directors make discovery of a number of important documents. The directors objected to ASIC’s request for discovery on the basis that the civil proceedings which were initiated by ASIC would expose the directors to penalties and as such, should not be ordered to make discovery. At issue for the High Court to decide was the appropriate meaning of s 1317L of the Corporations Act which provided that “the Court must apply the rules of evidence and procedure for civil matters when hearing applications for (a) a declaration of contravention: or (b) a pecuniary penalty order”. DECISION: According to the High Court of Australia, s 1317L requires the application of the body of law which has developed in relation to the privileges against penalties and forfeitures, when deciding whether the directors should be ordered to make discovery of documents in the proceedings: see also Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543 at 553-554. Since the application for discovery of documents would expose the directors to a penalty the directors could not be forced to make discovery.
Criminal liability .......................................................................................................................................................................
Where directors or company officers breach their duty recklessly or with intentional dishonesty the director or company officer may be liable for criminal prosecution. Section 184 of the Corporations Act provides that where a director or officer of the company has committed a reckless breach of their duty or are intentionally dishonest, the director or company officer has committed an offence which is punishable with a term of imprisonment of up to five years. [13.160]
SECTION 184 Good faith, use of position and use of information – criminal offences Good faith – directors and other officers (1)
A director or other officer of a corporation commits an offence if they: (a)
are reckless; or
(b) are intentionally dishonest; and fail to exercise their powers and discharge their duties:
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(c)
in good faith in the best interests of the corporation; or
(d)
for a proper purpose.
399
Note: Section 187 deals with the situation of directors of wholly-owned subsidiaries. Use of position – directors, other officers and employees A director, other officer or employee of a corporation commits an offence if they use their position dishonestly: (a) with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or (b)
recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.
Use of information – directors, other officers and employees (3)
A person who obtains information because they are, or have been, a director or other officer or employee of a corporation commits an offence if they use the information dishonestly: (a) with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the corporation; or (b)
recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.
In Kwok v The Queen (2007) 64 ACSR 307, a decision by the New South Wales Court of Criminal Appeal, the Court examined the application of s 184 of the Corporations Act. The defendant was charged with two offences under s 184 for dishonestly using his position as a director of Envirostar Energy Ltd (EEL) with the intention of gaining an advantage directly or indirectly for two other associated companies. The issue involved leases over land which had been owned by the associated companies of Kwok. Kwok failed to disclose at the relevant time his conflict of interest between his duty as director of EEL and his associated interests with the other two companies. It was alleged by the Crown that Kwok had acted dishonestly and had deliberately concealed his associated interests with the other two companies at the time EEL had entered into the lease arrangement, and had thus breached s 184(2)(a). EEL did not suffer a loss as a result of entering into the lease arrangement. At trial, Kwok was sentenced to periodic detention for 24 months (reduced to 14 months for good behaviour). On appeal, the Court of Criminal Appeal reduced Kwok's sentence to nine months' periodic detention. In Krecichwost v The Queen [2012] NSWCCA 101, it involved an appeal against a decision imposing a term of imprisonment under s 184(2)(a) of three years and six months with a non-parole period of eight months. Ground four of the appeal was “the learned trial judge erred in failing to direct the jury of
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(2)
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factors relevant to its consideration of whether the conduct was dishonest”. The trial judge directed the jury to charge the appellant's honesty according to “the standards of ordinary, decent people” (Peters v The Queen (1998) 192 CLR 493) this ground was dismissed. Appeal dismissed. “Objective test” in s 184 ....................................................................................................................................................................... [13.163] In SAJ v The Queen [2012] VSCA 243 a determination was between dishonesty under Peters v The Queen (1998) 192 CLR 493 and R v Ghosh [1982] 2 All ER 689, as applied by s 184(2). It was held that Peters v The Queen is the correct test. Peters removes the subjective criterion and dishonesty is judged according to “the standards of ordinary, decent people”. R v Ghosh has two limbs – the first deals with the jury determining if the prosecution has proved that the actions were dishonest according to ″ordinary standards of reasonable and honest people″. The second limb is the subjective test – did the defendant realise, that judged against those “ordinary standards of reasonable and honest people” was his behaviour dishonest?
Sentencing under s 182 and s 184 .......................................................................................................................................................................
On the matter of sentencing for breach of s 184, an interesting case study is Director of Public Prosecutions (Cth) v Northcote [2014] NSWCCA 26. The case involved an appeal from a purported manifestly inadequate sentencing of director who pled guilty to s 184(2). Garling J of the NSW Court of Criminal Appeal held that the principal offence against s 184(2) of the Corporations Act, involves “a high level of seriousness of the objective criminality. Mr Northcote personally profited by over $1 M from a deliberate pre-meditated course of conduct which extended over a lengthy period of time during which, on many occasions, he was in breach of his director's duties” At [para 120, p 29]. Garling J said the offence committed was as “at the higher end of the range for this offence” at [para 121, p 29]. His Honour added that in such a case, “nothing less than a term of full-time imprisonment served in custody is appropriate to reflect the nature and circumstances of the offence, and a penalty of such a severity as is appropriate to the offence” at [para 127, p 30]. The sentences of the District Court of NSW were quashed and, inter alia, on the s 182(2) offence the court sentenced the respondent to three years and six months. The emphatic view to such offences was evident in Garling J's statement “I do not discount having proper and due regard to the strong subjective circumstances involving Mr Northcote, but like so many other white collar crime offenders, these have less importance than they might in other circumstances” at [para 127, p 30]. [13.166]
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...................................................................................................................... Opes Prime Directors Jailed ASIC Media Release 11-150MR, 27 July 2011 Former directors of Opes Prime Stockbroking Ltd (OPSL), Lirim (Laurie) Emini and Anthony Blumberg, have been jailed following an ASIC investigation into the stockbroker’s 2008 collapse.
Today’s sentencing follows the guilty pleas of both men at a hearing on 19 July 2011 (refer 11-145AD). ASIC Chairman, Greg Medcraft, welcomed Justice Beach’s decision, noting that the regulator would continue to focus on deterring and dealing with illegal behaviour. “Building and enhancing confidence among investors is a key priority for ASIC. This includes taking action against directors who don’t fulfil their responsibilities.” Today’s sentences took into account the early guilty pleas of both men. “The law provides for significant discounts in cases where there is an early guilty plea. These discounts recognise an individual’s cooperation with authorities as well as facilitating the course of justice” Mr Medcraft said. Mr Emini, of Templestowe, Victoria, was convicted of two charges of dishonestly using his position as a director and one charge of recklessly using his position as a director of OPSL in order to secure bank finance. Mr Emini’s dishonesty charges related to transfers in the course of June 2006 and January to February 2008 of securities deposited by a client of Leveraged Capital Pty Ltd (of which Mr Emini was a director and shareholder) to Riqueza Holdings Limited (a client of OPSL over which Mr Emini exercised control). ASIC’s investigation identified that the June 2006 transfer of client securities (then valued at around $65 million) was used to provide collateral for a loan from OPSL to Riqueza, in circumstances where Mr Emini was not certain of Leveraged Capital’s ability to return securities to its client. The transfers which occurred in January and February 2008 were used to provide collateral (then valued at around $45 million) for the accounts of an OPSL client, Christopher Murphy, in circumstances where, through Leveraged Capital, Mr Emini had a personal interest in one of those accounts. Mr Emini’s charge of recklessly failing to exercise his powers and discharge his duties as a director related to a number of aspects including his signing of financial documentation on 20 March 2008 by which OPSL entered into a $95 million loan with ANZ to meet obligations of Leveraged Capital and altered other financial arrangements with the ANZ to the detriment of OPSL in circumstances where there was a conflict of interest in
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In the Victorian Supreme Court this morning, Justice Beach sentenced Mr Emini, the company’s former CEO, to 24 months imprisonment and ordered him to serve 12 months before being released on a recognisance release order. Former director, Mr Blumberg, was sentenced to 12 months imprisonment. Mr Blumberg will serve six months before being released on a recognisance release order.
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Opes Prime Directors Jailed cont. entering into those arrangements, OPSL was, or would have become, insolvent and where the financial position of those companies was not fully disclosed. Mr Blumberg, of Moorabbin, Victoria, was convicted of one charge of dishonestly using his position as a director in relation to the signing of the same financial documentation on 20 March 2008 concerning the $95 million loan from ANZ Bank. The case against Mr Julian Smith, of Blackheath, New South Wales, who was also a director of OPSL and Leveraged Capital, has been adjourned for trial in the Victorian Supreme Court on 11 April 2012. The matter was prosecuted by the Commonwealth Director of Public Prosecutions. Background OPSL collapsed on 27 March 2008 when administrators Ferrier Hodgson were appointed. Ferrier Hodgson were appointed as liquidators on 15 October 2008. In addition to the criminal investigation undertaken by ASIC following the collapse of OPSL on 27 March 2008, ASIC’s investigation into OPSL has also considered how any return available to OPSL creditors might be maximised. ASIC entered into a formal mediation process with the OPSL liquidators, ANZ Bank and Merrill Lynch to consider a commercial resolution to claims by ASIC and the administrators. On 6 March 2009, (refer 09-37MR), ASIC announced that that it would provide the necessary releases to allow a settlement offer to be put to OPSL creditors. Following a meeting of creditors on 4 August 2009, (refer 09-135AD) the Federal Court approved the Schemes of Arrangement. These schemes are expected to deliver a sum of $253 million to creditors. Dividends exceeding 37 cents have been paid by the scheme administrators. © Australian Securities & Investments Commission. Reproduced with permission.
Disclosure of interests Outline ....................................................................................................................................................................... [13.170] This Topic now discusses the disclosure and voting obligations of directors which arise from their general law and statutory duties in relation to conflicts of interest. Like the duties from which they arise, the disclosure and voting obligations are imposed by both the general law and the Corporations Act. They may also arise because of the company's internal rules.
General law ....................................................................................................................................................................... [13.180] There is a requirement that directors involved directly or indirectly in a contract with the company disclose that interest to the general meeting,
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not just to the chair or the board of directors: Furs Ltd v Tomkies (1936) 54 CLR 583. See also Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 but compare the less strict approach taken in Queensland Mines Ltd v Hudson (1978) 18 ALR 1. If this requirement is breached, the contract is voidable at the option of the company: Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722. The general law permits a director who is a member to vote in a general meeting on a matter in which the director has a conflict of interest: North West Transportation Co Ltd v Beatty (1887) 12 App Cas 589. However, if such a director controlled the voting power, the other members might be able to bring a statutory derivative action. The director's right to vote may also be restricted where the conflict arises in connection with a “related party transaction”. Corporations Act – disclosure of material personal interests .......................................................................................................................................................................
General statutory duty of disclosure
Section 191 applies to directors of both public and proprietary companies and requires disclosure of any material personal interest in a matter relating to the “affairs” of the company. “Affairs” is defined very broadly in s 53. Note s 191(1), (3) and (5):
[13.190]
SECTION 191(1), (3), (5) Material personal interest – director’s duty to disclose Director’s duty to notify other directors of material personal interest when conflict arises (1)
(3)
A director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless subsection (2) says otherwise. … The notice required by subsection (1) must: (a) give details of (i) the nature and extent of the interest; and (ii) (b)
the relation of the interest to the affairs of the company; and
be given at a directors’ meeting as soon as practicable after the director becomes aware of their interest in the matter.
The details must be recorded in the minutes of the meeting. … Section does not apply to single director proprietary company
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This section does not apply to a proprietary company that has only 1 director.
Modification of the duty of disclosure by a company’s internal rules
A company's internal rules may provide guidelines regarding disclosure and voting by directors on conflict issues. For example, directors may be required by the company's constitution to disclose any conflicting interests. Section 194, a replaceable rule applicable to proprietary companies only, permits a director with a material personal interest in a matter that relates to the affairs of the company, and which has been fully disclosed as required by s 191, to be present at a board meeting at which the proposal is discussed. The director is also permitted to vote on the proposal and retain any benefits from the transaction despite having a material personal interest. [13.200]
To summarise the statutory disclosure regime [13.210]
• the duty of disclosure in s 191(1) applies to all public and proprietary companies except for single director proprietary companies (s 191(5)); • a director must disclose any material personal interest except those interests listed in s 191(2); • if a director of a proprietary company discloses a material personal interest as required by s 191, the company's internal rules may allow that director to vote and retain any personal benefits from the transaction in question (s 194); • a director of a proprietary company need not disclose an interest if the other directors are aware of the nature and extent of the interest and its relation to the affairs of the company (s 191(2)(b)); • a director may give fellow directors standing notice of the nature and extent of an interest (s 192); • disclosure is to fellow directors at a board meeting, not to the general meeting as required by the general law; • ss 191 and 192 take effect in addition to any general law rules about conflicts of interest and any relevant provisions in a company's constitution: s 193. Extent of disclosure [13.220] It is clear that a director cannot satisfy the disclosure requirements just by making a general statement that he or she had a conflict of interest. In
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Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437, Santow J stated that disclosure had to be of sufficient detail for the whole board to understand the benefit to the director. The amount of detail depended on the proposed transaction and the context in which it arose, but mere mention of the transaction at a meeting was insufficient. In Woolworths Ltd v Kelly (1991) 22 NSWLR 189, the majority held that formal disclosure was not required where the other directors already had full information (as they had in this case). Consequences of contravention of disclosure interests
A breach of s 191(1) is a criminal offence. It is unclear what civil liability flows from the breach. A contravention of s 191(1) or of s 192 does not affect the validity of the act or matter in question: ss 191(4), 192(7); see also Roden v International Gas Applications (1995) 125 FLR 396. However, the contract may be voidable at the option of the company if the company's constitution required the director to make disclosure and the director failed to comply with that requirement, in addition to breaching s 191(1): Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437. It is also possible that s 1324 could be invoked to achieve the same result.
Corporations Act – public companies
Directors of public companies with private interests in company transactions have additional disclosure and voting obligations under: [13.240]
• s 195, which applies to directors with a “material personal interest” in any matter being considered at a board meeting and imposes additional restrictions on their right to be present and vote in these circumstances – this is not a replaceable rule and so cannot be excluded or modified by a public company's constitution (contrast s 194 which applies to proprietary companies); • s 205G, which applies to directors of listed companies. It requires them to notify the ASX of their interests in the company; • Pt 2D.2, which regulates the disclosure of directors' retirement benefits; and • Ch 2E, the related party transaction provisions, provided that the transaction in question fits the definition of a related party transaction.
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[13.230]
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The main provision is s 195.
SECTION 195 Restrictions on voting – directors of public companies only Restrictions on voting and being present (1)
A director of a public company who has a material personal interest in a matter that is being considered at a directors’ meeting must not: (a)
(1A)
be present while the matter is being considered at the meeting; or
(b) vote on the matter. Subsection (1) does not apply if: (a)
subsection (2) or (3) allows the director to be present; or
(b)
the interest does not need to be disclosed under section 191.
Note: A defendant bears an evidential burden in relation to the matter in subsection (1A), see subsection 13.3(3) of the Criminal Code. Participation with the approval of other directors (2)
The director may be present and vote if directors who do not have a material personal interest in the matter have passed a resolution that: (a) identifies the director, the nature and extent of the director’s interest in the matter and its relation to the affairs of the company; and (b)
states that those directors are satisfied that the interest should not disqualify the director from voting or being present.
Participation with ASIC approval (3)
The director may be present and vote if they are so entitled under a declaration or order made by ASIC under section 196.
Director may consider or vote on resolution to deal with matter at general meeting (4)
If there are not enough directors to form a quorum for a directors’ meeting because of subsection (1), 1 or more of the directors (including those who have a material personal interest in that matter) may call a general meeting and the general meeting may pass a resolution to deal with the matter.
Effect of contravention by director (5)
A contravention by a director of: (a)
this section; or
(b)
a condition attached to a declaration or order made by ASIC under section 196; does not affect the validity of any resolution.
The effect of s 195 is to prohibit a director who has a material personal interest in a matter being considered at a board meeting from being present at the
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meeting and/or voting on the matter without the approval of the other (disinterested) directors or ASIC. If there is no quorum of disinterested directors the matter may go to a general meeting, as provided in s 195(4).
Related party transactions Related party transactions are regulated by Ch 2E of the Corporations Act. Section 207 explains the object of this set of rules. [13.250]
The rules in this Chapter are designed to protect the interests of a public company’s members as a whole, by requiring member approval for giving financial benefits to related parties that could endanger those interests.
Chapter 2E reinforces the fiduciary duties and disclosure obligations of directors of public companies discussed previously. Subject to a number of exceptions, the rules in Ch 2E provide: 1.
A public company or an entity controlled by a public company must not “give a financial benefit” to a “related party” (s 208) – note, the definition of “entity” is very broad and includes an individual company, partnership or unincorporated body: see s 9. “Control” is defined in s 50AA as the “capacity to determine the outcome of decisions … about financial and operating policies”;
2.
“Related parties” is defined in s 228 and includes: • directors and spouses or de facto spouses of directors of the company; • directors and spouses or de facto spouses of directors of an entity that controls the company; • relatives (parents and children) of those persons; and • entities controlled by directors or their relatives.
3.
“Giving a financial benefit” is defined in s 229. It includes giving a financial benefit indirectly, by making an informal, oral or non-binding agreement and also includes a financial benefit that does not involve the payment of money: s 229(2). The following specific examples are set out in s 229(3): • giving or providing finance or property; • buying, selling or leasing an asset; • supplying or receiving services;
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SECTION 207
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• issuing shares or granting options; and • taking up or releasing an obligation. 4.
Exceptions to the prohibition include: • the provision of reasonable remuneration (salary, fringe benefits, insurance premiums, superannuation and so on) (ss 211 – 212); • advances of up to $5,000 made to related parties (s 213) (previously the amount was up to $2,000 and has now been increased to $5,000 following amendments made by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (Cth) which took effect from 28 June 2007); • arm's length (commercial) transactions (s 210); • financial benefits to related parties in their capacity as members, for example, dividends (s 215); and • benefits approved by the members in a general meeting where: – full information has been given; – proper notice of the meeting has been given; and – the interested parties do not vote: ss 208, 217 – 227.
5.
Contravention of s 208 does not invalidate a transaction and is not an offence by the public company or entity: s 209(1). However, a person who is involved in a contravention breaches s 209(2) which is a civil penalty provision. If the involvement is dishonest, that person commits a criminal offence: s 209(3).
ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1) is a very clear illustration of a related party transaction: • the $10 million paid by HIHC was clearly a “financial benefit” given to each or any of PEE, Adler Corporation and Adler; • PEE, Adler Corporation and Adler were all “related parties” under s 228; • the financial benefit did not come within the arm's length exception in s 210; • the financial benefit had not been approved by shareholders as required by Ch 2E and so contravened s 208; • Adler and Willliams (and to a lesser extent Fodera) were involved in the contravention (s 209): see ASIC v Adler at [171]-[217].
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[13.260]
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Figure 13.1: ASIC v Adler (2002) 168 FLR 253 (Largely affirmed on appeal (2003) 179 FLR 1) ....................................................................................................
1.
TRANSACTIONS $10 million loan by HHIC to PEE, formation of AEUT. Issue of A class units by AEUT to Adler Corp. Issue of B class units by AEUT to HHIC.
2.
Purchase of shares in HIH by AEUT on stockmarket for $3.99 million.
3.
Purchase of shares in unlisted technology and internet companies by AEUT from Adler Corp for an estimated loss of $3.8 million.
4.
Unsecured loans of more than $2 million by AEUT to companies and interests associated with Adler and Adler Corp.
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[13.270] Figure 13.2: Disclosure and voting rules where conflict of interest exists ....................................................................................................
Exoneration and relief for breach of duty Outline ....................................................................................................................................................................... [13.280] A director may be excused from civil liability arising from a breach of the director's general law duties outlined in this Chapter and Chapter 11 by:
• the members in general meeting – ratification; • the company's internal rules; or • the court.
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Ratification by the general meeting .......................................................................................................................................................................
Directors may be excused from general law liability if the general meeting ratifies their actions – for example, the general meeting may accept a conflict of interest and give their approval where full disclosure is made. If the directors in Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 had obtained approval, they would have been allowed to keep their profits. The general meeting may also ratify actions of directors who use their powers for improper purposes: Bamford v Bamford [1970] Ch 212. In Hogg v Cramphorn Ltd [1967] Ch 254 the court adjourned the case to enable a meeting to be called to ask the members for their opinion and the members ratified what the directors had done. In Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 the ratification came before the action – the directors asked for prospective approval and were granted it. Again, the directors must have made full disclosure.
Ratification is not available where [13.300]
• it would constitute a fraud on the minority – Ngurli Ltd v McCann (1953) 90 CLR 425 (see [13.250]); • the company is near insolvency and it would prejudice creditors – Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425; • it would defeat a member's personal right – Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 51 SASR 177; • it would be oppressive – Pt 2F.1; or • for breaches of statutory duties.
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[13.290]
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[13.310] Figure 13.3: Ratification by the general meeting ....................................................................................................
By the internal rules .......................................................................................................................................................................
At general law it was possible to have a constitution which excused directors from liability for certain breaches of duty: see, for example, Re City Equitable Fire Insurance Co Ltd [1925] Ch 407. However, purported exemption and indemnification clauses have been prohibited by statute for many years. The current provisions were simplified and rewritten by the Corporate Law Economic Reform Program Act 1999 (Cth) without changing the substantive effect of the previous rules. Section 199A(1) prohibits a company from exempting a director from liability to the company. Similarly, s 199A(2) specifically prohibits indemnification against the following liabilities (other than for legal costs) incurred as an officer or auditor: [13.320]
• a liability owed to the company; • a liability under a civil penalty order; or
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• a liability owed to someone other than the company that did not arise out of conduct in good faith. The company is allowed to indemnify directors against liability for legal costs incurred in defending an action except in the circumstances set out in s 199A(3) – namely, when the defence is unsuccessful. Note also s 199B. This provision prohibits a company (or related bodies) from paying premiums for insurance against liability for: • wilful breaches of duty; or
However, it is possible for the company to insure its directors and officers against liability for: • non-wilful breaches, other than breaches of ss 182 and 183 (see also s 199A(2)); and • the costs of defending proceedings whether civil or criminal and whatever their outcome: s 199B. Any purported exemption, indemnification or insurance that contravenes s 199A or 199B is void: s 199C. The difficulties faced by directors and officers in obtaining adequate insurance against personal liability are discussed in detail in the June 2004 Report by CAMAC, “Directors and Officers Insurance”.
By the court .......................................................................................................................................................................
Under s 1318, officers may be relieved of liability if they have acted honestly and, according to the court, “ought reasonably to be excused”: see Edwards v A-G (NSW) (2004) 60 NSWLR 667. Breaches of the civil penalty provisions may be treated similarly under s 1317S: see Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183. Note that it is unclear whether breaches of the statutory duties in Pt 2D.1 can be excused or ratified by either the members in general meeting or the company's constitution. Only the court may have this power. This issue will be considered by the High Court when it hears the appeal from the decision of the Full Supreme Court of South Australia in Carabelas v Scott (2003) 177 FLR 334, holding that the persons who were the only directors and shareholders of a company had the power to [13.330]
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• contraventions of ss 182 or 183.
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excuse a potential breach of a general law duty that could also amount to a breach of statutory duty. Leave to appeal to the High Court of Australia was granted on 12 August 2004. [13.340] Figure 13.4: Issues arising in relation to breaches of fiduciary duties by directors and other officers ....................................................................................................
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[13.350]
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Figure 13.5: What happens if duty breached? ....................................................................................................
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Mentor: Test your Knowledge ...................................................................................................................................... (See http://www.legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Directors' Duties – Part 3 Conflict of Interest and Disclosure.)
Practice Questions ...................................................................................................................................... 1.
What are the disclosure obligations of a director of a proprietary company who has a material personal interest in a matter being considered by the board?
2.
In what circumstances can a director of a public company who has a material personal interest in a matter being considered by the board be present and/or vote at the board meeting?
3.
Can a director who is also a member of a proprietary company vote at a general meeting in favour of a transaction in respect of which the director has a material personal interest? Is there any difference between the position of a director of a proprietary company and a director of a public company?
4.
What is the significance of a transaction falling within the definition of a “related party transaction” in Ch 2E of the Corporations Act?
Essay Questions ...................................................................................................................................... 1.
According to the House of Lords decision in Regal Hastings v Gulliver [1942] 1 All ER 378 a director can still be liable for breach of their fiduciary duties even if they have acted honestly and the company has benefited from their actions. Do you agree with the House of Lords decision in Regal Hastings?
2.
Should ratification by the members be allowed with all breaches of directors duties? Are there any circumstances where ratification should not be permitted?
Problems for Discussion ...................................................................................................................................... 1.
Roberta is the managing director of Eternal Youth Pty Ltd (EY), a profitable company specialising in buying and selling anti-ageing cosmetics and shampoos for sensitive hair. The market for EY's products are women between the ages of 40 and 70 years. While at the hairdresser's having a power perm, Roberta chats to her hairdresser, Leonardo. Leonardo asks Roberta whether her company
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would be interested in helping him to market a new organic hair soap called “Wonder Bar”. Leonardo claims that the soap prevents male hair loss.
At a board meeting of EY six months later, Roberta proposes that EY enters into a long-term contract with WHS to buy supplies of the organic hair soap for resale. The board agrees and, as part of the contract, Roberta negotiates with the board that she will be paid a small commission on each sale because she drew the board's attention to this new product opportunity. EY makes large profits from selling the soap overseas. EY learns that Roberta is the majority member in WHS. They seek advice on the following: (a) Has Roberta breached any of her directors' duties owed to EY? Which (if any) has she breached and why has she breached them?
2.
(b)
Should Roberta have been present at the board meeting when the contract with WHS was discussed and voted on?
(c)
Should the contract also have been disclosed to the general meeting for approval before EY went ahead?
(d)
What general law or statutory remedies (if any) should EY seek against Roberta?
(e)
What statutory penalties (if any) can be imposed against her? Who can impose them?
George, Harry and Ian are the only shareholders and directors of No-Waste Furniture Pty Ltd (No-Waste) which makes and sells furniture from recycled hardwood. They each have 1,000 shares in No-Waste. George runs the workshop which makes the furniture while Harry and Ian jointly run the business side of the company. The business has been very successful and it is clear that No-Waste needs to upgrade its office equipment. On Harry's strong recommendation, No-Waste agrees to buy a new “state of the art” computer system from AceComputers. Harry says this is the most suitable system available and will make it much easier to expand the business. Harry does not tell Ian
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Roberta tells Leonardo that her company would not be interested because it sells women's products only. She offers to help Leonardo herself. Leonardo agrees. Roberta and Leonardo set up a company called Wonder Hair Soap Pty Ltd (WHS) and become its directors and members. Roberta is the majority member. The business of the company is an overnight success.
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and George that he and his sister control AceComputers. Ian knows that Harry has an interest of some kind in AceComputers but does not ask for any details and does not mention this to George. Early last year, No-Waste was approached by Top Timber Pty Ltd (Top Timber), suggesting that the two companies enter into a joint venture to recycle a very large quantity of timber from a big inner city demolition project. After a lengthy discussion, George, Harry and Ian decided that No-Waste did not have the facilities to handle such a large amount of timber and rejected the proposal. Shortly afterwards, Ian, acting on his own behalf, and Top Timber formed a new company which successfully recycled the timber from the demolition project and made a very large profit. George has recently married Clare. Clare thinks that No-Waste is badly run and George, who is not interested in business matters, is happy to agree to transfer half his shares in the company to her. Without giving any reasons, Harry and Ian refuse to register the transfer of the shares to Clare. (a) George and Clare have found out about Harry's interest in AceComputers and Ian's involvement in the project with Top Timber. They seek advice on the following matters: (i) Have either Harry or Ian breached their fiduciary duties or any provisions of the Corporations Act in respect of the contract with AceComputers?
(b)
3.
(ii)
Has Ian breached his fiduciary duties or any provisions of the Corporations Act in entering into the project with Top Timber? Has No-Waste any claim to the profits he has made?
(iii)
Is there anything Clare (and George) can do about Harry and Ian's refusal to register the transfer of the shares to Clare?
What, if anything, should Ian have done to ensure that he did not breach any of his duties as a director in entering into the project with Top Timber?
Tina is the editor of and an executive director of XYZ Pty Ltd (XYZ) which publishes a free lifestyle magazine widely distributed in Melbourne. The magazine relies heavily on its advertising revenue. Tina became dissatisfied with her position in the company and decided to leave and set up her own competing publication. Before she resigned she sent letters to many of the businesses advertising in the magazine, inviting them to transfer their business to her new
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publication. She compiled the list of persons to whom she wrote from memory and publicly available sources of information such as the White Pages and other directories, not from XYZ's records. Three days after posting these letters Tina resigned from XYZ. Her new magazine was published the following week and many of the businesses she had contacted transferred their advertising to it. Advise XYZ: (a) whether Tina has breached her fiduciary duties or any provisions of the Corporations Act; and
4.
if Tina has breached any general law or statutory duties, what remedies might be available to XYZ?
Roger is a director of two companies: BHT Pty Ltd and Rubicon Pty Ltd. Both companies are in the business of property development. Whilst on a business trip for Rubicon in the United States he comes across a development site which he purchases by paying a deposit. He indicates on the contract of sale that the purchaser is BHT Pty Ltd. The development site was sold for $2.5 million. Roger justifies his purchase of the site for BHT on the basis that Rubicon could not afford the site anyway and would most likely not be interested in developing a site overseas since all of their properties are located in Australia. (a) Is Roger in breach of his directors' duties with Rubicon Pty Ltd? (b)
Does Roger have an arguable defence? In your view would his defence succeed?
(c)
What could Roger do now to prevent any further repercussions under the Corporations Act?
(d)
Could the Australian Securities and Investments Commission (ASIC) take action against Roger?
Guide to Problem Solving ...................................................................................................................................... The following issues are linked with those covered in Chapters 11 and 12. Breach of duty
• Identify the potential breaches of duties. Use Figure 13.4 at [13.340] to assist you. Remember to consider both general law and statutory duties. • Determine whether the duties have been breached – use Step 3 of Figure 13.4 at [13.340] to assist you in structuring your answer. Ask:
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(b)
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– What standard of conduct was expected of the director by the relevant duty? You will need to refer to the statute and general law to explain what the duty requires directors to do. – Did the director meet that standard? You need to analyse the facts of the problem and compare the director's actual conduct against the standard required by the duty you are discussing. Ratification of breach
This issue is nearly always linked with a breach of directors' (or officers') duties. Is this a matter which is ratifiable? Yes: • conflict of interest (Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378); or • improper use of power: Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666. No: see Figure 13.5 at [13.350]. Disclosure and voting by directors
• Use Figure 13.3 at [13.310] to structure your answer. • As to procedures for board meetings: – check the company's internal rules (eg, s 194 – replaceable rule for proprietary companies); – s 191; and – s 195 (public companies). • As to the general meeting: – check the company's internal rules; – are there any disclosure requirements under the general law or the Corporations Act (eg, Ch 2E – public companies)? • As to voting, determine whether the director is also a member? Directors may vote subject to limitations of fraud on the minority and oppression (see Peter's American Delicacy Co Ltd v Heath (1939) 61 CLR 457; and North-West Transportation Co v Beatty (1887) 12 App Cas 589); and – if a public company, see discussion of related party transactions. General law and statutory remedies
See Figure 13.5 at [13.350]. In determining which remedy is the most appropriate from the range available, analyse facts of the problem to determine: • is an urgent or immediate remedy required? For example, an injunction to stop a meeting going ahead;
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• does an action of the company need to be undone? For example, a contract entered into by the company set aside? A declaration by a court that the contract is voidable might be appropriate; • has the director made profits at the expense of the company? An account of profits would then be the appropriate remedy; • has the company suffered loss or damage by reason of the directors' actions? An award of damages should be sought; and
Figure 13.6: Statutory penalties ....................................................................................................
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• who is seeking the remedy? Is ASIC seeking the imposition of civil or criminal penalties? Alternatively, is the company/liquidator/member seeking a general law or statutory remedy: see Figures 13.4 and 13.5 at [13.340], [13.350] and below.
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Further Reading ...................................................................................................................................... Austin RP, Ford H and Ramsay I Company Directors: Principles of Law and Corporate Governance Lexis Nexis Butterworths, 2005, Chs 5, 7, 8, 9 and 17 Austin RP and Ramsay I Ford's Principles of Corporations Law 16th ed, LexisNexis, 2014, [9.057]-[9.120], [9.220]-[9.430], [9.470]-[9.650] Australian Government, Corporations and Markets Advisory Committee, “The Social Responsibility of Corporations Report” (December 2006) available at http://www.camac.gov.au Australian Government, Corporations and Markets Advisory Committee, “Corporate Duties Below Board Level Report” (April 2006) available at http://www.camac.gov.au Australian Government, Commonwealth Treasury, Review of Sanctions in Corporate Law (March 2007) available at http://www.treasury.gov.au Farrar J Corporate Governance Theories, Principles and Practice, 3rd ed, OUP, 2008 Kirby J “The History and Development of the Conflict and Profit Rules in Corporate Law – a Review” (2004) 22 C&SLJ 259 Kyrou E “Deeds of Indemnity, Access and Insurance: the Lurking Corporate Governance Danger” (2003) 15 Bond Law Review 32 Lipton P and Herzberg A Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, [13.3.05]-[13.3.175] Middleton T “The Difficulties of Applying Civil Evidence and Procedure Rules in ASIC's Civil Penalty Proceedings under the Corporations Act” (2003) 21 C&SLJ 507 Welsh M “ASIC, Civil Penalties and Compensation Orders under the Corporations Act 2001” (2003) 17 Commercial Law Quarterly 13 Welsh M “Eleven Years on – An Examination of ASIC's Use of an Expanding Civil Penalty Regime” (2004) 17 Australian Journal of Corporate Law 175 Welsh M “Adler, Whitlam, Elliott and Others: Judicial Interpretation of the Civil Penalty Provisions of the Corporations Act 2001 (Cth)” (2005) 18 Australian Journal of Corporate Law 243
CHAPTER 14 .......................................................................................................
Members’ Rights and Remedies Useful Websites ..................................................................... 423 Recent Developments ............................................................ 423 Aim ......................................................................................... 424 Related Topics ....................................................................... 424 Principles ............................................................................... 425 Introduction ............................................................................... 425 Personal rights and remedies ......................................................... 427
General statutory rights and remedies .............................................. 435 Restitution rights of members ......................................................... 454 Other Rights and Remedies ............................................................ 457 Mentor: Test your Knowledge ............................................... 457 Practice Questions ................................................................. 458 Essay Questions .................................................................... 458 Problems for Discussion ........................................................ 458 Guide to Problem Solving ...................................................... 460 Further Reading ..................................................................... 464
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Members' Rights and Remedies.)
Recent Developments ...................................................................................................................................... Corporations Act Amendments
Corporations Amendment (Sons of Gwalia) Act 2010 (Cth) Case law
Smartec Capital Pty Ltd v Centro Properties Ltd [2011] NSWSC 495 Trafalgar West Investments Pty Ltd v Superior Lawns Australia Pty Ltd [2012] WASC 460 (S)
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Enforcement of personal rights: Foss v Harbottle ................................. 435
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Smart Company Pty Ltd (In Liq) v Clipsal Australia Pty Ltd [2011] FCA 35 Pottie v Dunkley [2011] NSWSC 166 Ragless v IPA Holdings Pty Ltd [2012] SASC 203 Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235 MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31 Re Wan Ze Property Development (Aust) Pty Ltd [2012] NSWSC 722 Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104 Ubertini v Saeco International Group SpA (No 4) [2014] VSC 47 McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129 Armstrong world industries (Australia) Pty Ltd v Parma [2014] FCA 743 Weinstock v Beck [2013] HCA 14 Roumanus v Orchard Holdings (NSW) Pty Ltd (In Liq) [2012] FCA 775 Re QRxPharma Limited (Administrators Appointed) [2015] FCA 1140
Aim ...................................................................................................................................... At the end of this topic you should: • appreciate the difficulties faced by members who are seeking to challenge actions or decisions by a company, especially where breaches of directors' duty are involved; • understand the difference between derivative actions and personal actions; • know when the statutory derivative action under Pt 2F.1A may be used; • understand the scope of personal remedies available to members; • know when a decision of the majority may be challenged as being a “fraud on the minority”; • know when the statutory injunction under s 1324 can be invoked; • understand Pt 2F.1 and how it applies; and • understand when s 461(1)(e)–(g) and (k) can be applied.
Related Topics ...................................................................................................................................... Chapter 6 Management of Companies; Chapter 9 Membership; Chapter 11 Directors' Duties – Part 1 Duty of Care, Skill and Diligence; Chapter 12 Directors' Duties – Part 2 Good Faith and Proper Purpose; Chapter 13 Directors' Duties – Part 3 Conflict of Interest and Disclosure
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PRINCIPLES [14.10] This Topic discusses the nature and purpose of the rights and remedies available to members to challenge decisions or actions taken by the company. The object of members' remedies is to protect members (principally, minority members) from abuse at the hands of the controllers of the company, whether they be the directors or controlling (majority) members of the company. The potential for abuse arises because the board of directors is in control of the management of the company and the majority members are in control of the general meeting of the company. Chapter 11 discussed the risks which arise from giving management control to the board of directors. Majority members have control of the general meeting through their voting power. Minority members are vulnerable to the actions of both groups of controllers whenever the interests of the controllers and the minority members diverge. Every member of a company has a set of rights by virtue of her or his membership. These include rights conferred by both the general law (common law and law of equity) and the Corporations Act 2001 (Cth) (Corporations Act):
• the general law (common law and equitable rights): for example, the general law provides members with the right to vote at general meetings unless the company's internal rules remove that right (Pender v Lushington (1877) 6 Ch D 70 at 81); • the company's internal rules: the contract between the company and its members and between the members themselves that is formed by the company's internal rules can also confer rights on members: s 140(1) • statutory derivative action: Pt 2F.1A of the Corporations Act provides members with the right to an action on behalf of the company where the company is unwilling or unable to do so (s 236) and leave of the court is granted under s 237; • oppression remedy: s 232 of the Corporations Act provides members with the right to an action where the conduct complained of is unfairly prejudicial or unfairly discriminatory against a member or class of members; and • other Corporations Act provisions: for example, the Act provides members with the right to request the directors to convene a general meeting of the company (s 249D) and to demand a poll (s 250L).
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Introduction
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Figure 14.1: Members’ legal rights and remedies ....................................................................................................
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Chapter 4 Part 4–4—Protection of members’ interest of the CATSI Act; related provisions in Chapter 8—Civil consequences of contravening civil penalty provisions; Part 10–5—Protection for whistleblowers; Chapter 13—Offences;and Chapter 14—Courts and Proceedings; Division 576–25—Injunctions of the CATSI Act. Recent decisions in relation to breach of directors’ duties highlight that courts are willing to award substantial amount compensation and high fines for breach of such duties. Both the general law and the Corporations Act permit members to bring legal proceedings for the purposes of:
[14.20]
• challenging a company's actions or decisions before the court; and • obtaining remedies against the company and/or the officers responsible for those actions or decisions. Terminology for remedies and members’ rights ....................................................................................................................................................................... [14.30] An understanding of the terminology used in connection with members' legal actions is essential. These terms include personal actions, derivative actions, representative actions, statutory actions and class actions. Each term has a distinct and, at times, confusing meaning. The following table gives a summary definition of the terms. You will become more familiar with them as you read through this Topic.
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[14.40] TABLE 14.1: Key terms – members’ rights and remedies
Representative actions
Derivative actions
Derivative and personal actions together
Members' statutory remedies
Class actions
Meaning Actions taken by members where the breach affects a member's personal rights Actions where one member sues on behalf of other members to enforce a personal right which all members enjoy in order to save time and litigation costs A member or group of members brings an action on behalf of the company for a wrong done to the company. The company becomes a defendant to the action
Comment Term used in connection with both general law and statutory remedies for members As above. Provided for by rules of court
A joint action can occur if the action or decision gives rise to both personal and derivative (ie, company) rights Remedies in Pts 2F.1 and 2F.2, ss 461(1), 1322 and 1324
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354
Where seven or more joint applicants bring an action together against a common defendant
• See Pt 2F.1A
•
The members bring the action because the wrongdoers are in control of the company and the company does not sue
No issue of standing provided that the plaintiff meets the requirements of the sections in the Corporations Act, eg is a member The case must arise out of related circumstances as provided for in State and Federal Rules of Court
Personal rights and remedies Personal rights conferred by general law .......................................................................................................................................................................
The general law provides a range of methods by which members can challenge company decisions or actions detrimental to their interests. These include: [14.50]
• the right to challenge a fraud on the minority; • the right to have her or his voting rights protected against improper actions by the directors which would dilute or otherwise harm those rights (Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 51 SASR 177); • the right to sue directors for breach of their fiduciary duties in the special fact situations outlined in Chapter 12 where the courts have found that directors owed duties to particular shareholders not just to the company; and
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Term Personal actions
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• the right to challenge modifications of the company's internal rules which expropriate valuable proprietary rights attaching to shares: Gambotto v WCP Ltd (1995) 182 CLR 432. Fraud on the minority .......................................................................................................................................................................
Definition
Fraud on the minority is one of the grounds on which members are permitted by the general law to bring a personal action. “Fraud”, in this context, does not mean deceit, but rather abuse of power, whereby the majority members use their voting power to secure an unfair gain at the expense of the minority. The defrauders must be in effective control of the company. The doctrine of fraud on the minority derives from equitable principles. It operates to place a limit on the power of majority members in general meetings. It requires majority members to exercise their voting rights for proper purposes – namely, the range of purposes for which the power to vote was conferred at the time the company was formed. If the majority members use their votes for a purpose outside this range, the minority members are able to challenge the legality of the majority's vote as a “fraud on the minority”. [14.60]
Majority members are not fiduciaries [14.70] Despite the restrictions imposed by the doctrine of fraud on the minority, majority members do not owe any fiduciary duties or duty of care to the company or to the minority members of a company. Majority members are not in the same position as directors. Directors are in a fiduciary relationship with the company and are supposed to consider the company's interests, not their own: see Chapters 11, 12 and 13. Members, on the other hand, have long been considered in Australian law as free to vote in their own interests at general meetings (Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457), subject to the limitations imposed by the doctrine of fraud on the minority. The duties (if any) of the majority members in general meeting, apart from the limitation imposed by the doctrine of fraud on the minority, remain uncertain. A more recent case suggests that a fiduciary relationship can arise between members but only in special circumstances: see Brunninghausen v Glavanics (1999) 46 NSWLR 538.
Examples of fraud on the minority [14.80] The operation of the fraud on the minority exception is best understood by way of examples. The following are examples of situations
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where the fraud on the minority exception has arisen, but these are not closed categories. Fraud on the minority includes situations where the majority votes to: • ratify a breach of directors' duties by the present (or former) directors; • expropriate property belonging to the company for themselves; • expropriate the shares or rights attaching to shares held by minority members; and • modify the company's internal rules. The complaints made in these situations may also entitle a member to bring a derivative action under s 236 and/or an oppression claim under s 232. Improper ratification of directors’ breach of duty
Where directors breach their duty to the company, the general meeting may exonerate them but there are limits to this power. In particular, it seems that where the breach of duty involves directors using their powers for an improper purpose, the majority wishing to ratify what the directors have done must be careful not to commit a fraud on the minority: see Ngurli Ltd v McCann (1953) 90 CLR 425; Bamford v Bamford [1970] Ch 212; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666; and Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 51 SASR 177. The decision in Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666, and later in Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 51 SASR 177, indicate that the general meeting cannot approve a breach of duty by directors, where the approval itself is not given in good faith for the benefit of the company as a whole. The worst example is a situation where the majority uses their voting power to excuse a breach of duty in which they were personally involved as directors of the company. Can the general meeting excuse a director's negligence? In Pavlides v Jensen [1956] Ch 565 the court said it could where there was no fraud or ultra vires action. But in Daniels v Daniels [1978] 2 WLR 73 the court held that where the directors made unfair profits at the company's expense, they could not be excused. Expropriation of the company’s property
In Menier v Hooper's Telegraph Works (1874) 9 Ch App 350, the majority members resolved to wind up the company and transfer the assets to another company which they controlled. The court held the majority could not divide up the property for themselves and exclude the minority.
[14.100]
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[14.90]
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Directors cannot ratify their own expropriation of company property. In Cook v Deeks [1916] 1 AC 554 the court held that the contract negotiated by the directors belonged to the company, and the directors could not divert the contract and the benefit of it to themselves, even though they controlled the general meeting. Similarly, in Parke v Daily News Ltd [1962] Ch 927 the general meeting was unable to ratify the directors' decision to make gratuitous payments to employees. The money belonged to the company, that is, the shareholders, and could not be given to employees. Expropriation of members’ property
It may be a fraud on the minority for the majority members to use their voting power so as to deprive members of their shares, or “valuable proprietary rights attaching to those shares” (such as the power to vote) – see the discussion in Gambotto v WCP Ltd (1995) 182 CLR 432, at [14.120] below. It is interesting to note that, under some express provisions of the Corporations Act, companies can compulsorily acquire minority shareholdings and these procedures are not affected by the principles in Gambotto. Chapter 6A now allows for compulsory acquisitions both after a takeover bid and generally where a person holds 90% or more of the shares. Section 256B provides for selective capital reductions which can be used to eliminate minority shareholders: see Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 18 ACLC 665 (affirmed on appeal Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144). Another option that can be used to eliminate minority shareholders is a scheme of arrangement under s 414, for which court approval is required: see Re NRMA Ltd (No 1) (2000) 156 FLR 349 (see Chapter 24). [14.110]
Modifying the company’s internal rules Relevant law [14.120] From time to time, a company may wish to modify its internal rules. For such modifications to be legally effective, they must comply with the statutory requirements discussed in Chapter 5. However, a majority vote may comply literally with these requirements, yet still be invalid because it amounts to a fraud on the minority.
Gambotto v WCP [14.125] Gambotto v WCP Ltd (1995) 182 CLR 432 (High Court of Australia) FACTS: Almost all (99.7%) of the almost 17 million shares in WCP Ltd (WCP) were held by wholly owned subsidiaries of Industrial Equity Limited (IEL). Mr Gambotto held 15,898 of the remaining 50,590 shares. WCP called a general meeting to amend its internal rules by inserting a provision
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cont.
DECISION: All members of the High Court held that the proposed modification was invalid, even though it complied with the normal statutory requirements. The modification would “allow an expropriation by the majority of the shares, or of valuable proprietary rights attaching to the shares of a minority” and as such would only be valid if it was carried out for a proper purpose and did not operate oppressively towards the minority: at 444-445 per Mason CJ, Brennan, Deane and Dawson JJ. The fact that the alteration would “advance the interests of the company as a legal and commercial entity” by providing, for example, tax benefits and administrative savings, was not a sufficient justification because it did not “attach sufficient weight to the proprietary nature of a share”: at 446. The onus of proving that the test had been satisfied was on the majority and it had not been discharged. The High Court laid down new tests which must be satisfied before the proposed modification will be valid. The tests, discussed below, depend on the nature of the modification being made.
Modifications involving an expropriation of shares
The High Court in Gambotto v WCP Ltd (1995) 182 CLR 432 held that, where the modification to the internal rules would allow the majority members to expropriate the minority's shares or valuable rights (such as the right to vote) attaching to those shares, the modification must: [14.130]
• comply with the requirements in the Corporations Act; • be for a proper purpose; and • not operate oppressively – that is, unfairly in relation to minority members. The majority members have the onus of proving that this test has been satisfied. In other words, the majority has a duty to ensure that any modifications of a company's internal rules which would permit expropriation of shares or share rights are for a proper purpose and not oppressive towards the minority. The High Court held that the proposed modification did not satisfy these tests. The majority judges held that the modification was not for a proper purpose. It would only be for a proper purpose if it could be shown to save the company from a significant detriment or harm. The minority (McHugh J)
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allowing any member entitled to more than 90% of its shares to acquire all the remaining shares for $1.80 per share. The shares were valued at $1.36 per share. IEL wanted WCP to become a wholly owned subsidiary so that it could take advantage of WCP’s accumulated tax losses and also save a considerable amount in administrative costs. The minority shareholders who attended the general meeting voted unanimously in favour of the proposed amendment. However, Mr Gambotto did not attend the meeting and challenged the validity of this amendment, on the ground that the majority was attempting indirectly to expropriate his shares (see discussion above).
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held that the proposed alteration was oppressive because the majority had not made full disclosure of all material matters which might affect a member's vote on the proposed modification. Modifications giving rise to conflicts between members
Where the modification to the internal rules involves some conflict of interest between majority and minority members (apart from the expropriation of member rights), the modification will be valid if it:
[14.140]
• complies with the requirements in the Corporations Act; and • is not oppressive or beyond any purpose contemplated by the company's constitution. Other modifications
A modification which does not give rise to any conflict between majority and minority members will be valid if it: [14.150]
• complies with the requirements in the Corporations Act; and • is bona fide, in the interests of the company as a whole: Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656. Personal rights and remedies under statute .......................................................................................................................................................................
Outline [14.160] The Corporations Act provides members with a broad range of specific statutory rights and remedies which are commonly referred to as “personal statutory rights” that can be used by members seeking to enforce their rights against the company. They are considered to be personal rights because it is the member's inherent interest in the company as a shareholder which gives rise to the remedy.
Personal rights conferred by statute
The Corporations Act gives members a wide range of specific statutory rights and remedies. These include:
[14.170]
• the right to inspect the company's books (s 247A); • the right to apply to the court for an order to correct a company register (s 175); • the right to challenge decisions by the majority which affect members' special rights (s 246D); • the right to seek an injunction against a breach of the Corporations Act under s 1324; • the right to seek a remedy for oppression under Pt 2F.1; and
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• the right to apply for a winding up order under s 461(1). Right to inspect books
It is sometimes helpful to members seeking a remedy for perceived injustice to be able to inspect the company's books. Under s 247A, members can apply to the court for permission to inspect. This is a remedial provision and before exercising its discretion to allow inspection under s 247A, an applicant must satisfy the court that the application is made in good faith and for a proper purpose (not, for example, to obtain information to assist a takeover bid): see Unity APA Ltd v Humes Ltd (No 2) [1987] VR 474; Cescastle Pty Ltd v Renak Holdings Ltd (1991) 9 ACLC 1333; and Czerwinski v Syrena Royal Pty Ltd (No 1) (2000) 18 ACLC 337. Some recent cases indicate that courts may now be adopting a more liberal approach when considering these applications: see Keenfern Pty Ltd v Thorlock International Ltd (2002) 20 ACLC 1,322; Caveat Pty Ltd v Baillie (2002) 21 ACLC 42; Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344; and United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514. However, this broader approach has now been rejected by the Western Australian Full Court in Majestic Resources NL v Caveat Pty Ltd [2004] WASCA 201. Smartec Capital Pty Ltd v Centro Properties Ltd [14.185] Smartec Capital Pty Ltd v Centro Properties Ltd [2011] NSWSC 495 (Supreme Court of New South Wales) Facts: In Smartec Capital Pty Ltd v Centro Properties Ltd [2011] NSWSC 495, Centro (Centro property group, Centro (EPL) Ltd and CPT Manager Ltd) made a number of announcements in relation to a proposed restructure. Smartec had a 0.4854% holding in the company. This ranked them the 14 th biggest holder in the top 20. Smartec had concerns regarding the restructure. Smartec made application to the court for an order under s 247A(1). It sought access to all documents which “stand behind the … announcement and the aspects and details of its subject matter which have been referred to in later announcements and correspondence” at [6]. Decision: The court heard arguments as to the circumstances when good faith and proper purpose had been found and conversely not found. His Honour, Barrett J agreed with counsel for Smartec that the words ″in good faith and for a proper purpose are not confined by reference to some cause of action or legal wrong and are, on their face, at large″, citing Bryson AJ in Rowland v Meudon Pty Ltd [2008] NSWSC 381 at [35]. However, his Honour was concerned that Smartec were requesting access to documents which Centro had not lodged with the ASX or determined that they were to be disclosed to security holders. There were some 30,000 security holders, of which Smartec is only one. His Honour found that an order for inspection under s 247A(1) must be in cognisant of the disclosures already made to the ASX and security holders and that further disclosures must be in view of the effect they may have on the price or value of securities. In addition, his Honour previously stated in Praetorin Pty Ltd v TZ Ltd [2009] NSWSC 1237 at [76] that:
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[14.180]
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cont. in the case of an ASX listed entity with the expectation of the maintenance of an informed market and investor body is strongly underwritten by the continuous disclosure regime actively administered by ASX with statutory reports. The need for one investor to have access to company documents to the exclusion of all other investors is likely to be very greatly reduced by the existence of that regime at [69], [76]. His Honour determined that Smartec should be allowed access to inspect the “books”, consisting of correspondence between it and the ASX, with such access being determined by the court to ensure the maintenance of confidentiality at [83]. As to the five other groups of documents requested, his Honour found that there was “no proper purpose” demonstrated with those concerns at [84]–[90].
Correction of the register
Under s 175, “a person aggrieved” can apply to the court for an order to correct a register kept by the company. This would include a member applying to correct the register of members where an error has been made. Note also s 1071F, which applies where someone has been refused registration. This may be an important first step towards attaining “member” status and, therefore, standing under Pt 2F.1. In Trafalgar West Investments Pty Ltd v Superior Lawns Australia Pty Ltd [2012] WASC 460 (S), the court pursuant to s 1071F ordered the defendant to register the two share transfers, copies of which are annexed to an affidavit.
[14.190]
Variation of rights
Where the special rights of members (such as dividend rights) have been altered, 10% or more of the members, who did not vote in favour of the variation, may apply to the court to have the decision overturned: s 246D. The application can be made even though the proper procedure for variation has been followed.
[14.200]
Personal rights conferred by the statutory contract
You will recall from Chapter 5 that the company's internal rules are a contract between the company and its members and between the members themselves: s 140(1). In Hickman v Kent or Romney Marsh Sheepbreeders' Association [1915] 1 Ch 881 a member was able to enforce the statutory contract created by the company's internal rules under the statutory forerunner to s 140. If the majority breaches a provision of the internal rules which confers personal rights on members, the majority can be restrained: see also Pender v Lushington (1877) 6 Ch D 70; and Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399. [14.210]
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The difficulty is to decide whether a breach of the internal rules is either: • an internal irregularity capable of being ratified by the general meeting; or • a serious infringement of a personal right. In deciding these cases, the courts seem to be looking to see whether ratification by the general meeting has taken place, but ratification does not of itself destroy a member's claim. The question then becomes whether the individual's right should prevail over the wishes of the majority. Australian courts have tended to interpret personal rights broadly: see Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399.
[14.220] The rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 provided for two key developments to the law on members' remedies. First, Foss v Harbottle provided that the proper plaintiff in an action involving a wrong committed against the company was the company itself and not any of its members. The consequence of the “proper plaintiff rule” was significant because it provided that the company, and not the member, had the right to commence legal action to rectify any alleged wrong that had been committed against the company. Secondly, Foss v Harbottle provided that the alleged wrong can be ratified by a simple majority of members by way of resolution as provided by the company's constitution. The second rule has often been referred to as the “internal management rule” and reflects the rights of members to enforce their personal rights, including the right to ratify breaches as provided by the constitution. Since the internal management rule allowed majority members to rectify company breaches, the rights of minority members could be prejudiced if left unchecked. A number of exemptions to the second limb of the Foss v Harbottle rule were later developed by the courts to protect the rights of minority members. As has been discussed above, minority members were provided with various general law rights and remedies. Members' ability to enforce company breaches is now largely contained in the statutory derivative action under Pt 2F.1A of the Corporations Act. The right at general law for a member to bring, or commence an action in, proceedings on behalf of the company has now been abolished: s 236(3).
General statutory rights and remedies [14.230] In addition to statutory personal rights which can be used by members seeking to enforce their rights against the company, members also have available a number of general statutory rights and remedies which are granted by the Corporations Act. These general statutory rights include:
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• derivative action (ss 236 and 237); • oppression remedy (ss 232 – 235); • injunction (s 1324); • procedural irregularities (s 1322); and • winding up order (ss 461 and 462). Members may also choose to participate in legal proceedings against the company in the form of a class action under s 50 of the Australian Securities and Investments Commission Act 2001 (Cth) which mitigates the potential for loss and for costs to be awarded against any individual member. Derivative action .......................................................................................................................................................................
A member has a general statutory right to bring proceedings on behalf of a company or to intervene in proceedings to which the company is a party: s 236. The proceedings must be brought in the company's name, even though it is a member and not the company who brings them: s 236(2). Prior to the introduction of ss 236 and 237 of the Corporations Act members had a right to bring a derivative action under the common law and equity. That common law and equitable right has now been abolished by s 236(3): see Karam v Australia & New Zealand Banking Group Ltd (2000) 18 ACLC 590; and Chapman v E-Sports Club Worldwide Ltd (2001) 19 ACLC 213. The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth) (the originating Bill for the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act)) stated at [6.23] that the abolition of the general law (common law and equitable) rights was necessary to “promote certainty regarding the nature of the action and avoid confusion between any diverging principles relating to the statutory action and the common law action”. There is some doubt as to whether Pt 2F.1A operates retrospectively to abolish causes of action arising under the general law before the CLERP Act commenced on 13 March 2000. In Karam v Australia & New Zealand Banking Group Ltd (2000) 18 ACLC 590 at [31], Santow J said that the issue was not free from doubt but he believed that the better view is that Pt 2F.1A applies retrospectively because it is a procedural provision: see also Advent Investors Pty Ltd v Goldhirsch (2001) 19 ACLC 580; Chapman v E-Sports Club Worldwide Ltd (2001) 19 ACLC 213; and Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464. However, there may be an exception in circumstances where legal proceedings under the general law rules had actually begun before Pt 2F.1A commenced and displacing those proceedings would deprive the plaintiffs of substantive rights: see Shum Yip Properties Development Ltd v Chatswood Investment & Development Co Pty Ltd (2002) 166 FLR 451; and Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464 at [14.240]
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[40] per Austin J. With the passage of time, it can be expected that situations involving these issues will occur less frequently.
SECTION 236 Bringing, or intervening in, proceedings on behalf of a company A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if: (a) the person is: (i) a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or (ii) (b)
an officer or former officer of the company; and
the person is acting with leave granted under section 237.
(2)
Proceedings brought on behalf of a company must be brought in the company’s name.
(3)
The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.
Note 1: For the right to inspect company books, see subs 247A(3) to (6). Note 2: For the requirements to disclose proceedings and leave applications in the annual directors’ report, see subs 300(14) and (15). Note 3: This section does not prevent a person bringing, or intervening in, proceedings on their own behalf in respect of a personal right.
It is important to appreciate that an action under s 236 must be concerned with correcting a wrong done to the company. If a member wishes to challenge a wrong done to herself or himself, he or she must bring a personal action. Who can bring derivative proceedings? [14.260]
Proceedings under s 236 can be brought by:
• members (including those who are not actually on the register of members, but who are entitled to be registered) and former members of the company or a related company; and • directors or officers (present and former) of the company: see Isak Constructions (Aust) Pty Ltd v Faress (2003) 47 ACSR 224. It now appears settled that the fact that a company is being wound up will not prevent proceedings being brought under s 236: Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464; Charlton v Baber (2003) 47 ACSR 31; and Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 51 ACSR 245.
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(1)
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CORPORATIONS LAW: IN PRINCIPLE
The proceedings covered by s 236 include causes of action that the company has against either: • a director, for breach of duties owed to the company; or • a third party, for a breach of a contract or for a tort committed by that third party. Note: Creditors are not able to bring proceedings. Leave of the court required [14.270] Before commencing or intervening in proceedings in the name of, and on behalf of, a company, a person must apply for leave from the court under s 237: Karam v Australia & New Zealand Banking Group Ltd (2000) 18 ACLC 590; and Chapman v E-Sports Club Worldwide Ltd (2001) 19 ACLC 213. The court must grant leave if all the grounds in s 237(2) are satisfied: RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170; Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451; and Charlton v Baber (2003) 47 ACSR 31. Note s 237(1) – (3):
SECTION 237(1)-(3) Applying for and granting leave (1) (2)
A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings. The court must grant the application if it is satisfied that: (a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and (b)
the applicant is acting in good faith; and
(c)
it is in the best interests of the company that the applicant be granted leave; and
(d)
if the applicant is applying for leave to bring proceedings – there is a serious question to be tried; and either: (i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(e)
(ii) (3)
it is appropriate to grant leave subparagraph (i) is not satisfied.
even
though
A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that: (a) the proceedings are (i) (b)
by the company against a third party; or
(ii) by a third party against the company; and the company has decided:
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(i)
not to bring the proceedings; or
(ii)
not to defend the proceedings; or
to discontinue, settle or compromise proceedings; and all of the directors who participated in that decision: (i) acted in good faith for a proper purpose; and
439
(iii)
the
(ii)
did not have a material personal interest in the decision; and
(iii)
informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and
(iv)
rationally believed that the decision was in the best interests of the company.
These criteria are designed to prevent members from being able to bring actions on the company's behalf when it would be detrimental to the company and as the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth) states at [6.33]: to strike a balance between the need to provide a real avenue for applicants to seek redress on behalf of a company where it fails to do so and the need to prevent actions proceeding which have little likelihood of success.
Compare cases such as, Karam v Australia & New Zealand Banking Group Ltd (2000) 18 ACLC 590; RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170; Keyrate Pty Ltd v Hamarc Pty Ltd (2001) 38 ACSR 396; Metyor Inc v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186; Isak Constructions (Aust) Pty Ltd v Faress (2003) 47 ACSR 224; and Charlton v Baber (2003) 47 ACSR 31, where leave was granted with Chapman v E-Sports Club Worldwide Ltd (2001) 19 ACLC 213; Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313; Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451; and Cannon Street Pty Ltd v Karedis [2004] QSC 104, where leave was refused. These last three cases indicate that while an applicant may find it relatively easy to convince a court that there is a serious question to be tried (s 237(2)(d)), it may be more difficult for an applicant to convince the court that he or she is acting in good faith and that granting leave will be in the best interests of the company: s 237(2)(b), (c). In both Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 and Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451, the court refused leave on the grounds that the applicants were acting for a collateral purpose which amounted to an abuse of process: see the detailed discussion of this point by Barrett J in Charlton v Baber (2003) 47 ACSR 31 at [40]-[44]. More recently, Ragless v IPA
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The director’s belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.
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Holdings Pty Ltd [2012] SASC 203 restated the position (perhaps with further clarity) in Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313, that the benefit in seeking leave under s 237 must be as a person with standing under s 236(1)(a), rather than a benefit in another capacity which may result in “a double recovery”. Such a position would strike at one of the five criteria, namely, good faith at [43], [44]. Personal animosity is not of itself a decisive factor at [55]. In Pottie v Dunkley [2011] NSWSC 166 it was affirmed that that the court does not have discretion once the five criteria have been met. Instead, leave must be granted when the criteria is satisfied at [36]. In this case, delay in bringing the action was not deemed to affect the determination of good faith. Delay was attributed to the death of the plaintiff's father at [57], [88]. “Best interests” of the company
In Re Gladstone Pacific Nickel Ltd [2011] NSWSC 1235, considerations to satisfy the requirement that the action be in the “best interests of the company” were said to be twofold, firstly that it is in the best interests of the company that the action be brought and secondly that the best interests of the company are satisfied if the action is brought by the applicant. This also includes considering the likelihood of success, costs involved and consequences if the action is unsuccessful. Indemnity provided by the applicant is also a consideration. Assessment must also be made as to the resources required to pursue the action, resources available and the effect on other aspects of the business at [57]. [14.275]
Rebuttable presumption under s 237(3)
In MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31, the full Federal Court confirmed that the “rebuttable presumption” under s 237(3) is not available where there has been a decision not to issue proceedings against a director at [62]. The court also explained that an application for leave under s 237 would be pointless if it required a full trial of the issues. The legislation directs that leave be granted, so as to enable a derivative action, at which time, the full facts will be established at [67].
[14.280]
Effect of liquidation [14.285] In Smart Company Pty Ltd (In Liq) v Clipsal Australia Pty Ltd [2011] FCA 35, it was found that the court does have an implied power to grant leave for proceedings to remain in the company's name, despite going into liquidation. This is based on the court's powers to permit proceedings brought on the half of the company, creditor or member in the course of winding up. Although it has been described as an inherent power, the court found it to be
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441
an implied power at [43]. However, in this case EGR (a member of the applicant) was found not to be a “fit and proper person in the corporate sense to maintain the proceedings” at [50]. This is due to EGR's refusal to reveal who its beneficiaries were at [47]. The court agreed that s 236 was not available as the company is in liquidation at [8]. Effect of ratification on derivative action
Section 239 gives the court a discretion whether to take into account any ratification by the members when granting leave to bring an action on behalf of the company.
[14.290]
Costs of proceedings
Section 242 gives the court a broad discretion regarding orders for costs: see HPM Pty Ltd v Fear (2002) 171 FLR 12. The court can order the company to indemnify the applicant for the costs incurred in obtaining leave to proceed. This was affirmed in Re Wan Ze Property Development (Aust) Pty Ltd [2012] NSWSC 722, the plaintiffs sought an order that the defendants pay their costs of the proceedings on an indemnity basis and the order for costs was granted.
Why bring derivative proceedings?
A member who wishes to challenge a wrong done to the company now has a choice to bring either a derivative or personal action or a combination of the two. A variety of factors may influence that decision, for example:
[14.300]
• the member may be unhappy about a company decision or action that has reduced the overall wealth of the company and thereby its members; • the persons involved in the wrongful action or decision may be in control of the company and therefore in a position to prevent the company suing them; or • the cost of the legal action may be relevant – it is possible to seek an indemnity for legal costs as part of a statutory derivative action, which may make it a more attractive option than a personal action. Charlton v Baber [14.305] Charlton v Baber (2003) 47 ACSR 31 (Supreme Court of New South Wales) FACTS: Charlton and Baber were both members and directors of a company by the name of Newcastle Auto Air Pty Ltd. Newcastle Auto encountered financial difficulties, was placed into voluntary administration and later went into liquidation, following a creditors’ meeting and an application for winding up. In the course of its winding up, Charlton alleged
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[14.295]
442
CORPORATIONS LAW: IN PRINCIPLE
cont. that Baber had breached his directors’ duties owed to Newcastle Auto. Charlton applied under s 237 of the Corporations Act for leave to bring proceedings on behalf of Newcastle Auto pursuant to s 236. Charlton’s application on behalf of Newcastle Auto was challenged by Baber. DECISION: Leave was granted under s 237 of the Corporations Act for Charlton to commence proceedings on Newcastle Auto’s behalf against Baber for the alleged breach of directors’ duties. The court was satisfied that all of the criteria under s 237 were satisfied, namely: 1.
it was probable that the company itself would not bring proceedings since it was in liquidation and had limited funds (s 237(2)(a));
2.
the application by Charlton was made in good faith (s 237(2)(b));
3.
it was in the best interests of the company that the application proceed because if successful, it would provide benefit to the company (s 237(2)(c));
4.
the issues raised by Charlton’s application involved serious questions regarding alleged breach of directors’ duties (s 237(2)(d)); and
5.
Charlton provided sufficient notice of his intended application on behalf of the company: s 237(2)(e).
Oppression remedy ....................................................................................................................................................................... [14.310]
Relief from oppression can be obtained under Pt 2F.1. Note s 232:
SECTION 232 Grounds for Court order The Court may make an order under Section 233 if: (a)
the conduct of a company’s affairs; or
(b)
an actual or proposed act or omission by or on behalf of a company; or
(c)
a resolution, or a proposed resolution, of members or a class of members of a company; is either: (d)
contrary to the interests of the members as a whole; or
(e)
oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or any other capacity.
For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company. Note: For “affairs”, see s 53.
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Who can apply for relief? [14.320]
Section 234 allows an application to be made for relief by:
• a member (as defined in s 231 – essentially a person whose name is on the register of members), whether personally affected or not, or acting in her or his capacity as a member or not; • a person removed from the register of members because of a selective reduction of capital; • a person who has ceased to be a member if the application relates to the circumstances in which membership ceased;
• a person whom ASIC thinks appropriate having regard to its present or past investigations into the company's affairs (under the former s 246AA(1)(b) ASIC itself had standing to apply for relief; it is not clear whether it can still do so). The oppression or unfairness need not be directed against the member applying, nor does the member have to have been a member at the time the conduct took place: Re Spargos Mining NL (1990) 3 WAR 166. Conduct covered by s 232
There are two limbs to conduct covered by s 232. The member must believe either:
[14.330]
• that the affairs of the company are being conducted in a manner which is; or • that an act or omission or a resolution by the company or a class of members was, or would be; oppressive, or unfairly prejudicial to, or unfairly discriminatory against, a member or members, or contrary to the interests of members as a whole. The cases on the predecessor to Pt 2F.1 mainly involve small, proprietary companies. In these companies there is often a mutual understanding between members as to how the business is to be managed and no ready market for a disgruntled member to sell (compared with a listed public company). This statutory remedy has played an important role in protecting minority interests. Some successful cases on oppression [14.340] It is fairly well established that courts will entertain a diverse range of issues when assessing an application by a member for oppressive conduct. The following are some examples where the courts have deemed conduct to be sufficiently oppressive under s 232 of the Corporations Act.
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• a person to whom a share in the company has been transmitted by will or operation of law; or
444
CORPORATIONS LAW: IN PRINCIPLE
Inaction by directors and company
Re Bright Pine Mills Pty Ltd [1969] VR 1002: inaction can be regarded as oppressive. Scottish Co-operative Wholesale Society Ltd v Meyer [1959] 3 AC 324: allowing the company to languish is oppressive. [14.350]
Controlling member gains
Re Overton Holdings Pty Ltd [1985] WAR 224: even though all members are treated equally, there can still be oppression if the controlling member gains an advantage because of the resolution.
[14.360]
Gains by directors
Sanford v Sanford Courier Service Pty Ltd (1986) 5 ACLC 394: feathering of their own nests by the directors is oppressive. Re East West Promotions Pty Ltd (1986) 4 ACLC 84: a director's failure to account for company assets and using them in another similar business is oppressive.
[14.370]
Restricting members’ voting rights
Shears v Phosphate Co-operative Co Australia Ltd (1989) 7 ACLC 812: alteration of the articles to restrict a member's voting power is oppressive (see also Gambotto v WCP Ltd (1995) 182 CLR 432, but note that it was decided on purely general law grounds); [14.380]
Failure to pay dividends or review dividend policy [14.390] Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882: a failure to pay dividends may be oppressive in view of the history of the company, its financial needs and the reasonable expectations of the members. Shamsallah Holdings Pty Ltd v CBD Refrigeration & Airconditioning Services Pty Ltd (2001) 19 ACLC 517: failure to review a company's dividend policy to take its improving circumstances and profitability into account when, at the same time, the directors were taking steps to review their salary packages and vote themselves significant increases, was oppressive. Uncommercial loans
Re George Raymond Pty Ltd (2000) 18 ACLC 85: making uncommercial loans to a company in which the dominant director of a family company had a material personal interest without disclosure and without obtaining the consent of the minority shareholders was oppressive.
[14.400]
Exclusion from management
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672: a breakdown in the relationship between members of a family which led to one
[14.410]
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445
director, who had a legitimate expectation that he would be involved in managing the company operating the family business, being excluded from its management was oppressive, as were breaches of fiduciary duty by other directors of the company. Failure to provide information to a minority member
Shum Yip Properties Development Ltd v Chatswood Investment & Development Co Pty Ltd (2002) 166 FLR 451: failure to provide any information about the company's affairs or notices of meetings to a minority foreign shareholder was oppressive. [14.420]
Abuse of process
Turnbull v NRMA (2004) 186 FLR 360 during an industrial dispute, members of the NRMA had requested the directors to call a meeting under s 249D. The dispute was resolved before the meeting took place and the court held that in these circumstances, requiring the meeting to proceed would be both contrary to the interests of the members as a whole and oppressive.
Some unsuccessful cases on oppression [14.440] There have been cases where the application made under s 232 of the Corporations Act has not been successful on the basis that the alleged conduct was judged not to have been unfairly prejudicial or unfairly discriminatory. The following cases provide a good illustration of conduct which was deemed not to be oppressive and contrary to s 232. Discrimination and good faith
Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 (High Court): although action might be discriminatory, it can still be in good faith for the benefit of the company as a whole. The court will consider whether the decisions of the directors were such that no board acting reasonably could have made them.
[14.450]
Refusal to purchase shares [14.460] Re G Jeffery (Mens Store) Pty Ltd (1984) 2 ACLC 421: refusal to purchase shares does not, of itself, amount to oppression. Low profitability
Thomas v HW Thomas Ltd (1984) 2 ACLC 610: dissatisfaction with low profitability and a conservative management style was not sufficient, in the context of a family company in which all the other members accepted that the company should operate in a financially conservative way. The court said that there must be a “visible departure from the standards of fair dealing.”
[14.470]
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[14.430]
446
CORPORATIONS LAW: IN PRINCIPLE
Refusal to inspect company accounts
Re Dernacourt Investments Pty Ltd (1990) 20 NSWLR 588: refusal to allow books to be inspected is not, of itself, oppressive. [14.480]
Exclusion from management
O'Neill v Phillips [1999] 1 WLR 1092: excluding a minority shareholder from management is not of itself oppressive if a reasonable offer is made to purchase that person's shares at a fair value.
[14.490]
Dismissal of managing director
Ground & Foundation Supports Pty Ltd v GFS Management Services Pty Ltd (2003) 21 ACLC 506: a proprietary company had three shareholders who were also its directors. At a meeting attended by all three directors, two of the directors resolved to terminate the appointment of the third as managing director. The relationship between the directors had broken down and the dismissal of the managing director was held to be in the interests of the company and, on the facts, was not oppressive. [14.500]
Oppression can occur even where there has been no departure from the contractual position
In Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104, it was a situation of two parties with successful businesses owned jointly and separately, determined to part ways. An agreement was struck between the parties to pass the interest of the appellant to the respondent for a substantial sum of money. It appeared that both parties had failed to appreciate tax burdens involved and, due to the global financial crisis, the net value of the business had fallen at [319]–[321]. The appellant requested to be reinstated as a director which was refused by the respondent. At first instance, the trial judge found that the agreement to sell the interest of the appellant to the respondent was unenforceable and a claim to estop the respondent from denying the agreements were binding also failed. The appellant then began proceedings under oppression, seeking an order that the respondent “buys out” his interests. Austin J found that as there was no binding contract or any applicable estoppel, there could be no “unfairness” resulting from the failure to separate the interests. Their Honours, Campbell JA, MacFarlan and Young JJA concluded that it is possible for oppression to occur even where there has been no departure from the contractual position at [176], [178], [326], [314]. Ultimately, oppression was made out and a “buyout” was ordered rather than an order for winding up at [307].
[14.510]
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Remedies the court can grant [14.515] If satisfied that oppression has taken place, the court has a discretion under s 233(1) to grant any order it considers appropriate, including an order:
• that the company be wound up; • that its existing constitution be modified or repealed; • regulating the conduct of company affairs in the future; • for the purchase of shares by any member or by the company; • directing the company to institute, prosecute, defend or discontinue specified proceedings, or authorising a member or members of the company to institute, prosecute, defend or discontinue specified proceedings in the name of and on behalf of the company;
• restraining a person from engaging in specified conduct or from doing a specified act; or • requiring a person to do a specified act. The court tries to remedy the causes of conduct, rather than wind up companies, especially if the company's business is successful. The least intrusive remedy that will eliminate the oppression is to be preferred. This was evident in Ubertini v Saeco International Group SpA (No 4) [2014] VSC 47 which involves a complex set of facts pertaining to Ubertini and the distribution of Saeco coffee machines in Australia. It was a case where the oppressive conduct by both parties did not disentitle one party from relief and where the court was not willing to grant a winding up order if the granting of such an order would aid an ulterior motive of the party seeking the order. In this case, Ubertini negotiated the distribution rights for Saeco coffee machines in Australia. He incorporated Saeco Australia and managed the company which was very successful to the point that Saeco International purchased 60% of the shares from Ubertini (and his related holdings) for approximately $2.4 million. Ubertini agreed to stay on as manager. Subsequently, Ubertini's personal circumstances changed and he requested that Saeco International find someone else to manage Saeco Australia. Saeco International agreed and also agreed to purchase the remaining shares from Ubertini. Unfortunately, the negotiations for the sale and appointment of a new manager were unsuccessful. Both parties attempted to maximise their negotiating positions. However, Saeco International determined that it should
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• appointing a receiver or a receiver and manager of any or all of the company's property;
448
CORPORATIONS LAW: IN PRINCIPLE
place Saeco Australia into administration. Its directors voted in favour of the resolution, Ubertini voted against it with another member of the board abstaining. Ubertini requested the court make a finding of oppressive conduct on the part of Saeco International. He contended nine separate categories of oppression. Saeco International counterclaimed that Ubertini had engaged in conduct which was oppressive to it. The court found that both parties had engaged in oppressive conduct, however, that Ubertini's oppressive conduct toward Saeco International did not disentitle him to relief. Of particular interest are the findings surrounding the administration of Saeco Australia. The court found that Saeco International had issued invoices and claims for money which, whilst some amounts were legitimate, were largely part of a plan to obtain Saeco Australia without paying shareholders for the remaining shares at [532], [538]. The court found that, consistent with the plaintiffs submissions, that Saeco International had breached s 232(e). His honour found that it was unnecessary to consider s 232(d) as the conduct fell “squarely” within (e) at [536]. Saeco International had applied for an order from the court that Saeco Australia be wound up. Instead, the court found that an order to wind up Saeco Australia would be simply aiding the plans of Saeco International to obtain the company without paying the shareholders. Instead, the court ordered Saeco International to pay for the remaining shares in Saeco Australia at [539], [540], [546].
Statutory injunction .......................................................................................................................................................................
The Corporations Act gives the court a very broad power to grant an injunction in respect of a breach or threatened breach of the Corporations Act. Note s 1324(1): [14.520]
SECTION 1324(1) Injunctions (1)
Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute: (a)
a contravention of this Act; or
(b)
attempting to contravene this Act; or
(c)
aiding, abetting, counselling or procuring a person to contravene this Act; or
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(d)
inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or
(e)
being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or
(f) conspiring with others to contravene this Act; the court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the court it is desirable to do so, requiring that person to do any act or thing.
Conduct caught by s 1324
Section 1324 applies to an actual, continuing or imminent breach of the Corporations Act by the company itself and to persons involved in the company's contravention. The court also has power to award damages in addition to, or instead of, an injunction: s 1324(10). Who may apply under s 1324?
Section 1324 allows ASIC or a “person whose interests have been, are or would be affected by the conduct” to apply for an injunction. As well as members, this expression has been interpreted as giving standing to creditors: Allen v Atalay (1993) 12 ACLC 7; and Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 73 FCR 161. [14.540]
When can a person apply under s 1324?
Section 1324 applies only to breaches of the Corporations Act, not breaches of the general law. In Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128, Young J adopted a very narrow interpretation of s 1324, holding that s 1324 could not be used by members to complain about breaches of civil penalty provisions in the Corporations Act, such as directors' statutory duties in Pt 2D.1. He held that s 1324 was only available to ASIC in relation to breaches of Pt 2D.1. However, other judges in more recent cases have doubted whether this interpretation of the section is correct: Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 73 FCR 161; and Emlen Pty Ltd v St Barbara Mines Ltd (1997) 15 ACLC 1107; and McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129. In Armstrong world industries (Australia) Pty Ltd v Parma [2014] FCA 743, his Honour, Beach J clarified the difference between an injunction granted under s 1324(4) and an injunction granted under s 23 of the Federal Court of Australia act 1976 (Cth). An additional factor under s 1324(4) is the “utility or purpose” of the injunction – “such as preventing or ameliorating a threatened
[14.550]
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[14.530]
450
CORPORATIONS LAW: IN PRINCIPLE
contravention of the act” at [22]. His honour found that s 1324(4) “is in form and partly in substance different to the equitable basis, which is discussed in Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57” at [21]. Procedural irregularities: Section 1322 .......................................................................................................................................................................
Where a procedural irregularity (such as lack of notice or failure to call a poll) has caused substantial injustice, the aggrieved members may apply to the court under s 1322(2). In Mamouney v Soliman (1992) 10 ACLC 1674, the company called a meeting to pass a number of special resolutions to alter its constitution. The notice of the meeting was deficient in terms of its timeliness, distribution and content. The resolutions were passed at the meeting by a small majority. One of the effects of the resolutions was to relegate certain voting members to non-voting status. The resolutions were declared invalid by the court. The reasoning in Gambotto v WCP Ltd (1995) 182 CLR 432 (regarding the alteration of the constitution to expropriate “valuable proprietary rights attaching to shares”) would, by analogy, seem to support this result.. [14.560]
Weinstock v Beck [14.565] Weinstock v Beck [2013] HCA 14 (High Court of Australia) In Weinstock v Beck [2013] HCA 14, the High Court looked into the interpretation of s 1322(4) and overruled the decision of the Court of Appeal. Background: This case involved a corporation formed by a mother and father, as directors, who attempted to appoint their two children Amiram and Tamar as additional directors. The constitution of the corporation held that while the existing directors were able to appoint additional directors, those directors only hold office until the next following annual general meeting. This means that the additional directors ceased to be directors at the beginning of the annual general meeting. The quorum for the meeting was two members of the company. Unfortunately, the father died and the mother was taken ill with Alzheimer’s disease. Tamar had resigned decades earlier leaving Amiram the only remaining director. He attempted to appoint his wife Helen as another director. Tamar made an application to the court that the company be wound up as it no longer had any validly appointed directors. Amiram and Helen applied to the court under s 1322(4)(a) for a declaration that the appointment of Helen was not invalid. This was successful in the first instance (Barrett J), however, on appeal, Young JA and Sackville A-JA set the order aside. This is the appeal to the High Court after special leave was acquired. Court of Appeal: The Court of Appeal found that s 1322(4)(a) should not be interpreted liberally and that with the act stipulates a “contravention”, whilst that was not limited to “infringement”, the appointment of Helen was not such a “contravention”. Campbell JA in dissent, found that a “contravention” was satisfied when “something had happened that is
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cont. different to what the Constitution of the corporation requires”. In fact, Campbell JA found that Amiram had been a de facto director as defined by s 9 of the Corporations Act at [35].
It is not appropriate to torture a limit out of the language of s 1322(4)(a) against the extreme case of a stranger to the company purporting to make a decision appointing another stranger as a director. Extreme cases are amply covered by the discretionary nature of the power and the constraints upon its exercise imposed by s 1322(6). The present case was not an extreme case. Amiram was not a stranger to the company. He had discharged the functions of a director for 30 years owing, as an officer of the company, the obligations that were imposed upon him notwithstanding the cessation in December 1973 of his appointment as a director, a cessation of which he was evidently unaware. This was a case falling within the scope and purpose of s 1322(4)(a). [43] Orders were made to overturn the decision of the Court of Appeal, removing the invalidity of Helen’s appointment as director.
Class actions by ASIC ....................................................................................................................................................................... [14.570] Under s 50 of the Australian Securities and Investments Commission Act 2001 (Cth), ASIC can bring a “class action” on behalf of members or investors to recover damages for fraud, negligence, breach of duty or other misconduct. The action must be in the public interest and result from an ASIC investigation – for example, action taken by ASIC on behalf of investors following the collapse of the Pyramid Building Society in Victoria. In Australian Securities Commission v Deloitte Touche Tohmatsu (1996) 70 FCR 93, the Full Court of the Federal Court held that s 50 gave ASIC a very broad discretion in making a judgment as to whether it was in the public interest to commence a proceeding under s 50 and that the agreement of the board of directors was not necessary.
Winding up ....................................................................................................................................................................... [14.580] Section 461(1) deals with winding up by the court. There are four parts of the section which provide a possible remedy for aggrieved members: s 461(1)(e) – (g) and (k).
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High Court: The High Court overruled the Court of Appeal. The High Court found that s 1322 should be interpreted widely. French CJ found that, contrary to submissions by Tamar that this was not simply a case of non-compliance, but the exercise of power which is simply not available:
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SECTION 461(1) General grounds on which company may be wound up by Court The Court may order the winding up of a company if: (a)-(d) … (e)
directors have acted in affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appears to be unfair or unjust to other members; or
(f)
affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or in a manner that is contrary to the interests of the members as a whole; or
(g)
an act or omission, or a proposed act or omission, by or on behalf of the company, or a resolution, or a proposed resolution, of a class of members of the company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or was or would be contrary to the interests of the members as a whole; or
(h)-(j) … (k)
the Court is of opinion that it is just and equitable that the company be wound up.
Section 461(1)(e)
The use of the term “directors” in s 461(1)(e) does not mean that the board of directors has to act in concert. It is sufficient if the effective majority of directors act in this way: Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1976) 1 ACLR 361. Conduct does not have to be “unfair or unjust” to members as a whole. It is the “interests” of members which are relevant. [14.590]
Section 461(1)(f)-(g)
The grounds in s 461(1)(f) – (g) are the same as those provided in s 232 (oppressive or unfairly prejudicial conduct) and the arguments will also be similar. However, as winding up is a drastic remedy, Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104, the courts will be more reluctant to grant it than other possible remedies under s 233(1).
[14.600]
Section 461(1)(k) [14.610] Under s 461(1)(k), the “just and equitable” ground, the court can give relief even though what is being done is strictly legal. The classic illustration is Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 which involved a breakdown in mutual trust and confidence between the parties.
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Ebrahimi v Westbourne Galleries [14.613] Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (House of Lords) FACTS: Ebrahimi and Nazar had been in partnership dealing in carpets from 1945 until 1958. They then formed a private company to carry on the business. They were the only shareholders and directors and each had 500 shares in the company. Later, Nazar’s son also became a director and Ebrahimi and Nazar each transferred 100 shares to him. The company never paid any dividends, all profits were distributed to the directors as directors’ fees. In 1969 the relationship between Ebrahimi and Nazar broke down and the Nazars used their majority in the general meeting to pass a resolution removing Ebrahimi from the board. Ebrahimi applied to have the company wound up on the just and equitable ground.
[14.616] Other examples, but not closed categories, of winding up under s 461(1)(k) include: Breakdown of mutual trust and confidence
Re Wondoflex Textiles Pty Ltd [1951] VLR 458: again there was a small company resembling a partnership, and the court held that exclusion from management was a sufficient reason for winding up. Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113: the fact that one shareholder had tried to allot sufficient shares to make the other shareholder's holding virtually worthless was sufficient grounds for a winding up order. Stapp v Surge Holdings Pty Ltd (1999) 17 ACLC 896: when their relationship broke down, the fact that one of the only two shareholders in a property development company excluded the other from deciding on the application of the proceeds of a transaction, made false representations to the other about this matter and refused the other access to the company's books was held to be sufficient grounds for a winding up order; see also the similar fact situation in Malos v Malos (2003) 44 ACSR 511. [14.620]
Deadlock
Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426: here there was no oppression, but the two directors had fallen out to such a degree that they no longer even spoke to each other. The court felt it was just and equitable to wind up the company because this incompatibility would not have been contemplated when the company was formed. [14.630]
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DECISION: The House of Lords held that, even though there was power in the company’s constitution to remove a director, because Ebrahimi’s removal also had the effect of excluding him from management and profits, his removal (in the context of that particular company) was unjust. His petition for winding up was successful. (Ebrahimi’s application for alternative relief on the ground of oppression failed because of the restrictive wording of the English equivalent to Pt 2F.1 in force at that time.)
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Re Superbee Pty Ltd (1989) 7 ACLC 418: the company was also wound up because of irreconcilable differences; see also Gregor v British-Israel-World Federation (NSW) (2002) 41 ACSR 641. Fraud, misconduct or oppression [14.640] Loch v John Blackwood Ltd [1924] AC 783: the major member, together with her nominee directors, controlled the company and the two minority members were kept ignorant of the true state of the company. The major member hoped to acquire the minority's shares at an undervalue. The court found there was a “lack of probity” on the part of the controller – in other words, that she could not be trusted and, therefore, the company should be wound up: see also DCT v Casualife Furniture International Pty Ltd (2004) 9 VR 549. Failure of substratum
Re Tivoli Freeholds Ltd [1972] VR 445: in this case, the nature of the company's business was drastically changed (that is, the common aim of the company had gone) and, even in the absence of oppression, winding up was granted. Winding up is a drastic remedy,Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104, particularly as the assets in liquidation may be worth less than if the company were a going concern. Consequently, the courts provide opportunity for the parties to reach an agreement if possible. A further factor that the court will consider is whether the applicant seeking winding up has come to court with clean hands – that is, is not guilty of any misconduct: compare Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 with the more recent Australian decisions in Ruut v Head (1996) 20 ACSR 160 and Guerinoni v Argyle Concrete & Quarry Supplies Pty Ltd (1999) 34 ACSR 469. [14.650]
Restitution rights of members The High Court has recently drawn a distinction between a member claiming a right or remedy in her or his capacity as a member of the company and a member claiming a right or remedy against the company in an alternative capacity. According to the High Court the distinction is important because a member's right to claim against a company may be founded not in the capacity as a member but instead in an alternative capacity which would survive an insolvency and provide the member with the right to lodge a claim with a liquidator. The right that is enjoyed by the member is akin to a restitution right in their favour, one which is grounded in the company's obligation to pay damages because loss was occasioned by a wrong committed by the company. The issue concerning the surviving restitution rights of [14.660]
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members in the event of an insolvency arose in the High Court case of Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160. Sons of Gwalia v Margaretic [14.663] Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160 (High Court of FACTS: In August 2004, Margaretic purchased 20,000 fully paid ordinary shares in Sons of Gwalia Ltd (“SOG”), a listed mining and exploration company. In the same month, the directors of SOG decided to appoint an administrator to the company, having formed the opinion that the company was either insolvent or near insolvency. Margaretic claimed that when he purchased the shares in SOG, the company was in breach of its continuous disclosure obligations under ss 674 and 675 of the Corporations Act for failing to properly inform the market in a timely manner of the financial difficulties confronting SOG. Alternatively, Margaretic claimed that SOG’s failure amounted to conduct that was misleading or deceptive and in contravention of s 52 of the Trade Practices Act 1974 (Cth), s 1041H of the Corporations Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). As a result of the alleged company wrong, Margaretic claimed damages under statute, under common law and in equity. Margaretic intended to submit his damages claim as a creditor of SOG and further claimed that he was entitled to all of the rights of a creditor under Pt 5.3A of the Corporations Act, including the right to attend and vote at a creditors’ meetings and the right to receive information provided to creditors. The administrator of SOG objected to Margaretic’s claim on the basis that Margaretic was a member of SOG and therefore could not be deemed a creditor nor enjoy the rights of creditors under Pt 5.3A. DECISION: The High Court agreed with Margaretic and held that his claim for damages for the alleged wrong committed by SOG could be brought under Pt 5.3A. According to Heydon J (at [206]): In so far as the claim is put forward in the tort of deceit, it is a claim that stands altogether apart from any obligation created by the 2001 Act and owed by the company to its members. Those claims are not claims “owed by a company to a person in the person’s capacity as a member of the company”. For these reasons, s 563A does not apply to the claim made by Mr Margaretic.
In providing members the right to pursue claims in an alternative capacity other than as members, the High Court has given recognition to the restitution rights belonging to members. The High Court in Sons of Gwalia were prepared to uphold the rights of members which are grounded in the law of obligations, as stated by Heydon J at [205]-[206]: [14.666]
if money is paid to the company to create the relationship of member (as will be the case when a person subscribes for shares) the company's obligation to pay damages for fraudulent misrepresentation inducing that subscription, or to pay damages because loss was occasioned by the company's misleading or deceptive conduct, will not, in the absence of specific legislative provision to the contrary, be an obligation whose foundation can be found in the legislative prescription of the rights and duties of members … In the present
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Australia)
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case, the obligation which Mr Margaretic seeks to enforce is not an obligation which the 2001 Act creates in favour of a company's members. The obligation Mr Margaretic seeks to enforce, in so far as it is based in statutory causes of action, is rooted in the company's contravention of the prohibition against engaging in misleading or deceptive conduct and the company's liability to suffer an order for damages or other relief at the suit of any person who has suffered, or is likely to suffer, loss and damage as a result of the contravention.
Corporations Amendment Sons of Gwalia Act 2010 (Cth) .......................................................................................................................................................................
In response of the High Court's decision in Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160, amending legislation was introduced into Parliament in 2010 following a discussion paper that had been prepared by the Corporations and Markets Advisory Committee (CAMAC): “Shareholder claims against insolvent companies: Implications of the Sons of Gwalia decision Discussion Paper” (September 2007). Concern had been expressed by a number of commentators including investor groups and creditors that the High Court's decision would have increased the costs associated with a company's ability to secure debt financing. It was also asserted that the High Court's decision in support of members' rights could disadvantage unsecured creditors and lenders by increasing the number of potential claimants. CAMAC was asked to consider whether the position as stated by the High Court should be retained or changed, so that any claims made by members will be brought in the capacity of a member of the company rather than some other alternative capacity or legal basis. Increased costs and difficulty in maintaining access to credit markets, particularly for companies that have been experiencing financial distress were considered to be grounds for reversing the High Court's ruling. Moreover, there were concerns that the practical effect of the High Court's decision would be to shift the losses for shareholder claims away from those responsible for the conduct that gave rise to the loss or damage and instead transfer responsibility onto unsecured creditors. The Corporations Amendment (Sons of Gwalia) Act 2010 (Cth) (Sons of Gwalia Act) sought to reverse the effect of the High Court's ruling which had allowed shareholder claims in the form of damages to rank equally with unsecured creditors in a windup. The High Court had ruled that a compensation claim in the form of damages brought by a shareholder against a company was not subordinated by virtue of s 563A of the Corporations Act. The Sons of Gwalia Act reverses the High Court's decision so that any claim brought by a shareholder against a company that arose from the buying, selling, holding or other dealing with a shareholding is to be postponed in a [14.670]
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windup until after all other claims have been paid. The claims that will be postponed include judgment debts that have been entered into against a company. Hence, claims for compensation, including damages awards against a company, would be subordinated below the claims of other creditors in the event of external administration. In Roumanus v Orchard Holdings (NSW) Pty Ltd (In Liq) [2012] FCA 775, shareholders made a claim against two directors who were spooking investments in Orchard Holdings. The claim extended to making the corporation liable as an accessory for the conduct. His Honour, Foster J considered that, similar to the failure to meet continuous disclosure requirements in Sons of Gwalia Ltd, a case based on “positive misrepresentations provided that the corporation is found to have made the relevant misrepresentation or is relevantly held liable as an accessory in respect of the conduct of others” would hold the same reasoning at [44]. However, his Honour found that the corporation did not make the offending representations and was not an accessory to the contraventions at [182]. The complexity of the subordinate claim under s 563A and rights if the claim against the company is postponed under s 600H were examined by the Federal Court in the case of Re QRxPharma Limited (Administrators Appointed) [2015] FCA 1140. In that case Jagot J, inter alia, made orders that a more “restricted” form of notification to those former shareholders should occur.
Other Rights and Remedies Apart from the legal remedies to be discussed in this Topic, there are a number of other mechanisms which work to limit the effect of divergences of interest between controllers of companies and their minority members. These include:
[14.680]
• member voting rights – for example, under provisions of the Corporations Act which require members to approve certain transactions before they take place; • enforcement of the Corporations Act by ASIC and, in relation to publicly listed companies, enforcement of the Listing Rules by the ASX; and • market forces, such as capital markets in the case of publicly listed companies.
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Members' Rights and Remedies.)
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Practice Questions ...................................................................................................................................... 1.
Explain the difference between a member's derivative rights and personal rights.
2.
What factors might influence a member to bring a statutory derivative action (s 236) instead of an action for oppression: s 232?
3.
What advantages do statutory remedies have over general law remedies for members?
4.
What effect does ratification of a breach of directors' duties by general meeting of a company have if the majority members in company control the general meeting and are the directors of company? In these circumstances, would the minority be able to the statutory derivative action?
5.
In what kinds of situations is a member likely to be successful in obtaining relief from oppression under Pt 2F.1?
6.
Identify some of the circumstances which may form the basis for a winding up order under s 461(1).
7.
Does a member have standing under s 1324 to seek an injunction against a director who contravenes Pt 2D.1?
the the the use
Essay Questions ...................................................................................................................................... 1.
Do you agree with the High Court's ruling in Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160 which provides greater protection to shareholders rights? Or do you prefer the recent amendments to the Corporations Act as provided by the Corporations Amendment (Sons of Gwalia) Act 2010 (Cth)?
2.
“Statutory derivative actions have not been very effective in achieving protection for shareholders, as demonstrated by the very fact that so few derivative actions have been brought before the courts”. Critically discuss the above statement.
Problems for Discussion ...................................................................................................................................... 1.
Morris, John and Paul are directors and shareholders of Newry Property Developments Pty Ltd (NPD), a property development company which owns and operates a tavern. Morris and John are brothers. John and Paul are friends and partners in an accounting firm. Morris is an unemployed artist and sole parent of three young children. The total number of issued shares in NPD is 6,000 ordinary shares.
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Each shareholder has 2,000 shares. All the shares are fully paid.
• Should he bring a derivative or personal action against John and Paul? What factors should he take into account in making this decision? • If he brings a personal action, should he bring it under the general law or make an oppression claim under s 232? What factors would influence your recommendation? • If successful, what remedies should he seek? 2.
Alan, Bill and Clare were the directors and shareholders of Sailfree Pty Ltd (Sailfree) which distributes and sells boating equipment. Alan and Bill each had 300 shares in Sailfree while Clare had 200 shares. All three of them actively participated in the company's management. Last year Clare suffered a mild heart attack and decided that she should resign from the board of Sailfree and transfer her shares to her daughter, Gail. Alan and Bill did not object and the transfer was registered. Shortly afterwards, Alan discovered that Gail's fiancée, Tom, was a major shareholder in and a director of a large interstate company that intended to expand its business and would possibly be a serious competitor to Sailfree. Alan called a general meeting of Sailfree which passed a special resolution adopting the following internal rule: If a member or the spouse or child of a member carries on or is a director of a business that in the opinion of the directors is a competitor or a potential competitor of Sailfree, the directors may require that member to sell her or his shares to a person named by the directors at a fair price fixed by an independent expert appointed by the directors.
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NPD has been very successful but has not paid any dividends to its members for the last two years. Profits have instead been invested in further development projects. Morris' wife has recently died and he is very short of money to look after his family. He approaches John and Paul and asks them to consider whether NPD could begin to pay dividends again to its members. John and Paul refuse to consider Morris' request as it would upset the “long-term goals of NPD”. Morris is upset by this response and announces that he wants to sell his shares. John and Paul refuse to buy him out and demand that Morris resign as a director because he has lost his objectivity. Morris resigns reluctantly. He asks to see NPD's most recent set of financial statements. John and Paul refuse to provide the information. Morris discovers accidentally that NPD has been paying large “management fees” to John and Paul's accounting firm. Morris consults you as his legal adviser. He wants to know:
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The resolution was passed by Alan and Bill, who were the only people at the meeting. Gail was on her honeymoon in the Cook Islands at the time and did not receive the notice of meeting until she returned home. When she returned, she was given a notice requiring her to sell half her shares to Alan's wife, Sue, and half to Bill's wife, Helen, at a price of $20 per share (the value put on the shares by Graeme, the independent expert appointed by Alan and Bill). Gail does not want to sell her shares in Sailfree. Advise Gail: • whether the meeting had power to adopt the internal rule set out above; and • whether she has any grounds to challenge the notice requiring her to sell her shares. 3.
Bob and his nephew, Tom, are the only shareholders in MX Pty Ltd (MX). Bob holds 3,002 shares and Tom holds 5,002 shares. Bob and his wife, Elaine, are the only directors of MX, a family company formed by Tom's grandfather as an investment vehicle for the family's property. Tom inherited his shares in MX from his mother, who died when he was a child, and has little knowledge of the company's affairs. Bob, who was Tom's guardian until he attained his majority, has always managed the affairs of MX. Tom is now 25 and has recently become aware of documents purporting to be minutes of general meetings of MX at which Tom was shown as being present and at which resolutions were passed appointing Bob and Elaine as directors of MX; declaring dividends (which Tom did not receive); approving the payment of directors' fees to Bob and Elaine and approving a buy-back scheme. Tom was unaware that these meetings had been held and knew nothing about these resolutions, which he had purportedly approved. These discoveries have led to a complete breakdown in the relationship between Tom and his uncle. Advise Tom on the remedies that may possibly be available to him under the Corporations Act.
Guide to Problem Solving ...................................................................................................................................... Chapters 11, 12 and 13, regarding duties of directors and officers, overlap with the question of members' remedies. For example, if the directors act for an improper purpose and then ensure that their actions are ratified at a general meeting, can a minority member seek any redress? There are also instances where, although there have been no breaches of duty, a dissatisfied member may still seek a remedy: for example, under Pt 2F.1.
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Figure 14.2: Members’ remedies for breaches of directors’ (and officers’) duties ....................................................................................................
(a)
Ascertain the breach or breaches, distinguishing between general law and statute: see Chapter 11.
(b)
Ascertain whether a derivative or a personal right has been breached.
(c)
If a derivative right has been breached, can the members apply for leave to bring a statutory derivative action under Pt 2F.1A to obtain a remedy (damages, rescission, declaration of trust or account of profits)?
(d)
If the breach involves a personal right, have the members a right of action under general law or statute?
(e)
If it is a general law breach, what is the most appropriate remedy? (If the breach has not yet occurred or is ongoing, an injunction may be the most appropriate remedy – where it is an equitable remedy as compared with a statutory injunction under s 1324.) For statutory breaches: (i) is it a breach of a civil penalty provision? That is:
(f)
• ss 180-183;
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• s 209(2); • s 344; and • s 588G. (ii)
if it is a civil penalty provision: • “the company” may seek compensation under s 1317H: it is a “company” remedy so a member must bring a statutory derivative action on behalf of the company under Pt 2F.1A, or the members or creditors can appoint a liquidator who can then stand in the company's shoes; • “a person whose interests have been affected” may seek an injunction or an award of damages under s 1324: a member may be a person whose interests have been affected (subject to a possible doubt about a member's right to use this section in relation to breaches of civil penalty provisions following decision in Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128); and
(iii)
(g)
if it is not a civil penalty provision, check the section as to who has standing to bring an action:
• again, if the section says “the company” then a statutory derivative action needs to be considered. Oppression or winding up: (i) it may be that if general law and/or statutory breaches of duty to the company have occurred, a member should seek to bring a statutory derivative action; (ii)
otherwise, consider if there is a sufficient pattern of conduct or a sufficiently serious breach to support an action under Pt 2F.1 (see below);
(iii)
alternatively, check whether there is any basis for arguing that the company should be wound up under s 461(1) (see below); and
(iv)
even if a statutory derivative action could be used, it may still be preferable for the member to bring an action under Pt 2F.1 (or s 461(1)) to avoid the need for leave to be granted, and because of the broad range of orders the court can grant.
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Oppression and winding up
This issue may arise in the context of a breach of directors' duties (see above) and/or in the context of an amendment to the articles: for example, Gambotto v WCP Ltd (1995) 182 CLR 432. It may, however, arise where neither of these other issues are present: for example, Thomas v HW Thomas Ltd (1984) 2 ACLC 610. (a) Oppression: (i) briefly outline the two limbs of s 232; (ii)
decide if either the conducting “of the affairs of the company” or “an act or omission or resolution” is, was or would be: • oppressive; • unfairly prejudicial to, or unfairly discriminatory against a member or members; or
(iii)
consider the tests used for determining oppression, for example • decisions were such that no board acting reasonably could have made them (Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459); • a visible departure from the standards of fair dealing: Thomas v HW Thomas Ltd (1984) 2 ACLC 610.
(iv)
discuss cases, preferably recent ones and those most like the facts given; and
(v)
(b)
draw a conclusion, suggesting if possible, the particular order the court might make (and why). Winding up: (i) consider the four possibilities under s 461(1): • arguments on s 461(1)(f) and (g) will be the same as for oppression. The conclusion may be different, however, because winding up is final; and • s 461(1)(e) (directors acting in their own interests) and (k) (the just and equitable ground) might both need to be discussed, if there is insufficient evidence of oppression or discrimination. (i)
under s 461(1)(e), discuss the cases that interpret the wording and then apply the principles to the facts;
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• contrary to the interests of members as a whole.
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(ii)
(c)
under s 461(1)(k), find an appropriate category. (Remember the categories are not closed.) Discuss the relevant case(s) and show if, and how, the section applies; and
(iii) draw a conclusion. Other remedies: Overall, there may be other remedies to consider – (i) a personal action (arising because of a breach of a personal right rather than a wrong done to the company, for example, the s 140 contract formed by the company's internal rules); and (ii)
other provisions in the Corporations Act: • s 1324: injunction for contravention of the Corporations Act; • s 246D: class rights; • s 175: correction of the register; and
• s 1322(2): procedural irregularity. Tip – it is particularly important with a problem involving members' remedies to identify the most likely result on the facts given!
Further Reading ...................................................................................................................................... Ali P and Russell T “Investor Remedies Against Fiduciaries in Rising and Falling Markets” (2000) 18 C&SLJ 326 Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis, 2014, Ch 11 Australian Government, Corporations and Markets Advisory Committee, “The Social Responsibility of Corporations Report” (December 2006) available at http://www.camac.gov.au Australian Government, Corporations and Markets Advisory Committee, “Long-Tail Liabilities: The Treatment of Unascertained Future Personal Injury Claims Discussion Paper” (June 2007) available at http:// www.camac.gov.au Australian Government, Corporations and Markets Advisory Committee, “Shareholder Claims Against Insolvent Companies Implications of the Sons of Gwalia Decision Discussion Paper” (September 2007) available at http:// www.camac.gov.au Australian Government, Corporations and Markets Advisory Committee, “Personal Liability for Corporate Fault Report” (September 2006) available at http://www.camac.gov.au Boros E Minority Shareholders Remedies (Clarendon Press, Oxford, 1995) Chesterman RN “Oppression by the Majority – Or Is It?” (2004) 25 Australian Bar Review 103
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Colla A “Eliminating Minority Shareholdings – Recent Developments” (2001) 19 C&SLJ 7 DeMott D “Breach of Fiduciary Duty: On Justifiable Expectations of Loyalty and Their Consequences” (2006) 48 Arizona Law Review 925 Duffy M “Procedural Dilemmas for Contemporary Shareholder Remedies – Derivative Action or Class Action?” (2004) 22 C&SLJ 46 Farrar J and Boulle L “Minority Shareholder Remedies – Shifting Dispute Resolution Paradigms” (2001) 13 Bond Law Review 272 Fletcher K “CLERP and Minority Shareholder Rights” (2001) 13 Australian Journal of Corporate Law 290 Harris J and Hargovan A “The Shifting Balance of Shareholder Interests in Insolvency: Evolution or Revolution? Case Note: Sons of Gwalia Ltd v Margaretic” (2007) 31 MULR 591 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 17 McNee S “The Just and Equitable Ground – a Remedy of Last Resort” (2001) 9 Insolv LJ 147 Mitchell V “Has the Tyranny of the Majority Become Further Entrenched?” (2002) 20 C&SLJ 74 Price P “Australia's Statutory Derivative Action – Using the New Zealand Experience” (2000) 18 C&SLJ 493 Thai L “How Popular are Statutory Derivative Actions in Australia? Comparisons with United States, Canada and New Zealand” (2002) 30 ABLR 118 Note, Saunders B “Putting the Spoils of Litigation into the Shareholders' Pockets: When can Shareholders bring a Personal Action against the Directors of their Company?” (2004) 22 C&SLJ 535
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CHAPTER
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Financial Reports and Audit Useful Websites ..................................................................... 467 Recent Developments ............................................................ 468 Aim ......................................................................................... 468 Related Topics ....................................................................... 468 Principles ............................................................................... 468 Introduction ............................................................................... 468 Regulatory overview ..................................................................... 469 Basic obligations ......................................................................... 473 Financial reports .......................................................................... 476 Directors’ reports ........................................................................ 479 Reporting to members .................................................................. 483
Reporting to the ASX .................................................................... 486 Breach of the requirements in Chapter 2M ......................................... 488 Relief from compliance ................................................................. 488 Audit provisions .......................................................................... 489 Auditors’ duties ........................................................................... 492 Mentor: Test your Knowledge ............................................... 495 Practice Questions ................................................................. 495 Problems for Discussion ........................................................ 496 Guide to Problem Solving ...................................................... 497 Further Reading ..................................................................... 497
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Financial Reports and Audit.)
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Reporting to ASIC ........................................................................ 484
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Recent Developments ...................................................................................................................................... Corporations Legislation Amendment (Audit Enhancement) Act 2012 (Cth) Corporations Legislation Amendment (Financial Reporting Panel) Act 2012 (Cth) Corporations Legislation Amendment (Derivative Transactions) Act 2012 (Cth) Personal Liability for Corporate Fault Reform Act 2012 (Cth) Corporations and Financial Sector Legislation Amendment Act 2013 (Cth) Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth) Corporations Legislation Amendment (Deregulatory and Other Measures) Act 2015 (Cth) Corporations Amendment (Financial Advice Measures) Act 2016 (Cth)
Aim ...................................................................................................................................... At the end of this topic you should know: • the formal legal requirements for preparation and presentation of accounts; and • the duties of auditors.
Related Topics ...................................................................................................................................... Chapter 2 Business Organisations; Chapter 6 Management of Companies; Chapter 11 Directors' Duties – Part 1 Duty of Care, Skill and Diligence
PRINCIPLES Introduction Purpose of regulation .......................................................................................................................................................................
Company financial reports and audits are regulated so that members and creditors (and potential members and creditors) will have access to accurate information about the financial position of companies. Companies are required to comply with: [15.10]
• the Corporations Act 2001 (Cth) (Corporations Act); • accounting standards; and • for listed public companies, the Australian Securities Exchange (ASX) Listing Rules.
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Corporations Act .......................................................................................................................................................................
This Topic discusses the regulations in Ch 2M (Financial reports and audit) of the Corporations Act. Chapter 2M Corporations Act was enacted as part of the reforms to the Corporations Act by the Company Law Review Act 1998 (Cth) and were further revised by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9 Act): see Chapter 1. The rules in Ch 2M of the Corporations Act apply to the preparation of financial reports and audits from 1 July 1998.
[15.20]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
In order to assist auditors and accountants (bookkeepers) to prepare CATSI corporation reports, a Corporation Reporting Guide has been created which includes a summary of AASB 1053: Application of Tiers of Australian Accounting Standards. The guide can be found in ORIC’s website.
Regulatory overview Regulatory terminology .......................................................................................................................................................................
Chapter 2M lists the reporting obligations of various “entities” under the Corporations Act. The obligations vary according to the type of entity. For example, the reporting obligations of a small proprietary company are fewer than those of a publicly listed company. The following table defines the types of entity to which Ch 2M Corporations Act applies. Some of the terms used should already be familiar to you from Chapter 2. There may be some overlap between them – for example, a listed public company will usually also be a disclosing entity. [15.30]
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Chapter 7—Record keeping, reporting requirements and books; see also Chapter 3—Basic features of an Aboriginal and Torres Strait Islander corporation; Division 57-5 Item 26 Division Auditor entitled to notice and other communications, Item 36 Auditor’s right to be heard at general meetings; and Chapter 10—Regulation and enforcement in particular Part 10–5—Protection for whistleblowers, Division Part 10–5472—Confidentiality requirement of the CATSI Act.
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[15.40] TABLE 15.1 Types of entities in Chapter 2M of the Corporations Act Entities (for purpose of Chapter 2M) Public company
Listed public company Large proprietary company
Section
Definition
s9
Any company that is not a proprietary company. For differences between public and proprietary companies, see Chapter 2 s9 A public company which is listed on the Australian Securities Exchange or other “prescribed financial market operated in Australia” s 45A(3) see [2.300] A proprietary company with two of the following characteristics – • a consolidated revenue of $25 million pa or more
• • Small proprietary company
Registered scheme
Listed registered scheme
50 or more employees
s 45A(2) see [2.300] A proprietary company with two of the following characteristics – • a consolidated revenue of less than $25 million pa
• • Disclosing entity
gross consolidated assets of $12.5 million or more
Pt 1.2A ss 111AA – AX ss 9, 601EB
s9
gross consolidated assets of less than $12.5 million fewer than 50 employees
A body whose securities (s 92) are enhanced disclosure securities on issue. See further discussion below at [15.50] A managed investment scheme registered by ASIC. A managed investment scheme (s 9) is one where investors pool their contributions in a common investment or enterprise (for example, a unit trust or a time-sharing scheme) A registered scheme listed on the Australian Securities Exchange (ASX) or other “prescribed financial market operated in Australia”
Disclosing entities .......................................................................................................................................................................
If a body is a disclosing entity under Pt 1.2A of the Corporations Act, it must satisfy the financial reporting obligations for disclosing entities outlined in this Topic. [15.50]
The term “disclosing entity” is defined in s 111AC of the Corporations Act. It is capable of applying to a company, a statutory corporation or building society which issues securities known as enhanced disclosure securities (ED securities).
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SECTION 111AC DISCLOSING ENTITY (1)
If any securities of a body (except interests in a managed investment scheme) are ED securities, the body is a disclosing entity
for the purposes of this Act. (2)
If any interests in a managed investment scheme are ED securities, the undertaking to which the interests relate is a disclosing entity for
the purposes of this Act.
Some examples of ED securities are: • securities issued by bodies listed on the Australian Securities Exchange (including interests in a registered scheme); and • securities (other than debentures) issued pursuant to a prospectus or other disclosure document or as consideration for a takeover; • securities issued under a scheme of arrangement; and • debentures of borrowers where a trustee is required to be appointed.
SECTION 111AE SECURITIES OF BODY OR UNDERTAKING THAT IS INCLUDED IN A LICENSED MARKET’S OFFICIAL LIST (1)
If: (a)
a body corporate is, with its agreement, consent or acquiescence, included in the official list of a prescribed financial market; and
(b)
the market’s listing rules (according to their terms) apply to the body in relation to a class (which may be some or all) of securities issued by the body; securities issued by the body in that class are ED securities, and that market is a listing market in relation to that body. (1A)
If: (a)
an undertaking to which interests in a registered scheme relates is, with the agreement, consent or acquiescence of the responsible entity, included in the official list of a prescribed financial market; and
(b)
the market’s listing rules (according to their terms) apply to the undertaking in relation to a class (which may be some or all) of managed investment products that relate to the
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All listed bodies are disclosing entities unless they are expressly exempted – as are, for example, governments and some foreign entities: s 111AE, Corporations Act.
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scheme; managed investment products in that class that relate to the scheme are ED securities, and that market is a listing market in
relation to the undertaking. (2)
(3)
Subsections (1) and (1A) do not apply to securities of a body if: (a)
the body is a public authority of the Commonwealth or an instrumentality or agency of the Crown in right of the Commonwealth; and
(b)
the only securities issued by the body that would otherwise be ED securities because of subsection (1) or (1A) are debentures; and
(c)
both the repayment of principal, and the payment of interest, in respect of those debentures is guaranteed by the Commonwealth.
Subsections (1) and (1A) do not apply to securities of a body that is: (a)
a public authority of a State or Territory; or
(b)
an instrumentality or agency of the Crown in right of a State or Territory.
Overview of regulation .......................................................................................................................................................................
The following chart attempts to show the financial recording, reporting and audit obligations that arise under Ch 2M of the Corporations Act: see also the table in s 285(1), Corporations Act. You may find it helpful to keep referring back to this chart as you consider the nature of the various obligations in further detail. [15.60]
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[15.70]
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Figure 15.1: Chapter 2M Corporations Act – financial reports and audit ....................................................................................................
Basic obligations Outline ....................................................................................................................................................................... [15.80]
The three fundamental reporting obligations discussed in this Topic
are: • the obligation to keep financial records (s 286, Corporations Act); • the obligation to prepare financial and directors' reports for each financial year (s 292, Corporations Act); and • the obligation to have the financial reports audited: s 301, Corporations Act.
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Keeping financial records .......................................................................................................................................................................
Companies, registered schemes and disclosing entities must keep all financial records necessary to record and explain correctly their transactions and financial position: s 286(1), Corporations Act. The records must be kept in a form that enables true and fair accounts to be prepared from time to time. It is not sufficient merely to keep source documents: Van Reesema v Flavel (1992) 10 ACLC 291. Most companies will keep financial records in the form of a profit and loss statement, balance sheet and cash flow statement. “Financial records” are defined in s 9 of the Corporations Act: see ASIC Information Sheet 76 (INFO 76), “What Books and Records Should My Company Keep?” http://www.asic.gov.au.
[15.90]
SECTION 9 (ABRIDGED) DICTIONARY “Financial records” includes: (a)
invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and
(b) (c)
documents of prime entry; and working papers and other documents needed to explain: (i)
the methods by which financial statements are made up; and
(ii)
adjustments to be made in preparing financial statements.
They also include electronic forms of these records: s 1306, Corporations Act. The records must be kept for seven years: s 286(2), Corporations Act. Non-compliance with this obligation is a civil penalty provision under ss 344 and 1317E of the Corporations Act: see [15.360]. Under certain circumstances, the company may also be presumed to be insolvent: s 588E, Corporations Act. Any financial records kept in electronic form are required under s 288 of the Corporations Act to be convertible to hard copy. Reports to be prepared ....................................................................................................................................................................... [15.100] Section 292 of the Corporations Act requires disclosing entities, public companies, large proprietary companies and registered schemes to prepare:
• a financial report; and • a directors' report
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for each financial year. The first financial year for a company starts on the day on which it is registered and lasts for a period of 12 months or a different period as determined by the directors, the maximum period being 18 months. All subsequent financial years start at the end of the previous financial year and are 12 months long. The directors may determine that the financial year is to be shorter or longer (but not more than seven days): s 323D, Corporations Act. A subsequent financial year may last for a period of less than 12 months subject to certain conditions including good faith: s 323D(2A), Corporations Act. Half-year financial reports .......................................................................................................................................................................
In addition to the annual financial report, disclosing entities must also prepare half-year financial and directors' reports: ss 292(1)(a), 302, Corporations Act; and see [15.240]. [15.110]
Small proprietary companies .......................................................................................................................................................................
Small proprietary companies (other than those that are controlled by foreign companies which do not provide consolidated accounts to ASIC) are not required to prepare annual financial reports unless directed to do so by: • shareholders holding 5% or more of the voting shares (ss 292(2), 293, Corporations Act); or • ASIC: s 294, Corporations Act. See s 45A(2) and (3) of the Corporations Act where the threshold amounts are $25 million for consolidated revenue and $12.5 million for consolidated gross assets. Small proprietary companies as defined in s 45A(2) of the Corporations Act are entities which satisfy at least two of the following criteria: 1.
have consolidated revenue of less than $25 million;
2.
have consolidated gross assets of less than $12.5 million; or
3.
have fewer than 50 employees.
Financial reports to be audited ....................................................................................................................................................................... [15.130] A company (other than a small proprietary company), registered scheme or disclosing entity must:
• have its annual and half-yearly financial reports audited; and • obtain an auditor's report. See ss 301 (annual reports) and 302 (half-yearly reports) of the Corporations Act. Small proprietary companies that prepare financial reports at the direction of their members (s 293, Corporations Act) must also have the reports audited
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[15.120]
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CORPORATIONS LAW: IN PRINCIPLE
unless the members who gave the direction specifically asked for the report not to be audited: s 301(2), Corporations Act. As to what is an audit report and what are the obligations of auditors see [15.380]-[15.530].
Financial reports Contents .......................................................................................................................................................................
The annual financial report consists of the documents listed in s 295 of the Corporations Act. [15.140]
SECTION 295(1)-(3) CONTENTS OF ANNUAL FINANCIAL REPORT Basic contents (1) The financial report for a financial year consists of: (a) the financial statements for the year; and (b)
the notes to the financial statements; and
(c)
the directors’ declaration about the statements and notes.
Financial statements (2) The financial statements for the year are: (a)
unless paragraph (b) applies - the financial statements in relation to the company, registered scheme or disclosing entity required by the accounting standards; or
(b)
if the accounting standards require the company, registered scheme or disclosing entity to prepare financial statements in relation to the consolidated entity – the financial statements in relation to the consolidated entity that are required by the accounting standards.
Notes to financial statements (3) The notes to the financial statements are: (a) disclosures required by the regulations; and (b)
notes required by the accounting standards; and
(c)
any other information necessary to give a true and fair view (see section 297).
Compliance with accounting standards .......................................................................................................................................................................
Financial reports must comply with accounting standards set by the Australian Accounting Standards Board (AASB): ss 296(1) and 334, Corporations Act. [15.150]
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Accounting standards are a set of rules specifying the accounting methods and judgments which can be used to prepare financial statements. For example, AASB 127 determines how companies must prepare and present consolidated financial statements. This permits accounting standards to incorporate equity accounting principles: s 335, Corporations Act. Small proprietary companies who prepare financial reports at the direction of their members (s 293, Corporations Act) must comply with accounting standards (s 296(1), Corporations Act) unless the members who made the direction specifically state otherwise: s 296(1A), Corporations Act. True and fair view .......................................................................................................................................................................
As well as complying with the accounting standards, the financial statements must give a “true and fair view” of the company's financial position. [15.160]
SECTION 297 TRUE AND FAIR VIEW
(a)
the financial position and performance of the company, registered scheme or disclosing entity; and
(b)
if consolidated financial statements are required – the financial position and performance of the consolidated entity.
This section does not affect the obligation under section 296 for a financial report to comply with accounting standards. If the financial statements and notes prepared in compliance with the accounting standards would not give a true and fair view, additional information must be included in the notes to the financial statements under paragraph 295(3)(c).
However the section does not define “true and fair view” in any legal way. Section 344 of the Corporations Act requires directors to take all reasonable steps to ensure that the financial statements and notes comply with these requirements – that is, with ss 296 – 297 of the Corporations Act. If directors fail to take such steps, they contravene a civil penalty provision: s 1317E, Corporations Act (see [11.200]). If merely following the accounting standards would not give a true and fair view, any further information necessary to give a true and fair view must be added to the notes to the financial statements: s 295(3)(c), Corporations Act.
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The financial statements and notes for a financial year must give a true and fair view of:
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Directors’ declaration ....................................................................................................................................................................... [15.170] The financial report must include a declaration by the directors concerning the statements and notes in the report. The information to be included in that declaration is set out in s 295(4) of the Corporations Act.
SECTION 295(4) Directors’ declaration (4) The directors’ declaration is a declaration by the directors: (c) whether, in the directors’ opinion, there are reasonable grounds to believe that the company, registered scheme or disclosing entity will be able to pay its debts as and when they become due and payable; and
(e)
(ca)
if the company, registered scheme or disclosing entity has included in the notes to the financial statements, in compliance with the accounting standards, an explicit and unreserved statement of compliance with international financial reporting standards – that this statement has been included in the notes to the financial statements; and
(d)
whether, in the directors’ opinion, the financial statement and notes are in accordance with this Act, including:
(i)
section 296 (compliance with accounting standards); and
(ii)
section 297 (true and fair view); and
if the company, disclosing entity or registered scheme is listed – that the directors have been given the declarations required by section 295A.
Note: See paragraph 285(3)(c) for the reference to the debts of a registered scheme.
The declaration must: • be signed by a director; • specify the date on which it was made; and • be made in accordance with a resolution of the directors: s 295(5), Corporations Act. Section 295A of the Corporations Act places an additional obligation on the Chief Executive Officer and Chief Financial Officer of a listed company to “sign off” on the annual financial statements by making a written declaration to the board that: • the financial records of the company have been properly maintained in accordance with s 286 of the Corporations Act; and
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• the financial statements and notes comply with the Corporations Act and the accounting standards and give a true and fair view of the company's financial position.
Directors’ reports Contents .......................................................................................................................................................................
An annual directors' report is the second of the two reports required by s 292 of the Corporations Act: see [15.100]. The report must include:
[15.180]
• the general information required by s 299 or s 299A of the Corporations Act; and • the “specific” information required by ss 300 and 300A of the Corporations Act; and • a copy of the auditor's declaration under s 307C in relation to the audit for the financial year (s 298(1AA), Corporations Act). General information – s 299 .......................................................................................................................................................................
Section 299 of the Corporations Act requires the directors' report
to: • review operations during the year reported on and the results of those operations; • detail significant changes in the entity's state of affairs during the year; • state the entity's principal activities during the year and any significant changes in the nature of those activities; • detail any matter or circumstance that has arisen since the end of the year that has significantly affected, or may significantly affect, the entity's operations or state of affairs in future financial years; • refer to likely developments in the entity's operations in future financial years and the expected results of those operations; and • if the entity's operations are subject to any particular and significant environmental regulation, detail the entity's performance in relation to environmental regulation. The directors' report for a listed public company must also include an operating and financial review of the company containing the information that the members of the company would reasonably require to make an informed assessment of its operations, financial position, business strategies and future prospects: s 299A, Corporations Act. The directors must make their
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[15.190]
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own analysis of the company's business and decide what information should be disclosed to members in the review. This requirement is seen as an integral part of good corporate governance and high quality financial reporting. Specific information – s 300 .......................................................................................................................................................................
The directors' report must also include details of (s 300, Corporations Act): [15.200]
• dividends or distributions: • paid to members during the year; and • recommended or declared for payment to members, but not paid, during the year; and • the name of each person who has been a director of the company during or since the end of the year and the period for which they were a director; and • the name of each person who has been an officer of the company at any time during the year and was a partner in or director of an audit firm or audit company that was an auditor of the company at the time the audit was undertaken; and • any options granted over unissued shares during or since the end of the year to any of the directors or the five most highly remunerated officers of the company; and • any unissued shares or interests under option as at the day the report is made; and • any shares or interests issued during or since the end of the year as a result of the exercise of an option over unissued shares or interests; and • indemnities given and insurance premiums paid for a person who is or has been an officer or auditor. This information does not have to be included in the directors' report if it has been already been included in the company's financial report for the same financial year: s 300(2), Corporations Act. Additional “specific” information .......................................................................................................................................................................
Additional specific information must be provided by listed and unlisted public companies and listed and unlisted registered schemes. Only the additional obligations of listed and unlisted public companies are outlined here. [15.210]
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Public companies – s 300(10)
The directors' report for all listed and unlisted public companies (unless they are wholly owned subsidiaries of another company) must detail (s 300(10), Corporations Act): [15.220]
• each director's qualifications, experience and special responsibilities; • the number of board meetings held during the year and each director's attendance at those meetings; • the number of meetings by board committees held during the year and each director's attendance at those meetings; and • the qualifications and experience of each person who is a company secretary at the end of the year.
[15.230] Directors of listed companies have additional reporting and disclosure obligations under ss 300A and 300(11) – (11E) of the Corporations Act as well as under AASB: Director and Executive Disclosures by Disclosing Entities. These obligations ensure shareholders are given the necessary information about auditor independence, the provision of non-audit services by the auditor and directors' and officers' remuneration to enable them to exercise their rights in a general meeting in an active and informed manner: see Chapter 10. The obligation to disclose information about directors' and officers' remuneration includes directors and group executives of companies in a corporate group which lodges consolidated financial statements: s 300A(1)(c), Corporations Act.
SECTION 300A(1) (ABRIDGED) ANNUAL DIRECTORS’ REPORT – SPECIFIC INFORMATION TO BE PROVIDED BY LISTED COMPANIES The directors’ report for a financial year for a company must also include (in a separate and clearly identified section of the report): (a)
discussion of [board policy for determining, in relation to, the nature and amount (or value, as appropriate) of remuneration of the key management personnel for]: (i) the company[, if consolidated financial statements are not required; or] (ii)
[the consolidated entity, if consolidated financial statements are required; and]
(b)
discussion of the relationship between such policy and the company’s performance; and
(ba)
if an element of the remuneration of a [member of key management personnel for the company, or if consolidated financial statements
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Listed companies
482
(c)
CORPORATIONS LAW: IN PRINCIPLE
are required, for the consolidated entity]is dependent on the satisfaction of a performance condition: [detailed requirements in sub-paragraphs (i)-(iv) not extracted] the prescribed details in relation to the remuneration of: (i) if consolidated financial statements are required – each member of the key management personnel for the consolidated entity; and (ii)
if consolidated financial statements are not required – each member of the key management personnel for the company.
[detailed requirements in paragraphs (d)-(h) not extracted].
As well, s 300(11) of the Corporations Act requires the report to include details of directors' interests in: • the company's shares or shares of a related body corporate; • debentures or a registered scheme made available by the company or a related body corporate; • options over shares, debentures or interests in a registered scheme made available by the company or a related body corporate; • contracts: – to which the director is a party or under which the director is entitled to a benefit; and – that confer a right to call for or deliver shares, debentures or interests in a registered scheme made available by the company or a related body corporate; • all directorships of other listed companies held at any time in the preceding three years and the period for which each directorship has been held. Note: Directors must also disclose interests of these kinds as they are acquired to a relevant market operator (eg the ASX) under s 205G of the Corporations Act: see Chapter 6. Half-year directors’ reports .......................................................................................................................................................................
A disclosing entity must also prepare a half-year directors' report: see [15.110]. A half-year report must include: [15.240]
• a review of the entity's operations during the half-year and the results of those operations; • the name of each person who has been a director of the entity during that period and the length of time served as a director; • a copy of the auditor's independence declaration in relation to any audit or review of the financial report for the half-year;
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• if the financial report includes any information necessary to give a true and fair view of the company's performance, the directors' reasons for deciding it was necessary to include that information: s 306, Corporations Act. The report must be made in accordance with a resolution of the directors, dated and signed by a director: s 306(3), Corporations Act.
Reporting to members Basic obligation ....................................................................................................................................................................... [15.250] A company, registered scheme or disclosing entity that is required to prepare annual (and half-yearly) financial and directors' reports (see [15.100]) must also “report” to its members on an annual (and half-yearly) basis: s 314, Corporations Act. The reporting takes place by sending members (in hard copy or if the member has elected to receive in electronic form) either:
• a copy of the financial, directors' and auditor's reports for the reporting period; or
• a concise financial report in accordance with accounting standards; • the directors' report; • a statement by the auditor that the financial report has been audited and, in the auditor's opinion, the concise financial report complies with accounting standards; and • a copy of any qualification or statements included in the auditor's report on the financial report. The report must state that it is a concise report and that the full financial and auditor's reports will be sent to the member free of charge if the member asks for them: s 316(2)(e), Corporations Act. Members can make requests ....................................................................................................................................................................... [15.260] Under s 314 of the Corporations Act, the company has a choice whether to send its members a full or concise financial report. The advantage of a concise financial report from the company's viewpoint is the cost savings. However, a member who is unhappy about the amount of information provided can request that the company either:
• not send any material to her or him; or
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• a “concise” report: A concise report for the purposes of s 314(2) of the Corporations Act consists of:
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• send the member a full financial report, directors' report and auditors' report: s 316, Corporations Act. Deadlines .......................................................................................................................................................................
Section 315 of the Corporations Act prescribes deadlines for reporting to members. By default, they serve as deadlines for the preparation of the financial and directors' reports. The deadlines vary according to the type of company. They are summarised in the following table. [15.270]
[15.280] TABLE 15.2 Reporting deadlines Type of Company Unlisted public company
Section s 315(1)
Reporting Deadline The earlier of: • 21 days before the next AGM after the end of the financial year
• Listed company – Disclosing entity
s 295HA s 319(3)(a)
The earlier of: • 28 days before the AGM
• Small proprietary company (pursuant to s 315(2) direction by members – s 293)
three months after the end of the financial year
The later of: • two months after direction made
• Proprietary company (other than a disclosing entity and small proprietary companies as above) Registered schemes
four months after the end of the financial year
four months after the end of the financial year
s 315(4)
Within four months after the end of the financial year
s 315(3)
Within three months after the end of the financial year
All public companies, except companies with only one member, are required to hold an annual general meeting (AGM): s 250N, Corporations Act, see Chapter 10. The directors must lay before each AGM the financial, directors' and auditor's reports for the last financial year ending before the AGM: s 317, Corporations Act.
Reporting to ASIC Outline ....................................................................................................................................................................... [15.290]
ASIC by:
A company, registered scheme or disclosing entity must report to
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• lodging its financial, directors' and auditor's reports; • paying the annual review fee and notifying ASIC of any changes to the company's details as shown in the Extract of Particulars (see [15.310]); • notifying ASIC of any changes, such as changes to: – its registered office (s 142, Corporations Act); – its principal place of business (s 146, Corporations Act); – directors and secretaries (ss 201L, 205B, Corporations Act); and – notifying ASIC of any share issues (s 254X, Corporations Act) or share cancellations: s 254Y, Corporations Act. Disclosing entities also have “continuous disclosure” obligations: see [15.330]. Duty to lodge reports .......................................................................................................................................................................
A company, registered scheme or disclosing entity required to prepare or obtain financial, directors' and/or auditor's reports must lodge those report(s) with ASIC: s 319, Corporations Act. Disclosing entities must also lodge half-yearly reports: s 320, Corporations Act. A small proprietary company that is directed to prepare reports by its shareholders or ASIC (see [15.120]) is not required to lodge the reports with ASIC: s 319(2), Corporations Act. Large proprietary companies are normally required to lodge their reports with ASIC unless the company is not a disclosing entity and is a company that, before 1993, was classified as an exempt proprietary company (see s 319(4), Corporations Act) or has been given relief from audit requirements under ASIC Regulatory Guide 115: “Audit Relief for Proprietary Companies” and ASIC Class Order 98/1417: “Audit Relief for Proprietary Companies”. Annual statement/extract of particulars .......................................................................................................................................................................
A single multi-purpose form (Form 484 “Change to Company Details”) is used to notify ASIC of changes to company details. ASIC now sends every company an Annual Statement, which includes an Extract of Particulars setting out the company details as recorded on the Register, within two weeks of the company's review date (usually the anniversary of the company's registration, see s 345A of the Corporations Act) together with an invoice for payment of the company's annual review fee: s 346A, Corporations Act. If there are no changes to, or errors in, these details, all the company has to do is pay the annual fee (as at July 2016 the review fee was $1,161 for a public company and $246 for a proprietary company). The [15.310]
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[15.300]
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company's obligation is to notify ASIC of certain basic changes required by the Corporations Act but if there are no such changes, it will not need to lodge any paperwork at all. Solvency resolution .......................................................................................................................................................................
Unless a company has lodged a financial report and directors' report with ASIC within the previous 12 months, the directors are required to pass a solvency resolution stating whether, in their opinion, there were reasonable grounds to believe that the company would be able to pay its debts as and when they became due, within two months after each review date: s 347A, Corporations Act. If the directors resolve that the company is solvent there is no obligation to notify ASIC but if the directors do not pass a resolution at all or if they resolve that the company is not solvent, they must notify ASIC: s 347B, Corporations Act. Most companies, other than small proprietary companies, will not have to pass a solvency resolution because this is not required if a company has lodged a financial report with ASIC in the previous 12 months. [15.320]
Continuous disclosure obligations .......................................................................................................................................................................
Disclosing entities are also required to disclose material information on a continuous basis under ss 674 and 675 of the Corporations Act. The requirements depend on whether the disclosing entity is listed or unlisted. A disclosing entity is a listed disclosing entity if all or any of its ED securities (see [15.50]) are quoted on the ASX. All other disclosing entities are unlisted disclosing entities. For unlisted disclosing entities, disclosure is by lodgment of relevant documents with ASIC. Listed disclosing entities must also lodge information with the ASX as required by the ASX Listing Rules. [15.330]
Reporting to the ASX General disclosure ....................................................................................................................................................................... [15.340] The ASX Listing Rules contain several rules which require listed bodies to disclose matters to the market to ensure that it operates on a fully informed basis. In some instances, immediate disclosure is required. Listing Rule 3.1 requires a body to tell the ASX immediately of any “price-sensitive” information, that is, information which would have a material effect on the price or value of the body's securities. Listing Rule 3.1B extends this
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obligation to require a listed body to respond to comments or speculation in the media which the ASX thinks might create a false market in the body's securities. Listing Rule 3.1A sets out the circumstances in which information does not have to be disclosed: see [22.280]. Section 674 of the Corporations Act – continuous disclosure – applies to listed disclosing entities and reinforces the disclosure requirements in the ASX Listing Rules: s 674(1), Corporations Act. There is civil liability for contraventions of the continuous disclosure regime for persons involved in a contravention as well as the listed disclosing entity: s 674(2A), Corporations Act. ASIC has power to issue infringement notices imposing “on the spot” financial penalties for less serious contraventions of the continuous disclosure regime: s 1317DAC, Corporations Act; see [22.290]. A contravention of s 674(2) of the Corporations Act may attract:
• a financial penalty following the issue of an infringement notice by ASIC in respect of less serious contraventions. (See ASIC Regulatory Guide 73 (June 2013) which notes: “The issue of an infringement notice, and subsequent satisfaction of it, is not an admission of liability, nor does it represent a finding that the Corporations Act has been breached. It simply signals our view of the alleged conduct and provides a manner in which the issue may be dealt with, without engaging in lengthy and expensive court proceedings”); and • criminal consequences: s 1311 (200 penalty units or imprisonment for 5 years or both). Disclosure of information filed overseas ....................................................................................................................................................................... [15.350] Section 323DA of the Corporations Act requires listed companies that disclose information to:
• the Securities and Exchange Commission (the US equivalent of ASIC); or • the New York Stock Exchange; or • a market operator in another foreign country to disclose that information to the ASX or a relevant market operator on the next business day after making the disclosure overseas: see also [15.250].
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• civil penalty consequences under Pt 9.4B for both the listed body and any other persons, such as directors, who were involved in the contravention (see [11.200]);
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Breach of the requirements in Chapter 2M [15.360] Section 344 of the Corporations Act requires a director to take all reasonable steps to comply with or secure compliance with the requirements in Pt 2M.2 (keeping financial records) and Pt 2M.3 (financial reporting) of the Corporations Act. Section 344(1) of the Corporations Act is a civil penalty provision, contravention of which attracts the civil penalties in Pt 9.4B of the Corporations Act: see [11.200]. In Van Reesema v Flavel (1992) 10 ACLC 291 the court held that the minimum financial records to be kept were a general ledger and general journal. Source documents were insufficient. In ASC v Fairlie (1993) 11 ACLC 669, the court said that where the company's financial records were in chaos, the director could not avoid liability merely by employing adequately trained staff and retaining appropriate professional advice. Directors must ensure that employees are competent and that procedures are adequate to maintain an accounting system. Other sections which impose criminal liability are ss 1308 and 1309 of the Corporations Act, relating to false or misleading information.
Relief from compliance [15.370] Under s 340 of the Corporations Act, ASIC has power to relieve directors, companies and auditors from compliance with the requirements in Pt 2M.2 (keeping financial records) and Pt 2M.3 of the Corporations Act (financial reporting). Before granting this relief, ASIC must be satisfied that complying with the statutory requirements would:
• make the financial report or other reports misleading; or • be inappropriate in the circumstances; or • impose unreasonable burdens: see Incat Australia Pty Ltd v ASIC (2000) 33 ACSR 462; Re SRKKK and ASIC (2002) 42 ACSR 551; and • not be retrospective: see Re SAQ and ASIC (2005) 55 ACSR 243. ASIC has the power to issue class orders providing relief from compliance to particular categories of company: s 341, Corporations Act. ASIC Regulatory Guide 43: “Financial Reports and Audit Relief” sets out the circumstances under which ASIC will consider exercising its discretion to provide relief and on what grounds. If a company fits one of the specified categories, the company or its directors and auditors automatically qualify for concessions and need not apply individually for relief under s 340 of the Corporations Act.
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Audit provisions Purpose .......................................................................................................................................................................
The purpose of the audit provisions is to provide members with an independent assessment of the company's financial position and to ensure compliance with the external reporting requirements. Corporate collapses such as Enron in the United States and HIH Insurance in Australia highlighted the need for legislative reforms to ensure the independence of auditors and to improve the regulation of the auditing profession. Following the recommendations made by the Ramsay Report and the Report of the HIH Royal Commission (see [1.140]), the CLERP 9 Act in 2004 made significant changes to the former provisions regulating the appointment, qualifications and independence of auditors. In June 2012 the Corporations Act was amended and certain auditors are now required to provide an Annual Transparency Report to ASIC (see Pt 2M.4A, Corporations Act). At the same time ASIC was given the power to publish audit deficiency reports if an auditor, audit firm or audit company does not take appropriate action to remedy a failure to comply with relevant auditing standards, codes of conduct, or requirements that have been identified. ASIC was granted power to communicate its concerns directly with the affected audit clients (see ss 50A – 50E, 127(2C), Australian Securities and Investments Commission Act 2001 (Cth)). Appointment of an auditor ....................................................................................................................................................................... [15.390] Public companies are required to appoint an auditor within one month of registration. This auditor will hold office until the company's first annual general meeting, at which the company must appoint an auditor: s 327A, Corporations Act. From 2015, small companies that are limited by guarantee which don't require the appointment of an auditor or which elect to have their financial reports reviewed are not required to appoint an auditor: ss 327A(1A) and 327B(1A), Corporations Act. The directors of a proprietary company have a discretion to appoint an auditor where no auditor is appointed by the company in a general meeting: s 325, Corporations Act. A small proprietary company is only required to appoint an auditor if either shareholders with at least 5% of the votes or ASIC have directed the company to prepare an audited financial report: ss 293 – 294, Corporations Act. Small proprietary companies that are foreign corporate controlled companies however are required to appoint an auditor: s 292(2), Corporations Act.
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[15.380]
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A person must consent in writing before being appointed as auditor: s 328A, Corporations Act. Qualifications of an auditor ....................................................................................................................................................................... [15.400] Only registered company auditors can be appointed as, or act as, auditor of a company. The CLERP 9 Act introduced more stringent requirements for the qualification and registration of company auditors. Since 2004 individuals, a partnership firm or a company can be registered as a company auditor: ss 1299A – 1299B, 324AA, Corporations Act. To be eligible to apply to ASIC for registration as a company auditor, individual applicants must comply with the educational requirements in s 1280 of the Corporations Act. Similar requirements apply to the directors of a company applying for registration as an authorised audit company: ss 1299A – 1299B, Corporations Act.
Auditor independence ....................................................................................................................................................................... [15.410] A number of measures exist that ensure that auditor independence is addressed and include the following: Listed Companies:
• Consultancy income must be disclosed in the annual reports together with a mandatory statement which notes that directors are satisfied that the provision of consultancy or non audit services are comparable with auditor independence: ss 300(11B) and 300(11D), Corporations Act; • Mandatory rotation of individuals (not the audit firm), who have a significant role in the audit of a listed company, usually after five years: s 324DA, Corporations Act; • Auditors must attend the AGMs and respond to members questions: s 250RA, Corporations Act; All companies (but not including small proprietary companies): • restrictions on specific employment and financial relationships between auditors and their clients: ss 324CI and 324CJ, Corporations Act; All companies: • oversight of the auditor independence requirements and the making of an annual declaration of independence: s 307C(1), Corporations Act. As part of its Strategic Plan for 2013 – 2016, the Australian Governments “Financial Reporting Council's” key objective is to be an external advisor to the Australian Government on the financial reporting system. As part of its functions, it aims to provide broad oversight of the processes for setting accounting and auditing standards for the public and private sectors and to
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provide strategic advice on the quality of audits conducted by Australian auditors. See Australian Government, Financial Reporting Council: Strategic Plan 2013-2106 (http://www.frc.gov.au/about_the_frc/strategic-plans/ strategic-plan-2013-16). Other functions include: • To develop governance standards; • Advise accounting professional bodes on auditor independence; • Monitor and report on companies compliance with audit related disclosure requirements; • Monitor and assess the application of disciplinary sanctions imposed by accounting bodies. Tenure of appointment .......................................................................................................................................................................
An auditor holds office after being appointed following the first annual general meeting until: [15.420]
• death;
• resignation (except in the case of proprietary companies, an auditor may only resign with the consent of ASIC: s 329(5), Corporations Act); • in public companies the capability of acting ceases (ss 327B(2), (2A) – (2C), Corporations Act); or • winding up. Auditing rotation ....................................................................................................................................................................... [15.430] There are rotation rules that apply for listed companies. These rules are intended to assist in maintaining auditor independence and to avoid over-familiarity, which may lead to that independence being compromised: ss 324DA – 324DD, Corporations Act. For example, lead and review auditors (those in charge of the audit) who have conducted audits on a company will be rotated off that audit engagement every five years, and cannot assume responsibility for that particular audit client for a further two years. Directors may extend the auditor rotation period by up to two more years providing auditor independence and audit quality is maintained: ss 324DAA, 324DAB, Corporations Act.
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• removal by the members in general meeting under s 329(1) of the Corporations Act;
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Auditors’ duties Auditors owe duties under the Corporations Act (“statutory duties”) and under the general law.
[15.440]
Statutory duties .......................................................................................................................................................................
The auditor has several duties under ss 307 – 313 of the Corporations Act. They include: [15.450]
• forming an opinion about whether the financial report is in accordance with the requirements in ss 296 or 304 (compliance with accounting standards) and ss 297 or 305 of the Corporations Act (true and fair view) (s 307, Corporations Act); • reporting to members on whether the annual (and half-yearly) financial report is in accordance with the requirements in ss 295 – 297 and 303 of the Corporations Act (ss 308 and 309, Corporations Act); • if auditing a listed company, attending the annual general meeting at which the auditor's report is to be considered and providing answers to written questions (ss 250RA and 250PA, Corporations Act); • complying with the auditing standards (s 307A, Corporations Act); • reporting to the trustee for debenture-holders where the company is a borrower or guarantor (s 313(2), Corporations Act); and • being a public watchdog for ASIC regarding suspected contraventions of the Corporations Act: s 311, Corporations Act. Report to members .......................................................................................................................................................................
The auditor must report to members on whether the company's financial reports: [15.460]
• comply with accounting standards; and • give a true and fair view of the company's financial position and performance during the year: s 308(1), Corporations Act. If, in the auditor's opinion, the financial statements are not drawn up in accordance with a particular applicable accounting standard, the report must give particulars of the financial effect of the non-compliance: s 308(2), Corporations Act.
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Reporting to ASIC .......................................................................................................................................................................
The auditor has a duty to inform ASIC of certain matters. The auditor must notify ASIC in writing as soon as practicable, and in any case within 28 days, after becoming aware of circumstances: [15.470]
• where the auditor has reasonable grounds to suspect a significant contravention of the Corporations Act; or • that amount to an attempt to unduly influence, coerce, manipulate or mislead a person involved in the conduct of the audit, or to otherwise interfere with the conduct of the audit: s 311, Corporations Act. The auditor's duty to report arises where the auditor believes that a contravention is significant (see s 311(4), Corporations Act) or is one that has not been or will not be adequately dealt with by commenting on it in the auditor's report or bringing it to the attention of the directors. ASIC Regulatory Guide 34: “Auditor's Obligations: Reporting to ASIC” indicates that ASIC expects auditors to be vigilant in detecting and reporting contraventions of the Corporations Act. Examples of reportable breaches include: • clear breaches of directors' duties – for example, any dishonesty (see Chapters 11, 12 and 13); • failing to keep proper records; and • giving a prohibited financial benefit to a related party: see Chapter 13. Criminal liability ....................................................................................................................................................................... [15.480] Auditors can be liable under ss 1308 and 1309 of the Corporations Act for false or misleading statements.
General law duties of auditors .......................................................................................................................................................................
The auditor also has duties towards the company and towards other people under the general law. [15.490]
Duties to the company [15.500] Auditors have a duty to use reasonable care and skill. They can be liable for breach of that duty:
• under the contract between the auditor and the company to perform the audit; and/or
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• issuing shares at a discount;
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• under the law of tort because the relationship of auditor and client gives rise to a duty of care towards the client. This does not mean that auditors guarantee the correctness of the accounts. It just means they must use reasonable care and skill when reviewing the accounts: see Re Kingston Cotton Mill Co (No 2) [1896] 2 Ch 279. Auditors are under a duty to do more than just mechanically check vouchers and arithmetic, and wait until their suspicions are aroused. It has been said that the duty of an auditor is verification. For verification the auditor must be aware of the possibility that the records may not be true. Therefore, before relying on records, the company's system of internal control should be checked. In Pacific Acceptance Corp Ltd v Forsyth (1970) 92 WN (NSW) 29, the auditors failed to discover fraud relating to mortgages and were sued for negligence. The auditors' defence was that they were justified in relying upon the outside solicitors to ensure the mortgages were properly executed and registered. The court rejected this argument, however, saying that the auditors had failed to check the internal control system before relying on it: see also Arthur Young & Co v WA Chip & Pulp Co Pty Ltd [1989] WAR 100; Cambridge Credit Corp Ltd v Hutcheson (1985) 3 ACLC 263; Segenhoe Ltd v Akins (1990) 29 NSWLR 569; and Daniels v Anderson (1995) 37 NSWLR 438. Duties to outsiders
Can auditors have a duty to people other than the company? The answer is yes, because auditors have a duty in tort as well as in contract. Where, for example, an auditor has made a negligent misstatement on which an investor relies, the investor can bring an action in tort: see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465; and Scott Group Ltd v McFarlane [1978] 1 NZLR 553. The crucial issue is proximity. The High Court considered this issue in relation to reliance on an auditors' report by a financier in Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241.
[15.510]
Esanda Finance v Peat Marwick Hungerfords [15.520] Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 (High Court of Australia) FACTS: Esanda (E) was a finance company who lent money to another finance company, Excel Finance Ltd. Peat Marwick Hungerfords (PMH) were the auditors who certified Excel’s financial accounts. E alleged that PMH was negligent in carrying out their duties and that by relying on the accounts, E suffered loss. DECISION: The High Court dismissed E’s appeal because E could not establish the required element of proximity. Brennan CJ held (at 252) that before a plaintiff can recover against an auditor, it is necessary to show:
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cont. • the auditor knew or ought reasonably to have known that the information or advice – for example, the auditor’s report, would be communicated to the plaintiff: • either personally; or • as a member of a identifiable class of people to whom the information would be communicated – for example, investors in a share issue; • the information or advice would be communicated for a purpose that would (very likely) lead to the plaintiff entering into a transaction of the kind that it did in fact enter into; and • it would be very likely that the plaintiff would enter into such a transaction relying on the information or advice provided. This would expose it to the risk of economic loss if the information was untrue or the advice given was unsound. E’s appeal was unsuccessful because the High Court found that E could not establish the elements listed above.
Auditors should also be aware of the scope of item 18 of Sch 2 of the Competition and Consumer Act 2010 (Cth), which catches misleading and deceptive conduct. No intention to mislead or deceive is required and the Competition and Consumer Act provides plaintiffs with a wide range of remedies. Since 2004 there has been a system of proportionate liability for auditors for economic loss or damage to property caused by misleading or deceptive conduct so that a defendant's liability will be limited to an amount reflecting that part of the damage that the court considers just, having regard to the extent of the defendant's responsibility. These changes apply to the Corporations Act, the Australian Securities and Investments Commission Act 2001 (Cth) and the Competition and Consumer Act, and are intended to alleviate the difficulties that auditors and other professionals have faced in recent years when attempting to obtain professional indemnity insurance.
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/ for multiple choice questions and answers on the Topic of Financial Reports and Audit.)
Practice Questions ...................................................................................................................................... 1.
When does a small proprietary company have to prepare financial reports? Must they be in accordance with accounting standards? Must they be audited?
2.
Describe in broad terms what must be disclosed by directors in a directors' report for a publicly listed company.
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[15.530]
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3.
In your opinion, are the disclosure obligations in directors' reports for publicly listed companies too onerous?
4.
What obligations does an auditor have to: – the members of a company? – ASIC?
5.
In what circumstances can ASIC relieve directors, companies and auditors from compliance with their obligations under Ch 2M of the Corporations Act?
6.
Who can qualify to be an auditor under the present Corporations Act?
Problems for Discussion ...................................................................................................................................... 1.
Sucker Ltd (Sucker) is a finance company. It provides “retail” finance for the purchase of cars and houses. Big Boys Finance Ltd (BBF) is a large finance company which lends money to small finance companies, including Sucker, to run their businesses. BBF has lent $15 million to Sucker in the last year. Prior to approving that loan, BBF read the auditors' reports on Sucker for the last three years. The reports were unqualified [suggesting the auditor was satisfied in all material respects with the company's financial report and compliance to accounting standards and the Corporations Act]. The auditors have known about defects in the company's records and internal controls, relating to its lending practices, for the last three years. Management has been told of these deficiencies but the auditors are aware that no action has been taken by the board. Recently, the auditors wrote to the board suggesting improvements to Sucker's internal procedures but did not expressly refer to the issue of lending practices nor indicate that remedial action was urgently necessary. About six months later, it is discovered that Sucker has lost large sums through poor loans to defaulting customers. The employees responsible for approving loans had not been adequately supervised. Sucker goes into liquidation. Although BBF is a secured creditor of Sucker, there is no prospect of BBF recovering the outstanding $15 million. Should the auditors be liable for all or some of BBF's losses? Discuss.
2.
Susan is considering investing in CMW Ltd (CMW). She obtains a copy of CMW's last annual report which contains unqualified financial statements. After reading the annual report carefully she decides, on the basis of the figures shown in the report, to invest in CMW. Shortly afterwards, it is disclosed that the auditor's negligence resulted in the company's profits being seriously overstated in the annual report.
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Immediately afterwards, CMW's share price plummets to less than half what Susan paid for them. If Susan had known the true figures she would not have invested in CMW at all. Advise Susan whether she has any prospect of successfully suing the auditor for her loss.
Guide to Problem Solving ...................................................................................................................................... 1.
Which duty or duties of an auditor are relevant in these circumstances?
2.
What is the extent of these duties? What is the relationship, if any, between the auditor and the claimant and is there any contractual basis on which the auditor could be considered to owe a duty to the claimant?
3.
If there is no contractual duty, does the auditor owe a duty in tort in these circumstances? Explain the requirements laid down by the High Court in Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 at 284. Does the required element of proximity exist?
4.
If so, has the auditor breached this duty? Did the auditor do enough to bring the issue to the attention of the company's management? Refer to the comments in Daniels v Anderson (1995) 37 NSWLR 438: see Chapter 11.
Further Reading ...................................................................................................................................... Golding G and Kalfus N “The Continuous Evolution of Australia's Continuous Disclosure Laws” (2004) 22 C&SLJ 385 Lakidis E “The Auditor as Gatekeeper for the Investing Public: Auditor Independence and the CLERP Reforms – A Comparative Analysis” (2005) 23 C&SLJ 416 Lipton P Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Chs 15 and 16 Lumsden A “Audit Committee Membership and its Consequences” (2002) 20 C&SLJ 340 Overell M, Chapple L and Clarkson P “Environmental Reporting in the Australian Mining Industry: Complying with Regulation or Meeting International Best Practice?” (2008) 36 ABLR 137 Ramsay I Independence of Australian Company Auditors, Review of Current Australian Requirements and Proposals for Reform Report to the Minister for Financial Services and Regulation, October 2001 (the Ramsay Report)
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Welsh M “Enforcing Contraventions of the Continuous Disclosure Provisions: Civil or Administrative Penalties” (2007) 25 C&SLJ 315
CHAPTER 16 .......................................................................................................
Share Capital – General Nature Useful Websites ..................................................................... 499 Aim ......................................................................................... 500 Related Topics ....................................................................... 500 Principles ............................................................................... 500 Introduction ............................................................................... 500 Legal nature of a share .................................................................. 501 Types of shares ........................................................................... 502 Specification of share capital .......................................................... 502 Circumstances in which companies issue shares ................................. 503 Issue of shares to the public ........................................................... 504 Share capital .............................................................................. 506 Valuation of shares ...................................................................... 507 Issue price ................................................................................. 508 Partly paid shares ........................................................................ 508 Issue for consideration other than cash ............................................. 509 Restrictions on share issues ........................................................... 509
Mentor: Test your Knowledge ............................................... 512 Practice Questions ................................................................. 512 Essay Question ...................................................................... 513 Problems for Discussion ........................................................ 513 Guide to Problem Solving ...................................................... 514 Further Reading ..................................................................... 515
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Share Capital – General Nature.)
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Share options, rights issues and dividend reinvestment plans ................. 511
500
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Aim ...................................................................................................................................... At the end of this topic you should understand: • what is a company's “share capital”; and • the legal requirements and procedures applying to the allotment and issue of shares.
Related Topics ...................................................................................................................................... Chapter 5 Internal Rules; Chapter 9 Membership; Chapter 14 Members' Rights and Remedies; Chapter 17 Classes of Shares; Chapter 21 Fundraising
PRINCIPLES Introduction In general terms, the capital of a company is made up of equity and debt. The ratio of debt to equity is called gearing. Equity is the amount available to members of the company after all liabilities have been paid. A company limited by shares obtains equity by the issue of shares in return for contributions of capital from the members. A company has the power to issue its own shares: s 124(1)(a) of the Corporations Act 2001 (Cth) (Corporations Act). Debt is capital obtained by borrowing money privately (for example, from a bank) or publicly (for example, from members of the public in return for debentures in the company). The circumstances in which companies issue shares are regulated by Ch 2H (ss 254A – 254Y) of the Corporations Act (“the share capital rules”).
[16.10]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
The CATSI Act does not have similar provisions in relations to shares as the Corporations Act 2001 (Cth). This is because members of an Aboriginal and Torres Strait Islander corporation cannot own or trade shares in their corporation. However, such a corporation may hold shares in a body corporate that does have shares (see Division 689—Subsidiaries and control).
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501
Legal nature of a share Property rights ....................................................................................................................................................................... [16.20] A share is an item of personal property, separate from the company's property: s 1070A, Corporations Act. As property, shares attract the rights and benefits provided by the principles of property law. They also attract rights and benefits under a company's internal rules, the Corporations Act and the general law. Shares are considered to be property capable of being transferred, inherited, disposed and used as security or collateral. Ordinarily, shares also provide members with a bundle of property rights including:
1.
the right to vote (s 253C, Corporations Act);
2.
the right to receive notice and attend meetings (s 252G, Corporations Act); and
3.
the right to receive a dividend once declared by the board: s 254W, Corporations Act. In this sense, shares are often said to have the qualities of property similar to other forms of personal property. The proprietary nature inherent in shares was explored by the High Court of Australia in the landmark case of Gambotto v WCP Ltd (1995) 182 CLR 432. The High Court in Gambotto was of the view that shares provided members with valuable proprietary rights that could not be expropriated unfairly. Property rights and securities lending In a decision handed down by the Federal Court in Beconwood Securities Pty Ltd v ANZ Banking Group [2008] FCA 594 the court examined the proprietary rights attached to shares.
[16.30]
Beconwood Securities v ANZ Banking Group [16.35] Beconwood Securities Pty Ltd v ANZ Banking Group [2008] FCA 594 (Federal Court of Australia) FACTS: A dispute arose between the ANZ Bank exercising its rights as a secured creditor and shareholders in Opes Prime Stockbroking Ltd (OPS). OPS collapsed in 2008 and the ANZ Bank exercised its rights over the assets of OPS, which included the shareholdings of a large number of clients belonging to OPS. Central to the issue were the property rights of shareholders who had purchased shares in a number of listed companies on the ASX and who had contracted with OPS as their designated broker. The relationship between the shareholders (Beconwood) and OPS was documented in an agreement entitled “Securities Lending and Borrowing Agreement.” Under the agreement, the ANZ Bank lent money to the clients
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.......................................................................................................................................................................
502
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cont. of OPS to purchase shares in a number of listed companies on the ASX. One of the clients of OPS was the plaintiff, Beconwood. In return for the money that was advanced by ANZ Bank, Beconwood transferred legal ownership of its purchased shares to OPS. A dispute arose when OPS collapsed and the ANZ Bank exercised its rights as a secured creditor under the agreement. ANZ sought to enforce its rights under the agreement by disposing of a number of shares in a variety of listed companies held by OPS. Beconwood argued that it still retained a security interest, in the form of an equitable interest or an interest as a mortgagor, over the shares it had purchased through OPS. DECISION: Finkelstein J decided that the ANZ Bank could exercise its interests as a secured creditor and sell all of the shares purchased by OPS clients, including the shares purchased by Beconwood. According to his Honour, the Securities Lending and Borrowing Agreement entered into between OPS and Beconwood did not create a mortgage interest or an equitable interest in favour of Beconwood. Instead, the agreement caused Beconwood to transfer it property rights in the purchased shares to OPS. At the time OPS collapsed, the ANZ Bank could exercise its rights as a secured creditor over the assets of OPS, including all of the client shareholdings belonging to OPS.
Types of shares A company may issue different types of shares, referred to in the Corporations Act as “classes of shares”. Shares may differ as to the terms on which they are issued and the rights and restrictions attaching to them: s 254B, Corporations Act. The bulk of company shares are known as ordinary shares. The Corporations Act does not define “ordinary share”. Shares are said to be ordinary shares when no special rights or restrictions attach to them. Apart from ordinary shares, companies can also issue preference shares: s 254A(1)(b), Corporations Act. Preference shares have special rights attaching to them, usually the right to receive payment of dividends in priority to ordinary shares. [16.40]
Specification of share capital [16.50] At the time of registering a company, a company must lodge an application with ASIC which includes information on the initial share capital of the company.
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SECTION 117(2)(k) (2) The application must state the following: (a)-(j) … (k)
for a company limited by shares or an unlimited company – the following: (i) the number and class of shares each member agrees in writing to take up; (ii)
the amount (if any) each member agrees in writing to pay for each share;
(iia)
whether the shares each member agrees in writing to take up will be fully paid on registration;
(iii)
if that amount is not to be paid in full on registration – the amount (if any) each member agrees in writing to be unpaid on each share;
(iv)
whether or not the shares each member agrees in writing to take up will be beneficially owned by the member on registration;
Circumstances in which companies issue shares A company can either issue shares privately to certain people, or it may invite the public to subscribe for shares. An example of a private issue is a transaction by which a sole trader or partnership sells its business to a company in return for shares in the company: see Salomon v Salomon & Co Ltd [1897] AC 22. An example of a public issue is a floatation of shares by which a public company offers its shares to investors at large. Both public and private companies may also issue shares by: [16.60]
• a placement through a broker for subscription by particular investors, such as institutional investors; • a rights issue, such as when shares are offered by a company to existing shareholders on a pro-rata basis at an issue price lower than market value;
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The information required by s 117(2)(k) of the Corporations Act serves only as a historical record of the company's share capital at the time of its registration. It does not prevent the company from issuing additional shares to the initial members or to other people (individuals or other companies) who become members of the company after registration. New shares may be issued at the amount stated in the application or for different amounts. The only requirement is that the company notify ASIC of any subsequent share issues: s 254X, Corporations Act.
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• a bonus share issue whereby a company distributes profits to its shareholders in the form of shares. The company treats the profits as if the shareholders received them and then immediately gave them back to the company to pay for additional shares; or • a dividend reinvestment scheme under which shareholders forgo payment of dividends in return for new shares issued to them, usually at a discount to market value.
Issue of shares to the public Disclosure requirements .......................................................................................................................................................................
Issues to the public must, at present, be undertaken by way of a prospectus or other disclosure document released by the company and must generally comply with the requirements contained in Ch 6D of the Corporations Act. Significant changes were made to fundraising requirements by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act), the Financial Services Reform Act 2001 (Cth) and the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) (CLERP 9 Act). As discussed in Chapter 21, fundraising disclosure under Ch 6D of the Corporations Act is required for an issue of securities to retail investors: ss 704, 706 and 708(8), Corporations Act. Content for the disclosure document/ prospectus is determined by a general disclosure test under s 710. The main purpose for a disclosure document is to provide relevant information to investors so they have the ability to make an informed decision regarding the allocation of their investment dollars. At a minimum, the disclosure document must provide information to investors concerning the rights and liabilities attaching to the securities that are offered as well as relevant financial information, including balance sheets and profit and loss statements: s 710(1), Corporations Act. In addition, there are specific items warranting disclosure which are contained in s 711 of the Corporations Act. [16.70]
Application for shares .......................................................................................................................................................................
An application form must be attached to the prospectus or disclosure document. This is merely an “invitation” by the company for people to invest in it by purchasing its shares. An investor subscribes for shares by completing and lodging the form. The investor's application constitutes an offer which the company can reject or vary, for example, in the case where there is an over-subscription for the company's shares. The company issues shares to a successful applicant. [16.80]
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505
Issue of shares ....................................................................................................................................................................... [16.90]
At the time the shares are issued to a shareholder, the shareholder
receives: • a “holding statement”; and • a Securityholder Reference Number (SRN) as evidence that they been issued with (sometimes referred to as “allotted”) shares in the company. An applicant for shares does not become a member of the company until after the applicant's name is entered in the register of members: Maddocks v DJE Constructions Pty Ltd (1982) 148 CLR 104. Requirements before company issues shares ....................................................................................................................................................................... [16.100] If a public company offers shares or other securities and the offer requires a disclosure document, the company cannot issue (or, in some cases, transfer) any securities:
• unless the issue is in response to an application form that accompanied the disclosure document (s 723(1), Corporations Act);
• if the disclosure document stated or implied that the securities were to be quoted on the ASX or another securities exchange, unless an application for quotation is made with seven days of the date of the document or the securities are quoted within three months, the issue will be void and the money must be returned to the applicant(s) as soon as practicable: s 723(3), Corporations Act. Publicly listed companies must notify ASIC and the ASX of any share issues: s 254X, Corporations Act and ASX Listing Rule 3.10.5. [16.110] Figure 16.1: Public share issue timeline ....................................................................................................
Note: see also Chapters 9 and 21.
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• if the disclosure document included a minimum subscription condition (the minimum amount which, in the opinion of the directors, must be raised to get the company started), until that condition is satisfied (s 723(2), Corporations Act); and
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Improper issues ....................................................................................................................................................................... [16.120] Under s 254E of the Corporations Act, the court can validate an otherwise improper issue on the ground that it is just and equitable to do so: see Re Monitronix Ltd (1987) 5 ACLC 1063; Re The Swan Brewery Co Ltd (No 2) (1976) 3 ACLR 168; Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113; Moran v Moranco Enterprises Pty Ltd (1996) 14 ACLC 1669; Re Onslow Salt Pty Ltd (2003) 45 ACSR 322; and Re Salt Asia Holdings Pty Ltd (2004) 49 ACSR 38.
Celtic Capital Pty Ltd v Cityview Corporation Ltd [16.125] Celtic Capital Pty Ltd v Cityview Corporation Ltd [2010] WASC 357 (Supreme Court of Western Australia) The court considered s 254E in Celtic Capital Pty Ltd v Cityview Corporation Ltd [2010] WASC 357. FACTS: A prospectus was lodged with the ASX. Immediately following the lodgment, HSBC applied for 160,000,000 shares, fulfilling the minimum subscription. The shares were issued and allotted to HSBC on the same day and subsequently sold to the market. The following day, ASIC issued an interim stock order prohibiting the issue, sale or transfer of the securities under this prospectus. Two further orders were issued resulting in the shares not being quoted on the ASX within the time stipulated under ss 723(3), 724(1)(b) and 724(2) of the Corporations Law. DECISION: Despite HSBC having a right of return of the shares under s 724, the shares had been sold multiple times, making HSBC unable to return the shares. Under s 254E of the Corporations Law, the court may issue an order validating the purported issues of shares if the issue is “invalid” for any reason. Master Sanderson considered the previous case law on the issue to determine just how widely “invalid” for any reason should be interpreted. The court found that “invalid” should be read “widely” providing flexibility to the remedial provision (at [21]). Consistent with this approach is confirmation that the grant of validity can operate retrospectively (at [25]). The court made the orders validating the shares to HSBC as it was in the interests of justice and equity to do so.
Share capital Authorised/nominal capital ....................................................................................................................................................................... [16.130] In 1998, as part of its reforms of the Corporations Law, the Corporations Law Simplification Taskforce introduced changes to the way share capital was to be defined and managed. The Simplification Taskforce abolished the concept of “authorised capital” or “nominal share capital” because nominal capital became less commercially relevant as companies sought alternative sources of finance. Authorised capital also had little
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relevance to actual issued capital as a company was not required to issue shares up to its authorised capital limit. The Corporations Law was amended to remove the requirement that a limited liability company must include in their constitution a statement indicating the amount of their authorised share capital. Par value ....................................................................................................................................................................... [16.140] Shares represent a proportionate interest in the net assets of a business. Shares are prescribed a value (see “Valuation of shares” below) which may be based on an issue price, market value or by adopting some other valuation methodology, including net present value (NPV) or net asset backing. The use of a “par value” or nominated value was therefore considered by many in the business and investor community to have little or no commercial relevance. A nominated value has no intrinsic value and does not represent the true net worth of a company. In 1998 the Corporations Law Simplification Taskforce abolished the concept of “par value”. The amendments were incorporated in s 254C of the Corporations Act which now states that shares of a company have no par value.
Valuation of shares [16.150]
Shares may be valued in a number of ways including:
• by market value – the value the market (whether the ASX or the private market) places on the company and, in turn, on the company's shares. The market value may, over time, bear little or no relationship to the issue price of the shares; • by calculating the assets of the company, less liabilities, and dividing the balance by the number of shares on issue. This gives the “net asset backing” per share; or • by net present value – a valuation method which requires determining the discounted expected future cash flows of the company, less the initial amount that is outlaid. Expected future cash flows are discounted by a relevant reference rate which can be a general market interest rate or a specific industry interest rate. Once the expected future cash flows are discounted and the initial outlay is taken away a “net present value” is provided and can be used to determine the intrinsic value of the underlying security.
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• by the issue price – the amount determined by the company as payable for the shares at the time of issue by the company;
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Issue price There is no set method for calculating the issue price of shares. Companies use a variety of methods, including the net asset backing per share. The issue price may change over time to reflect changes in the company's economic fortunes. A company may issue ordinary shares at the price of $1.00 and six months later, issue more ordinary shares for: [16.160]
• a higher price, say $3.00 – if, for example, the market's perception of the company's value has increased; or • a lower price, say 50 cents – if the market's perception of the company's value has decreased. Shares issued at different issue prices (higher or lower) have the same market value and attract the same rights and benefits as shares previously issued by the company. The person buying shares at a later date simply pays more or less, depending on the company's economic circumstances, to get the same investment.
Partly paid shares Shares may be issued as fully paid or partly paid. Partly paid shares are shares issued on the condition that a shareholder does not have to pay the full issue price to the company at the time of issue (for example, issued at $2.00, but paid to $1.00). Note s 254M(1) of the Corporations Act:
[16.170]
SECTION 254M(1) Liability on partly paid-shares General rule about shareholder’s liability for calls (1)
If shares in a company are partly-paid, the shareholder is liable to pay calls on the shares in accordance with the terms on which the shares are on issue. This subsection does not apply to a no liability company.
Note: The shareholder may also be liable as a contributory under sections 514 – 529 if the company is wound up.
The terms on which partly paid shares are issued usually provide that: • the company can call on the shareholder during the life of the company to make further payments, known as “calls” and members are liable for these payments (except in the case of a no liability company; and • if the company is wound up, except in the case of a no liability company, the shareholder can be called on by the company's liquidator to contribute the unpaid balance owing on the holder's shares.
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509
Shareholders are also liable as “contributories” (s 9, Corporations Act, no liability companies are excluded from this definition) for the unpaid amounts if the company is wound up: ss 514 – 529, Corporations Act. However, if the issue price for the shares has been fully paid, the shareholders of a limited liability company cannot be called upon to pay any further calls: s 516, Corporations Act.
Issue for consideration other than cash [16.180] Companies may issue shares in exchange for assets. This is particularly common where a promoter forms a new company. The promoter takes shares in return for transferring his or her assets to the company (as occurred in Salomon v Salomon & Co Ltd [1897] AC 22: see [4.30]). The consideration other than cash, however, must be some consideration recognised under contract law. The courts are concerned that the consideration be adequate. This is not a requirement under normal contractual principles. Courts assess whether the consideration for an issue represents money's worth: see Re White Star Line [1938] 1 All ER 607. To reduce the risk of abuse occurring, it is sensible for directors/promoters to obtain an independent valuation of the assets being sold to the company. If personal valuations are relied on, directors risk personal liability for breaching their directors' duties: see Chapters 11, 12 and 13.
Restrictions on share issues General [16.190] Directors are entitled to issue any number of shares in a company without obtaining authorisation from the existing shareholders except in the following circumstances:
• where the company's internal rules limit the number of shares which the directors can issue without shareholder authorisation; • where the proposed share issue would have the effect of varying or cancelling the rights attaching to existing shares; or • where the company is a proprietary company governed by the replaceable rule in s 254D of the Corporations Act or a similar provision in its constitution, that gives existing shareholders a right of pre-emption. Limitation in internal rules ....................................................................................................................................................................... [16.200] A company may impose a ceiling on the total number of shares which the directors are authorised to issue without obtaining shareholder
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.......................................................................................................................................................................
510
CORPORATIONS LAW: IN PRINCIPLE
approval. The restriction should be set out in the company's constitution, along with any other restrictions concerning the exercise of company powers: s 125(1), Corporations Act. Where a company has an internal rule of this kind, it operates as follows: • the directors are free to issue shares without shareholder approval up until they reach the maximum limit; and • if they wish to issue shares beyond that limit, they must first seek the approval of existing shareholders. Varying or cancelling existing share rights .......................................................................................................................................................................
Directors must follow special procedures when issuing new shares which have the effect of varying or cancelling the rights attaching to existing shares in a company: ss 246B – 246G, Corporations Act. If a company has a constitution and the constitution provides the procedure for varying or cancelling class rights, the procedure must be applied: s 246B(1), Corporations Act. If there is no constitution or no provision within a company's constitution, a special resolution of members will ordinarily be required to vary or cancel class rights: s 246B(2), Corporations Act. If members in the class do not all agree to the variation of rights, there is provision in the Corporations Act for members who hold at least 10% of the votes in the class that is affected to apply to the court to have the variation set aside: s 246D, Corporations Act. A company intending to vary class rights must lodge with ASIC notice and any required resolutions: s 246F, Corporations Act. Members can request a copy of any relevant document along with any required resolution varying or cancelling class rights: s 246G, Corporations Act. The object of these provisions is to safeguard the interests of existing shareholders. [16.210]
Right of pre-emption .......................................................................................................................................................................
A right of pre-emption giving existing shareholders a right of “first refusal” to buy another member's shares is common in proprietary companies and provided for in the replaceable rule in s 254D of the Corporations Act. [16.220]
SECTION 254D Pre-emption for existing shareholders on issue of shares in proprietary company (replaceable rule – see section 135) (1)
Before issuing shares of a particular class, the directors of a proprietary company must offer them to the existing holders of shares of that class. As far as practicable, the number of shares
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511
offered to each shareholder must be in proportion to the number of shares of that class that they already hold. (2)
To make the offer, the directors must give the shareholders a statement setting out the terms of the offer, including: (a) the number of shares offered; and (b)
the period for which it will remain open.
(3)
The directors may issue any shares not taken up under the offer under subsection (1) as they see fit.
(4)
The company may by resolution passed at a general meeting authorise the directors to make a particular issue of shares without complying with subsection (1).
Section 254D of the Corporations Act is a replaceable rule. A company may, by ordinary resolution passed at a general meeting, authorise the directors to issue the shares without complying with these requirements: s 254D(4), Corporations Act.
Share options, rights issues and dividend reinvestment plans [16.230] Companies can increase their share capital in several other ways apart from making a new public issue (float) or making placements of shares to individuals.
Options [16.240] Companies may issue options which allow investors to take up more shares at a later date. Options may be issued at a price or they may be issued free to existing shareholders. There are two main types of options:
• call options: options to buy shares at a pre-determined price; and • put options: options to sell shares at a pre-determined price. The price for the option is pre-determined and is derived from the underlying share. A component of the option price includes time value or interest. Options that have a longer time value will have a higher value relative to a short-dated option. The options will specify a date up to which they can be exercised (or dates throughout the year on which they can be exercised). Companies will set the dates to suit their anticipated need for injections of capital. The price at which the options convert to shares will be stipulated or based on a calculation set out in the terms of the option. Option-holders compare the market price of the share with the cost of the option plus the exercise price, and decide whether they will gain on conversion. If the option-holder decides against exercising the option the option will lapse. An alternative for option-holders in listed companies is to sell the options in the
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.......................................................................................................................................................................
512
CORPORATIONS LAW: IN PRINCIPLE
market prior to the expiry date. Generally, options are regulated under Ch 7 of the Corporations Act since they ordinarily come within the definition of “derivative” under s 761D of the Corporations Act. However, there may be occasions when an option may be considered to be an issue of securities/shares and requires a disclosure document under Ch 6D of the Corporations Act, notwithstanding that an issue of options over securities/shares is not to be taken to be an offer of the underlying securities/shares: s 702, Corporations Act. Rights .......................................................................................................................................................................
Rights are similar to options but the time limit for exercising them is normally six months. Existing shareholders receive an entitlement to take up more shares at a stipulated price. Their entitlement is proportional to the number of shares they already hold – for example, one right for every four shares. Rights may be issued as renounceable or non-renounceable. Renounceable rights may be sold to others, but non-renounceable ones lapse if they are not taken up by those to whom they were issued. [16.250]
Dividend reinvestment plans .......................................................................................................................................................................
Dividend reinvestment plans are a mechanism used commonly by listed companies to build up equity (and also reduce cash outflows). Under the plans, shareholders opt to be issued more shares instead of receiving cash dividends. The amount they would have received goes to pay for the shares which are issued. [16.260]
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Share Capital – General Nature.)
Practice Questions ...................................................................................................................................... 1.
Give reasons why the issue price, market price and net asset backing of the same share may differ.
2.
The issued share capital of ABC Toys Pty Ltd is 1,000 shares which were issued for an issue price of $10.00 per share. At the end of the last financial year, the company's net assets were $80,000 and its liabilities were $30,000. What is the net asset backing per share?
CHAPTER
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513
3.
Briefly explain three ways in which companies may increase their share capital using existing shareholders.
4.
What special protection does the Corporations Act provide to existing shareholders of proprietary companies in respect of a new share issue?
Essay Question ...................................................................................................................................... “All loans provided to shareholders are the same. The loans provide shareholders with money to purchase more shares and the lenders are given security over the shareholder's portfolio.” Critically evaluate the above quote in light of the Federal Court decision in Beconwood Securities Pty Ltd v ANZ Banking Group [2008] FCA 594.
Problems for Discussion ...................................................................................................................................... Tangelo Computers Pty Ltd (Tangelo) was incorporated on 2 July 2007. It has share capital of $500,000, which represents 500,000 shares issued for the price of $1.00 per share. Of those shares, 430,000 have been fully paid and 70,000 paid to 50 cents. The majority shareholder and chief executive of the company is Valerie Valencia. In December 2015, Valerie Valencia's brother, Citrus, puts his small computer business up for sale. Tangelo is keen to secure the contract but cannot pay in cash. It is agreed that Citrus will be issued with 200,000 shares (with an issue price of $4.00) in return for his business. A shareholders' meeting takes place on 5 September 2015. A special resolution is passed which states that the directors must not issue any additional shares in the company without the approval of the shareholders at a general meeting of the company. In October 2015, Tangelo requires more capital to fund its expansion into Asian markets. The board of directors offers a fresh issue of 500,000 shares to its employees who are not presently shareholders of the company for an issue price of $2.00 per share. No shareholder meetings are held to discuss or ratify any of the above decisions. (a) Is the arrangement to purchase Citrus' business (by way of a share issue) legal? Why/why not? (b)
Comment on the legality of the board's decision to issue shares to Tangelo's employees.
(c)
If Tangelo went into liquidation with 50 cents still being owed on some shares, would the shareholders who took up those shares be liable as contributories?
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1.
514
2.
CORPORATIONS LAW: IN PRINCIPLE
Rick is a keen trader on the Australian Securities Exchange (ASX). Following a meeting with his financial advisor, Rick decides to contact his stockbroker, Westlink Financial Services, to arrange a loan over his shareholdings in various listed companies. Rick has a total share portfolio of $3.2 million. He decides to take out a loan of $2.2 million with Westlink Financial Services. Unknown to Rick, the loan document provided by Westlink contains a number of clauses which require him to transfer his entire portfolio over to Westlink II, a subsidiary company controlled by his stockbroker. The loan money which is advanced to Rick comes from Eastpac Bank. Eastpac Bank, in turn, executes a standard-form document with Westlink Financial Services and Westlink II for the $2.2 million loan. After six months of trading with Westlink Financial Services, the brokerage firm goes into administration. Eastpac begins to sell all of the client shareholdings of Westlink Financial Services, including Rick's entire portfolio. (a) Is Eastpac allowed to liquidate and sell Westlink's client shareholdings? (b)
Can Rick prevent Eastpac from selling his portfolio?
(c)
Would your answer to (a) and (b) above be any different if Rick had entered into a margin loan arrangement (that is, Rick remains the owner of his share portfolio and the loan money lent by Eastpac is secured over his shareholding)?
Guide to Problem Solving ...................................................................................................................................... Issue of shares
Possible points to consider: • the requirements for a valid issue of shares. Remember that shares may be issued for non-cash consideration; • any relevant constitutional limitations (either in the company's own constitution or the replaceable rules – for example, s 245D, Corporations Act) on the directors' normal power to issue new shares without obtaining authority from the existing shareholders; and • whether the full issue price has been paid for all the shares and the possible liability of any shareholders who only paid part of the issue price: see s 516, Corporations Act.
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515
Further Reading ......................................................................................................................................
Chapter 16
Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis, 2014, Ch 17. Chan HW and Brown R “Rights Issues versus Placements in Australia: Regulation or Choice?” (2004) 22 C&SLJ 301 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 8 Mannolini J “Brave New World of No Par Value Shares” (1999) 17 C&SLJ 30
CHAPTER 17 .......................................................................................................
Classes of Shares Useful Websites ..................................................................... 517 Recent Developments ............................................................ 518 Aim ......................................................................................... 518 Related Topics ....................................................................... 518 Principles ............................................................................... 518 Classes of shares ......................................................................... 518 Preference shares ........................................................................ 519 Issuing preference shares .............................................................. 520 Rights of preference shareholders .................................................... 520 Priority of payment of capital and dividends ....................................... 521 Interpretation of rights of preference shareholders ............................... 522 What if the company is wound up and dividends are not paid? ................ 523 Redeemable preference shares ....................................................... 523 Converting preference shares ......................................................... 526 Variation or cancellation of share rights ............................................. 526 Legal procedure for varying class rights: s 246B .................................. 531 Mentor: Test your Knowledge ............................................... 538 Practice Questions ................................................................. 539 Essay Questions .................................................................... 539 Problems for Discussion ........................................................ 539
Further Reading ..................................................................... 543
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Classes of Shares.)
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Guide to Problem Solving ...................................................... 541
518
CORPORATIONS LAW: IN PRINCIPLE
Recent Developments ...................................................................................................................................... HNA Irish Nominee Ltd v Kinghorn [2010] FCAFC 57 Weinstock v Beck [2011] NSWCA 228 Dungowan Manley Pty Ltd v McLaughlin [2012] NSWCA 180 Whitby Land Co Pty Ltd v Li [2014] FCA 806 Cody v Live Board Holdings Ltd [2014] NSWSC 78
Aim ...................................................................................................................................... At the end of this topic you should understand: • what is meant by a “class” of shares; • the rights of preference shareholders; and • how rights attaching to shares can be varied.
Related Topics ...................................................................................................................................... Chapter 5 Internal Rules; Chapter 16 Share Capital – General Nature
PRINCIPLES Classes of shares Introduction .......................................................................................................................................................................
A company has the power to decide the terms on which it issues shares and the rights and restrictions attaching to those shares: s 254B(1) of the Corporations Act 2001 (Cth) (Corporations Act). It may issue different classes of shares. A class of shares is a category of shares which have particular rights and benefits that are different to the rights and benefits attaching to other shares. Classes of shares may differ according to all or any of the following rights: [17.10]
• entitlement to dividend; • rights to priority in payment of dividend; • voting rights; • rights to repayment of capital on winding up; • rights to participate in surplus assets on winding up; and
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CLASSES OF SHARES
519
• rights of enjoyment of certain assets, for example, property owned by the company. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
As noted in Chapter 16, members of an Aboriginal and Torres Strait Islander corporation cannot own or trade shares in their corporation. There are no corresponding provisions under the CATSI Act. In relation variation and cancellation of class rights see Chapter 4, Part 4-4 Division 172 of the CATSI Act. Source of rights .......................................................................................................................................................................
The rights and benefits attaching to shares should be set out in the internal rules of the company. [17.20]
Reason for classes of shares ....................................................................................................................................................................... [17.30] Companies may choose to have more than one class of shares for the following reasons:
• to confine control of the company to the holders of one particular class of shares by giving them weighted voting rights – for example, in a small family company; • to enable dividends to be distributed in different amounts to different groups of shareholders in the one company; • for taxation considerations; and
Preference shares [17.40] Classes of shares do not require technical names. They can be described as “Class A”, “Class B” and “Class C”. Some classes of shares have been used so often by companies that they have developed special names. An example is preference shares. Where some shareholders are given priority over other shareholders as to receipt of dividends, their shares are called preference shares and the other shares are called ordinary shares. Preference shares usually carry an entitlement to a fixed rate of dividend which, for an investor, makes them similar to an
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• to raise share capital on terms similar to borrowing from creditors – for example, shares which have rights to a fixed rate of dividend, limited voting rights and no rights to participate in the surplus assets on liquidation of the company.
520
CORPORATIONS LAW: IN PRINCIPLE
investment in fixed interest products such as debentures or bonds, as long as profits are made and the company decides to pay a dividend. No dividends of any kind can be paid unless profits are made. Ordinary shares, on the other hand, carry no fixed entitlement to dividends even when profits are made. The directors determine the amount per ordinary share to be paid, after taking into account the company's financial position and the amount to be paid to preference shareholders (if any). Chapter 20 discusses the advantages and disadvantages of raising funds as equity rather than as loan capital.
Issuing preference shares [17.50] Section 254A(1)(b) of the Corporations Act gives companies the power to issue preference shares, including redeemable preference shares. An issue of preference shares must comply with the requirements of s 254A(2).
SECTION 254A(2) (2)
A company can issue preference shares only if the rights attached to the preference shares with respect to the following matters are set out in the company’s constitution (if any) or have been otherwise approved by special resolution of the company: (a) repayment of capital; (b)
participation in surplus assets and profits;
(c)
cumulative and non-cumulative dividends;
(d)
voting;
(e)
priority of payment of capital and dividends in relation to other shares or classes of preference shares.
Rights of preference shareholders Cumulative dividends .......................................................................................................................................................................
The company must specify whether the dividends payable to preference shareholders are cumulative or non-cumulative. Cumulative dividends are dividends which accumulate if the company does not pay the full dividend in any year. The preference shareholders are then entitled to have the deficiency made up in a later year, before any dividend is paid to ordinary shareholders.
[17.60]
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[17.70] TABLE 17.1 Dividends on preference shares Example Cumulative preference shares with 10% dividend rate Year 1 – Losses No dividend Year 2 – Profits 12% dividend 1st Pref shareholders 10% arrears (from Year 1) 2nd Pref shareholders 2% arrears (part payment of current year) Total 12% • Carry forward (ie, accumulate) arrears of 8% • Ordinary shareholders not paid until full entitlement of preference shareholders paid
Priority of payment of capital and dividends The company must specify the priority rights enjoyed by preference shareholders. Typically, preference shareholders receive priority of payment of dividends over ordinary shareholders. Although they receive priority of payment, preference shareholders are still only entitled to dividends when the company has made a profit, and the directors have decided to pay a dividend. Preference shareholders may also be given priority of repayment of capital in the event that the company is wound up. [17.80]
Participation in surplus assets and profits ....................................................................................................................................................................... [17.90]
The company may also specify that:
• preference shareholders are to be given the right to further dividends in the same year (either with or after ordinary shareholders). Preference shares with this right are usually called participating preference shares; and • if the company is wound up and there are surplus assets after all debts have been paid, preference shareholders have the right to share in the surplus assets either in conjunction with, or in priority to, the ordinary shareholders. ....................................................................................................................................................................... [17.100] The company must specify the voting rights attaching to preference shares. The “standard” right is one vote per share (preference or ordinary), but it is common for companies to restrict the voting rights of preference shareholders to certain issues (such as a resolution to wind up the company).
Repayment of capital ....................................................................................................................................................................... [17.110] Finally, the company must specify whether the preference shares are redeemable preference shares. These are preference shares which give
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Voting rights
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the company or the shareholder the option to require the company to repay shareholders' capital contributions at some future date.
Interpretation of rights of preference shareholders A company contravenes s 254A(2) of the Corporations Act by issuing preference shares whose rights are not set out in the company's internal rules. However, a company and/or its shareholders can apply to the court for an order validating or confirming the terms of a preference share issue: s 254E, Corporations Act. Validating orders were made in two cases where failure to comply with s 254A was the result of ignorance and oversight, rather than a blatant disregard of the law: see Re Onslow Salt Pty Ltd (2003) 45 ACSR 322; and Re Salt Asia Holdings Pty Ltd (2004) 49 ACSR 38. Courts refer to the following presumptions to fill any gaps in the internal rules regarding the preference shareholders' rights. [17.120]
Dividends ....................................................................................................................................................................... [17.130]
The following presumptions apply to dividends on preference
shares. 1.
Preference shares are presumed to carry a right to cumulative dividends: Webb v Earle (1875) 20 Eq 556.
2.
Preference shares may be interpreted as carrying a right to further dividends in the same year where they are called participating preference shares in company documents.
3.
If a share is merely given preference as to payment of a dividend, it is presumed that there is no automatic right to participate in the profits available for distribution after the preferential dividend has been paid – in other words, a statement in the internal rules as to rights is exhaustive of those rights: Will v United Lankat Plantations Co Ltd [1914] AC 11. “Exhaustive” means that if something is stated in the internal rules regarding a particular right, then that is all that is given in relation to that matter.
Voting rights ....................................................................................................................................................................... [17.140] Where the company does not specify the voting rights attaching to preference shares, s 250E(1) of the Corporations Act, a replaceable rule, fills the gap. It provides that each shareholder, whether preference or ordinary has equal voting rights (one vote per share on a poll).
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Winding up ....................................................................................................................................................................... [17.150] In a winding up, if the company makes no provision regarding the distribution of capital to preference shareholders on winding up, then the preference shareholders are presumed to have a right to share equally in the surplus assets with the ordinary shareholders: Birch v Cropper (1889) 14 App Cas 525. On the other hand, if preference shareholders are given priority in repayment of their capital, this is presumed to be exhaustive of their rights to the assets available for distribution upon winding up: Re Plashett Pastoral Co Pty Ltd (1969) 90 WN (Pt 1) (NSW) 295.
What if the company is wound up and dividends are not paid? [17.160] The preference shareholders are not entitled to an amount representing those unpaid dividends (arrears) upon winding up, unless:
• the dividends have been fixed or declared and their date for payment has fallen due; or • a right to payment of (undeclared or unpaid) dividends in the event of winding up is set out in the company's internal rules dealing with preference share rights – the company may give the preference shareholders a special right to be paid an amount representing the unpaid dividends. These “arrears” are not debts of the company, but are additions to the preference shareholders' capital. They would rank after payment of the company's debts.
Redeemable preference shares
SECTION 254A(3) (3)
Redeemable preference shares are preference shares that are issued on the terms that they are liable to be redeemed. They may be redeemable: (a) at a fixed time or on the happening of a particular event; or (b)
at the company’s option; or
(c)
at the shareholder’s option.
Note: Redeemable preference shares are dealt with in sections 254J254L.
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[17.170] Section 254A(3) allows companies to issue preference shares that may be redeemed.
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Redeemable preference shares must be redeemed according to the terms of issue: s 254J, Corporations Act. They may be redeemed only if the shares are fully paid up and they are redeemed out of profits or from the proceeds of a fresh issue of shares made for the purposes of the redemption: s 254K, Corporations Act. The object of s 254K of the Corporations Act is to prevent the company from using existing share capital to redeem preference shares, thereby reducing the share capital available to ordinary shareholders and creditors. As an alternative to redemption, redeemable preference shares may also be cancelled under a reduction of capital or a share buy-back. In Weinstock v Beck [2011] NSWCA 228, the NSW Court of Appeal looked at the issue of whether certain shares that had been allotted by a company were in fact redeemable preference shares within the meaning of the Corporations Act. Weinstock v Beck [17.175] Weinstock v Beck [2011] NSWCA 228 (New South Wales Court of Appeal) FACTS: A company had issued 8 shares that were designated Class “C” Redeemable Preference shares. In July 2004, the preference shareholder passed away and the directors of the company resolved to redeem the preference shares at $1 per share. One of the executors of the estate claimed that the true value of the 8 shares on a winding up would be $7,266,000. The Court was asked to decide whether: (1) The 8 “C” Class Shares were redeemable preference shares within the meaning of the Corporations Act; (2) There was sufficient evidence of a resolution to redeem those shares; (3) The redemption should have been at fair market value rather than at $1 per share. At first instance the NSW Supreme Court held that the “C” Class shares were not redeemable preference shares within the meaning of the Corporations Act. The Court held this view on the basis that the “C” Class shares failed to be preference shares because the preference that they were given on issue was not over ordinary shares on issue. Hence, the “C” Class shares were not preference shares because they did not entitle the holder to some comparative advantage. On appeal, the NSW Court of Appeal held by majority 2:1 that the 8 Class “C” shares were redeemable preference shares within the meaning of the Corporations Act. The Court of Appeal further held that the “C” Class shares had been validly redeemed by the company in July 2004. The majority in the Court of Appeal were of the view that the “C” Class shares were validly issued and conferred on their holders preferential rights as defined in the Company’s Articles of Association. These rights would remain potential only, unless and until the directors issued ordinary shares. Beck sought leave to appeal to the High Court on a single ground – that the court erred in concluding that the shares were in fact redeemable preference shares despite no other shares being issued for them to be in preference of (at [17]).
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cont. The High Court unanimously dismissed the appeal with French CJ finding that there is no logical requirement that preference shares be brought into existence after ordinary shares (at [44]), meaning that the issue of the redeemable preference shares and the redemption was valid (at [45]). Hayne, Crennan and Kiefel JJ found that there was no barrier despite no ordinary shares ever being issued. The redeemable preference shares still “preferred the holder of those shares over the holder of any ordinary share in the company” (at [75]). Gageler J Found that preferential rights under s 254A(2)(a) – (d) of the act and set out in the company’s constitution deem that such shares are preference shares and, unless converted or redeemed remain as such with or without the issue of ordinary shares. Those rights are similar to a contract between the preference shareholder and the company (at [92]). His Honour also confirmed that the operation of s 254K was to ensure that the “net capital of the company therefore cannot be reduced by the redemption of redeemable preference shares” (at [94]).
Whitby Land Co Pty Ltd v Li [17.178] Whitby Land Co Pty Ltd v Li [2014] FCA 806 (Federal Court of Australia) In Whitby Land Co Pty Ltd v Li [2014] FCA 806 the court considered the limitation of when redeemable shares can be redeemed under s 254K of the Corporations Act.
The shares were not redeemed and Li made a statutory demand that the $1,000,000 be repaid plus “interest” calculated at 20% per annum. The courts needed to determine whether there was a “plausible contention requiring investigation” as to the debt claimed in the statutory demand. HELD: Section 254K of the Corporations Act limits when redeemable preference shares can be redeemed. The shares must be fully paid up and redemption must be out of “profits or the proceeds of a new issue of shares made for the purpose of the redemption”. However, both parties agreed that there were no profits, nor new share issues. Therefore, any redemption of the shares would be in contravention of s 254K of the Act. His honour, Siopis J considered previous case law on the issue, particularly that of Kandelka Management Pty Ltd v Pisces Group Ltd (2009) 76 ACSR 113 at [73]: clearly, the remedy of specific performance of such an obligation would not be available if its effect was to require a contravention of s 254K. Nor would a judgement in debt or for damages in those
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FACTS: Whitby (developer) and Li (investor) came to an investment agreement whereby Li would be issued with 1,000,000 redeemable preference shares for the sum of $1,000,000 (face value one dollar). They were redeemable for face value plus an annual return of 20% to the date of redemption. The shares must be redeemed within 13 months, but may be extended up to a further six months.
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cont. circumstances. A winding up on the “just and equitable ground” may be the only appropriate remedy available to the holder of the redeemable preference shares. His honour found that there is no enforceable debt against Whitby.
Converting preference shares [17.180]
(a)
Section 254G(1) of the Corporations Act permits a company to:
convert an ordinary share into a preference share; and
(b) convert a preference share into an ordinary share. “Converting preference shares” have become very popular. The reason is that converting preference shares have the advantages of both preference shares and convertible notes, without the disadvantages. First, converting preference shares convert to ordinary shares (usually at the company's option) so they are not a liability (as are convertible notes) and are shown as part of shareholders' funds in the balance sheet. Secondly, converting preference shares do not have to be redeemed for cash, as do traditional preference shares, so the company does not have to budget for a large cash outflow at redemption. Finally, although the dividend payment is at a fixed rate, the dividend is not a debt due by the company (as is interest on convertible notes). Payment depends on the company having profits and the directors deciding to pay a dividend.
Variation or cancellation of share rights General concern .......................................................................................................................................................................
Part 2F.2 of the Corporations Act (ss 246B – 246G) permits companies to vary or cancel the rights attaching to a particular class of shares or members under regulated conditions. The object of the provisions is to protect the interests of shareholders who are members of the class whose rights are to be varied or cancelled (“the affected class”). Members of the affected class require protection because there is a risk that the company could undertake a variation or cancellation of their rights for non-legitimate purposes. For example: [17.190]
• to eliminate a person from being a member of the company by cancelling all of the rights attaching to the member's shares; • to benefit some members at the expense of others by increasing the rights attaching to some shares but not others; or • to prejudice some members by decreasing the rights attaching to their shares only.
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Rights requiring protection .......................................................................................................................................................................
The procedures in Pt 2F.2 of the Corporations Act protect the special (legal) rights attaching to shares in a particular class of shares (or class of members, in the case of companies without a share capital). As noted at [17.20], these rights will be set out in the company's internal rules. They include dividend rights, voting rights and rights to use company property. A class of shares or members refers to a category of shares or members with particular rights and benefits attaching to them which distinguishes them from other categories of shares or members. There is no minimum or maximum number of shares or members required to constitute a class of shares or members. One share or member is capable of forming a separate class of shares for the purpose of determining whether there has been a variation of rights: see s 246C, Corporations Act. In Cody v Live Board Holdings Ltd [2014] NSWSC 78, a declaration was sought to confirm that issuing preference shares in accordance with a shareholders agreement was valid. [17.200]
Cody v Live Board Holdings Ltd [17.205] Cody v Live Board Holdings Ltd [2014] NSWSC 78 (Supreme Court of New South Wales) FACTS: Ordinary shares in the company had already been issued and, in line with a shareholders agreement from 2012, the company then went about raising further capital through the issuing of preference shares. The company’s constitution stated at clause 6 that any variation of class rights is to be supported by the approval of 75% of the shares of that class or by a class special resolution.
HELD: His Honour, Brereton J found that issuing preference shares over the existing ordinary shares would mean that the new shares ranked ahead of the existing shares. He found that this would require the concurrence of 75% of the ordinary class of shareholders (at [22]). He also found that no shareholder majority had been requested with respect to the decision to issue new preference shares as per the shareholders agreement where shareholders must make decisions with respect to schedule C (at [23]). His honour also found that the shareholders agreement did not specify that preference shares would be the form of capital raising in the future therefore, those ordinary shareholders who were bound by the shareholders agreement had not consented to the new issuing of preference shares (at [25]).
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The shareholder’s agreement specified that there would be further capital raising, however it was silent as to form. Schedule C specified that any reconstruction of the share capital and any “issue of shares or other security or the grant of rights over any shares or other securities of the company, including but not limited to the grant of any option to subscribe to new shares, other than pursuant to this agreement”. Clauses 4.6 and 5.1 both specified that shareholders must approve any decision/make decisions by simple majority with respect to schedule C.
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cont. The shares were therefore not issued validly and the court refused to make a declaration.
What is a variation of class rights? ....................................................................................................................................................................... [17.210] A transaction involves a variation of share rights if it varies or cancels the legal rights attaching to shares or membership. A company may vary the rights of a particular class of shares or members directly or indirectly. An example of a direct variation is the cancellation or variation of voting rights or dividend rights attaching to a share. An example of an indirect variation is an issue of preference shares which rank the same as existing preference shares, thereby varying the priority rights previously enjoyed by existing preference shareholders: s 246C(6), Corporations Act. The court in HNA Irish Nominee Ltd v Kinghorn [2010] FCAFC 57 considered what consisted a variation of class rights.
HNA Irish Nominee Ltd v Kinghorn [17.215] HNA Irish Nominee Ltd v Kinghorn [2010] FCAFC 57 (Federal Court of Australia Full Court) FACTS: HNA acquired preference shares in 35 companies which grouped together as R I LA. The constitution stated that preference shareholders are not entitled to vote at any general meeting except where a proposal affects rights attached to a preference share. An amendment to the constitution was proposed which would allow voting at general meetings on proposals or resolutions on issues which would affect be classed preference shares; to elect, appoint or remove directors; amend the constitution; wind up; to convert ordinary shares into a larger number; to alter the voting rights of any shares on issue. The proposal would both diminish some rights, but grant other rights. Under s 246B, if the company constitution has a procedure to vary or cancel rights, then the procedure must be followed. HNA sought to vote on the proposal at a general meeting for a number of reasons, however, primarily because they believed they had a right to vote because the Constitution stated that they could vote on proposals that “affect rights” attached to a preference share. HELD: The trial judge in HNA Irish Nominee Ltd v Kinghorn [2010] FCA 311 (at [33]) stated that he considered that the constitution was “limited to a proposal that affects existing rights attached to the preference shares under the Constitution and does not apply to a proposal that has the effect of adding new rights. That is to say, it must be possible to identify rights that are presently attached to the preference shares and determine whether those rights are affected by the proposal”. On appeal, the court found that “because the proposed resolution seeks to add to the existing rights of preference shareholders, it does not come with the exception to the general rule carved out by (the Constitution)” (at
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cont. [45]). And, “[HNA’s] right to vote upon the current proposal was not exercise will at the time of the meeting at which the resolution was put” (at [47]). HNA’s appeal was therefore dismissed with costs.
Deemed variations: s 246C ....................................................................................................................................................................... [17.220] Section 246C of the Corporations Act states that the following actions are taken to be variations of class rights:
• the division of one class of shares into two or more classes of shares, where different rights attach to each class of shares after the division (s 246C(1), Corporations Act); • the variation of the rights attaching to only some shares in a class of shares where the rights attaching to the remaining shares are left unchanged (s 246C(2), Corporations Act); • where a company has one class of shares, the issue of new shares with different rights to those attaching to existing shares (s 246C(5), Corporations Act): – the new share issue will not amount to a variation of rights if either the company's internal rules or a document (such as a special resolution setting out the terms of the share issue) lodged with ASIC permits the company to issue new shares on different terms; and
– the new preference issue will not amount to a variation of rights if the company's internal rules permit the company to issue new preference shares on the same terms.
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• the issue of new preference shares that rank equally with existing preference shares (s 245C(6), Corporations Act):
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Transactions which are not variations ....................................................................................................................................................................... [17.230] The following transactions have been held not to constitute variations of class rights:
1.
A reduction of capital such as the return of capital to shareholders and the cancellation of their shares: Re Saltdean Estate Co Ltd [1968] 1 WLR 1844; and House of Fraser Plc v ACGE Investments Ltd [1987] AC 387. A reduction of capital amounts to the satisfaction of the shareholders' claims against the company, not a variation of their class rights. However, a company may include a provision in its internal rules deeming reductions of capital to be a variation of rights subject to Pt 2F.2 of the Corporations Act.
2.
An issue of shares which has the effect of diluting the voting power (that is, the proportion of votes held) of an existing class of shares has been found not to constitute a variation of the existing class rights: Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512; and White v Bristol Aeroplane Co Ltd [1953] Ch 65. In both cases, the legal right (the right to vote) attaching to the existing classes of shares remained the same but was a less effective right than it had previously been. Both cases reflect a narrow interpretation of what constitutes a variation of class rights.
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531
[17.240] Figure 17.1: Key issues – variation of class rights ....................................................................................................
Precautionary measure regarding share issues .......................................................................................................................................................................
A company's decision to issue new shares from time to time can become a sensitive issue for existing shareholders. To protect existing shareholders in proprietary companies, s 254D of the Corporations Act, a replaceable rule, requires directors to first offer any new shares of a particular class to the existing shareholders in the class in proportion to their existing shareholdings. This is known as a “pre-emptive right provision”.
Legal procedure for varying class rights: s 246B The procedure for varying rights depends on whether or not the company has a constitution which includes a provision for varying the rights attaching to a class of shares or members (“a variation of rights provision”). [17.260]
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[17.250]
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Where a company has such a provision in its constitution, any variation of rights must comply with s 246B(1) of the Corporations Act. Where it does not have such a provision, the variation must comply with s 246B(2) of the Corporations Act.
Where constitution includes provision ....................................................................................................................................................................... [17.270] Section 246B(1) of the Corporations Act applies when a company's constitution includes a procedure to be followed when varying share rights.
SECTION 246B(1) If constitution sets out procedure (1)
If a company has a constitution that sets out the procedure for varying or cancelling: (a)
for a company with a share capital – rights attached to shares in a class of shares; or
(b)
for a company without a share capital – rights of members in a class of members; those rights may be varied or cancelled only in accordance with the procedure. The procedure may be changed only if the procedure itself is complied with.
Section 246B(1) of the Corporations Act applies to variations of share rights as well as proposed changes to the variation provision in a company's constitution. This protection is necessary otherwise a variation of rights provision could be altered without the consent of the affected class to make it easier for the company to vary share rights in the future. Example
Assume that a company has a constitution with the following variation of rights provision:
[17.280]
If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may, whether or not the company is being wound up, be varied with the consent in writing of the holders of three-quarters of the issued shares of that class, or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of the class.
A variation of rights attaching to shares pursuant to this provision requires either consent in writing by three-quarters of the holders of the affected class
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of shares or a special resolution (approved by three-quarters of the votes cast, s 9 of the Corporations Act) passed by the holders of the affected class of shares. The case of Dungowan Manley Pty Ltd v McLaughlin [2012] NSWCA 180 illustrates the application of a variation of rights attaching to shares where there are provisions in the company's constitution (Memorandum/ Articles of Association). Dungowan Manly Pty Ltd v McLaughlin [17.285] Dungowan Manly Pty Ltd v McLaughlin [2012] NSWCA 180 (New South Wales Court of Appeal) FACTS: This case was an appeal from the decision of Ward J (McLaughlin v Dungowan Manly Pty Ltd [2010] NSWSC 187). The McLaughlins crossappealed for an increase in damages. The McLaughlins were shareholders in Dungowan Flats, comprising of 22 units, which was erected in 1919. The company acquired the property in 1957. In 1996 the McLaughlin’s purchased unit 4, located on the first floor. The building, being substantially aged, had significant maintenance issues from about 2000. The company proposed a redevelopment which, as described by the trial judge, consisted of (at [7]): demolition of the rear of the building, the conversion of two ground floor units to facilitate additional car parking, the construction of three additional floors (with eight new units) at the top of the building, and the internal modification/reconfiguration of existing units (apparently to take advantage of town planning concessions available for “heritage” buildings). What had been a [four] storey home unit building was converted into a [seven] storey home unit building with a car stacker on the ground floor (under the level on which the McLaughlin’s unit was situated); the extension being modern in character.
The company’s memorandum of Association stated that there were 56,550 shares of 1 pound each. Those shares were divided into 26 “share groups” comprising different numbers of shares. The McLaughlins’ shares entitled them to use their flat (number four) as a home. In addition, shareholders were entitled to use “all common areas of the building including hallways, lifts, passageways and stairways.” Further, article 3(f) of the memorandum of Association stated that (at [26]): the rights conferred [or] the obligations imposed by this article shall not be abridged varied or restricted or released except by unanimous resolution of the members who are holders of a share group and present in person or by proxy at a meeting of the company The McLaughlins’ representative attended the AGM in 2006. Despite the dissent of the representative, resolutions were passed to alter article 3 of the
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The McLaughlins opposed this redevelopment.
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cont. articles of association including increasing the company’s capital, reclassifying unissued shares, issuing new shares, deleting shares and conferring new share groups. Did such amendments vary the rights of the shareholders? Decision: At trial, whilst her Honour awarded the McLaughlins damages for breach of contract ($200,000) and compensation for oppression, her Honour found a more limited variation of McLaughlin’s shareholder rights. Her honour found that the installation of a car stacker below the McLaughlin’s apartment did change the amenity of the building and affected the McLaughlins’ rights (at [371]). However, her Honour found that with respect to doubling the size of the building, and introducing new classes of shares, that the memorandum of Association provided an object of which those objects included maintaining the building as a “first-class” building which may allow for the building of extra floors in order to permit renovation (at [371]). Therefore, had the car stacker not been installed below the McLaughlins’ apartment, her Honour would have found no requirement to obtain unanimous consent from the McLaughlins (at [373], [374]). At appeal, McFarland JA applied the principles from Wilson v Meudon Pty Ltd [2005] NSWCA 448, the facts of which are very similar – the Wilsons held shares for the use of the unit on the top floor of the building. They opposed the extension of a penthouse unit, to be erected on top of the unit which presently had no unit above it (at [15]). Bryson JA noted the effect of s 246B as a safeguard (at [28]): This protection extends to control of all decisions of the company and its organs, including its directors, which might otherwise vary right next to groups of shares; including decisions under director’s powers of management under article 111 and under powers relating to the issue of new shares and to attaching rights to shares. Hodgson JA found in Wilson that “to erect another unit on top of a unit that presently has no unit above it would materially alter the characteristics of the former unit, by materially altering its situation in the building; and in a way, it would vary the right to use and occupy that home” (at [15]). Bryson JA stated that “a right is conferred [by the articles of Association] on the holder of each group that the rest of the building will be used in the ways specified and within the areas specified and not otherwise” (at [47]). In applying Wilson to the matter, McFarland JA considered whether there would be a material alteration to the building in conflict with the articles of association (at [71], [73]). His honour (with Bathurst CJ agreeing) found that the redevelopment would materially alter the characteristics of the home unit. Therefore, the McLaughlin’s consent was required under article 3, as the rights were being abridged varied restricted or released (at [80]). In addition, the amendments purportedly passed at the AGM in 2006 were “ineffective without the McLaughlins’ consent” (at [79]). McFarland JA found that the companies object as referred to by the trial judge (at [372]) was something which is no longer required under s 124(1)
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cont. and does not “override specific provisions of the articles of association defining its shareholder rights” (at [78]). Dungowan’s appeal was dismissed and the Court made orders that the compensation for breach of contract be increased.
Where no constitution or no provision for variations ....................................................................................................................................................................... [17.290] Section 246B(2) of the Corporations Act applies if a company's constitution does not include a procedure for varying share rights.
SECTION 246B(2) If constitution does not set out procedure (2)
If a company does not have a constitution, or has a constitution that does not set out the procedure for varying or cancelling: (a)
for a company with a share capital – rights attached to shares in a class of shares; or
(b)
for a company without a share capital – rights of members in a class of members; those rights may be varied or cancelled only by special resolution of the company and: (c) by special resolution passed at a meeting: (i) for a company with a share capital of the class of members holding shares in the class; or (ii)
with the written consent of members with at least 75% of the votes in the class.
The two methods – a special resolution (s 9, Corporations Act) or written consent – have the same approval requirements, that is, 75% of the shareholders of the affected class. There is no legal incentive for choosing between them. Written consent may be preferred to avoid the need to organise and give notice of a class meeting. The Federal Court in Biodiesel Producers Ltd v Stewart [2007] FCA 722 examined the application of s 246B of the Corporations Act in the context of an allocation of “B Class performance shares” which was approved by the board but did not have shareholder approval (see below).
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(d)
for a company without a share capital of the class of members whose rights are being varied or cancelled; or
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Biodiesel Producers v Stewart [17.295] Biodiesel Producers Ltd v Stewart [2007] FCA 722 (Federal Court of Australia) FACTS: Biodiesel Producers Ltd was a company that had been incorporated for the purpose of establishing an operating plant in Albury/ Wodonga to produce biodiesel for markets in New South Wales, Victoria and the ACT. A circulating resolution was put before the board of Biodiesel for the allocation of performance shares to the respondent, who was a chartered accountant and employed part-time by the company. The performance shares were to be converted to B Class shares in the company. The circulating resolution was not approved by the company’s shareholders, notwithstanding that a shareholders agreement had been entered into between the company and its shareholders. The company was not aware that the allocation of performance shares to the respondent amounted to a variation of class rights requiring shareholder approval under s 246B of the Corporations Act. The Federal Court was asked to examine the application of s 246B in the context of the allocation of “performance shares” to the respondent which carried with it special rights which purported to create a new class of shares (B Class) in the company. The respondent argued that there had been shareholder approval by reason of the shareholder agreement that had been reached between the company and its shareholders. DECISION: The circulating resolution and the creation of B Class shares amounted to a variation of existing rights of the shareholders in the company. The company’s own constitution was not complied with and the execution of the shareholders agreement did not mean that there was compliance with s 246B of the Corporations Act. According to Lander J (at [346]): in any event, there were material differences between the performance shares which were contemplated in the shareholders agreement and those contemplated in the circular resolution … The terms of the performance shares in the circular resolution were more advantageous to the respondents than those contemplated in the shareholders agreement. For that further reason, it cannot be said that the signing of the shareholders agreement by the shareholders satisfied the requirements of s 246B of the Corporations Act or the [company’s] Constitution.
Determining what is a class for consent purposes ....................................................................................................................................................................... [17.300] The division of shares into different classes with different rights or varying the rights of only some of the shares in a class are two particular situations where the Corporations Act deems a variation of rights to have taken place: s 246C(1) and (2), Corporations Act. The members whose rights have been affected by those variations form a separate class of shares for the purposes of conducting meetings or obtaining consent under s 246B of the Corporations Act.
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Challenging validity of variation of rights .......................................................................................................................................................................
Unfair prejudice ground – s 246D [17.310] Even where the company complies with s 246B of the Corporations Act, members with 10% or more of the votes in the affected class may apply to the court to have the variation or cancellation set aside on the ground that it unfairly prejudices them: s 246D, Corporations Act. The persons applying to the court must not have consented to the variation at the time it was made. Application must be made within one month after the variation or cancellation is made: s 246D(2), Corporations Act. The court may set aside the variation or cancellation if satisfied that it would unfairly prejudice the applicants, but if it is not so satisfied it must confirm the variation or cancellation: s 246D(5), Corporations Act.
Other grounds
In addition to s 246D of the Corporations Act, it may be possible to bring legal action to challenge a variation or cancellation of shares which can be characterised as: [17.320]
• a removal or expropriation of valuable property rights attaching to shares (Gambotto v WCP Ltd (1995) 182 CLR 432); • conduct which is oppressive, unfairly prejudicial, discriminatory or contrary to the interests of the members as a whole (Pt 2F.1 of the Corporations Act); and/or • conduct which contravenes the provisions of the Corporations Act: s 1324. See Chapter 13 for further discussion of these issues. Legal effect of a variation of rights .......................................................................................................................................................................
The date on which an authorised variation or cancellation of class rights takes effect depends on whether or not the variation was unanimously agreed to by members of the affected class.
[17.330]
[17.340] TABLE 17.2 When a variation of rights takes effect Variation Unanimous agreement by shareholders
Date takes effect Date of resolution or consent unless other date specified
Majority agreement by shareholders, no One month after date of resolution or court challenge consent
Section s 246E Corporations Act s 246D(3)(a) Corporations Act
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When variation takes effect
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Variation Majority agreement, court challenge
Date takes effect When court challenge determined
Section s 246D(3)(b) Corporations Act
Notice requirements [17.350] The company must notify the members of the affected class within seven days after the variation or cancellation of class rights: s 246B(3), Corporations Act. The company must also provide details to ASIC of any division or conversion of shares within 14 days: s 246F, Corporations Act. [17.360] Figure 17.2: Summary – class rights ....................................................................................................
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Classes of Shares.)
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Practice Questions ...................................................................................................................................... 1. 2.
What is a class of shares? Why do companies have classes of shares? (a)
What is a redeemable preference share? Why do companies issue them?
(b)
How may redeemable preference shares be redeemed?
3.
What purpose does s 246B of the Corporations Act serve in relation to the members of a particular class of shares?
4.
Summarise the situations where s 246C of the Corporations Act deems there to be a variation of share rights in relation to a company with a share capital.
5.
Prepare a list of the types of legal action open to a preference shareholder to challenge a variation by a company of the rights attaching to his or her preference shares. Does the variation take effect despite the commencement of legal proceedings?
6.
In X company, there are 20,000 $1 preference shares and 80,000 $1 ordinary shares on issue. All shares are fully paid. The company's constitution states that preference shareholders have priority over ordinary shareholders to return of capital on winding up. When X company winds up, the total amount available for distribution to the shareholders is $150,000. Assuming there are no arrears of dividend, how much per share will the preference shareholders receive? Explain.
1.
“A variation of class rights is in the best interests of the company because it allows the board to best manage the company's capital and should be supported by all shareholders”. Critically discuss the above statement.
2.
“All shareholders, whether they are preference or ordinary shareholders, should be treated in a like manner”. Do you agree with the above statement? Should the Corporations Act recognise the inherent differences between different classes of shareholders? Give reasons for your answers.
Problems for Discussion ...................................................................................................................................... 1.
Delusions of Grandeur Ltd (the Company) was incorporated on 3 July 2007. The Company's share capital consists of 25,000 ordinary shares issued at a price of $5.00 per share and 5,000 preference shares, issued
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Essay Questions ......................................................................................................................................
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at a price of $2.00 and bearing a preference dividend rate of 7% per annum. The rights attaching to the preference shares are set out in a special resolution passed by the Company shortly after its registration. Sixty per cent of the ordinary shares are held by the Aura family. The Company wants to raise further funds for expansion. It prefers an equity capital raising to a loan capital raising in order to maintain its conservative gearing ratios. The Aura family wishes to retain their current level of control of the company but without having to invest further funds in it. The company proposes to undertake the following share capital transactions to raise $85,000: (a)
to increase the dividend rate for preference shareholders from 7% to 10%;
(b)
to issue 5,000 new preference shares on the same terms as the existing preference shares;
(c)
to divide the ordinary shares into two groups, Group A and Group B. Group A shares (owned by the Aura family) will have two votes each on a poll. Group B shares will have one vote each on a poll; and
(d)
to issue 25,000 new Group B shares to new investors at an issue price of $5.00 per share.
Taking one transaction at a time, can the Company undertake the transaction immediately? If not, what procedures must the Company comply with before undertaking the transaction? 2.
Boran Ltd (Boran) is an unlisted public company. Its share capital consists of 500,000 fully paid ordinary shares issued at a price of $1.00 per share and 250,000 fully paid (non-redeemable) preference shares issued at a price of $2.00 each. The preference shares carry the following rights: • a right to a fixed cumulative dividend of 10%; • a right to share equally with ordinary shareholders in any distribution of surplus assets (after return of capital) on winding up; and • a right to exercise one vote per share, but only in relation to a proposal for a reduction of capital or a proposal affecting rights attached to the preference shares. These rights were set out in a special resolution passed by the company before the issue of the preference shares. Eliza and Cyril hold between them 80% of the ordinary shares and 78% of the preference shares and control the composition of Boran's board. Jane holds the other 12% of the preference shares and 1,000 ordinary shares. Eliza and Cyril think it
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unfair that preference shareholders are entitled to share surplus assets equally with ordinary shareholders on a winding up, particularly in the light of the high dividend payments the preference shareholders have received over many years. They have no immediate intention of winding up Boran, but may wish do so within the next few years. Jane strongly objects to any proposals that might affect her rights as a preference shareholder. Advise Eliza and Cyril: (a)
whether Boran can alter the right of preference shareholders to share equally in surplus assets on a winding up by amending the company's internal rules; and
(b)
whether the company could improve the position of ordinary shareholders on winding up by making a bonus issue of fully paid shares to ordinary shareholders.
Advise Jane whether she can take any action to prevent either or both of these proposals going ahead.
Guide to Problem Solving ...................................................................................................................................... Rights of preference shareholders
Possible areas to consider: (a)
where rights attaching to preference shares are found in a company's internal management rules;
(b)
dividends while the company is a going concern;
(c)
rights in winding up to return of capital;
(d)
rights in winding up to surplus assets; and
(e) rights in winding up to arrears of dividend. These rights may be explained as follows: • Rights attaching to preference shares must be set out in the company's internal rules (s 254A(2) of the Corporations Act); and • if company issues shares in circumstances which do not comply with s 254A(2) of the Corporations Act, the company and/or its shareholders can apply to the court for an order validating the issue: s 254E, Corporations Act; see Re Onslow Salt Pty Ltd (2003) 45 ACSR 322; and Re Salt Asia Holdings Pty Ltd (2004) 49 ACSR 38. (b) Dividends while company is a going concern
• Dividends are presumed to be cumulative and must be paid before ordinary dividends. But, this is subject to the overriding principle that the
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(a) Rights found in internal management rules
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company decides to pay a dividend (see Webb v Earle (1875) 20 Eq 556; and Burland v Earle [1902] AC 83); and • where shareholders are merely given a preferential right to dividends, they cannot participate further as the right to receive dividends is exhaustive – that is, they cannot become participating preference shareholders: see Will v United Lankat Plantations Ltd [1914] AC 11. (c) Rights in winding up to return of capital
• The constitution or a special resolution will state which class has priority. If they are silent, capital is shared equally: Birch v Cropper (1889) 14 App Cas 525. (d) Rights in winding up to surplus assets
• If the constitution or special resolution is silent on rights to return of capital, surplus assets are shared equally, as for (b); • however, if priority is given to return of capital, this is exhaustive: Re Plashett Pastoral Co Pty Ltd (1969) 90 WN (Pt 1) (NSW) 295. (e) Rights in winding up to arrears of dividend
• There is no right to arrears of dividend unless the company decides to pay a dividend or the constitution or a special resolution expressly give a right to arrears. Variation or cancellation of rights: s 246B
See Figure 17.1 at [17.240] and Figure 17.2 at [17.360]. 1.
Is the effect of the proposed action to vary or cancel legal rights or merely a change in the operation of those rights? If the former, s 246B of the Corporations Act applies. If the latter, then s 246B of the Corporations Act need not be followed unless s 246C of the Corporations Act deems the action to be a variation. For what constitutes a mere change in operation of rights, see Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512.
2.
If the proposed action is a variation or cancellation of rights, does the company have a constitution which includes a variation of rights clause? If so, s 246B(1)(a) or (b) of the Corporations Act applies (depending on the type of company).
If not, s 246B(2) of the Corporations Act applies. Even if the correct procedure is followed, 10% or more of the affected group or class may apply to the court to have the resolution set aside provided that they did not vote in favour of the resolution: s 246D, Corporations Act.
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Any shareholder(s) may apply under s 1324 of the Corporations Act for redress where there has been a contravention of the Corporations Act, that is, the proper procedure has not been followed. Application to the court must be made within one month (s 246D(2)) and the court has a discretion to set aside the change on the ground that it “would unfairly prejudice the [objecting] members”: s 246D(5), Corporations Act. Other possible remedies for shareholders are legal action challenging the expropriation of valuable property rights, fraud on the minority, oppression or winding up.
Further Reading ......................................................................................................................................
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Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis, 2014, Chs 17 and 24. Lee BT “Equity and Preference Shares: A Problem of Definition” (1992) Singapore Journal of Legal Studies 127 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, [8.110]-[8.195]
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Transactions Affecting Share Capital Useful Websites ..................................................................... 545 Aim ......................................................................................... 546 Recent developments ............................................................ 546 Related Topics ....................................................................... 546 Principles ............................................................................... 546 Introduction ............................................................................... 546 Doctrine of capital maintenance: Trevor v Whitworth rule ...................... 546 Corporations Act reforms ............................................................... 548 Protection of creditors and shareholders ............................................ 548 Reductions of share capital ............................................................ 549 Exempted reductions of capital ....................................................... 557 Companies acquiring their own shares .............................................. 557 Share buy-backs .......................................................................... 560 Financial assistance for purchase of a company’s own shares ................. 565 Failing to comply with Chapter 2J .................................................... 568 Remedies for contravening Chapter 2J .............................................. 569 Mentor: Test your Knowledge ............................................... 569 Practice Questions ................................................................. 569 Essay Questions .................................................................... 570 Problems for Discussion ........................................................ 570 Guide to Problem Solving ...................................................... 572 Further Reading ..................................................................... 573
(See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Transactions Affecting Share Capital.)
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Useful Websites ......................................................................................................................................
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Aim ...................................................................................................................................... At the end of this Topic you should understand the doctrine of capital maintenance and its modern application to: • reductions of a company's share capital; and • dealings in the company's own shares.
Recent developments ...................................................................................................................................... Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth)
Related Topics ...................................................................................................................................... Chapter 14 Members' Rights and Remedies; Chapter 16 Share Capital – General Nature; Chapter 17 Classes of Shares
PRINCIPLES Introduction This Topic discusses the legal procedures with which a company limited by shares must comply when undertaking certain transactions affecting its share capital. They are:
[18.10]
• reductions of capital; • companies acquiring or controlling their own shares; and • companies giving financial assistance for the purchase of their own shares. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Similar to Chapter 16, the CATSI Act does not have corresponding provisions in relation to securities as the Corporations Act 2001 (Cth). This is because members of an Aboriginal and Torres Strait Islander corporation are not allowed to issue debentures or other securities.
Doctrine of capital maintenance: Trevor v Whitworth rule The transactions listed above at [18.10] are regulated by Ch 2J of the Corporations Act 2001 (Cth) (Corporations Act). The broad purpose of Ch 2J of the Corporations Act is to ensure that the interests of creditors and
[18.20]
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shareholders are protected when companies undertake these transactions. Chapter 2J of the Corporations Act gives statutory effect to the “doctrine of capital maintenance”, originally established by the general law. That doctrine requires companies limited by shares to maintain their issued share capital in order to protect the interests of the company's creditors and shareholders. Creditors and shareholders are “entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business”: Trevor v Whitworth (1887) 12 App Cas 409 at 423-424 (see below). If the doctrine of capital maintenance was strictly applied, it would prohibit a company from undertaking any of the transactions listed above at [18.10] because they result in a reduction of the company's share capital. Trevor v Whitworth [18.25] Trevor v Whitworth (1887) 12 App Cas 409 (House of Lords) FACTS: A limited liability company was incorporated with paid up capital of £150,000, consisting of 15,000 shares of £10 each. The objects of the company allowed the entity to acquire and carry on a business manufacturing flannels. The memorandum did not authorise the company to purchase back its shares. Instead, two articles provided for the following: Article 179: “Any share may be purchased by the company from any person willing to sell it, and at such price, not exceeding the then marketable value thereof, as the board think reasonable”. Article 181: “Shares so purchased may at the discretion of the board be sold or disposed of by them or be absolutely extinguished, as they deem most advantageous for the company”. The company later went into liquidation. A shareholder sued the company for the outstanding moneys owed to the shareholder as a result of an earlier buy-back of shares by the company. The liquidator, on behalf of the company, submitted that the company was not authorised to buy back the shareholder’s shares, and consequently, did not have to pay the outstanding balance to the shareholder.
One of the main objects contemplated by the legislature, in restricting the power of limited companies to reduce the amount of their capital as set forth in the memorandum, is to protect the interests of the outside public who may become their creditors. In my opinion the effect of these statutory restrictions is to prohibit every transaction between a company and a shareholder, by means of which the money already paid to the company in respect of his shares is returned to him, unless the Court has sanctioned the transaction. Paid-up capital may be diminished or lost in the course of the company’s trading; that is a result which no legislation can prevent; but persons who deal with, and give credit to a limited
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DECISION: The House of Lords held that a company incorporated under the Companies Act 1862 (UK)had no power to purchase its own shares. The reason for the prohibition, explained by Lord Watson (at 423-424), came to be commonly known as the capital maintenance rule:
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cont. company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid, as well as upon the responsibility of its members for the capital remaining at call; and they are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business.
Corporations Act reforms [18.30] The strict application of the doctrine of capital maintenance has been gradually modified by reforms to the Corporations Act. However, the rules which still continue to give full effect to the capital maintenance doctrine include:
• dividends to be paid only where a three-part test based on net assess, fairness and solvency have been passed (s 254T, Corporations Act); • interests of shareholders and creditors are to be protected (s 256A, Corporations Act); • the general prohibition against a company dealing in its own shares except in limited circumstances (s 259A, Corporations Act); and • any financial assistance provided by the company to a person acquiring shares in the company must not materially prejudice the interests of the shareholders or creditors (s 260A, Corporations Act).
Protection of creditors and shareholders Chapter 2J of the Corporations Act sets out the requirements with which a company must comply when undertaking either a capital reduction, share buy-back or financial assistance transaction. The requirements for each transaction are listed separately, but there are noticeable similarities between the three sets. Broadly, each set of requirements addresses the following concerns: [18.40]
• the risk of the transaction leading to the company's insolvency; • the fairness and reasonableness of the transaction as between the company's shareholders; and • the disclosure to shareholders of all information material to the transaction. Compare s 256A of the Corporations Act, which states the purpose of the capital reduction and share buy-back provisions, with s 260A of the Corporations Act, which states the conditions under which a company may give financial assistance for the purchase of its own shares.
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Reductions of share capital What is a reduction of capital? ....................................................................................................................................................................... [18.50]
A reduction of capital includes the following transactions:
• the cancellation of shares and the repayment of capital by a company to its shareholders; • the reduction of the issue price of shares and the repayment of that capital to shareholders; • the swapping of shares with debentures or other debt instruments (shareholders change status to become creditors); • the cancellation of paid up capital that has been lost or is not represented by available assets (a lost capital reduction: see s 258F of the Corporations Act); or • the reduction or extinguishment of shareholders' liability to pay calls on partly paid shares. Reasons for undertaking a capital reduction .......................................................................................................................................................................
A company may have a legitimate business purpose for undertaking a share capital reduction including: [18.60]
• to return capital in excess of its needs to its shareholders; • to bring share capital more into line with the net assets of the company; • to exchange equity for debt because it can raise debt finance on more attractive terms. Reductions of share capital may also be undertaken by companies to eliminate a minority member from the share register. Members can be eliminated by cancelling their shares and returning to them their investment in the company. Action of this kind may be taken where the person's continued membership of the company is having a destabilising effect on the company or to bolster the power of the directors or majority members at the expense of the minority members. Share capital reductions undertaken for such purposes may be subject to legal challenge by the minority shareholders as being oppressive, even where they comply with the procedures in Ch 2J of the Corporations Act.
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• to bolster earnings per share; and
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Regulation of capital reductions .......................................................................................................................................................................
A company proposing to undertake a reduction of capital (other than those exempted under ss 258A – 258F, Corporations Act) must comply with two sets of procedures:
[18.70]
• the requirements in ss 256A – 256E of the Corporations Act; and • any internal rule which restricts or prohibits the exercise of the company's power to reduce its share capital. If a company has an internal rule which prohibits reductions of capital, the company will be prevented from carrying out a reduction under any circumstances. Alternatively, if the internal rule restricts the circumstances in which a company carries out a capital reduction, the company must comply with those requirements in addition to the requirements in the Corporations Act: see Re RGC Ltd (1998) 29 ACSR 445; and Westchester Financial Services Pty Ltd v Acclaim Exploration NL (1999) 32 ACSR 499. Minimum requirements for a capital reduction ....................................................................................................................................................................... [18.80]
A capital reduction must comply with s 256B(1) of the Corporations
Act.
SECTION 256B(1) Company may make reduction not otherwise authorised (1)
A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction: (a) is fair and reasonable to the company’s shareholders as a whole; and (b)
does not materially prejudice the company’s ability to pay its creditors; and
(c)
is approved by shareholders under section 256C.
A cancellation of a share for no consideration is a reduction of share capital, but paragraph (b) does not apply to this kind of reduction. [Notes to section not extracted]
Protection of shareholders and creditors .......................................................................................................................................................................
As noted at [18.40], the purpose of this set of requirements is to protect the interests of creditors and shareholders. Section 256B(1)(a) of the Corporations Act addresses the fairness of the transaction as between the company's shareholders. Section 256B(1)(b) of the Corporations Act addresses [18.90]
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the risk of the transaction leading to the company's insolvency. Section 256B(1)(c) of the Corporations Act requires shareholders to be given the opportunity to vote in favour of or against the reduction after being provided with all the relevant information by the company: s 256C(4), Corporations Act. Capital reduction must be fair and reasonable to shareholders as a whole
Section 256B(1)(a) involves two important concepts, neither of which is defined within the Corporations Act. A capital reduction must be “fair and reasonable” to “the company's shareholders as a whole”. [18.100]
Fair and reasonable
The Explanatory Memorandum to the Company Law Review Bill 1997 (Cth) in respect of s 256B of the Corporations Act explained the first concept as follows at [12.24]: [18.110]
“Fair and reasonable” is intended to be a composite requirement. Factors that might be relevant to determining whether a capital reduction is fair and reasonable to shareholders as a whole include the following: (a) the adequacy of any consideration paid to shareholders (b) whether the reduction would have the practical effect of depriving some shareholders of their rights (for example, by stripping the company of funds that would otherwise be available for distribution to preference shareholders) (c) whether the reduction is being used to effect a takeover and avoid the takeover provisions (d) whether the reduction involves an arrangement that should more properly proceed as a scheme of arrangement.
In Re CostaExchange Ltd; Elkington v CostaExchange Ltd [2011] VSC 501 the court considered the notion of what is “fair and reasonable” under s 256B(1)(a). Re CostaExchange Ltd; Elkington v CostaExchange Ltd
FACTS: A minority shareholder (Mr Elkington) brought an action against CostaExchange, claiming a breach of s 256B(1)(a) and 256D(1) of the Corporations Act. The breach related to a selective reduction in the company share capital and the resulting cancellation of minority shares for a price of $0.86 each. Mr Elkington claimed that $0.86 was an unfair price because it was less than the value formulated on a control basis. An independent expert had concluded that $0.86 each was fair and reasonable to shareholders as a whole, being less than “fair market value on a control basis”, and above “fair market value on a minority basis” (at [1], [30] – [40]). The proposed cancellation of minority shares and a future capital raising program were put and passed at a general meeting of shareholders. A special meeting of minority shareholders also approved the capital reduction.
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[18.115] Re CostaExchange Ltd; Elkington v CostaExchange Ltd [2011] VSC 501 (Supreme Court of Victoria)
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cont. DECISION: Her Honour, Ferguson J considered the meaning of “fair and reasonable” under s 256B of the Corporations Act and referred to the explanatory memorandum which states that “fair and reasonable” intends to be a composite requirement listing factors such as “adequacy of any consideration paid”, if the reduction deprives some shareholders of their rights, if the reduction is used to effect a takeover, avoiding takeover provisions or if the reduction would be more properly be a scheme of arrangement (at [12]). In concluding whether the offer was “fair and reasonable”, her Honour stated (at [59]): however, the phrase “fair and reasonable” conveys one merged concept. In assessing what is fair and reasonable, a wide range of matters relevant to the particular circumstances of the case will need to be taken into account. Value will necessarily be one of the important considerations. However, it is not the sole relevant consideration. In some cases, it may not be the most influential factor. The act considers the interest of all shareholders not just the minority in considering what is fair and reasonable (at [4]). Her Honour also found that the legislation protects “minority shareholders” by providing them with a power of veto. This is to ensure they are protected from being overborne by the majority. The minority shareholders voted in favour of the selective capital reduction, achieving more than the 75% majority required (at [61]). The selective capital reduction was found to be “fair and reasonable” to the shareholders as a whole. Mr Elkington’s application was dismissed.
Shareholders as a whole
The reference in s 256B(1)(a) of the Corporations Act, to “shareholders as a whole”, focuses on the effect of a capital reduction, rather than its purpose. The reduction must be fair and reasonable to shareholders as a collective group, rather than every individual shareholder within the group. It is possible that a reduction may be fair and reasonable to shareholders as a whole but not fair and reasonable for every individual shareholder. However, provided that the reduction is fair and reasonable to shareholders as a whole, it satisfies the test in s 256B(1)(a) of the Corporations Act.
[18.120]
Ability to pay creditors
Section 256B(1)(b) of the Corporations Act requires that a capital reduction must not materially prejudice the company's ability to pay its creditors. There is no definition of “material prejudice” in the Corporations Act. The Explanatory Memorandum to the Company Law Review Bill 1997 (Cth) in respect of s 256B(1) of the Corporations Act explained at [12.23]: [18.130]
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Whether prejudice is “material” will be a question of judgment to be determined in light of all relevant circumstances, including the particular characteristics of the company and the situation of the company's creditors.
This test of material prejudice focuses on the effect of the reduction on creditors, rather than the purpose for which the company undertook the reduction. The knowledge of the company or its directors is not relevant to compliance with s 256B(1)(b) of the Corporations Act. For example, it does not matter whether the company or its directors had knowledge of any matters (for example, a lawsuit against the company) which, along with the reduction of capital, would be likely to prejudice the company's ability to pay its creditors. The court in Re CSR Ltd (2010) 183 FCR 358 considered the issue of “materially prejudice” under s 256B(1)(b). Re CSR Ltd [18.135] Re CSR Ltd (2010) 183 FCR 358 (Federal Court of Australia Full Court) FACTS: CSR proposed at demerger of its sugar and renewable energy businesses to create two listed companies, one being “new CSR”. The demerger would be undertaken through a capital reduction and a scheme of arrangement between CSR and its existing shareholders. CSR has future liabilities with respect to asbestos-related diseases. One issue was whether such a capital reduction materially prejudiced the ability of CSR to pay its creditors? DECISION: At first instance, the trial judge declined to make the orders under s 411 of the Corporations Act for the scheme of arrangement. Her Honour found that because there will be a significant reduction in the capital available to meet future claims for asbestos-related diseases and the lack of certainty, particularly with relation to future claims, of the “actuarial estimates and other expert opinion” that the orders could not be made (at [35] – [36]).
The court found that “material prejudice to a company’s ability to pay its creditors as relating to the creation of a material as opposed to a theoretical increase, in the likelihood that the reduction in capital will result in a reduced ability to pay creditors” (at [45]). Further, the court found that that the expert opinion provided did not suggest that there was a reasonable prediction CSR would not be able to pay its creditors (at [46]):
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On appeal, CSR claimed that their actuarial estimates did not omit future claims et al. In addition, CSR claimed they would be funding future claims from one of its new entities, the new CSR and that the new company would be able to satisfy these liabilities without recourse to asset realisation (at [21]). CSR similarly argued that under s 256B(1)(b) of the Corporations Act a company might be “materially prejudiced” in its ability to pay its creditors if it cannot pay debts from its cash flow and is obliged to sell assets or raise capital (at [39]).
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cont. None of the evidence adduced, including the evidence of the intervenors experts, suggests that the exercises of projection and assessment proposed on CSR’s behalf are spurious or illusory because the assumptions on which they proceed are too uncertain to afford a sound basis for a conclusion that is not only reasonable but responsible having full regard to the interests of asbestos claimants and other creditors. The Court concluded that the reduction in capital and its associated risk of the non-payment of new CSR’s creditors is theoretical rather than material (at [68]). Orders were made under s 411(1) of the Corporations Act for a meeting of shareholders.
Shareholder approval
The type of shareholder approval under s 256B(1)(c) of the Corporations Act required depends on whether the reduction is an equal reduction or a selective reduction. [18.140]
Equal reductions [18.150]
An equal reduction is a capital reduction which:
• relates only to ordinary shares; • applies to each holder of ordinary shares in proportion to the number of ordinary shares they hold; and • is on terms that are the same for each holder of ordinary shares: s 256B(2), Corporations Act. The reduction must be approved by a resolution passed at a general meeting of the company: s 256C(1), Corporations Act. Selective reductions [18.160] A selective reduction is any capital reduction which is not an equal reduction: s 256B(2), Corporations Act. The wording of the definition makes it clear that any reduction of capital involving preference shares or any shares that are not ordinary shares is a selective reduction, regardless of its terms: s 256B(2)(a), Corporations Act. A selective reduction must be approved by either:
• a special resolution (that is, a 75% majority of those entitled to vote) passed at a general meeting of the company (s 256C(2)(a), Corporations Act); or • a resolution passed by all ordinary shareholders (not just all those present at the meeting or voting by proxy) at a general meeting: s 256C(2)(b), Corporations Act.
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Where the special resolution procedure is adopted, no person who will receive consideration as part of the capital reduction, or whose liability to pay any amount unpaid on shares will be reduced, may cast a vote in favour of the resolution: see Re Tiger Investment Co Ltd (1999) 158 FLR 321; and Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144. Where the reduction involves the cancellation of shares, it must also be approved by a special resolution of the shareholders whose shares are to be cancelled: s 256C(2), Corporations Act; and see Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144. Winpar Holdings v Goldfields Kalgoorlie [18.165] Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144 (NSW Court of Appeal) FACTS: (Winpar) held 12,373 ordinary shares in Goldfields Kalgoorlie Ltd (GKL) which represented approximately 0.05% of the total of 244,382,133 shares that had been issued by GKL. Almost 88% of the total share capital in GKL was concentrated in a few related companies and subsidiaries of GKL. The remaining capital was held by non-related companies. In June 2000, GKL gave notice to its members of an extraordinary general meeting (EGM) to consider a proposed selective reduction of its share capital. The proposal involved the cancellation of the shares of the non-related shareholders, including Winpar, in return for a payment to the shareholders of 55 cents per share. The EGM was held later in June where resolutions were passed by the members at the meeting. Winpar voted against the resolutions and challenged the validity of the selective buy-back. DECISION: At first instance, Santow J dismissed Winpar’s application that the selective buy-back had breached ss 256B and 256C of the Corporations Act.
Practical matters [18.170]
• Both shareholders and ASIC must be given notice of the meeting(s) at which a resolution required by s 256C of the Corporations Act is to be voted on.
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On appeal, the New South Wales Court of Appeal held that GKL had complied with ss 256B and 257C of the Corporations Act. According to the Court of Appeal, the selective buy-back was fair and reasonable to all shareholders. The non-related shareholders were to receive a payment of 55 cents per share which was considered to be fair and reasonable payment in consideration of the value of their shares. Further, the selective buy-back would reduce operating costs at head office and this, in turn, would provide a benefit to all shareholders, as required by s 256B(1)(a) Corporations Act. The EGM was properly convened and approval for the selective buy-back had been sought and obtained by GKL at the meeting of all members, including the members whose shares were the subject of the buy-back: ss 256B(1)(c) and 275C, Corporations Act.
556
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• The company must provide a statement to shareholders (and lodge a copy with ASIC) containing all the information which it believes is material to their decision on how to vote on the resolutions: s 256C(4) – (5), Corporations Act; and see Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144. • The company must lodge a copy of the special resolution with ASIC within 14 days after it is passed: s 256C(3), Corporations Act. • The reduction has legal effect (meaning the company is allowed to make the reduction) 14 days following this lodgment: 256C(3), Corporations Act. [18.180] TABLE 18.1 Summary of Procedures for Capital Reductions Procedures for capital reductions
Equal reduction
Reduction requirements • s 256B
Ordinary resolution s 256C(1) Special/unanimous resolution s 256C(2)
1. Fair and reasonable to shareholders as whole 2. Not materially prejudicial to creditors 3. Approved by shareholders yes – – yes
Disclose all relevant information s 256C(4)
yes
yes
Lodge documents with ASIC s 256C(5) Period of notice of meeting to shareholders s 249H – 249HA
yes
yes
•
Requirements (if any) in internal rules
Notify resolutions to ASIC s 256C(3) Date when reduction can be made s 256C(3)
Selective reduction
(a) proprietary company: 21 days (b) listed company: 28 days yes yes 14 days after lodgment of resolutions with ASIC
Other relevant legislation .......................................................................................................................................................................
Section 256E of the Corporations Act contains a very important table listing other provisions which are applicable to capital reductions. This table shows how the Corporations Act as a whole tries to achieve compliance. Under these linking provisions, directors who engage in reductions of capital which cause the company to become insolvent may be personally liable under ss 588G and 1317H of the Corporations Act. Other relevant provisions such as those concerning related party transactions and continuous disclosure are also expressly linked to reductions of capital by s 256E of the Corporations Act. [18.190]
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Exempted reductions of capital Sections 258A – 258F of the Corporations Act authorise some other capital reductions which may take place without the need to comply with s 256B of the Corporations Act. For example: [18.200]
• capital reductions by unlimited companies (the position of creditors is not prejudiced because the members are personally liable if the company cannot pay its debts) (s 258A, Corporations Act); • capital reductions resulting from the cancellation of forfeited shares provided that they were forfeited pursuant to the terms of the share issue (s 258D, Corporations Act); • a redemption of redeemable preference shares funded from the proceeds of a new issue of shares made for the purposes of the redemption (s 258E(1)(a), Corporations Act); • a share buy-back under ss 257A – 257J, if the shares are paid for out of share capital (s 258E(1)(b), Corporations Act); • capital reductions involving the cancellation of shares in the context of a takeover (s 258E(2), Corporations Act); • capital reductions ordered by the court under s 1325A of the Corporations Act because of contravention of the takeover or compulsory acquisition provisions (s 258E(3), Corporations Act); and • a lost capital reduction – the reduction of capital that is lost or not represented by the available assets of the company (s 258F, Corporations Act).
Companies acquiring their own shares General prohibition .......................................................................................................................................................................
Companies are generally prohibited from directly acquiring their own shares (also called “self-acquisition”) except in the special circumstances set out in s 259A of the Corporations Act.
SECTION 259A Directly acquiring own shares A company must not acquire shares (or units of shares) in itself except: (a)
in buying back shares under section 257A; or
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[18.210]
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CORPORATIONS LAW: IN PRINCIPLE
(b)
in acquiring an interest (other than a legal interest) in fully-paid shares in the company if no consideration is given for the acquisition by the company or an entity it controls; or
(c)
under a court order; or
(d)
in circumstances covered by subsection 259B(2) or (3).
The Corporations Act also prevents a company from indirectly acquiring its own shares either by: • taking security over shares in itself except as permitted by s 259B of the Corporations Act; • issuing or transferring shares in itself to an entity it controls (s 259E of the Corporations Act defines control for these purposes) (s 259C, Corporations Act); or • obtaining or increasing control over an entity which holds shares in the company: s 259D, Corporations Act. Reason for prohibition .......................................................................................................................................................................
The purchase by a company of its own shares contravenes the doctrine of capital maintenance because the transaction reduces the share capital available to creditors and shareholders: Trevor v Whitworth (1887) 12 App Cas 409. If there was no prohibition on companies buying their capital, then it would be possible for a company to continue to reduce the company's cash account. Companies that are in financial difficulty could use a buy-back to affect the redistribution of cash and other assets to shareholders, thus putting into jeopardy the company's ability to pay back its creditors. Sections 259A – 259D of the Corporations Act preserve this doctrine by prohibiting companies from acquiring their own shares directly or indirectly, except as permitted by s 259A of the Corporations Act. The object of ss 259A – 259D of the Corporations Act is to prevent a company from purchasing its own shares for non-legitimate purposes, such as to: [18.220]
• manipulate the price of the company's shares to the detriment of investors; • stall or frustrate a takeover bid by an existing shareholder; • assist the board of directors or a group of shareholders to consolidate their control of the company and act in their own interests, rather than the interests of all shareholders; • buy out some shareholders at the expense of other shareholders willing to sell their shares; and
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• save shareholders' investment in the company in the event of corporate insolvency by buying them out before the company is wound up, leaving a smaller pool of funds to satisfy creditors' claims. Exceptions to the general prohibition ....................................................................................................................................................................... [18.230] Section 259A of the Corporations Act allows a company to purchase its own shares in four situations:
• s 259A(a) allows share buy-backs; • s 259A(b) allows the acquisition of an interest in fully paid shares (other than a legal interest) if no consideration is given for it by either the company or an entity it controls; • s 259A(c) concerns situations where a company is required to purchase shares by a court order, for example, under Pt 2F.1; and • s 259A(d) concerns situations where a company takes security over its shares under an employee share scheme. It also applies when the company is a financial institution and it takes security over its shares as part of its ordinary course of business of providing loan finance. Indirect self-acquisition by taking security over its own shares .......................................................................................................................................................................
A company may indirectly acquire shares in itself by exercising its rights under a security permitted by s 259B(2) or (3) of the Corporations Act. Where a company acquires shares pursuant to a security, it must dispose of those shares within 12 months of acquiring them: s 259B(4), Corporations Act. It must not exercise any voting rights attaching to the shares during the period it holds the shares: s 259B(5), Corporations Act. [18.240]
Other indirect self-acquisitions .......................................................................................................................................................................
Section 259C of the Corporations Act provides that an issue or transfer of shares by a company to an entity controlled by the company is void except in the circumstances set out in the section. For these purposes, control is defined as the capacity to determine the outcome of decisions about the entity's financial and operation policies: s 259E, Corporations Act; see also [4.100]. The entity could be a natural person, another company, a partnership or a trust: s 64A, Corporations Act. Where a company obtains control of an entity which holds shares in the company, within 12 months after this occurs, it must either cease to control the entity or the entity must cease to hold shares in the company: s 259D(1), Corporations Act. The entity must not exercise any voting rights attaching to the shares in the company during the 12-month
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[18.250]
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CORPORATIONS LAW: IN PRINCIPLE
period: s 259D(3), Corporations Act. The Corporations Act imposes heavy penalties for any breach of s 259D of the Corporations Act.
Share buy-backs What is a share buy-back? .......................................................................................................................................................................
A share buy-back is any transaction by which a company buys back its own shares from existing shareholders. The transaction involves an agreement between the company and the selling shareholders to transfer shares to the company in return for consideration provided by the company. [18.260]
Regulation of share buy-backs: ss 257A-257J ....................................................................................................................................................................... [18.270] Share buy-backs are regulated by ss 257A – 257J of the Corporations Act. They are one of the main exceptions to the prohibition against companies buying their own shares. It is important to note however that these statutory rights that a company has under the Corporations Act to buy back their own shares can be put aside or restricted by the company's own constitution: s 257A, Corporations Act.
Relationship between a buy-back and a capital reduction ....................................................................................................................................................................... [18.280] A share buy-back also results in a reduction of share capital, but share buy-backs are not governed by the requirements applying to direct reductions of capital: ss 256A – 256E, Corporations Act. A separate set of requirements applies for share buy-backs: ss 257A – 257J, Corporations Act. Most requirements for a share buy-back are similar to the requirements for capital reductions. The major practical difference is that a share buy-back can only take place with the consent of the shareholders whose shares are being bought back. Shareholders are not compelled to agree to sell their shares back to the company. By contrast, a capital reduction can take place without requiring the consent of the shareholders whose capital is being returned, provided that it complies with the set of statutory requirements applying to capital reductions.
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Requirements for a buy-back .......................................................................................................................................................................
The minimum requirements for a buy-back are very similar to those for a reduction of capital. Note s 257A of the Corporations Act:
[18.290]
SECTION 257A The company’s power to buy back its own shares A company may buy back its own shares if: (a)
the buy-back does not materially prejudice the company’s ability to pay its creditors; and
(b)
the company follows the procedures laid down in this Division.
Note 1: If a company has a constitution, it may include provisions in the constitution that preclude the company buying back its own shares or impose restrictions on the exercise of the company’s power to buy back its own shares. Note 2: A company may buy-back redeemable preference shares and may do so on terms other than the terms on which they could be redeemed. For the redemption of redeemable preference shares, see sections 254J-254L.
Protection of creditors and shareholders .......................................................................................................................................................................
As with capital reductions, the purpose of these requirements is to protect the interests of creditors and the remaining shareholders (those shareholders whose shares are not being bought back by the company): s 256A, Corporations Act. The shareholders whose shares are being bought are protected by the fact that they must agree to the share buy-back before it can take place. Section 257A(a) of the Corporations Act addresses the risk of the buy-back transaction leading to the company's insolvency. The same requirement applies to share capital reductions. The procedures in ss 257B – 257J of the Corporations Act address the issue of fairness between the company's shareholders and require the company to provide relevant information about the transaction to the shareholders. The extent of the information that must be provided to shareholders varies, depending on the type of buy-back.
[18.300]
.......................................................................................................................................................................
A company may wish to buy back its own shares for the same business reasons that it undertakes a share capital reduction, as well as:
[18.310]
• to reduce administrative costs by buying out the holders of odd lots of shares;
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Reasons for undertaking a buy-back
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CORPORATIONS LAW: IN PRINCIPLE
• to enable employees to realise shares acquired under an employee share scheme when they leave the company; and • to enable a retiring shareholder to be bought out of a company. Share buy-backs provide another way, in addition to reductions of capital, that a company can eliminate minority members. However, with a buy-back, the minority whose shares are being bought back must consent. Types of permitted buy-backs ....................................................................................................................................................................... [18.320]
The Corporations Act permits five types of share buy-back:
• equal access buy-backs; • on-market buy-backs; • employee share scheme buy-backs; • minimum holding buy-backs; and • selective buy-backs. Equal access buy-backs
Equal access share buy-backs are similar to equal capital reductions. They are buy-backs which satisfy the following conditions: [18.330]
(a)
the offers under the scheme relate only to ordinary shares;
(b)
the offers are made to every ordinary shareholder to buy back the same percentage of their ordinary shares;
(c)
all of the ordinary shareholders have a reasonable opportunity to accept the offers made to them; and
(d)
the terms of the offers are the same: s 257B(2), Corporations Act.
On-market buy-backs [18.340] On-market buy-backs are buy-backs of listed shares on the stock exchange, either in Australia or in a financial market outside Australia approved by ASIC: s 257B(6) – (7), Corporations Act.
Employee share scheme buy-back
Employee share scheme buy-backs are buy-backs under a scheme for the acquisition of shares in a company by or on behalf of the employees or directors of the company, which has been approved by the company in general meeting: s 9, Corporations Act. The buy-backs usually occur when employees cease employment with the company. [18.350]
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Minimum holding buy-backs
Minimum holding buy-backs permit a listed company to buy back parcels of shares which are smaller than a marketable parcel of shares under the trading rules of the relevant financial market: s 9, Corporations Act. The Corporations Act requires any company using this scheme to buy back all of the shareholder's shares in the company. [18.360]
Selective buy-backs
These are defined as buy-backs not included in the other four types: s 9, Corporations Act. Generally, they will be buy-back offers made to particular shareholders (or groups), or to holders of other than ordinary shares (for example, preference shares). [18.370]
Procedure for buy-backs .......................................................................................................................................................................
Section 257B(1) of the Corporations Act is in the form of a table which sets out the requirements for each type of buy-back. With the exception of a minimum holding buy-back, each of the schemes requires the company undertaking a buy-back to give notice to ASIC of its intention to carry out a buy-back. The normal maximum size limit for buy-backs is 10% of the shares within 12 months. This is referred to as the “10/12 limit”: s 257B(4), Corporations Act. The 10/12 limit may be exceeded under certain conditions.
[18.380]
[18.390] TABLE 18.2 Procedures for share buy-backs: s 257B minimum holding
ordinary resolution s 257C special/ unanimous resolution s 257D lodge offer documents with ASIC s 257E 14 days' notice s 257F disclose relevant information when offer made s 257G
–
employee on-market equal access selecshare scheme scheme tive Within Over Within10/12 Over10/12 Within Over buy10/12 10/12 limit limit 10/12 10/12 back limit limit limit limit – yes – yes – yes –
–
–
–
–
–
–
–
yes
–
–
–
–
–
yes
yes
yes
–
yes
yes
yes
yes
yes
yes
yes
–
–
–
–
–
yes
yes
yes
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procedures
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CORPORATIONS LAW: IN PRINCIPLE
procedures
minimum holding
cancel shares s 257H notify cancellation to ASIC s 254Y
yes yes
employee on-market equal access selecshare scheme scheme tive Within Over Within10/12 Over10/12 Within Over buy10/12 10/12 limit limit 10/12 10/12 back limit limit limit limit yes yes yes yes yes yes yes yes
yes
yes
yes
yes
yes
yes
Once the shares are bought back under any buy-back scheme, they must be cancelled: s 257H, Corporations Act. The company must notify ASIC of the shares which have been bought back and cancelled: s 254Y, Corporations Act. On-market buy-backs must also comply with the procedures in ASX Listing Rules 7.29-7.35, which broadly require companies to keep the ASX informed about such transactions. Equal access schemes: Section 257C
No shareholder approval is needed for an equal access scheme buy-back unless the 10/12 limit is exceeded. If the 10/12 limit is exceeded, the following steps must be taken:
[18.400]
• prior approval of the terms of the buy-back agreement by ordinary resolution of the general meeting or the agreement must be conditional on the approval of the meeting; • the company must include a statement setting out all information known to the company which is material to the decision on how to vote on the resolution with the notice of the meeting; and • notice of the meeting, together with any relevant documents, must be lodged with ASIC before being sent to shareholders: ss 257C and 257F, Corporations Act. Selective buy-backs: Section 257D
Because only some shareholders are being given the opportunity to sell their shares back to the company (if they wish to do so) stricter procedural requirements apply to selective buy-backs. These schemes require: [18.410]
• approval by special resolution of the members, with no votes being cast by selling shareholders, or unanimous approval by all ordinary shareholders at a general meeting; and • the same notification and disclosure requirements as for equal access schemes: ss 257D and 257F, Corporations Act.
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Other relevant legislation .......................................................................................................................................................................
Section 257J of the Corporations Act contains an important table which lists other provisions in the Corporations Act applicable to buy-backs (compare the similar table in s 256E).
[18.420]
Financial assistance for purchase of a company’s own shares General restriction .......................................................................................................................................................................
As a matter of principle, purchasers should pay for shares they buy from their own resources: see Darvall v North Sydney Brick & Tile Co Ltd (1989) 15 ACLR 230 at 257 per Kirby P. If a company lends money or provides other financial assistance for the purchase of its shares it may also breach the doctrine of capital maintenance. If, for example, the borrower cannot repay the loan, the effect is that the company has bought, or helped to buy, its own shares. To protect creditors and shareholders, s 260A of the Corporations Act permits a company to give financial assistance to a person to acquire its shares, but only under regulated conditions.
[18.430]
SECTION 260A(1), (2) Financial assistance by a company for acquiring shares in the company or a holding company A company may units of shares) company only if: (a) giving the (i) the (ii) (b)
(2)
financially assist a person to acquire shares (or in the company or a holding company of the assistance does not materially prejudice: interests of the company or its shareholders; or
the company’s ability to pay its creditors; or
the assistance is approved by shareholders under section 260B (that section also requires advance notice to ASIC); or
(c) the assistance is exempted under section 260C. Without limiting subsection (1), financial assistance may: (a) be given before or after the acquisition of shares (or units of shares); and (b)
take the form of paying a dividend.
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(1)
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CORPORATIONS LAW: IN PRINCIPLE
Protection of creditors and shareholders ....................................................................................................................................................................... [18.440] Section 260A(1)(a)(i) of the Corporations Act addresses the issue of the fairness of the financial assistance transaction from the viewpoint of the company and its shareholders. Section 260A(1)(a)(ii) of the Corporations Act addresses the risk of financial assistance leading to the company's insolvency from the viewpoint of its creditors. The issues addressed by these provisions are similar to those addressed by the requirements for capital reductions and buy-backs.
What is financial assistance? ....................................................................................................................................................................... [18.450] The Corporations Act does not define what is meant by the concept of financial assistance, other than noting that it may be given before or after the acquisition of shares and may take the form of paying a dividend: s 260A(2), Corporations Act. In the absence of a statutory definition, case law provides many examples of financial assistance, including:
• the making of a loan – DJE Constructions Pty Ltd v Maddocks [1982] 1 NSWLR 5; ASIC v Adler (2002) 168 FLR 253 (largely affirmed on appeal Adler v ASIC (2003) 179 FLR 1); • issuing a debenture – Victor Battery Co Ltd v Curry's Ltd [1946] Ch 242; • giving security over company assets – Firmin v Gray & Co Pty Ltd [1985] 1 Qd R 160; and • incurring a personal obligation on behalf of another – Burton v Palmer [1980] 2 NSWLR 878. See other examples of “financial assistance” in Belmont Finance Corp Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 and E H Dey Pty Ltd (in liq) v Dey [1966] VR 464. The cases indicate that courts have adopted a practical and realistic approach in deciding whether a transaction involves a company giving financial assistance: see Dempster v National Companies & Securities Commission (1993) 9 WAR 215; Milburn v Pivot Ltd (1997) 78 FCR 472; Tallglen Pty Ltd v Optus Communications Pty Ltd (1998) 146 FLR 380; Wambo Mining Corp Pty Ltd v Wall Street (Holding) Pty Ltd (1998) 16 ACLC 1601. “Material prejudice” .......................................................................................................................................................................
Section 260A(1)(a) of the Corporations Act permits a company to give financial assistance provided that the assistance does not materially prejudice either the company, its shareholders or the company's ability to pay its creditors. The object of this provision is to enable companies to undertake normal commercial transactions which do not prejudice the company's [18.460]
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financial position. The requirement of no material prejudice is similar to the “no material prejudice” requirements for share capital reductions and share buy-backs. The effect of the transaction on the company and its shareholders should be assessed separately, because the company is an entity separate from its shareholders. It is possible that there will be circumstances where giving financial assistance will materially prejudice the company, but not its shareholders. In those circumstances, the company could not give financial assistance relying on s 260A(1)(a) of the Corporations Act. Instead, it would have to get approval from the shareholders under s 260B of the Corporations Act. It appears that before the act of giving financial assistance can be held to cause “material prejudice”, the financial assistance must have diminished the company's resources in some way: see Tallglen Pty Ltd v Optus Communications Pty Ltd (1998) 146 FLR 380; and Wambo Mining Corp Pty Ltd v Wall Street (Holding) Pty Ltd (1998) 16 ACLC 1601. In ASIC v Adler (2002) 168 FLR 253 at [335]–[355], Santow J adopted this “impoverishment” doctrine. The judge said it was necessary to take a commercial approach and look at the whole transaction to determine whether or not it had diminished the company's resources. In this case, HIHC had handed over $10 million in cash in return for an interest in units in a unit trust and, as Santow J said (at [355]), these rights were “from the start of materially lesser value than the cash handed over”. This transaction eventually resulted in an actual loss of over $2 million to HIHC as well as loss of use of a further almost $4 million that could have been used for other investments or for business purposes. Shareholder approval procedure .......................................................................................................................................................................
Section 260A(1)(b) of the Corporations Act permits a company to give financial assistance even if this would materially prejudice the interests of the company or its ability to pay its creditors, provided that the assistance is approved by shareholders pursuant to s 260B of the Corporations Act. The procedure for obtaining approval is very similar to the shareholder approval procedures for selective share capital reductions and selective share buy-backs.
[18.470]
....................................................................................................................................................................... [18.480] Section 260C of the Corporations Act exempts financial assistance given by a company in the ordinary course of commercial dealing or if its ordinary business includes money lending and the assistance is given in the ordinary course of that business.
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Financial assistance exemptions
568
CORPORATIONS LAW: IN PRINCIPLE
[18.490] Figure 18.1: Summary of transactions affecting share capital ....................................................................................................
Failing to comply with Chapter 2J The legal consequences of failing to comply with Ch 2J of the Corporations Act are the same for each transaction discussed in this Topic. Civil penalty sanctions apply to breaches of the capital reduction rules (s 256D, Corporations Act), the share buy-back rules (s 257J, Corporations Act), the self-acquisition rules (s 259F, Corporations Act) and the financial assistance rules (s 260D, Corporations Act) in Ch 2J of the Corporations Act. Companies are specifically excluded from liability as they are the “victims” of the contraventions. Officers involved in the contravention are subject to the civil penalty provisions. They can be liable for a pecuniary penalty in respect [18.500]
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of each breach or an order banning them from managing a company, as well as liability for breaches of general directors' duties: s 260E, Corporations Act. They can also be liable to pay compensation to the company: s 1317H, Corporations Act. In ASIC v Adler (2002) 168 FLR 253 Santow J made orders: • banning Adler and Williams from managing a company for 20 and 10 years, respectively; • imposing substantial pecuniary penalties on Adler ($450,000), Adler Corporation ($450,000), Williams ($250,000) and Fodera ($5,000); and • requiring Adler, Williams and Adler Corporation to pay total compensation of $7,986,402 to HIHC. (The amount of compensation was varied by the Court of Appeal, but the other penalties were unchanged: see Adler v ASIC (2003) 179 FLR 1.) Any transaction undertaken in contravention of Ch 2J of the Corporations Act remains legally valid and enforceable despite the fact that it contravenes the Corporations Act.
Remedies for contravening Chapter 2J [18.510] Shareholders and creditors can apply to the court for an injunction to restrain a company from undertaking a share capital transaction in contravention of the procedural requirements in Ch 2J of the Corporations Act: s 1324 (see discussion of s 1324 in Chapter 14). Injunctions are a useful remedy for stopping an improper share capital transaction before it is completed. Once completed, an injunction is no longer an appropriate remedy because the transaction is taken to be valid and effective. Shareholders can resort instead to members' remedies, such as under Pt 2F.1. Creditors may have rights under ss 588G – 588Z of the Corporations Act.
Mentor: Test your Knowledge ......................................................................................................................................
Practice Questions ...................................................................................................................................... 1.
(a)
What is the doctrine of capital maintenance?
(b)
How does Ch 2J of the Corporations Act give effect to the doctrine?
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(See http://www.legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Transactions Affecting Share Capital.)
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CORPORATIONS LAW: IN PRINCIPLE
2.
Why might a company prefer to undertake a share buy-back, in preference to a reduction of capital, as a means of returning share capital to investors?
3.
Can a company keep its own shares when it acquires them by exercising its rights to security in relation to an employee share scheme?
4.
Explain what a selective share buy-back is.
5.
If you decided to buy shares in the Commonwealth Bank, could you use money borrowed from that bank either as a direct loan or a margin loan in order to buy them? Discuss.
6.
Is any transaction which contravenes the procedural requirements in Ch 2J of the Corporations Act invalid by reason of that contravention?
7.
What is the purpose of the 10/12 rule for share buy-backs under Ch 2J of the Corporations Act?
8.
In what circumstances do the resolution requirements for share buy-backs achieve the objectives of Ch 2J of the Corporations Act?
Essay Questions ...................................................................................................................................... 1.
“The introduction of Ch 2J of the Corporations Act and allowing share buy-backs has made the rule in Trevor v Whitworth (1887) 12 App Cas 409 no longer relevant”. Discuss.
2.
“All procedural restrictions on share-buy backs should be removed since share buy-backs benefit all shareholders on the basis that the company is returning capital back to its shareholders and thereby increasing earnings per share”. Critically discuss the quotation in light of the requirements in Ch 2J of the Corporations Act and the New South Wales Court of Appeal's decision in Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144.
Problems for Discussion ...................................................................................................................................... 1.
Popsi Softdrinks Ltd (Popsi) is a successful softdrink and fruit juice drink manufacturer. Popsi has 2,000,000 ordinary shares issued at a price of $1 per share. Popsi decides to sell its fruit juice operation for $500,000. Popsi has no present or future use for this money. It already has a substantial “capital projects” reserve from which it will finance any further expansion of its business. The directors propose to return the funds to shareholders. Popsi seeks advice as to how to undertake
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such a transaction. Answer the following questions: (a)
What transaction(s) could Popsi undertake in order to return the funds to shareholders?
(b)
If more than one transaction is possible, which one would you recommend that Popsi undertake and why would you recommend it?
(c)
Assume that Popsi undertakes a capital reduction. Would the transaction satisfy the requirements of Ch 2J of the Corporations Act if: (i) Ginger Ale, a shareholder with 30,000 ordinary shares, objects to the proposed distribution on the ground that it will adversely affect her tax position for the current financial year? (ii)
2.
If the proposed distribution takes place as a capital reduction, how much per share will each shareholder receive and what changes, if any, will occur to the company's accounts and the holdings of the shareholders?
Alan, Damien and Eric are the only shareholders and directors of ADE Pty Ltd (ADE) which sells farming equipment. ADE has recently purchased new office computers from Offices Pty Ltd. Damien and his wife are the only shareholders and directors of Offices and Damien disclosed his interest to the other directors of ADE as required by the Corporations Act. Until very recently ADE's business has been profitable, but at the moment it has some liquidity problems. ADE already has a considerable loan from the bank and the directors are reluctant to borrow any more until business improves. The directors resolve to each take up another 100 shares in ADE and use most of the proceeds to pay for the computers. Damien is rather short of cash, but because the terms of issue of the new shares do not require him to pay for them until after ADE has paid Offices for the computers, he can then use those funds to pay for his shares (after receiving the payment, Offices immediately lends the necessary money to Damien). Does this arrangement for financing the issue of shares to Damien involve any breaches of the Corporations Act by Damien, the other directors or ADE Pty Ltd?
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(d)
Popsi owes Carbonated Waters Pty Ltd $600,000 for carbonated water supplied to Popsi last month?
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Guide to Problem Solving ...................................................................................................................................... Selecting type of transaction
1.
Capital can be repaid to investors either by way of a capital reduction or a share buy-back.
2.
Define what is a capital reduction. Explain how it would be undertaken. List the requirements for undertaking a capital reduction.
3.
Define what is a share buy-back. Explain how it would be undertaken. List the requirements for undertaking a share buy-back.
4.
Compare and contrast the requirements under 1 and 2. Which transaction, on the facts, would be easier and why?
5.
Does the transaction involve financial assistance?
Reduction of capital
1.
Does the proposal amount to a reduction of share capital? If not, Ch 2J of the Corporations Act does not apply.
2.
If it is a reduction of share capital, what type of reduction is it? An equal reduction or a selective reduction? See s 256B(2) of the Corporations Act.
3.
What are the requirements for the reduction of capital? State the three requirements in s 256B(1) of the Corporations Act and explain how they have been met by the proposal.
4.
Consider first the issue of fairness and reasonableness to the shareholders as a whole: • use the guidelines from the Explanatory Memorandum to the Company Law Review Bill 1997 (Cth) in respect of s 256B of the Corporations Act to assist you to determine whether the transaction is fair and reasonable; and • assess the effect that the transaction will have on shareholders as a collective group, rather than any individual within that group.
5.
Consider the issue of material prejudice to the company's ability to pay its creditors. Use the guidelines from the Explanatory Memorandum to the Company Law Review Bill 1997 (Cth) in respect of s 256B of the Corporations Act (see [18.130]) to assist you to determine whether the transaction prejudices creditors. Focus on the effect that the transaction will have on creditors, not the purpose for which the directors undertook the transaction.
6.
Consider the issue of shareholder approval: s 256C, Corporations Act. Determine what type of approval is required.
CHAPTER
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TRANSACTIONS AFFECTING SHARE CAPITAL
573
7.
Note any practical matters which may be relevant to reductions of capital.
8.
Discuss the consequences of breach, which include civil penalty sanctions for officers.
Financial assistance
1.
Does the proposal involve financial assistance? If not, Ch 2J of the Corporations Act does not apply. Consider the examples of financial assistance in the cases referred to in this Topic. Remember, the courts adopt a commercially realistic approach in deciding whether a transaction involves “assistance” and if so, whether it is “financial” assistance.
2.
Even if it involves financial assistance, does giving the financial assistance materially prejudice: • the interests of the company; • the interests of shareholders; or • the company's ability to pay its creditors: s 260A(1)(a), Corporations Act?
3.
It is important to deal with the effect of the transaction on each of these parties separately.
4.
If the transaction does involve material prejudice – what are the requirements for shareholder approval in s 260B? Have these been complied with?
5.
Does the transaction fall within the exemptions in s 260C of the Corporations Act?
6.
Discuss the consequences of breach of s 260A of the Corporations Act for both the company and its directors. What sanctions may apply to the latter?
Alevras S and du Plessis J, “The payment of dividends: Legal confusion, complexities and the need for comprehensive reform in Australia” (2014) 32 Company and Securities Law Journal 312 Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis, 2014, Ch 24. Brown CA and Efthim K “The Effect of Taxation on Equal Access Buybacks in Australia” (2005) 5 International Review of Finance 199 Brown CA “The Forensics of Share Buybacks” (2004) JASSA (Summer) 30
Chapter 18
Further Reading ......................................................................................................................................
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CORPORATIONS LAW: IN PRINCIPLE
Cho YY and Kshore V “The “Material Prejudice” Test and the Financial Assistance Prohibition” (2004) 78 ALJ 194 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, [8.200]-[8.375] Mitchell JD, Dharmawan GV and Clarke AW “Management's Views on Share Buy-Backs: An Australian Survey” (2001) 41 Accounting and Finance 93 Ramsay I and Lamba AS Share Buy-backs: An Empirical Investigation Research Report, Centre for Corporate Law and Securities Regulation, The University of Melbourne, 2000
.......................................................................................................
Dividends Useful Websites ..................................................................... 575 Aim ......................................................................................... 575 Related Topics ....................................................................... 576 Principles ............................................................................... 576 Introduction ............................................................................... 576 Calculation of dividend .................................................................. 577 Who decides whether to pay a dividend? ........................................... 577 Differing dividend rights ................................................................ 579 When can a dividend be paid? ......................................................... 580 When does a dividend become a debt? ............................................. 581 Liability of directors and auditors for wrongful payment of dividends ........ 582 Dividend imputation system ........................................................... 582 Mentor: Test your Knowledge ............................................... 583 Practice Questions ................................................................. 583 Essay Questions .................................................................... 584 Problems for Discussion ........................................................ 584 Guide to Problem Solving ...................................................... 585 Further Reading ..................................................................... 586
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Dividends.)
Aim ...................................................................................................................................... At the end of this topic you should know: • the procedure and requirements for payment of dividends; and • the rights of shareholders regarding dividends.
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Related Topics ...................................................................................................................................... Chapter 5 Internal Rules; Chapter 15 Financial Reports and Audit; Chapter 17 Classes of Shares
PRINCIPLES Introduction [19.10] This Topic discusses the law of dividends. A dividend is a share of the company's profits paid to a shareholder. Subject to a small number of fundamental rules in Pt 2H.5 of the Corporations Act 2001 (Cth) (Corporations Act), the rules governing the procedure for the payment of dividends can be found in a company's internal rules. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
The CATSI Act does not have similar provisions in relation to dividends. However, as part of the internal rules of the corporation, members may include rules in the corporations rule book on the way in which profits are shared. Final and interim dividends .......................................................................................................................................................................
Companies have the power to distribute profits as dividends to shareholders: s 124, Corporations Act. Provided that a company's operations have been profitable and the directors have recommended that dividends be paid, most public companies pay dividends each half-year. A “final” dividend is one paid at the end of a company's financial year and disclosed by the company's annual financial reports. An “interim” dividend is a dividend paid in the period between each annual presentation of the financial reports to the company's general meeting. Dividends are usually paid in cash, although they can be paid in other forms such as issuing shares, the grant of options or the transfer of assets. Interest is not payable on a dividend: s 254U, Corporations Act. [19.20]
Bonus shares and dividend reinvestment plans .......................................................................................................................................................................
A company may issue bonus shares as an alternative to paying cash dividends. The amount of the dividend goes to pay for the extra (bonus) shares which the company issues to the shareholders. No money leaves the [19.30]
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577
company. In the financial reports, the profit and loss account is decreased, and the share capital account is increased by the amount of the distribution. Many public companies also have dividend reinvestment plans which allow shareholders to choose to receive all or part of their dividends in the form of new shares in the company rather than as a cash payment. This enables shareholders to increase their holdings in the company without being required to pay a fee or commission to a broker.
Calculation of dividend Companies pay dividends to their shareholders in one of the following forms: [19.40]
• a dividend expressed as a percentage of the issue price of a share; or • a dividend expressed as a fixed amount (number of cents) per share. The second method is the easier of the two methods and is the one most commonly used. Calculating a dividend by reference to the issue price of a share (the first method) can become complicated when the issue price for the shares changes between share issues. The relationship between the market value of a share and the dividend paid on a share is called the dividend yield.
Who decides whether to pay a dividend? [19.50] The directors normally have the power to decide if, when and how to pay dividends: s 254U, Corporations Act.
SECTION 254U Other provisions about paying dividends (replaceable rule – see section 135) (1)
The directors may determine that a dividend is payable and fix: (a)
the amount; and
(b)
the time for payment; and
(c)
the method of payment.
The methods of payment may include the payment of cash, the issue of shares, the grant of options and the transfer of assets. (2)
Interest is not payable on a dividend.
Section 254U of the Corporations Act is a replaceable rule, which can be modified or excluded by the company's own internal rules. For example, a company's constitution may exclude s 254U of the Corporations Act by requiring final dividends to be approved by an ordinary resolution of its shareholders. The requirement for shareholder approval is common in the
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578
CORPORATIONS LAW: IN PRINCIPLE
constitutions of companies registered before 1 July 1998 that have not been revised or updated since then. The constitution of these companies typically gives directors the power to pay interim, but not final dividends. Directors can recommend final dividends but they must put their recommendation to a vote at the annual general meeting of the shareholders. If the resolution in favour of the final dividend is passed, the dividend is said to be “declared”. By comparison, under s 254U of the Corporations Act, the authorisation of shareholders is not required before the final dividend can be determined by the directors. No entitlement to a dividend .......................................................................................................................................................................
Shareholders are not entitled to a dividend as of right unless this is specifically stated in the company's internal rules: Burland v Earle [1902] AC 83. The traditional view of the courts is that dividend policy is a matter for the appropriate organ of the company – either the company in general meeting or the directors. Section 254U of the Corporations Act reinforces this view by giving to the directors the power to determine that a dividend is payable, subject to the company's other internal rules.
[19.60]
Failure to pay dividends ....................................................................................................................................................................... [19.70] What is the situation if the directors persistently refuse to pay a dividend, even though the company is making good profits and is solvent? The courts take the view that shareholders cannot force companies to pay dividends. Dividend policy is generally regarded as a matter for the board. The directors have a plan for the future of the company and they are the ones to decide on the best use of company funds. Sometimes, particularly in small companies, the situation is not so straightforward. It is possible that a board will have an ulterior motive for refusing to pay dividends. Suppose in a small company, where the directors are also the only members, there is a falling out between the directors and one is removed by the others. This director could be put in a situation where he or she is “locked-in” (because no-one will buy her or his shares or the board refuses to register any transfer), yet he or she receives no dividends because all profits are paid to the board by way of remuneration. What can such a shareholder do? There are two possibilities. He or she could argue oppression (Pt 2F.1, Corporations Act) saying that the directors were acting in their own interests or unfairly. The other possibility would be to bring a fraud on the minority action: see Miles v Sydney Meat Preserving Co Ltd (1912) 12 SR (NSW) 98. In the American case of Dodge v Ford Motor Co 204 Michigan Supreme Court Reports 459 (1919), the court ordered
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DIVIDENDS
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payment of a dividend because the company was prosperous, and refusal to pay a dividend was seen as an abuse of the directors' discretion. The Australian cases of Sanford v Sanford Courier Service Pty Ltd (1986) 5 ACLC 394; Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882; and Shamsallah Holdings Pty Ltd v CBD Refrigeration & Airconditioning Services Pty Ltd (2001) 19 ACLC 517 are oppression cases (Pt 2F.1, Corporations Act) based on a refusal to pay dividends. This was only one aspect of the cases, however, and care should be taken because of their special facts.
Differing dividend rights [19.80] A company's constitution may provide for the share capital to be divided into classes of shares, each class of which may have different dividend rights. For example, the constitution may permit the directors to pay dividends on one class of shares to the exclusion of the other classes. Section 254W of the Corporations Act deals with the dividend rights attaching to shares within the same class of shares.
SECTION 254W(1) Dividend rights Shares in public companies (1)
Each share in a class of shares in a public company has the same dividend rights unless: (a)
the company has a constitution and it provides for the shares to have different dividend rights; or
(b)
different dividend rights are resolution of the company.
provided
for
by
special
Shares in a particular class of shares in a public company can have different dividend rights only if the company's constitution or a special resolution of the company provides for differing rights. Section 254W(2) of the Corporations Act deals with the same issue in relation to proprietary companies. Note that s 254W(2) of the Corporations Act is a replaceable rule, while s 254W(1) of the Corporations Act is not.
SECTION 254W(2) Shares in proprietary companies (replaceable rule – see section 135) (2)
Subject to the terms on which shares in a proprietary company are on issue, the directors may pay dividends as they see fit.
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CORPORATIONS LAW: IN PRINCIPLE
The object of s 254W(2) of the Corporations Act is to give directors of proprietary companies the discretion to pay dividends to some ordinary shareholders but not others. Family companies often wish to pay dividends to some members but not to others for tax purposes. The aim is to save proprietary companies from the complication and expense involved in dividing their shares into classes purely for the purpose of paying dividends. However, distinguishing between shareholders, by paying dividends to some but not all members of the same class of shares, may amount to a variation of class rights under s 246C of the Corporations Act and/or oppression under Pt 2F.1 of the Corporations Act.
When can a dividend be paid? [19.90] Section 254T of the Corporations Act has three limbs for the payment of a dividend:
SECTION 254T Circumstances in which a dividend may be paid (1) A company must not pay a dividend unless: (a)
the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and
(b)
the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and
(c)
the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.
Note 1: As an example, the payment of a dividend would materially prejudice the company’s ability to pay its creditors if the company would become insolvent as a result of the payment. Note 2: For a director’s duty to prevent insolvent trading on payment of dividends, see section 588G.
Section 254T dividend payment requirements: The three limb test .......................................................................................................................................................................
Balance sheet test
A balance sheet test is used to determine that the company is solvent before a dividend is declared and that sufficient net assets (assets less liabilities) remain to make the dividend payment: s 254T(1)(a), Corporations Act. The calculation of assets and liabilities required under the balance sheet
[19.100]
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DIVIDENDS
581
test should be completed in accordance with Australian accounting standards: s 254T(2), Corporations Act. The balance sheet test is also in operation in New Zealand and Canada. Protection of shareholders [19.110] In addition to the balance sheet test, the payment of the dividend must be both fair and reasonable to the company's shareholders as a whole: s 254T(1)(b), Corporations Act. The second limb is designed to provide sufficient protection for shareholders who are not entitled to the payment of the dividend.
Solvency requirement
Section 254T also imposes a solvency requirement on the payment of a dividend. A company must not pay a dividend if the payment of the dividend would result in the company becoming insolvent and materially prejudice the company's ability to pay its creditors: s 254T(1)(c), Corporations Act. Hence, the emphasis now rests on the board to ensure that the company remains solvent at the time the dividend is declared. Importantly, the existing duty to prevent insolvent trading as provided under s 588G of the Corporations Act will continue to apply to directors: see s 254T, Note 2, Corporations Act. [19.120]
Position of section 254T before the 2010 amendments ....................................................................................................................................................................... [19.130] The rules governing the payment of dividends prior to the 2010 amendments to s 254T of the Corporations Act were based on a “profits” test rather than on solvency. The object of the previous s 254T of the Corporations Act was to ensure dividends were only paid out of profits; that is profits had to exist at the time the dividend was paid, not at the time the directors determined that a dividend was payable. The new requirements under s 254T of the Corporations Act and its emphasis on solvency rather than profit represent a marked departure from the previous law.
When does a dividend become a debt? Subject to one exception, a company is not liable to pay a dividend unless and until the time for payment of the dividend arrives. Note s 254V(1) and (2) of the Corporations Act:
[19.140]
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CHAPTER
582
CORPORATIONS LAW: IN PRINCIPLE
SECTION 254V When does the company incur a debt? (1)
A company does not incur a debt merely by fixing the amount or time for payment of a dividend. The debt arises only when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then.
(2)
However, if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared.
This provision applies to both final and interim dividends. It permits directors to revoke a decision to pay a dividend at any time before the time fixed for payment of the dividend. The exception in s 254V(2) of the Corporations Act concerns final dividends payable by companies with internal rules requiring the traditional declaration of final dividends at the annual general meeting of shareholders. If a company adopts this traditional method of declaring final dividends, the company incurs the debt when the dividend is declared, rather than when it is paid.
Liability of directors and auditors for wrongful payment of dividends Any dividend payment contrary to s 254T of the Corporations Act may result in directors becoming liable for insolvent trading and being ordered to compensate the company if they authorise the payment of dividends which render the company insolvent: s 588G, Corporations Act. [19.150]
Where dividends have been paid and this has led to the company becoming insolvent due to the auditors' negligence, the auditors will generally be liable to the company. The payment is not recoverable from the (innocent) shareholders, even though the shareholders have received a windfall gain. The shareholders are separate from the company and are to be treated as a third party: see Segenhoe Ltd v Akins (1990) 29 NSWLR 569.
Dividend imputation system Although a company is a separate legal entity, this feature is ignored to some extent for taxation purposes.
[19.160]
If companies, as separate entities, paid tax on their profits and then the shareholders, as individuals, had to pay tax on their dividends, it could be
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DIVIDENDS
583
argued that the profits were taxed twice. The dividend imputation system is designed to overcome this “double taxation”. Under the dividend imputation system, resident companies which pay tax can pass on a tax credit to their shareholders in their dividends. Dividends on which tax have been paid are known as “franked dividends”. If the full company tax rate of 30% has been paid, the dividends are called “fully franked”. Resident shareholders who receive franked dividends can currently calculate their tax liability in the following way: Step 1. The amount of the dividend received and the imputed credit (that is, the amount of tax the company has paid on that dividend) are added together. Step 2. The total is added to all other taxable income. Step 3. The tax payable, including the Medicare levy, is calculated. Step 4. The tax credit is deducted from the tax payable. Example: Dividend received Imputed credit (fully franked) Income from other sources Total assessable income Tax payable (based on 2015/16 tax rates including Medicare levy of 2%) Less franking credit Tax payable after dividend imputation
$ 700 300 20,000 21,000 952 300 652
Mentor: Test your Knowledge ...................................................................................................................................... (See http://www.legal.thomsonreuters.com.au/browse/mentor multiple choice questions and answers on the Topic of Dividends.)
for
Practice Questions ...................................................................................................................................... 1.
When can a company pay a dividend?
2.
Why should a company be solvent at the time a dividend is declared?
3.
Who would be liable if a company was solvent at the time the dividend was declared but insolvent at the time the dividend was paid?
4.
Suppose a dividend falls due for payment on 1 November of every year. On 1 November, the company is operating at a loss. Should the company pay the dividend? Explain.
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CHAPTER
584
5.
CORPORATIONS LAW: IN PRINCIPLE
A company has $1,000,000 in excess funds: (a) list the procedures by which these funds could be distributed to the shareholders; and (b)
explain why the company would prefer to distribute the funds as a dividend in preference to the other procedures.
Essay Questions ...................................................................................................................................... 1.
Should a company be allowed to pay a dividend to its shareholders even if the company's net assets fluctuate over time?
2.
Do you agree with the recent amendments to the law covering the payment of dividends? What are the main advantages and disadvantages between the current law on dividend payments and the previous s 254T of the Corporations Act?
Problems for Discussion ...................................................................................................................................... 1.
Shareholders' funds in the balance sheet of Galaxy Ltd as at 31 December 2015 showed the following. Issued Capital 20,000,000 fully paid ordinary shares issued for $1.00 2,000,000 fully paid preference shares issued for $1.00 Retained earnings Asset Revaluation Reserve Total Shareholders' Funds
$20,000,000 2,000,000 (2,000,000) 1,000,000 21,000,000
The directors of Galaxy Ltd have received the following information from the company's accountants in February 2016: The company's net asset position has further deteriorated because of an increase in the provision of bad and doubtful debts. This is likely due to the non-recoverability of a large accounts receivable account that will have a material impact on the company's ability to remain as a going concern.
The company intends to hold its Annual General Meeting in March 2016. Under the terms of the share issue, the preference shareholders have the right to a dividend rate of 6% of the issue price per share. The Board intends to declare a 5 cent final dividend to the ordinary shareholders. Can the board declare the ordinary dividend without being in breach of s 254T?
2.
19
DIVIDENDS
585
Spec Pty Ltd (Spec) is a property development company. It owns parcels of rural and semi-rural land in Victoria. Bill owns 80% of the shares in Spec and controls the composition of its board. Last year the company made a small trading loss, but it owns a large area of land with a frontage to the Gold Coast which is valued in the company's balance sheet at $10 million but which is expected to be worth at least $25 million when it is developed as a golf course resort. Bill needs cash for another project in which he is involved. He wants the board to revalue the land at $25 million and then to distribute the $15 million “excess” to the shareholders in the form of a dividend. Advise the directors of Spec: (a)
whether they can comply with Bill's wishes without breaching the Corporations Act; and
(b)
what guidelines should they follow in making their decision.
Guide to Problem Solving ...................................................................................................................................... Requirements for the payment of a dividend (a)
The requirements for the payment of dividends are contained in s 254T of the Corporations Act.
(b)
Under s 254T directors must consider at the time of declaring the dividend: (1) whether the company has sufficient net assets to pay the dividend immediately before the dividend is declared and the excess is sufficient to pay the dividend (balance sheet test); (2)
whether it would be fair and reasonable to the company's shareholders as a whole (shareholder test);
(3)
whether it would materially prejudice the company's ability to pay its creditors (solvency test).
Rights of shareholders to dividends
(a)
The directors must first decide to pay (or the company declare: see s 254V(2), Corporations Act) a dividend: Burland v Earle [1902] AC 83, unless the internal rules say otherwise.
(b)
Preference shareholders' entitlements accumulate but cannot be enforced as a debt due to the shareholder until the time fixed for payment of a dividend (or when a dividend is declared: s 254V(2), Corporations Act).
(c)
Regarding persistent refusal to pay dividends, shareholders can argue oppression or fraud on the minority but are usually unlikely to succeed
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CHAPTER
586
CORPORATIONS LAW: IN PRINCIPLE
except in extreme circumstances: see Miles v Sydney Meat Preserving Co Ltd (1912) 12 SR (NSW) 98; Dodge v Ford Motor Co 204 Mich 459 (1919) (US); Sanford v Sanford Courier Service Pty Ltd (1986) 5 ACLC 394; Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882; and Shamsallah Holdings Pty Ltd v CBD Refrigeration & Airconditioning Services (2001) 19 ACLC 517.
Further Reading ...................................................................................................................................... Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis, 2014, Ch 18 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 10 Routledge J and Slade P “The Company Dividend Restriction: Does it Promote Good Corporate Governance?” (2003) 21 C&SLJ 447
.......................................................................................................
Loan Capital Useful Websites ..................................................................... 587 Recent Developments ............................................................ 587 Aim ......................................................................................... 588 Related Topic ......................................................................... 588 Principles ............................................................................... 588 Introduction ............................................................................... 588 Authority to borrow money ............................................................ 589 Debt vs equity ............................................................................. 589 Debentures ................................................................................ 590 Trustee for debenture-holders ......................................................... 593 Personal property securities ........................................................... 595 What is a “security interest”? .......................................................... 597 Registration of security interests ...................................................... 598 Subordinate debt ......................................................................... 605 The Whittaker Report .................................................................... 606 Mentor: Test your Knowledge ............................................... 606 Practice Questions ................................................................. 606 Problems for Discussion ........................................................ 607 Guide to Problem Solving ...................................................... 608 Further Reading ..................................................................... 609
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Loan Capital.)
Recent Developments ...................................................................................................................................... Corporations Act Amendments
Personal Property Securities Act 2009 (Cth) Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth)
Chapter 20
CHAPTER 20
588
CORPORATIONS LAW: IN PRINCIPLE
Personal Property Securities (Corporations and Other Amendments) Act 2011 (Cth) Australian Government, Whittaker B, Review of the Personal Property Securities Act 2009, Final Report (2015) (The Whittaker Report)
Aim ...................................................................................................................................... At the end of this topic you should know: • the distinction between share capital and loan capital; • the meaning of “debenture” and the conditions under which a company may borrow money from the public; • how personal property securities are now regulated; • what is a “security interest” over a company's property; • the difference between a a circulating and non-circulating security interest; and • why security interests over company property should be registered.
Related Topic ...................................................................................................................................... Chapter 16 Share Capital – General Nature
PRINCIPLES Introduction This Topic discusses how the Corporations Act 2001 (Cth) (Corporations Act) regulates the relationship between a company and suppliers of loan capital to the company. It is one of many relationships in which a company plays the role of debtor. Others include the company's relationship with its bank (for overdraft facilities supplied to the company), employees (for unpaid wages) and trade creditors (for goods and services supplied to the corporation on credit). Creditors lending money or extending credit to a company may require the company to provide security for their loans. Creditors who take security have a proprietary right over one or more assets of the borrower which, in the event of default, enables them to seize those assets and sell them to recover any amounts outstanding on their loans. Unsecured creditors can only sue for the debt – they have no rights over particular assets. This and many other aspects of transactions between a creditor and a corporate debtor are no different to transactions between creditors and individual debtors. [20.10]
20
LOAN CAPITAL
589
Apart from the issues discussed here, the laws regulating creditor–debtor relations are outside the realm of corporate law. The Corporations Act as amended by the Personal Property Securities Act 2009 (Cth) (PPS Act) (as amended) regulates loans to companies in the form of debentures and unsecured notes and security given by a company for a loan over a circulating or non-circulating asset. The PPS Act commenced on 30 January 2012 and the transitional period (by which time all PPS Act security interests must be perfected) ended on 31 January 2014. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
There are no corresponding provisions in relation to loan capital in the CATSI Act because such corporations are not allowed to issue debentures or other securities.
Authority to borrow money Companies have the power to borrow money: s 124(1), Corporations Act. Where a company has a constitution, the constitution may include provisions which otherwise restrict the borrowing powers given to the company by the Corporations Act. Despite such restrictions, the Corporations Act permits creditors to make a number of assumptions about the company's authority to incur debt and give security for loans. Public companies may borrow money from the public provided they comply with the disclosure requirements in the Corporations Act. [20.20]
Debt vs equity [20.30] Finance obtained from lenders (for example, a bank overdraft or a loan) is known as debt finance or “loan capital”. Capital provided by shareholders is known as “equity capital”. Gearing is the ratio of funds borrowed by a company compared to the share capital. If loan capital is large compared to equity capital, the gearing is said to be high. If borrowing is low, the gearing is said to be low. As a rule, the higher the gearing, the greater the risk for investors. However, there may be occasions where certain financial instruments are not easily characterised as belonging either to debt or equity. Hybrid financial instruments may have dual characteristics of debt and equity, making assessments concerning gearing difficult to evaluate. In a recent decision, St George Ltd v Commissioner of Taxation [2008] FCA 453, the Federal Court came across the difficult task of characterising subordinate debentures as either debt or equity for tax purposes. The Court held that subordinate debentures used by St George Bank to finance a merger with Advance Bank
Chapter 20
CHAPTER
590
CORPORATIONS LAW: IN PRINCIPLE
Australia were properly characterised as equity capital and not debt. The Court further held that since the debentures were not debt, any interest paid by St George was not an allowable deduction under Australian tax law. The following table summarises legal factors which may influence a company when deciding whether to raise funds in the form of loan capital or equity capital. [20.40] TABLE 20.1 Choosing between equity and loan capital Factors Legal capacity of person providing money
Return on investment
Amount of return
Loan Capital Becomes a creditor, with limited rights under Corporations Act unless company becomes insolvent (may also be a shareholder in company) Creditors are entitled to repayment of principal plus interest, whether or not company is making profits Usually a fixed rate of interest, which becomes a debt due on maturity
Deductibility of company Tax deductible expenses involved in raising capital Deductibility of payments made Interest is tax deductible by company to person providing money Effect of liquidation of company Creditors' claims must be met before repayment of equity capital
Equity Capital Becomes a shareholder with membership rights, eg, right to vote and access to legal remedies under Pt 2F.1 Shareholders' dividends not automatic. Must be determined or declared and paid from profits Dividend payable on ordinary shares is determined by the directors. It only becomes enforceable as a debt when the time for payment has arrived Not tax deductible
Dividends are not tax deductible
Shareholder's equity only repaid from any surplus left after payment of creditors' claims
Debentures Statutory definition .......................................................................................................................................................................
A “debenture” was traditionally thought of as a document under which a company acknowledges that it has borrowed money for some length of time. At common law a debenture was defined as a document that is issued by a corporation which acknowledges that a debt is owed by that corporation: Edmonds v Blaina Furnaces Co (1887) 36 Ch D 215. The definition of debenture for the purposes of the Corporations Act is in broader terms. [20.50]
20
LOAN CAPITAL
591
SECTION 9 (ABRIDGED) Dictionary “debenture” of a body means a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a charge over property of the body to secure repayment of the money. However, a debenture does not include: (a)
an undertaking to repay money deposited with or lent to the body by a person if: (i) the person deposits or lends the money in the ordinary course of a business carried on by the person; and (ii)
(b)
(c)
the body receives the money in the ordinary course of carrying on a business that neither comprises nor forms part of a business of borrowing money and providing finance; or
an undertaking by an Australian ADI to repay money deposited with it, or lent to it, in the ordinary course of its banking business; or Note: This paragraph has an extended meaning in relation to Chapter 8 (see subsection 1200A(2)). an undertaking to pay money under: (i) a cheque; or (ii)
an order for the payment of money; or
(iii)
a bill of exchange; or
(e)
an undertaking by a body corporate to pay money to a related body corporate; or
(f)
an undertaking to repay money that is prescribed by the regulations.
For the purposes of this definition, if a chose in action that includes an undertaking by a body to pay money as a debt is offered as consideration for the acquisition of securities under an off-market takeover bid, or is issued under a compromise of arrangement under Part 5.1, the undertaking is taken to be an undertaking to repay as a debt money deposited with or lent to the body.
Under the Corporations Act, a debenture is any promise made by the corporation to repay money that has been provided to it for the purposes of financing its operations. As a “chose in action”, a debenture represents a legal right against the corporation. See s 9, Corporations Act. One of the reasons for the introduction of this definition was to facilitate electronic trade in debentures. The definition in s 9 includes (but need not) a security interest over property of the body to secure repayment of the money.
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There are a number of exclusions to the definition which are intended to ensure that these provisions do not unnecessarily complicate normal business transactions. The exclusions include: • an undertaking by an Australian ADI to repay money deposited with it, or lent to it, in the ordinary course of its banking business; or • an undertaking to repay money deposited with or lent to the body by a person if: (i) the person deposits or lends the money in the ordinary course of a business carried on by the person; and (ii)
the body receives the money in the ordinary course of carrying on a business that neither comprises nor forms part of a business of borrowing money and providing finance; or
• undertakings to pay money under a cheque or an order for the payment of money or bill of exchange; or • an undertaking by a body corporate to pay money to a related body corporate; or • an undertaking to repay money that is prescribed by the regulations. A debenture may be issued to one person or be one of a series of debentures issued to a large number of persons. Public offerings ....................................................................................................................................................................... [20.60] A public company can raise loan finance from the investing public by way of debentures. The usual method is for a company to offer to the public a set of debentures, called debenture stock. The holders of the debentures become creditors of the company for a particular sum of money, being part of the total sum owing in respect of the debenture stock. Such issues will normally require a disclosure document. Debentures may be redeemed according to the terms of issue and also traded like shares. Companies must keep a register of debenture-holders: s 168, Corporations Act.
Description of debentures .......................................................................................................................................................................
Even though the definition of “debentures” (s 9, Corporations Act) covers both secured and unsecured loans, the public perception of a debenture has traditionally been a secured rather than an unsecured loan. The rules in s 283BH of the Corporations Act ensure investors are not misled by restricting the way in which debentures can be described in: [20.70]
CHAPTER
20
LOAN CAPITAL
593
• any disclosure made in relation to the offer of debentures; • the debentures themselves: s 283BH(1), Corporations Act; to ensure that the term is only used to describe loans that are adequately secured. The best security is that provided by a mortgage debenture. This is defined as a debenture secured by a registered or registrable first mortgage given to the trustee (for debenture-holders) over land, where the amount borrowed is not more than 60% of the land value according to a qualified valuer: s 283BH(2), Corporations Act. A debenture is defined as a debenture secured by a charge in favour of the trustee over the whole or any part of the tangible property of the company, where that property is sufficient and reasonably likely to be sufficient to meet the liability to repay the loan: s 283BH(3), Corporations Act. If these requirements are not satisfied – namely, if the lender is not given adequate security, the terms unsecured note or unsecured deposit note must be used: s 283BH(1), Corporations Act. The net effect of s 283BH of the Corporations Act is to prevent a company from being able to use the term “debenture” unless the company has provided adequate security for the loan. Reason for distinctions [20.80] The Corporations Act distinguishes between mortgage debentures, debentures and unsecured notes because of the different risks which arise for the holders of the three forms of debenture. A mortgage debenture affords the highest degree of protection for holders because it is secured by land which has been professionally valued. A debenture ranks next as it is secured by sufficient tangible assets. Holders of unsecured notes take the greatest risk. They can only sue the company for the debt owing under their contract. They have no proprietary remedy or other means of claiming directly against the company's assets.
Conversion to shares
A company may also issue debentures or notes which allow the holder to convert these into shares at a later date. They are known as convertible debentures or convertible notes. (Compare these with converting preference shares discussed in Chapter 17.) [20.90]
Trustee for debenture-holders [20.100] As it would be impossible for all lenders to supervise their investment personally, the Corporations Act provides that, before a borrowing
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• any documents relating to the offer; or
594
CORPORATIONS LAW: IN PRINCIPLE
corporation offers debentures to the public, a trustee must be appointed who acts for and on behalf of the many debenture-holders pursuant to the terms of a trust deed: s 283AA, Corporations Act. Only an entity listed in s 283AC(1) of the Corporations Act – such as the Public Trustee or an authorised trustee company – is eligible to be a trustee, provided that the appointment will not result in any conflict of interest or duty: s 283AC(2), Corporations Act. A breach of these provisions attracts fines of up to 25 penalty units or imprisonment for six months or both. See s 1311 and Schedule 3 of the Corporations Act. The trustee and the borrowing company enter into a deed, the terms of which set out the respective rights, powers and duties of the trustee, the borrowing company, any guarantor body and the debenture-holders. The aim of this procedure is to protect the interests of the debenture-holders. Section 283AB of the Corporations Act requires the trust deed to provide that: • the right to enforce the borrower's duty to repay; • any charge or security for repayment; and • the right to enforce any other duties owed by the borrower or guarantor, are to be held on trust by the trustee for the benefit of the debenture-holders. The trustee has quite onerous obligations. The trustee must exercise reasonable diligence to ensure that the property of the borrower is and will continue to be sufficient to repay the debt when it becomes due: s 283DA(a), Corporations Act. The trustee must also exercise reasonable diligence to ensure that the company and any guarantor comply with the trust deed: s 283DA(b), Corporations Act. Section 283DA of the Corporations Act lists numerous other obligations placed on the trustee. Duties of borrowers and guarantors .......................................................................................................................................................................
The obligations of borrowers and guarantors are set out in the covenants which form part of the trust deed. Sections 283BA – 283CE of the Corporations Act also impose direct statutory obligations on borrowers and guarantors. Among the most important of these are: [20.110]
• the duty of the borrower and/or guarantor to carry on and conduct its business in a proper and efficient manner (ss 283BB(a) and 283CB(a), Corporations Act); and • the duty of the borrower and/or guarantor to make all its financial and other records available for inspection by the trustee and provide any information or assistance required: ss 283BB(c) and 283CB(b), Corporations Act.
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LOAN CAPITAL
595
An intentional or reckless breach of any of these statutory duties by either a borrower or a guarantor is a criminal offence: ss 283BI, 283CE and 1311, Corporations Act. A breach of these provisions attracts fines of up to 25 penalty units or imprisonment for six months or both.
Personal property securities On January 2012, the Personal Property Securities (PPS) legislative regime came into effect. The PPS legislative framework comprised the following Acts: [20.120]
• Personal Property Securities Act 2009 (Cth) (PPS Act); • Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth); and • Personal Property Securities (Corporations and Other Amendments) Act 2011 (Cth). The PPS regime introduced a new functional approach to the regulation and registration of personal securities. It established a single harmonised national law designed to regulate the registration of security interests in personal property. The PPS regime aims to harmonise over 70 Commonwealth, State and Territory laws, common law and equity rules governing personal property securities. The PPS Act was modelled on personal property securities legislation in New Zealand, Canada and the United States and also incorporates work completed by the United Nations Commission on International Trade Law (UNCITRAL) and the International Institute for the Unification of Private Law (UNIDROIT). Corporations Act amendments ....................................................................................................................................................................... [20.130] The PPS reforms introduced a number of amendments to the Corporations Act that deal with the regulation and registration of security interests given by companies. Companies may give security for a loan in the form of a charge over the company's land, its other assets or securities. A charge is the legal name given to any security for the repayment of a debt. It can take the form of a legal mortgage, but is more usually an equitable mortgage or charge. The definition section of the Corporations Act, s 9, defines a charge as “a charge created in any way and includes a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise.” The PPS reforms implement a functional approach to security interests which applies to all security transactions where the effect is to secure a payment or performance of an obligation. This also includes fixed or floating
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CHAPTER
596
CORPORATIONS LAW: IN PRINCIPLE
charges which have been now redefined as reference to a “security interest” that is attached to either a circulating or non-circulating asset. Circulating and non-circulating security interest
Under the previous law, charges were classified either as fixed or floating. With the introduction of the PPS reforms, a floating charge over property would now be referred to as a “security interest” that has attached to a circulating asset. For example: a floating charge that involves a “security interest” is one that is secured over a circulating asset such as stock, cash in bank and accounts receivable. Following the PPS reforms a fixed charge over property is now referred to as “security interest” over a non-circulating asset. Examples of a “security interest” over a non-circulating asset include loans or mortgages which are secured over a company's land and buildings. There are two classes of circulating assets: [20.140]
1.
Where the secured party has given the grantor (of the security) express or implied authority for any transfer of the personal property, in the ordinary course of the grantor's business, free of the “security interest”; and
2.
Current assets including inventory, negotiable instruments, currency, at call deposits with a bank, building society or credit union (other than term deposits), accounts for turning over trading stock and accounts rendered for the provision of services that fall within the ordinary course of a business. A “security interest” over a circulating asset would ordinarily allow the company to continue dealing with them in the ordinary course of its business – for example, by turning over trading stock. The lender has a valid security over this shifting fund of assets but has no right to interfere in the conduct of the business as long as the company does not breach any term of the security agreement and only deals with the charged assets in the ordinary course of its business: see Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 1 ACLC 1333. Not all assets will fall within the two classes of a circulating asset and instead some personal property will be classified as non-circulating. Security agreement
All of the rights and obligations attached to the “security interest” are now governed by the terms of the security agreement. The PPS reforms reaffirm that the definition of circulating assets conforms with the existing law on floating charges. This means that when determining whether or not a floating charge exists over personal property consideration will be given to the terms of the security agreement between the grantor and secured party. In
[20.150]
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LOAN CAPITAL
597
addition, another important criterion is the level of control given to the secured party over the underlying asset. The greater the level of control the less likely the arrangement will be considered to meet the definition of a circulating asset. As with all agreements, the intention of both parties at the time the agreement is formed is also an important determining factor for appropriately classifying the arrangement. Retention of title clauses under the PPS Act ....................................................................................................................................................................... [20.160] Sometimes a seller will provide that transfer of title will not take place until the goods have been paid for. Such a provision is known as a retention of title clause or a “Romalpa clause”: see Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. This is a common practice with sales of trading stock. The aim of a retention of title clause is to allow the seller to reclaim goods that would otherwise be included in the assets subject to a creditor's claim under a crystallised floating security interest. A normal retention of title clause is useful only where the goods can be identified and where permission to enter premises has been given. If the goods have been transformed or mixed with other goods, the retention clause will fail and the seller will be in the same position as an unsecured creditor. Some retention of title clauses are now drafted in much broader terms so as to claim title to all goods supplied to the purchaser until the supplier is paid.
What is a “security interest”? [20.170]
A “security interest” is defined under s 12 of the PPS Act to
include an interest in personal property provided by any of the following transactions, if the transaction, in substance, secures payments or performance of an obligation: • (a) a fixed charge; • (b) a floating charge; • (c) a chattel mortgage; • (d) a conditional sale agreement; • (e) a hire purchase agreement; • (f) a pledge; • (g) a trust receipt; • (h) a consignment; • (i) a lease of goods; • (j) an assignment;
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CHAPTER
598
CORPORATIONS LAW: IN PRINCIPLE
• (k) a transfer of title; • (l) a flawed asset arrangement
The PPS Act also makes clear what is not a security interest. Excluded from the definition are licences and an interest of a kind that is prescribed by the regulations: s 12(5), PPS Act. The security interest must arise because of a consensual transaction: Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2014] VSCA 326.
Registration of security interests Previously, charges were registered under ss 262 and 263 (Ch 2K) of the Corporations Act. The PPS reforms repealed Ch 2K of the Corporations Act and replaced it with Ch 5 of the Corporations Act. The charges that were previously registered under Ch 2K of the Corporations Act will now be migrated to the PPS Register which has been established by the PPS Act. The PPS Act amended the Corporations Act by creating a new s 588FL of the Corporations Act. Section 588FL replicates the previous ss 266 and 267 of the Corporations Act with a few modifications. For security interests that have been entered into after the commencement of the PPS reforms, s 588FL will replace ss 266 and 267 of the Corporations Act. Section 588FL of the Corporations Act aims to prevent security interests being granted fraudulently over company assets where the company is at risk of imminent administration. Hence, s 588FL of the Corporations Act is a protective measure designed to protect trustees and unsecured creditors with claims over company assets that would otherwise become encumbered. [20.180]
SECTION 588FL Vesting of PPSA security interests if collateral not registered within time Scope (1)
This section applies if: (a) any of the following events occurs: (i)
an order is made, or a resolution is passed, for the winding up of a company;
(ii)
an administrator of a company is appointed under section 436A, 436B or 436C;
(iii)
a company executes a deed of company arrangement under Part 5.3A; and
CHAPTER
(2)
LOAN CAPITAL
599
a PPSA security interest granted by the company in collateral is covered by subsection (2).
Note: A security interest granted by a company in relation to which paragraph (a) applies that is unperfected at the critical time may vest in the company under section 267 or 267A of the Personal Property Securities Act 2009. This subsection covers a PPSA security interest if: (a) at the critical time, or, if the security interest arises after the critical time, when the security interest arises:
(b)
(i)
the security interest is enforceable against third parties under the law of Australia; and
(ii)
the security interest is perfected by registration, and by no other means; and
the registration time for the collateral is after the latest of the following times: (i)
6 months before the critical time;
(ii)
the time that is the end of 20 business days after the security agreement that gave rise to the security interest came into force, or the time that is the critical time, whichever time is earlier;
(iii)
if the security agreement giving rise to the security interest came into force under the law of a foreign jurisdiction, but the security interest first became enforceable against third parties under the law of Australia after the time that is 6 months before the critical time – the time that is the end of 56 days after the security interest became so enforceable, or the time that is the critical time, whichever time is earlier;
(iv)
a later time section 588FM.
ordered
by
the
Court
under
Note 1: For the meaning of “critical time”, see subsection (7). Note 2: For when a security interest is enforceable against third parties under the law of Australia, see section 20 of the Personal Property Securities Act 2009. Note 3: A security interest may become perfected at a particular time by a registration that is made earlier than that time, if the security interest attaches to the collateral at the later time (after registration). See section 21 of the Personal Property Securities Act 2009.
(3)
Note 4: The Personal Property Securities Act 2009 provides for perfection by registration, possession or control, or by force of that Act (see section 21 of that Act). [Repealed] Vesting of security interest in company
(4)
The PPSA security interest vests in the company at the following time, unless the security interest is unaffected by this section because of section 588FN: (a) if the security interest first becomes enforceable against third parties at or before the critical time–immediately before the event mentioned in paragraph (1)(a);
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(b)
20
600
CORPORATIONS LAW: IN PRINCIPLE
(b)
if the security interest first becomes enforceable against third parties after the critical time–at the time it first becomes so enforceable.
Note: For the meaning of “critical time”, see subsection (7). Property acquired for new value without knowledge (5)
Subsection (4) does not affect the title of a person to personal property if: (a) the person acquires the personal property for new value from a secured party, from a person on behalf of a secured party, or from a receiver in the exercise of powers: (i) conferred by the security agreement providing for the security interest; or (ii) (b)
implied by the general law; and
at the time the person acquires the property, the person has no actual or constructive knowledge of the following (as the case requires): (i)
the filing of an application for an order to wind up the company;
(ii)
the passing of a resolution to wind up the company;
(iii)
the appointment of an administrator of the company under section 436A, 436B or 436C;
(iv)
the execution of a deed of company arrangement by the company under Part 5.3A.
Note: For what is actual or constructive knowledge, sections 297 and 298 of the Personal Property Securities Act 2009. (6)
(7)
see
In a proceeding in Australia under this Act, the onus of proving the fact that a person acquires personal property without actual or constructive knowledge as mentioned in paragraph (5)(b) lies with the person asserting that fact. In this section: critical time, in relation to a company, means: (a) if the company is being wound up – when, on a day, the event occurs by virtue of which the winding up is taken to have begun or commenced on that day under section 513A or 513B; or (b)
in any other case – when, on a day, the event occurs by virtue of which the day is the section 513C day for the company.
A key feature of s 588FL of the Corporations Act is that with a registered security interest protection is afforded by the very nature of the registration process. This effectively prevents or minimises the incidence of fraud from occurring especially with the granting of a security interest to a third party with knowledge of an imminent administration, liquidation or deed of company arrangement.
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LOAN CAPITAL
601
Where there are unperfected security interests, on winding up or where a company is in Voluntary Liquidation, the security interests will vest in the grantor: see s 267, PPS Act. Section 588FL(2)of the Corporations Act applies where a security interest has been registered in Australia, the security interest will vest in the grantor where they have not been perfected by registration within six months of the company entering into external administration. In Pozzebon (Trustee) v Australian Gaming and entertainment Ltd [2014] FCA 1032, the secured parties lost their interest in the subject collateral. In this case, the secured parties did not register their interests until many months after the security agreement was entered into. This was despite the secured parties having registered their interest on the PPSR shortly prior to entering Voluntary Administration. Effective and defective registration ....................................................................................................................................................................... [20.190] The general rule is that registration is deemed to be effective from the time the description of the item is searchable on the PPS Register. It is the secured party's responsibility to ensure that the information that is contained on the PPS Register is accurate and complete. Registration will be ineffective in circumstances where the details of the registration contain a seriously misleading defect in any of the data or information listed on the PPS Register. A defect would ordinarily include an irregularity, omission or error which is contained in the registration. Sections 164 – 166 of the PPS Act provide specific circumstances in which a registration would be deemed to be ineffective:
• where an incorrect serial number has been entered into the PPS Register; • where the security interest has been mistakenly identified as a purchase money security interest; • where there is a defect in the data prescribed by the regulations. Effect of defective registration
Similar to the previous s 262 of the Corporations Act, ineffective registration under the PPS Act does not affect the validity of the underlying security interest. However, if registration is defective it may affect the order or priority of payment of debt. The loss of priority which results from defective registration is a powerful motivation to ensure that the security interests are properly registered. [20.192]
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CHAPTER
602
CORPORATIONS LAW: IN PRINCIPLE
The Priority Rules ....................................................................................................................................................................... [20.195] The priority rules under the PPS Act reflect those under the previous Ch 2K of the Corporations Act. Section 55 of the PPS Act covers the priority rules:
• Perfected security interests vs unperfected security interests • Order of perfection (being by registration, possession or control)
PERSONAL PROPERTY SECURITIES ACT 2009 (Cth) – SECTION 55 Default priority rules (1)
This section sets out the priority between security interests in the same collateral if this Act provides no other way of determining that priority. Note: For other rules about priorities, see the following: (a) the remaining provisions of this Part; (b)
Chapter 3 (agricultural commingling);
interests,
accessions
(c)
Part 9.4 (transitional application of this Act).
and
Priority between unperfected security interests (2)
Priority between unperfected security interests in the same collateral is to be determined by the order of attachment of the security interests.
Perfected security interest has priority over unperfected security interest (3)
A perfected security interest in collateral has priority over an unperfected security interest in the same collateral.
Priority for perfection in other ways (4)
Priority between 2 or more security interests in collateral that are currently perfected is to be determined by the order in which the priority time (see subsection (5)) for each security interest occurs.
(5)
For the purposes of subsection (4), the priority time for a security interest in collateral is, subject to subsection (6), the earliest of the following times to occur in relation to the security interest: (a) the registration time for the collateral;
(6)
(b)
the time the secured party, or another person on behalf of the secured party, first perfects the security interest by taking possession or control of the collateral;
(c)
the time the security interest is temporarily perfected, or otherwise perfected, by force of this Act.
A time is a priority time for a security interest only if, once the security interest is perfected at or after that time, the security interest remains continuously perfected.
20
LOAN CAPITAL
603
The priority rules under s 55 of the PPS Act are important because attachment and perfection can occur in any order. This could therefore allow a secured party to register a financing statement before the security agreement is actually finalized. In such circumstances, they will obtain priority to the collateral back to the actual registration date. How to obtain Priority under the PPS Act ....................................................................................................................................................................... [20.200] Under the PPS Act, a secured party must ensure that they perfect their security interest in order to obtain priority over that interest. Perfection refers to the process whereby a secured party obtains priority over the collateral which can be enforced against the grantor as well as a third party. Generally perfection occurs when a security interest is registered on the Personal Property Securities Register. Less commonly, perfection can also occur via possession or control. A number of steps are required for perfection to occur:
• The security interest is to be attached to personal property as collateral. Once attached, a secured party can enforce the security against the debtor: see s 19, PPS Act. • The security interest must be enforceable against third parties. See s 20 of the PPS Act which requires written evidence of the agreement or possession or control over the collateral. • The secured party must have either possession or control over the collateral: see s 21, PPS Act. The most common form of perfection occurs by registration on the PPSR of a financing statement. See Re Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd [2013] NSWSC 852 which dealt with the PPS Act and priority vesting issues. Re Maiden Civil (P&E) Pty Ltd [20.205] Re Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd [2013] NSWSC 852 (Supreme Court of New South Wales) FACTS: In 2010, Queensland Excavation Services Pty Ltd & Ors (QES) purchased Caterpillar Equipment with third party finance. It then leased the same equipment to Maiden Civil (P&E) Pty Ltd (Maiden). The lease was not in writing. Maiden had possession of the equipment, making periodical lease payments to QES. QES did not register its interest in the equipment either on the Northern Territory Register) before 30 January 2012 or, after that date, on the PPS Register. Maiden borrowed money from Fast Financial Solutions Pty Ltd (Fast Financial) in March 2012, and at that time it granted Fast Financial a security interest over all of its assets, which also included the Caterpillar equipment. Fast Financial registered that interest on the PPS register.
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CHAPTER
604
CORPORATIONS LAW: IN PRINCIPLE
cont. Fast Financial appointed receivers to Maiden in July 2012. On or at the same time QES terminated the QES Lease. Maiden’s receivers then claimed possession of the Caterpillar equipment. Maiden then went into voluntary administration and then into liquidation. HELD: The court found in favour of the receivers. Justice Brereton found that the QES Lease was a “PPS Lease” and was therefore a security interest in favour of QES. However, in question was whether s 20 of the PPS Act applied since it was not in writing. In addition, the lease was a transitional security interest because it was in force prior to 30 January 2012. The effect of this was that it could have had protection under the PPS Act for 2 years under the transitional provisions of the PPS Act. However, the court found that because it could have been registered on the relevant Northern Territory Register, and it was not, then the transitional protections did not apply and that the security interest was therefore not perfected. The court held that the receivers of Maiden were thus entitled to possession of the Caterpillar equipment, and could use it to satisfy the debt to Fast Financial. This was because Fast Financial’s security interest prevailed over that of QES. The basis for this outcome rested on the following points: • Fast Financials interest was perfected. Under the PPS Act, perfected interests have priority over unperfected interests. It was not relevant that QES owned the Caterpillar equipment. • In addition, the security interest of QES vested in Maiden upon Madien’s administration, and therefore QES has no further interest in such equipment. Interestingly, the Corporations Act under s 588FM does allow corporate grantors of security interests to apply to the court for permission to allow for late registration. The court may exercise this discretion in circumstances where it can be shown that the failure to register was due to mere inadvertence.
SECTION 588FM Extension of time for registration (1)
(2)
A company, or any person interested, may apply to the Court (within the meaning of section 58AA) for an order fixing a later time for the purposes of subparagraph 588FL(2)(b)(iv). Note: If an insolvency-related event occurs in relation to a company, paragraph 588FL(2)(b) fixes a time by which a PPSA security interest granted by the company must be registered under the Personal Property Securities Act 2009, failing which the security interest may vest in the company. On an application under this section, the Court may make the order sought if it is satisfied that: (a) the failure to register the collateral earlier: (i)
was accidental or due to inadvertence or some other sufficient cause; or
CHAPTER
(b) (3)
LOAN CAPITAL
605
is not of such a nature as to prejudice the position of creditors or shareholders; or
on other grounds, it is just and equitable to grant relief.
The Court may make the order sought on any terms and conditions that seem just and expedient to the Court.
Searching the PPS Register .......................................................................................................................................................................
The PPS Act provides that a person may search the Register by providing the following details in the search request: [20.210]
• grantor's details; • serial number of any collateral described in the Register; • time of search; • earlier nominated time; • any other criteria prescribed by the regulations. One of the central rationales for the creation of the PPS Register was to provide a relatively cheap, efficient and accessible search facility of personal property securities within Australia. The additional benefit with the creation of a single uniform national register was that it achieved harmonisation of a number of State and Territory databases. Transitional arrangements ....................................................................................................................................................................... [20.220] The PPS Act came into effect on 30 January 2012 at the same time the PPS Register was created. The transitional provisions contained within the PPS Act apply to existing registrable charges. ASIC's Register is now closed for any new registrations of personal property securities. The repeal of Ch 2K of the Corporations Act will not immediately apply to registrable charges under the Corporations Act. Instead, a number of provisions under Ch 2K of the Corporations Act will continue to apply to these registrable charges for seven years.
Subordinate debt [20.230] The parties to debenture trust deeds or loans secured by charges over company assets may make their own agreements about priority of payment in the event of liquidation. For example, debentures may be issued on terms that the debt owing is to be subordinated so that other debts will be repaid before it is repaid. Alternatively, the terms may rank the debt on the same repayment level as the share capital. Subordinated debt provides a means
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(ii)
20
606
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for a company to raise what is effectively quasi equity capital without diluting control of the company. The Federal Court looked at the issue of subordinate debt and legal characterisation in its decision in St George Ltd v Commissioner of Taxation [2008] FCA 453. In St George v FCT the Federal Court held that subordinate debentures used by St George Bank to finance a merger with Advance Bank Australia were properly characterised as equity capital and not debt. The Federal Court further held that since the debentures were not debt, any interest paid by St George was not an allowable deduction under Australian tax law. Influencing the Court's decision in St George were factors unique to Authorised Deposit-taking Institutions (ADIs), such as banks. As part of its funding requirements for its proposed merger with Advance Bank Australia, St George was required to restore capital adequacy ratios and comply with the Reserve Bank of Australia's prudential capital requirements. Since one of the main functions of the subordinate debentures issued by St George was to supplement St George's Tier 1 and Tier 2 capital requirements, the Court was of the view that the debentures had the essential characteristics of capital rather than debt for tax purposes.
The Whittaker Report The Whittaker Report, commissioned by the Australian Government and released in February 2015, undertook a review of the of the Personal Property Securities Act 2009 (Cth). It considered improvements to the PPS Act, with a focus on noncompliance with the PPS Act, opportunities for minimizing regulatory and administrative burdens, current inefficiencies, definition and scope of personal property covered by the PPS Act, and the integration of the PPS Act with other legislation. See Australian Government, Review of the Personal Property Securities Act 2009, Final Report, available from https://www.ag.gov.au/ Consultations/Documents/PPSReview/ ReviewofthePersonalPropertySecuritiesAct2009FinalReport.pdf.
[20.240]
Mentor: Test your Knowledge ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Loan Capital.)
Practice Questions ...................................................................................................................................... 1.
Why were the PPS Reforms enacted? How have the PPS Reforms been incorporated within the Corporations Act?
2.
What is the difference between a circulating and non-circulating asset?
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607
3.
What is the legal effect of a defective registration under the PPS Act?
4.
What is subordinate debt? How was the legal characterisation issue dealt with in the Federal Court case of St George v Federal Commissioner of Taxation [2008] FCA 453?
5.
Explain how a registered security interest can be enforced against a third party creditor?
Problems for Discussion ...................................................................................................................................... 1.
Fresh Ltd (Fresh) needs to raise finance for the expansion of its fresh food business. It is considering two options. (a) a public issue of redeemable preference shares; and (b)
a loan from Strategic Finance Ltd (Strategic).
If it proceeds with option (b), Strategic requires Fresh to provide security for the loan. Fresh owns land, buildings, plant and equipment and trading stock (food for resale). Answer the following questions: (a) What are the advantages and disadvantages of Fresh proceeding with option (b) rather than option (a)?
2.
(b)
Should Strategic register its security interest? Which form of security would you recommend and why would you recommend it?
(c)
If Strategic registers a security interest in the form of a circulating asset over the company's assets, would the charge be a legally effective security if: (i) Fresh did not register the security interest under the Corporations Act? (ii)
Strategic, rather than Fresh, registered the security interest under the Corporations Act? What would Strategic have to do in order to register the security interest?
(iii)
The security interest was registered 50 days after it was created and four months later the company is put into voluntary administration?
(iv)
The security interest was registered 50 days after it was created and in the meantime a security interest in favour of another finance company was executed and registered?
Able Pty Ltd (Able) makes garden furniture. It has always financed its business by an overdraft from the State Bank (the Bank) secured by a fixed charge over the company's premises and a floating charge over all
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its other assets and undertaking. The terms of the circulating asset security interest included the following clause: … this security interest shall operate as a circulating security only as regards all assets hereby secured but so that the borrower is not at liberty to create any other mortgage or charge in priority to or pari passu with this security interest except with the consent in writing of the lender and if the borrower shall deal with any of the secured property other than in the course of its ordinary business then the circulating asset security shall ipso facto become non-circulating to all the secured property …
Able has liquidity problems. Last month, its only large delivery truck broke down and was taken to Lyons Trucks (Lyons) to be repaired. Able had always dealt with Lyons and at that time owed Lyons $15,000. The repair work on the delivery truck was expected to cost another $5,000 and Lyons, knowing that Able had liquidity problems, refused to undertake this work unless the existing debt was paid. Because Able needed the truck urgently it agreed to transfer its smaller delivery van to Lyons to pay off the existing debt. Ten days later, Able defaulted on its loan from the Bank and as a result the Bank's circulating security interest crystallised. The Bank is claiming that it is entitled to the delivery van that was transferred to Lyons. Advise Lyons whether it is entitled to retain the delivery truck.
Guide to Problem Solving ...................................................................................................................................... Circulating and non-circulating security interests and crystallisation
(a)
Is the security interest expressed to be over a company's fixed assets such as land or machinery or is it over shifting or circulating assets such as trading stock or book debts?
(b)
Do the terms of the security interest allow the borrowing company to deal with the assets subject to the security in the ordinary course of its business without having to get permission from the lender?
(c)
Do the terms of the security interest include a negative pledge?
(d)
Has the borrowing company breached any of the terms of the security interest? In particular, if it is over circulating assets, has the borrowing company done anything which is outside the course of its ordinary business?
(e)
Does the charge provide for automatic crystallisation if any of its terms are breached or must the lender take some action to enforce its rights?
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(a)
Are the security interests registrable? If not, general law rules apply. Examples are: • registered vs unregistrable; • unregistrable vs unregistrable; • registrable (but unregistered) vs unregistrable.
(b)
Assuming the problem only involves registrable security interests, have all the security interests been registered? • if not, any registered security interest takes priority, under Ch 5 of the PPS Act, unless the registered grantee had notice (at the time) of the earlier (unregistered) security interest; and • if so, the secured interest registered earlier takes priority unless: – the grantee had notice of a previously-created security interest (which happened to be registered subsequently); or – the earlier security interest was over circulating assets which did not contain a negative pledge and the subsequent security interest was over non-circulating assets; or – the order of priorities was varied by agreement between the parties.
(c)
If no security interest has been registered, the one created earlier will generally take priority.
Further Reading ...................................................................................................................................... Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis, 2014, Ch 19 Duggan A “Romalpa Agreements Post PPSA” (2011) 33 Sydney Law Review 645 Johnson R “Taking Security over Book Debts: The Position in Australia” (2006) 14 Insolv LJ 226 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 11 McGrath T “The Floating Charge and Void and Voidable Transactions” (2002) 10 Insolv LJ 37 McWilliams D “The Floating Charge and its Place within Article 9, PPSA Security Regimes and Australian Law” (2004) 22 C&SLJ 481 Turner PG “A Two-Stage Approach to Interpretation” (2004) 22 C&SLJ 427
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Priorities of security interests
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Australian Government, B Whittaker, Review of the Personal Property Securities Act 2009, Final Report (2015) (The Whittaker Report) available from https://www.ag.gov.au/Consultations/Documents/PPSReview/ ReviewofthePersonalPropertySecuritiesAct2009FinalReport.pdf.
CHAPTER 21 .......................................................................................................
Useful Websites ..................................................................... 611 Recent Developments ............................................................ 612 Aim ......................................................................................... 612 Related Topic ......................................................................... 612 Principles ............................................................................... 612 Introduction ............................................................................... 612 Different types of disclosure documents ............................................ 614 When is a disclosure document required? .......................................... 617 Form and content ........................................................................ 622 Lodgment of disclosure documents .................................................. 627 Supplementary and replacement disclosure documents ........................ 628 Advertisements ........................................................................... 628 Securities hawking ....................................................................... 629 ASIC’s powers ............................................................................ 630 Liability for disclosure documents .................................................... 632 Proposed disclosure regime for crowd-sourced funding offers ................ 637 Mentor: Test your Knowledge ............................................... 638 Practice Questions ................................................................. 638 Essay Questions .................................................................... 639 Problems for Discussion ........................................................ 639 Guide to Problem Solving ...................................................... 641 Further Reading ..................................................................... 641
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Fundraising.)
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Recent Developments ...................................................................................................................................... Australian Securities and Investments Commission
ASIC RG 228: Prospectuses: Effective Disclosure for Retail Investors (March 2016) ASIC RG 254: Offering Securities under a Disclosure Document (March 2016) Corporations Act Amendments
Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth)
Aim ...................................................................................................................................... At the end of this topic you should know: • the different types of disclosure documents and when each is required; • the general categories of exemption from providing a disclosure document; • the requirements for a complying disclosure document; and • the civil and criminal liabilities of the company, its directors, experts and others for misleading or deceptive statements or non-disclosures in a disclosure document.
Related Topic ...................................................................................................................................... Chapter 22 Financial Services, Products and Markets
PRINCIPLES Introduction This Topic deals with companies raising money from the public. Companies may raise capital through contributions by investors known to the company or through loans from banks or other financial institutions. These “private” ways of raising funds are to be contrasted with offers or invitations to the public to invest in companies. Companies wishing to raise funds by offering their shares or other securities must prepare a disclosure document unless exempt. The provisions are set out in Ch 6D of the Corporations Act 2001 (Cth) (Corporations Act) (offers of other financial products are dealt with in Ch 7 of the Corporations Act which is considered in Ch 22). Chapter 6D was introduced by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act) on the basis that, as set out in the Commonwealth Treasury paper Fundraising – Capital Raising Initiatives to Build Enterprise and Employment Paper No 2 (CLERP Paper No 2, Canberra, 1997) p 9:
[21.10]
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Disclosure of material information in an effective way places investors in a position to make more confident assessments about securities without undertaking their own costly inquiries. It is generally more practicable and cost-effective for the fundraiser, rather than numerous investors, to undertake inquiries and disclose details about its own business
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
The requirements in Chapter 6D do not apply to Aboriginal and Torres Strait Islander corporations as the members cannot own or trade shares or hold debentures: see Chapters 16 and 20. Application to public companies .......................................................................................................................................................................
It is important to note that the provisions relating to disclosure documents are not relevant for proprietary companies because they are prohibited from undertaking these types of fundraising activities. Section 113(3) provides that, “a proprietary company must not engage in any activity that would require disclosure to investors …” except for offers of shares to employees and existing shareholders. Furthermore, a proprietary company which breaches s 113 may be required to convert to a public company. Therefore, the disclosure document provisions apply only to public companies. Proprietary companies must merely beware of inadvertently contravening these provisions. [21.20]
Legislative aims .......................................................................................................................................................................
The main aim of the provisions dealing with fundraising by public companies is to ensure that investors are in a position to make fully informed investment decisions. The provisions also aim to make it easier for smaller public companies to access capital. To achieve these aims, Ch 6D provides for different types of disclosure documents depending on the circumstances. For example, for certain types of offerings, such as offers where the amount to be raised is $10 million or less, a less complex offer document can be prepared. In order to facilitate offerings by small and medium-sized enterprises (sometimes referred to as SMEs), the legislation provides for a type of offer document known as an offer information statement, which is less onerous to prepare. The Corporations Amendment (Crowd-sourced Funding) Bill 2015 (Cth) would introduce a regulatory framework to facilitate crowd-sourced equity funding [21.30]
Chapter 21
Note: The law relating to disclosure documents is a technical, specialist area. The aim of this Topic is to provide an overview of this complex area.
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by small, unlisted public companies. Note that the Bill lapsed on 9 May 2016 when Parliament was dissolved for the double dissolution. It may, however, be re-introduced at a later stage. The Bill would include a special disclosure regime to be used for certain offers of securities for issue by these companies, instead of complying with the general requirements under Ch 6D regarding disclosure to investors (and the related prohibitions, liabilities and remedies provisions). As a “CSF offer” under the proposed regime does not require the same level of disclosure as existing Ch 6D disclosure documents, there is to be a cap on the maximum amount of funds ($5 million) that an issuer company can raise under the crowd-sourced funding regime. These proposed amendments are discussed further below (see [21.330]).
Different types of disclosure documents [21.40]
The types of disclosure documents in Ch 6D are set out in s 705:
• a prospectus or a short form prospectus (or in some cases a special prospectus for quoted securities); • an offer information statement; • a profile statement; and • a two-part simple corporate bonds prospectus. The circumstances in which the different types of disclosure documents can be used are now considered. Prospectus .......................................................................................................................................................................
The basic disclosure document for Ch 6D is a prospectus. Section 709 provides that if an offer of securities (other than an offer of simple corporate bonds) requires disclosure to investors, a prospectus must be prepared for the offer, unless an offer information statement can be used instead. The form and content requirements for a prospectus are considered at [21.120]. Where a prospectus is required, s 712 provides that it may simply refer to material lodged with ASIC rather than setting it out in full. This is referred to as a short form prospectus and may be used for any offer of securities (with the exception of simple corporate bonds). The use of a short form prospectus is designed to reduce disclosure obligations requirements compared to a full prospectus. In certain circumstances an entity that is listed on a financial market (such as the ASX) and has been subject to the continuous disclosure regime (see Chapter 22) can make an offer of securities using a prospectus for quoted securities. This type of prospectus is less onerous to prepare than a full disclosure prospectus: s 713. The circumstances in which such a prospectus [21.50]
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can be used and what is required are discussed at [21.130]. An alternative for a listed entity undertaking a rights issue is to rely on the exemption in s 708AA (see [21.110]). Offer information statement If the amount to be raised by the offer (including amounts raised by previous offers) is $10 million or less, an issuer may prepare an offer information statement instead of a prospectus. The threshold amount was increased from $5 million in 2007 to encourage the wider use of the offer information statement. However, because an offer information statement contains reduced disclosure, ASX has stated that the statement cannot be used if the company wishes to have its securities quoted on the ASX: see [21.140]. The disclosure requirements for an offer information statement are less onerous than for a prospectus (see [21.140]). There are also some differences relating to defences to liability for the content of an offer information statement. These matters are considered at [21.140] and [21.250].
[21.60]
Profile statement .......................................................................................................................................................................
A profile statement can be used for an offer of securities if approved by ASIC. However, according to s 709 it is still necessary to prepare a prospectus and lodge it with ASIC and to provide a free copy to investors if they ask for it. The aim of the profile statement provisions was to provide investors with a more concise, and therefore more useful, document and to promote comparability between similar investment products. ASIC decided that initially the only case in which it would allow use of a profile statement was for the offer of interests in unlisted registered managed investment schemes formed to invest in cash, equities, property securities, fixed interest securities or related assets. As a result of amendments made by the Financial Services Reform Act 2001 (Cth), offers of such financial products are now regulated under Ch 7: see [22.40]. However, it is possible that ASIC may permit the use of profile statements in other circumstances in the future. The information requirements for a profile statement are considered at [21.150]. [21.70]
Two-part simple corporate bonds prospectus .......................................................................................................................................................................
Offers of “simple corporate bonds” must use a two-part disclosure document, which is referred to as a two-part simple corporate bonds prospectus. A full prospectus is generally required for offers of corporate [21.80]
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bonds to retail investors. However, following amendments introduced by the Corporate Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth), a specific disclosure regime applies to offers of simple corporate bonds. A simple corporate bond is a debenture that satisfies particular criteria set out in s 713A. The conditions that must be satisfied include that the securities are or will be quoted on a prescribed financial market, and that the issuer is a body that has continuously quoted securities or is a wholly owned subsidiary of such a body that has or agrees to guarantee repayment of principal and interest. The two-part simple corporate bonds prospectus is composed of a base prospectus and an offer-specific prospectus: s 713B. There are also special rules for the lodgement of disclosure documents (see [21.150]) and supplementary and replacement documents (see [21.160]): ss 713B(5), 719A. Section 705 .......................................................................................................................................................................
Section 705 provides a table showing the types of disclosure documents and the relevant sections.
[21.90]
SECTION 705 Types of disclosure document The following table shows what disclosure documents to use if an offer of securities needs disclosure to investors under this Part.
Disclosure document Type 1 prospectus The standard full-disclosure document.
Sections content [710, 711, 713] procedure [717] liability [728 and 729] defences [731, 733]
2 short form prospectus May be used for any offer. Section 712 allows a prospectus to refer to material lodged with ASIC instead of setting it out. Investors are entitled to a copy of this material if they ask for it. 2A 2-part simple corporate bonds prospectus
content [712]
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Disclosure document
Section 721 allows a brief profile statement (rather than the prospectus) to be sent out with offers with ASIC approval. The prospectus must still be prepared and lodged with ASIC. Investors are entitled to a copy of the prospectus if they ask for it.
content [714] procedure [717] liability [728 and 729] defences [732, 733]
4 offer information statement Section 709 allows an offer information statement to be used instead of a prospectus for an offer to issue securities if the amount raised from issues of securities is $10 million or less.
content [715] procedure [717] liability [728 and 729] defences [732, 733]
When is a disclosure document required? Offers requiring disclosure ....................................................................................................................................................................... [21.100] Section 706 provides that an offer of securities for issue requires disclosure unless the offer is exempt under ss 708 or 708AA. It is therefore necessary to consider the terms “offer”, “securities” and “issue” and then to consider the exemptions. For the purposes of the fundraising provisions, the term offer is defined to include “inviting applications for the issue of the securities”: s 700(2). The term is not, therefore, limited to its technical or contractual meaning and could include distributing material that would encourage a person to enter into a course of negotiations calculated to result in the issue of securities: Attorney-General (NSW) v Australian Fixed Trusts Ltd [1974] 1 NSWLR 110. The securities covered by the fundraising rules are shares of a body, debentures of a body (or legal or equitable interests in them) and options to acquire (by way of issue) any such securities: s 700. This definition means that
Chapter 21
Type Sections Must be used for any offer of content [713C, 713D, 713E] simple corporate bonds. procedure [717] liability [728 and 729] defences [731 and 733] 3 profile statement
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the disclosure provisions apply to securities of a body (not just a corporation). A “body” is defined as any body (whether corporate or unincorporated) and includes societies and associations: s 9. It is important to note that the fundraising provisions are primarily concerned with initial or primary offers of securities (that is, the issue of securities), not with secondary trading of securities (that is, the sale of existing securities). An offer of securities for sale (rather than issue) only requires a disclosure document in limited circumstances. A disclosure document will be required in three cases: 1.
a person making the offer controls the body and the securities are either not quoted on the ASX, or if quoted, not offered for sale in the ordinary course of trading (s 707(2)) – for example, a sale by way of a “crossing” (see Glossary) negotiated “well away from any stock market” would not be in the ordinary course of trading (Aberfoyle Ltd v Western Metals Ltd (1998) 84 FCR 113); or
2.
there is an indirect issue, that is, an offer of the securities for sale within 12–months after their issue and the body issued the securities without preparing a disclosure document (presumably because an exemption applied) and: • the body issued the securities with the purpose of the investor selling or transferring them, or • the person acquired the securities with the purpose of selling or transferring them: s 707(3).
3.
there is an indirect issue, that is, an offer of the securities for sale within 12 months after their issue by a person who controls the body and the securities are not quoted on the ASX, the body issued the securities without preparing a disclosure document (presumably because an exemption applied) and: • the body issued the securities with the purpose of the investor selling or transferring them, or
• the person acquired the securities with the purpose of selling or transferring them: s 707(5). Unless the contrary is proved, the body or person is taken to have the relevant purpose in s 707(3) or (5) if any of the securities are subsequently sold, or offered for sale, within 12 months of their issue: s 707(4), (5). In both cases, however, no disclosure document is required if the offer for sale is exempt under s 708, for example, if the on-sale is to a professional investor (see [21.110]).
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The purpose of s 707(3) and (5) is to prevent the disclosure requirements being circumvented by the issue of securities to a party to whom disclosure is not required (for example, because of s 708) and that party then offers the securities for sale to investors without disclosure (see Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17). The provisions will apply even if the sale is by a subsequent purchaser: Australian Securities and Investments Commission v Axis International Management Pty Ltd (2011) 81 ACSR 631. The court does have power under s 1322 to validate offers and sales that do not comply with s 707(3) or (5) if it is satisfied that no injustice has occurred: Re Silver Lake Resources Ltd [2012] FCA 32. Section 708A exempts the issuer from compliance with s 707(3) or (5) if investors already have access to prospectus-type information – for example, because a prospectus relating to an offer to the public has been issued at about the same time as the private placement. ASIC has issued RG 173 Disclosure for on-sale of securities and other financial products (updated March 2016) which indicates when relief from the operation of s 707(3) and (5) might be available. Excluded offers ....................................................................................................................................................................... [21.110] There are a number of offers of securities that do not require a disclosure document: s 708. The exemptions generally apply to both issues and sales that might otherwise require a disclosure document. In some cases the exemption arises because it is likely that the potential investor will already have access to information. In other cases the exemption arises because of the prohibitive cost of requiring disclosure for small-scale fundraising. Some of the exemptions are very technical and require an understanding of other definitions, but briefly the exemptions are:
• the small scale exemption – where personal offers are made that result in issues to no more than 20 people in any 12-month period and with no more than $2 million being raised in total. A personal offer is one that may only be accepted by the person to whom it is made and the person is likely to be interested in the offer because of some previous contact with the offeror, some professional or other connection to the offeror, or where the person has expressed an interest in the offer (s 708(1) – (7)); • the sophisticated investor exemption – where offers are made to investors who are considered to be sophisticated by virtue of the size of their investment ($500,000 plus) or their wealth (net assets of at least $2.5 million or gross income for each of last two financial years of at least $250,000) as certified by a qualified accountant. Alternatively, offers made through a licensed securities dealer (see Chapter 22) who certifies that the
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investor has sufficient investment experience and the investor signs a written acknowledgement tha tthey have not received a disclosure document (s 708(8) – (10)); • the professional investor exemption – where the offer is made to a licensed securities dealer or investment adviser (see Chapter 22) who is acting as principal in the transaction or to certain specified bodies such as banks, insurance companies or regulated superannuation funds or to people who control at least $10 million for the purpose of investment in securities (s 708(11)); • the associated party exemption – where the offer is made to a “senior manager” of the body or of a related body. The exemption also applies to a spouse, parent, child, brother or sister of a senior manager, or to a company controlled by any of those people. The term senior manager is defined in s 9 but appears to exclude a director. ASIC issued a Class Order in 2004 to clarify that directors are included: CO 04/899 (s 708(12)); • the existing holder exemption – where offers are made to existing holders of securities, but only if the offer is for fully-paid shares under a dividend reinvestment plan or bonus share plan; or if the offer is to issue debentures to one or more existing debenture holders (s 708(13), (14)); • the no consideration exemption – where no consideration is to be provided for the issue or transfer of the securities. ASIC has taken the view that offers under an Employee Share Scheme do not fall within this exemption, even where the scheme does not require any payment, because the employment relationship is a form of consideration: RG 49: Employee Incentive Schemes, RG 49.10 (s 708(15), (16)); • the takeovers and schemes of arrangement exemption – where the securities are offered as consideration under a takeover bid made under Ch 6 (see Chapter 23) and must, therefore, be accompanied by a bidder's statement. In relation to schemes of arrangement (sometimes used as an alternative to a takeover), the exemption is available if the securities are issued under a compromise or arrangement under Pt 5.1 that has been approved at a meeting held as a result of a court order under s 411 (see [23.10]) (s 708(17), (18)); • the deed of company arrangement exemption – where the securities are offered to a company's creditors under a deed of company arrangement, and the sole consideration is the release of the company from a debt (s 708(17A)); • the debentures exemption – where the offer of debentures is made by an Australian ADI (authorised deposit-taking institution) as defined in s 9, or a body registered under the Life Insurance Act 1995 (Cth) (s 708(19));
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• the exempt bodies and public authorities exemption – where the offer is made by an “exempt body”, defined in s 66A as a body incorporated under the law of a State or Territory rather than registered under Corporations Act, or where the offer is made by an “exempt public authority”, defined in s 9 as a body corporate that is a public authority, or instrumentality or agency of the Crown (although the exemption does not apply to the sale of existing securities by a government body) (s 708(20), (21)). There are three other exemptions that should be noted: • the rights issue exemption – under s 708AA for rights issues involving offers of quoted securities. This exemption is subject to a number of requirements including that the securities have not been suspended from trading on a financial market for more than five days in the past 12 months. However, the most important requirement is that the offeror gives a notice to the market operator (the ASX) that states that the company has complied with its continuous disclosure obligations (see Chapter 22) or sets out any information that has been excluded in accordance with the Listing Rules. This is commonly referred to as a “cleansing notice”. The term “rights issue” is defined as an offer made to all shareholders in a class on the same terms: s 9A. This appears to provide an easier alternative to the special prospectus for quoted securities (see [21.130]) but it is not a “disclosure document” and so the defences to liability, for example, for misleading statements discussed at [21.250] to [21.280] are not available. ASIC has published a Regulatory Guide that covers this exemption: RG 189: Disclosure Relief for Rights Issues; • the secondary sales exemption – under s 708A an offer involving secondary sales of existing securities is exempt from the disclosure requirements in Ch 6D, as well as the disclosure requirements under Pt 7.9 provided the securities have been listed and quoted on a prescribed financial market for a period of three months: s 708A(5)(a). Circumstances in which the exemption applies have been noted in [21.100]. The offeror must provide a notice to the market operator stating that all relevant information has been disclosed or that a current prospectus is available. ASIC has released a Regulatory Guide that, inter alia, deals with this exemption from the requirements for offers of securities for sale: see RG 173: Disclosure for On-Sale of Securities and Other Financial Products; and • the employee share schemes exemption – offers of securities to employees under an employee share scheme will be within s 706 and are not covered by any exemptions. ASIC has provided some relief from the requirement to produce a prospectus or other disclosure document in RG
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49: Employee Incentive Schemes, CO 14/1000 (listed entities) and CO 14/1001 (unlisted entities). In order to be eligible for the relief there must be an employer/employee relationship or a relationship of sufficient interdependence (that is, being contracted to work the pro-rata equivalent of 40% or more of a comparable full-time position). For listed entities, there is a limit of 5% of the shares in the entity being offered under the scheme (this is to ensure that the purpose of the offer is not fundraising). The relief available for offers by unlisted entities is much more limited than the relief for listed entities, and has meant that it is difficult for unlisted entities to offer employees the opportunity to acquire shares under an employee share scheme. One possibility is that the employer could prepare an Offer Information Statement (see [21.140]) but the requirement to include an audited financial statement prepared within the last six months is considered onerous for many unlisted entities.
Form and content What must a disclosure document contain? ....................................................................................................................................................................... [21.120] The form and content requirements for disclosure documents are contained in ss 710 – 716. The content requirements differ depending on the type of disclosure document being used – prospectus, offer information statement, profile statement or two-part simple corporate bonds prospectus. A prospectus must contain all information that investors and their professional advisers would reasonably require to make an informed assessment of certain matters set out in the legislation: s 710. This is described as the “general disclosure obligation”.
SECTION 710 (ABRIDGED) Prospectus content – general disclosure test (1)
A prospectus for a body’s securities must contain all the information that investors and their professional advisers would reasonably require to make an informed assessment of the matters [set out below]. The prospectus must contain this information: (a)
(b)
only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in the prospectus; and only if the person [who participates in the preparation of the prospectus]: (i)
actually knows the information; or
CHAPTER
Offer 1 offer to issue (or transfer) shares [or] debentures…
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623
in the circumstances ought reasonably to have obtained the information by making enquiries. Matters • the rights and liabilities attaching to the securities offered • the assets and liabilities, financial position and performance, profits and losses and prospects of the body that is to issue the shares [or] debentures or interests
From this section it is clear that the general disclosure obligation attempts to place the onus for full and accurate disclosure on those preparing the prospectus, rather than just requiring them to comply with a checklist of information. This general disclosure obligation only requires information to be disclosed if certain people actually know, or ought reasonably to have obtained, the information by making enquiries. A person's knowledge is relevant only if they are: • the person offering the securities or one of its directors; or • an underwriter, a financial services licensee, an expert or adviser named in the prospectus: s 710(3). In deciding what information should be included under the general disclosure obligation, the offeror must have regard to: • the nature of the securities and of the body; • the matters that likely investors may reasonably be expected to know; and • the fact that certain matters may reasonably be expected to be known to their professional advisers: s 710(2). There has been debate about whether the requirement to include information about “prospects” of the issuer equates to a requirement to include a financial forecast in the prospectus. There is no authority to say that a forecast is required in all circumstances. Market expectations mean that most disclosure documents do contain forecasts. It has been stated, however, that if a forecast is included, special care must be taken to ensure that the statement is not misleading or deceptive: Pancontinental Mining Ltd v Goldfields Ltd (1995) 13 ACLC 577; Solomon Pacific Resources NL v Acacia Resources Ltd (1996) 19 ACSR 238. ASIC has issued a Regulatory Guide dealing with RG 170: Prospective Financial Information. ASIC agrees that if a forecast is included there must be reasonable grounds for making the forecast.
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(ii)
21
624
CORPORATIONS LAW: IN PRINCIPLE
In addition to the information that must be disclosed under the general disclosure obligation, there are a number of specific matters that must be disclosed under s 711. They include: • the terms and conditions of the offer; • interests and fees of people involved in the preparation of the prospectus; • details of any application to be quoted on a securities exchange (if applicable); • the expiry date of the prospectus (not later than 13 months from the date of the prospectus); and • any additional information required by the Regulations. The prospectus must also be dated (that is, the date of lodgment with ASIC) and contain the consent of any experts: s 716. A prospectus may be in paper or an electronic format. However, there is a requirement that an application form is “included in, or accompanied by” the disclosure document: ss 723(1), 727(2). For examples of prospectuses, as well as other disclosure documents, see the OFFERlist page at the ASIC website: http://www.asic.gov.au/online-services/register-for-online-access/offerlist. As already noted, in any case in which a prospectus is required it is possible to use a short form prospectus – that is, the prospectus may simply refer to a document (or part of a document) that has been lodged with ASIC: s 712. If the information referred to is primarily of interest to professional advisers or professional investors, the prospectus must include a description of the contents of the document and a statement that it is of interest to those people. In all other cases, the prospectus must include sufficient information about the contents of the document to allow investors to decide whether to obtain a copy of the document. If a prospectus indicates that application will be made for listing on a financial market (whether in Australia or not) and no application is made within the specified time, or permission for listing is not obtained, any allotment or issue which has been made is void: s 723(3). ASIC has issued a Regulatory Guide RG 228: Prospectuses: Effective Disclosure for Retail Investors which notes at [RG 228.2] that information in disclosure documents must be worded and presented in a “clear, concise and effective manner” (see s 715A which applies to all disclosure documents) and provides guidance for complying with the general disclosure obligation in s 710. This Regulatory Guide was produced after criticism that many prospectuses contained too much marketing material and did not present key information to retail investors in an appropriate way.
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[21.130] A prospectus for an offer of listed securities is only required to contain information about the transaction and other material information not previously disclosed to the market: s 713. The reason for this less onerous disclosure obligation for a prospectus for quoted securities is that an entity whose securities are listed will be subject to the continuous disclosure regime: see Chapter 22. The aim of this provision is to simplify prospectuses that will, in most cases, be sent to existing shareholders (as in a rights issue). Most of the information normally required in a prospectus will already have been provided to the market. However, information that does not have to be disclosed under the continuous disclosure rules (for example, under the ASX Listing Rule 3.1A.2 exemption for certain confidential information: see Chapter 22 will have to be disclosed in the prospectus if investors and their advisers would reasonably require that information to make an informed investment decision: s 713(5). ASIC may preclude an entity from using this type of prospectus if it believes that the shortened form of disclosure is inappropriate: see Section C of Regulatory Guide RG 254: Offering Securities under Disclosure Documents. As already noted at [21.110] an alternative for a listed entity is to comply with the exemption in s 708AA and produce a cleansing statement that complies with that section.
Offer information statements
As already noted, an offer information statement may only be used where the amount of money to be raised by the offer of securities (including amounts raised by previous offers) is $10 million or less. The disclosure obligation for an offer information statement is limited to the specific information required by s 715(1). The general disclosure obligation does not apply. An offer information statement must:
[21.140]
• identify the body and the nature of the securities; • describe the body's business; • describe what the funds raised by the offer are to be used for; • state the nature of risks involved in investing in the securities; • give details of amounts payable such as fees, commissions and charges; • state that a copy has been lodged with ASIC but that ASIC takes no responsibility for the content; • state that the document is not a prospectus and contains a lower level of disclosure; • state that investors should obtain professional investment advice;
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Offers of listed securities
626
CORPORATIONS LAW: IN PRINCIPLE
• include an audited financial report prepared within the last 6 months; and • include any other information required by the regulations. Section D of Regulatory Guide RG 254: Offering Securities under a Disclosure Document discusses the form and content of financial reports required to be included in an offer information statement. The ASX has indicated that it will not accept an offer information statement for a company wishing to have its securities quoted on the ASX: see ASX Listing Rule 1.1, Condition 3. If a company wishes to apply for listing following the offer of securities, it will need to issue a prospectus. Profile statements [21.150] A profile statement can only be used if ASIC has given its approval. As already noted, there are no existing approved situations for the use of a profile statement. However, even if the use of a profile statement is approved, it is still necessary to prepare and lodge a prospectus that complies with the content requirements for a prospectus and to provide a free copy of the prospectus to investors if they request it. Section 714 provides that a profile statement must contain:
• information about the body; • the nature of the securities; • the nature of the risks involved in investing in the securities; • give details of amounts payable such as fees, commissions and charges; and • any other information required by ASIC. Two-part simple corporate bonds prospectus
Offers for issue or sale of simple corporate bonds must be offered under a two-part simple corporate bonds prospectus (unless the offer period commences before 19 December 2016, whereby s 709(1A) allows a full prospectus to be used). A two-part simple corporate bonds prospectus contains both a base prospectus and an offer-specific prospectus. The base prospectus has a life of three years and there will be a separate offer-specific prospectus for each offer of bonds during the life of the base prospectus. The base prospectus must provide general information about the issuer and the bond issue that is unlikely to change over those three years. The content that must be included in the base prospectus is set out in s 713C and reg 6D.2.04. It includes the following: [21.160]
• information on the program of the bonds (if applicable) and details of key aspects of the bonds, including the interest rate, term, maturity and redemption of the bonds;
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• information about the issuing body's business, management personnel, business strategy and governance arrangements, and other information that relates to the investment decision;
• the main risks associated with the bonds, the issuing body's main business risks, and other risks relevant to a consumer's investment decision: reg 6D.2.04. The offer-specific prospectus must provide offer details, key dates and other relevant information for the offer and may update information contained in the base prospectus: see s 713D and reg 6D.2.05. Certain material can be incorporated by reference in both the base prospectus and the offer-specific prospectus: s 713E.
Lodgment of disclosure documents A disclosure document (with the exception of a two-part simple corporate bonds prospectus) must be lodged with ASIC prior to distribution: s 718. This means that a person offering securities will generally be permitted to distribute a disclosure document immediately after it has been lodged with ASIC. However, in the case of unlisted securities, there is a seven-day waiting period after lodgment, which may be extended to 14 days by ASIC, before applications can be processed: s 727(3). The waiting period is to give ASIC an opportunity to review the disclosure document for defects. ASIC's policy with respect to reviewing disclosure documents is set out in ASIC Regulatory Guide RG 254: Offering Securities under a Disclosure Document. In that Regulatory Guide (Section F), ASIC states that it will: [21.170]
• refuse to accept or comment on draft disclosure documents prior to lodgment (other than in exceptional circumstances); • review selected disclosure documents during the waiting period (documents will be selected for review if there is reason to suspect a compliance risk or on a random basis); and • review disclosure documents after lodgment on the same basis as above. However, even if ASIC reviews the disclosure document, it takes no responsibility for the content of the disclosure document and the disclosure document must contain a statement to that effect: s 711(7)(b); s 714(1)(e)(ii); s 715(1)(f)(ii). Two-part simple corporate bonds prospectuses are not subject to the same lodgment requirements as other disclosure documents. A two-part simple
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• key financial ratios, calculated in accordance with reg 6D.2.06, that are relevant to the issuing body; and
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corporate bonds prospectus for an offer of simple corporate bonds is taken to have been lodged with ASIC on the day the offer-specific prospectus for the offer is lodged with ASIC: s 713B(5).
Supplementary and replacement disclosure documents [21.180] Where the person making an offer of securities becomes aware of a deficiency in the disclosure document, or a new circumstance has arisen that would have been required to be included in the disclosure document, the person may lodge either a supplementary or replacement prospectus: s 719(1). A supplementary prospectus merely cures a deficiency or updates information. It must accompany any subsequent issue of the prospectus. The issuer of the securities may lodge with ASIC a supplementary prospectus if:
• the issuer becomes aware of a misleading or deceptive statement in the disclosure document; or • there is an omission of information required under ss 710 – 715; or • a new circumstance has arisen since the disclosure document was lodged: s 719. A replacement prospectus is necessary where changes are more significant. The replacement prospectus supplants the original, which must not be issued after lodgment of the replacement prospectus. There are similar rules regarding lodging supplementary and replacement documents that apply specifically to a two-part simple corporate bonds prospectus, which are set out in s 719A. It is an offence to continue making offers of securities (including offers of simple corporate bonds) where there is a deficiency in the disclosure document, or a new circumstance, that is materially adverse from the point of view of the investor: s 728(3). Liability under Ch 6D is considered at [21.220] to [21.320].
Advertisements There are some restrictions on advertising both before a disclosure document has been lodged with ASIC (“pre-disclosure document period”) and after it has been lodged (“post-disclosure document period”). The restriction on advertising and publicity surrounding an offer of securities is based on the view that an investment decision should be made primarily on the information contained in the disclosure document. The basic prohibition is that if an offer of securities needs a disclosure document, a person must not advertise it, or publish a statement that directly or indirectly refers to the offer, or is reasonably likely to induce people to
[21.190]
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apply for the securities, unless one of the exceptions applies: s 734(2), (2A). In deciding whether a statement directly or indirectly refers to the offer or is reasonably likely to induce a person to apply for securities, regard is had to such matters as whether the statement forms part of the normal advertising of the body's products: s 734(3). The exceptions then permit certain advertising in the pre- and post-disclosure document periods and, in the former case, differ depending on whether or not the securities are quoted on a financial market. The position is as follows: • for (pre-disclosure document period) offers of securities quoted on a financial market in the advertising is permitted provided a statement is included that a disclosure document will be available and that anyone wishing to acquire securities will need to complete an application form in or with that document (s 734(5)(a)). Under s 734(5)(a) the advertisement must include a statement regarding the following: – the identity of the issuer or vendor of the securities; – that a disclosure document will be made available; – where and when the disclosure document will be available; – that an investor who intends to purchase the securities should consider the disclosure document; and – that an investor who intends to acquire the securities must do so using the application form in the disclosure document. • for offers of securities not quoted on a financial market in the pre-disclosure document period all that is permitted is a “tombstone” advertisement that states that a disclosure document will be available and that anyone wishing to acquire securities will need to complete an application form (s 734(5)(b)); and • for offers in the post-disclosure document period, whether or not the securities are quoted on a financial market – advertising is permitted provided it refers to the disclosure document and states that anyone wishing to acquire securities will need to complete an application form: s 734(6). There are also a number of exceptions designed to permit companies to carry on their normal advertising and other business: s 734(7)(a) – (e). See also Section J of RG 254: Offering Securities under a Disclosure Document.
Securities hawking A person must not offer securities for issue or sale in an unsolicited meeting with, or telephone call to, another person: s 736. This is generally referred to as “securities hawking”. The rationale for this prohibition is to prevent unsolicited offers of securities through pressure-selling techniques.
[21.200]
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What is prohibited is an unsolicited meeting or telephone call: the prohibition does not apply to communications by email, facsimile or post (presumably because these communication methods are less direct). Under s 736(2), the prohibition does not apply to an offer of securities if: • the offer does not need a disclosure document because of s 708(8) or (10) (the sophisticated investor exemption) or s 708(11) (the professional investor exemption) (see [21.110]); • the offer is an offer of quoted securities made by telephone by a licensed securities dealer; • the offer is made to a client by a licensed securities dealer through whom the client has bought or sold securities in the last 12 months; or • the offer is made under an eligible employee share scheme as defined in s 9 (see [21.110]). If securities are issued or transferred in breach of the securities hawking prohibition, investors may return securities within one month after issue or transfer. If investors do so they are entitled to be repaid the amount they paid for the securities: s 738. ASIC has released a Regulatory Guide on this matter, RG 38: The Hawking Provisions.
ASIC’s powers An important feature of Ch 6D is that it gives ASIC a number of powers. One power allows ASIC to exempt a person from a particular provision or to modify or vary any of the provisions in Ch 6D where strict compliance with the letter of the law appears to ASIC to be inappropriate: s 741(1). This allows issuers a level of flexibility in the operation of the fundraising provisions in circumstances where application of the law may be too onerous. ASIC also has power to act quickly where it believes that a lodged disclosure document may contain misstatements or omissions: see discussion of s 728 that deals with misstatements or omission in [21.220]. Section 739 allows ASIC to issue a stop order that prevents any further offers, issues, sales or transfers of the securities being made. ASIC can also issue a stop order where it is satisfied that the information in a disclosure document is not worded and presented in a clear, concise and effective manner as required by s 715A. ASIC regularly issues reports dealing with regulation and oversight of corporate fundraising. These reports set out the concerns ASIC has had with
[21.210]
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fundraising documents over the previous six months and the action that ASIC has taken. The following report (released February 2016) covers the period July to December 2015.
...................................................................................................................... REPORT 469: ASIC regulation of corporate finance: July to December 2015
22 In our review of prospectuses lodged with ASIC during this period, we noted concerns, requested amended disclosure or intervened in offers of securities where there was: (a)
inappropriate disclosure of financial information and company solvency (over 10% of all prospectuses lodged, which is down from the previous period); and
(b)
improper disclosure of forecast financial information (in 4% of prospectuses lodged, slightly down from 4.8% in the previous period).
... 24 We noted concerns, requested amended disclosure or intervened in a number of offers due to insufficient disclosure about the structure of the offer. For example, in all prospectuses lodged during this period: (a)
control issues were identified in over 6% of prospectuses (down from 10% in the previous period). These concerns are primarily identified in prospectuses for rights offers; and
(b)
related party issues were evident in over 3% of prospectuses (up from 2% in the previous period).
25 We also raised a number of disclosure concerns in this period regarding: (a)
funding or financing (in almost 7% of prospectuses lodged, down from 8% in the previous period);
(b)
compliance with industry reporting codes, such as the Australasian Code for Reporting of Explorations Results, Minerals Resources and Ore Reserves (JORC Code) in mining prospectuses (2% of prospectuses lodged).
26 We identified a number of other common disclosure concerns, such as companies failing to: (a)
adequately disclose their business model;
(b)
provide “clear, concise and effective” disclosure;
(c)
disclose material contracts;
(d)
provide adequate risk disclosure – the disclosure is either insufficiently prominent in the prospectus or is not tailored to the company’s circumstances; and
(e)
obtain consent from an entity or individual to whom they have expressly or impliedly attributed consent.
© Australian Securities & Investments Commission. Reproduced with permission.
The following media release highlights the action that could be taken by ASIC where it regards a prospectus as deficient.
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Disclosure concerns
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ASIC acts against Pluton Resources for disclosure and reporting failures Media Release 15-007 21 January 2015 ASIC has acted to restrict Perth-based Pluton Resources Limited (Receivers and managers appointed) (Pluton) from issuing a reduced content prospectus until 15 January 2016. ASIC’s decision means Pluton will not be able to rely on reduced disclosure rules if they want to raise funds from investors using a prospectus. The decision follows concerns that Pluton failed to comply with its continuous disclosure obligations and various reporting requirements. In particular, ASIC found that Pluton failed to lodge its Annual Financial Report for 2014 with ASIC by 30 September 2014 and failed to report to its members (via an Annual General Meeting) by 31 October 2014. ASIC also found that between 28 January 2014 and 22 April 2014, Pluton failed to disclose the terms of a Convertible Securities Agreement with YA Global Masters SPV Ltd, entered into on or by 28 January 2014, until the release of an announcement to the market entitled “Prospectus for Entitlements Issue” on 22 April 2014. This information was information that was required to be disclosed under ASX Listing Rule 3.1. ASIC Commissioner John Price said, “Current and potential future shareholders in a company need to be in an informed position to assess a company’s prospects and its financial position”. “In appropriate cases, ASIC will act against companies that fail to meet their reporting and disclosure obligations to ensure all material information is made available in future fundraisings.” © Australian Securities & Investments Commission. Reproduced with permission.
Liability for disclosure documents Liability under the Corporations Act ....................................................................................................................................................................... [21.220] Chapter 6D contains a number of prohibitions. Breach of these prohibitions can give rise to criminal liability and in some cases, civil liability. The most significant prohibition is to be found in s 728 which deals with defective disclosure documents. Chapter 6D also prohibits a range of other conduct such as:
• making offers that require disclosure without lodging a disclosure document (s 727(1); • accepting applications within the 7 or 14 day waiting period after lodgment of the disclosure document (s 727(3)); and • issuing or transferring securities in breach of the 20 investor, or the $2 million ceiling: s 727(4).
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Most importantly s 728 provides that a person must not offer securities under a disclosure document if there is: • a misleading or deceptive statement in the disclosure document;
• a new circumstance that has arisen since the disclosure document was lodged, which would have been required to be included in the disclosure document had it arisen before the disclosure document was lodged. In relation to forecasts and other forward-looking statements, a person is taken to make a misleading statement if the person does not have reasonable grounds for making the statement: s 728(2). This generally requires the person making the statement to spell out the assumptions underlying the making of the forward-looking statement and identifying any risks that might mean that the forecast or other prediction is not met. See RG 170: Prospective Financial Information discussed at [21.120]. Criminal liability: Corporations Act
A breach of s 728 will constitute a criminal offence (s 1311) only if the misleading or deceptive statement, the omission or the new circumstance is “materially adverse” from the point of view of the investor: s 728(3). This indicates that it is the failure to reveal or to disclose fully any “bad news” that can give rise to criminal liability. Penalties for breach of s 728 are set out in Sch 3 of the Act. Higher penalties apply to companies: s 1312.
[21.230]
Civil liability: Corporations Act
Where there is a breach of s 728, any person who suffers loss because of the breach may recover the amount of loss or damage from a person specified in the legislation, if the loss or damage is one for which the legislation makes the person liable. The reference to “because of” indicates that there must be a causal nexus between the breach and the loss suffered. Section 729(1) contains the following Table setting out who can be liable and for what they can be liable.
[21.240]
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• an omission from the disclosure document of material required by the content rules set out in ss 710 – 715; or
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SECTION 729(1) (ABRIDGED) Right to recover for loss or damage resulting from contravention People liable on disclosure docu- [operative] ment are liable for loss or damage caused These people … by …
1 the person making the offer any contravention of s 728(1) in relation to the disclosure document 2 each director of the body any contravention of making the offer s 728(1) in relation to the disclosure document 3 a person named in the any contravention of disclosure document with s 728(1) in relation to the their consent as a prodisclosure document posed director… 4 an underwriter (but not a any contravention of sub-underwriter)… s 728(1) in relation to the disclosure document the inclusion of the 5 a person named in the statement in the disclosure disclosure document with document their consent as having made a statement: (a) that is included in the disclosure document; or (b) on which a statement in the disclosure document is based 6 a person who contravenes, that contravention or is involved in the contravention of, s 728(1)
This indicates that liability for a defective disclosure document is most likely to arise for the issuing body, its directors and the underwriter. Other people, such as financial advisers, accountants, lawyers or other experts, are only liable for statements in the disclosure document that they have made, or that are based on their statements, and they have consented to being named in relation to the particular statement.
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Defences ....................................................................................................................................................................... [21.250] All people involved in the preparation of a disclosure document will have defences available, but the defences will vary depending on the type of disclosure document. The defences are available for potential civil liability and for potential criminal liability arising from contravention of s 728.
Due diligence defence
All people with potential liability for a defective prospectus can rely on what is called the “due diligence” defence. Section 731 provides that a person will not be liable under s 729 (civil liability) and will not be criminally liable, if they prove that they:
[21.260]
• made all inquiries (if any) as were reasonable in the circumstances; and • believed on reasonable grounds that the statement was not misleading or deceptive. Similarly, a person will not be liable for an omission if they made all reasonable inquiries and believed on reasonable grounds that there was no omission from the prospectus. The making of reasonable inquiries to ensure that the prospectus is accurate and complete is commonly referred to as exercising “due diligence”. A similar provision in the Trade Practices Act 1974 (Cth) (now replaced by the Competition and Consumer Act 2010 (Cth)) was interpreted in Universal Telecasters (Qld) Ltd v Guthrie (1978) 18 ALR 531 at 534, to require: • a proper system to provide against contraventions; and • adequate supervision to ensure that the system was carried out. In relation to fundraising, this has resulted in the establishment of due diligence committees, comprising representatives of those involved in preparation of the prospectus. The aim is to ensure that all statements appearing in the prospectus are accurate and that the prospectus is complete. This is often a timeconsuming and costly exercise. Lack of knowledge defence
All people with potential liability for an offer information statement (or a profile statement) can rely on the lack of knowledge defence: s 732. That is, they will not be liable in relation to a misstatement if they prove that they [21.270]
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Liability is also imposed on any person “involved in the contravention”. The circumstances in which a person will be involved in the contravention include where a person has aided or abetted the contravention, or been knowingly concerned in, or a party to, the contravention: s 79. This requires knowledge of the essential facts and some element of involvement: Yorke v Lucas (1985) 158 CLR 661; ASIC v Somerville (2009) 77 NSWLR 110.
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did not know that the statement was misleading or deceptive or, in relation to an omission, that they did not know there was an omission. This defence will be much easier to satisfy because there is no requirement to undertake reasonable inquiries. General defences
There are also three general defences available to all people with potential liability for all types of disclosure documents. The first is the “reasonable reliance” defence which is available if a person places reasonable reliance on information given to them by someone who is not a director, agent or employee: s 733(1) and (2). This could apply if the person places reliance on information provided by an expert or an official person. The second general defence is the “withdrawal of consent” defence. This is available to a person other than a director if they prove that they publicly withdrew their consent to being named in the disclosure document: s 733(3). The third general defence is the “unawareness” defence. Under this defence, a person will not be liable because of a new circumstance that has arisen since the disclosure document was lodged if the person proves that they were not aware of that matter: s 733(4). [21.280]
Civil action – general law ....................................................................................................................................................................... [21.290] Under the general law there are several remedies for misrepresentation. These remedies are in addition to the statutory remedies already considered. Although people would usually rely on those statutory remedies, it is expressly stated that the statute does not affect any liability a person has under any other law. It is therefore necessary to be aware of other remedies.
Rescission
Generally, rescission is available for misrepresentation in a disclosure document only if the person bringing the action (the plaintiff) is an applicant for shares rather than a purchaser from someone else. The right to rescission will be lost if the contract is affirmed (for example, if dividends are freely accepted), or if full restitution is not possible. [21.300]
Damages for fraudulent misrepresentation
Damages will be available where a misrepresentation in a disclosure document is fraudulent but will be limited to the amount needed to right the wrong done – the plaintiff cannot get damages for expected future gains. [21.310]
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Damages for negligent misrepresentation
Liability in tort may arise from a misrepresentation which is carelessly made. There must be a duty of care owed and the maker of the statement must have foreseen that the other party would rely on the statement: see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465; L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225; Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) (2007) 63 ACSR 1.
Proposed disclosure regime for crowd-sourced funding offers [21.330] The Corporations Amendment (Crowd-sourced Funding) Bill 2015 (Cth) proposed to introduce a new part into Ch 6D to facilitate crowdsourced funding by establishing a separate disclosure regime for certain offers of securities for issue in small, unlisted public companies (“CSF offers”). As already noted the Bill lapsed on the calling of the double dissolution election in May 2016 but may be reintroduced. The crowd-sourced funding amendments would allow a large number of people to make a small investment in a company. According to the Explanatory Memorandum, crowd-sourced funding would give small businesses and start-ups an additional funding option, and it would provide more investment opportunities to retail investors, who are generally unable to gain direct access to early-stage financing activities. Under the Bill a CSF offer is an offer that meets certain requirements:
• the offer is for the issue of securities of the company making the offer (a CSF offer can only cover primary issues); • the company making the offer is an “eligible CSF company” at the time of the offer; • the securities satisfy the eligibility conditions specified in the regulations; • the offer complies with the “issuer cap” ($5 million); and • the company does not intend the funds sought under the offer to be used by the company or a related party of the company to invest in securities or interests in other entities or managed investment schemes (proposed s 738G). An “eligible CSF company” means a public company limited by shares, with its principal place of business and majority of directors in Australia; the company must satisfy gross assets and turnover caps; the company (or any related party) must not be a listed corporation or have a substantial purpose of investing in securities or interests in other entities or managed investments schemes (proposed s 738H).
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[21.320]
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The regime requires a “CSF offer document” to be prepared for each CSF offer and this document must contain all the information specified in the regulations (proposed s 738J). A CSF offer document must be published on a platform of a single “CSF intermediary” (a financial services licensee whose license expressly authorises the licensee to provide crowd-sourced funding) in order to make a CSF offer of a company's securities (proposed s 738L). The information in a CSF offer document must be worded and presented in a clear, concise and effective manner (proposed s 738K). A company making a CSF offer would be able to offer securities of the same class pursuant to an offer that is exempt from disclosure under s 708 (proposed s 738A). This would allow a company to make a CSF offer of shares via an intermediary to crowd investors, as well as making an offer of shares to investors for whom disclosure is not required. The proposed amendments also include prohibitions, liabilities and investor protections applying to CSF offers, including rules relating to defective disclosure documents and advertising restrictions. ASIC's powers in relation to offers of securities (such as the power to make a stop order) would also be amended so that they apply to CSF offers.
Mentor: Test your Knowledge ...................................................................................................................................... (See http://www.legal.thomsonreuters.com.au/browse/mentor multiple choice questions and answers on the Topic of Fundraising.)
for
Practice Questions ...................................................................................................................................... 1.
Certain offers of securities do not require a disclosure document: see s 708. Explain the rationale behind the exclusions. Is it the same rationale for all the exceptions?
2.
In general terms, what information must a prospectus contain? How does this differ from the information required for an offer information statement? Why is there a difference?
3.
Suppose a listed company wished to make a rights issue. Is a disclosure document required? Are there any special requirements as to content?
4.
Who can be liable for misleading and deceptive conduct in relation to disclosure documents? Is there a difference as to who can be liable for criminal and civil liability?
5.
What is meant by “due diligence”? What is the purpose of requiring issuers to exercise due diligence? Why is the exercise of due diligence such a costly exercise?
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When is a supplementary or replacement disclosure document required to be lodged with ASIC?
1.
According to the Treasury paper Fundraising – Capital Raising Initiatives to Build Enterprise and Employment Paper No 2 (CLERP Paper No 2, Canberra, 1997), the central aim of Ch 6D was to provide “disclosure of material information in an effective way [which] places investors in a position to make more confident assessments about securities without undertaking their own costly inquiries. It is generally more practicable and cost-effective for the fundraiser, rather than numerous investors, to undertake inquiries and disclose details about its own business”. Do you agree with the above statement and does Ch 6D, in your view, provide for effective disclosure to prospective investors?
2.
“Chapter 6D provides for effective regulation of profit forecasts and future predictions which are contained in a company's prospectus.” Do you agree with this statement? In what circumstances can a company and/or its directors be held liable for “blue sky” predictions which are contained in a disclosure document? What can be done to protect the company and directors from such potential liability?
Problems for Discussion ...................................................................................................................................... 1.
Larry Large (also known as Large Larry) started a business in the early 1990s involving direct marketing of a range of garden products. He operated through a proprietary company, Large Larry Pty Ltd. The business was quite successful, aided apparently by a media campaign featuring Larry himself. In 2011 he decided to dramatically expand the business and to change the operation from direct marketing to distribution of products through various retail outlets. In that year he converted the proprietary company into a public company (Large Larry Ltd). He now wants to raise $10 million in additional funds to assist with the expansion and also to retire some debt. One option that is being considered is to offer shares in Large Larry Ltd to a number of institutional investors. An alternative option is to “float” the business, that is, offer the shares to the public and apply for listing on the Australian Securities Exchange (ASX). Larry is very upbeat about the company's prospects. He believes that with favourable economic conditions the company will double in size within a year. He approaches you and asks you to advise him on the following matters:
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Essay Questions ......................................................................................................................................
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(a)
What are the implications under Ch 6D of the two fundraising options being considered?
(b)
If a decision is made to carry out a float and seek listing on the ASX, what type of disclosure document will be required and what type of information must it contain?
(c)
Can Larry continue with, or upgrade, his current media campaign (he believes it will help generate public interest in any offering)?
(d)
If the offer document includes forecasts consistent with Larry's view concerning the prospects of the company, what consequences could follow if the forecasts are not met? Are there any precautions in relation to disclosure that Larry, the board of directors and the advisers should take?
ATT Ltd, a biopharmaceutical company, has lodged a prospectus with ASIC intending to raise $100 million from investors. The aim of the capital raising is to allow the company to develop its range of research and development products. In the company's prospectus ATT Ltd has provided for forecast earnings/losses for the next three years as follows: $15 million loss, $25 million loss and $10 million profit. ATT Ltd is expecting a profit in the third year of listing on the ASX. The earnings forecast is based on the company expecting to complete development of a blockbuster breast cancer drug from its research and development activities. However, preliminary results from a clinical trial reveal the breast cancer drug has not shown conclusive results. The results from the clinical trial have not been disclosed in the prospectus. (a) Advise whether ATT Ltd is in breach of any of its Ch 6D disclosure obligations. (b)
Advise what ATT Ltd could do to rectify the omission if required to do so under Ch 6D.
(c)
What possible remedies could investors have if they have relied on ATT's prospectus to purchase securities in the company?
(d)
Would ATT Ltd be required to disclose in the prospectus the results from the clinical trials if the results were positive and likely to be effective in the treatment of breast cancer?
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Guide to Problem Solving ...................................................................................................................................... Is a disclosure document required?
1.
Is there an offer or invitation?
2.
Does the offer or invitation deal with securities as defined in s 700?
3.
Does the offer relate to a primary offering (“issue”) or secondary trading (“sale”)? If secondary trading, is a disclosure document required? (See s 707.)
4.
Do any of the exceptions in ss 708, 708A or s 708AA apply so that a disclosure document is not required?
Other disclosure issues
1.
What type of disclosure document will be required? See s 709.
2.
What type of information must a disclosure document contain? See ss 710 and 711. Should it contain an earnings forecast? What are the consequences for liability if it does?
3.
What restrictions does the legislation impose on any future advertising campaign? See s 734.
Liabilities and defences
1.
2.
If a disclosure document does contain defective information what type of liability can arise and who can be liable? (a) Has there been a misleading or deceptive statement, an omission or a new circumstance: s 728? (b)
Is the defect “materially adverse” so as to attract criminal liability: s 1311?
(c)
Will a shareholder be able to bring an action if loss is suffered as a result of the breach of s 728: s 729?
(d)
Who could be liable: s 729?
(e)
Are any defences available: ss 731-733?
What role could a supplementary or replacement prospectus play in these circumstances: see s 719?
Further Reading ...................................................................................................................................... Ancev T “Equity Crowdfunding in Australia: A Regulatory Balancing Act” (2015) 33 C&SLJ 353
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Consider s 706 – is there an “offer” of “securities” for “issue”?
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Austin RP and Ramsay IM Ford, Austin and Ramsay's Principles of Corporations Law, 16th ed, LexisNexis, 2015, Ch 22 Boros E “Corporations Online” (2001) 19 C&SLJ 492 Calleja N “Current Issues Relating to Prospectus Advertising and Securities Hawking” (2000) 18 C&SLJ 23 Ciro T “Misleading and Deceptive Conduct in Capital Markets” (1999) 5 NZBLQ 80 Hood A and Boswell D “Due Diligence Reviews for Fundraisings Under the Corporations Law” in Walker, Fisse and Ramsay (eds) Securities Regulation in Australia and New Zealand, LBC Information Services, 1998 Karl A, Kazakoff A and Chapple L “Market Responses to Offer Information Statements” (2003) 21 C&SLJ 231 Kyrwood J “Disclosure of Forecasts in Prospectuses” (1998) 16 C&SLJ 350 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 7 North G “Companies Take Heed: The Misleading or Deceptive Conduct Provisions are Gaining Prominence” (2012) 30 C&SLJ 342 Peters C “Revisiting the Regulation of SME Fundraising” (2006) 24 C&SLJ 319. Stace V “Are Directors Liable in Negligence for Misstatements in a Prospectus?” (2016) 34 C&SLJ 48.
CHAPTER 22 .......................................................................................................
Financial Services, Products and Markets Useful Websites ..................................................................... 644 Recent Developments ............................................................ 644
Related Topics ....................................................................... 644 Principles ............................................................................... 645 Key concepts .............................................................................. 645 Regulation of financial service providers ............................................ 652 Financial Services Licences ............................................................ 652 Disclosure and other obligations ...................................................... 653 Prohibited market conduct ............................................................. 658 Insider trading ............................................................................ 662 Liability for insider trading ............................................................. 666 Regulation of financial markets ....................................................... 668 Licensing of financial markets ......................................................... 669 Role of ASIC ............................................................................... 670 Role of APRA .............................................................................. 671 Role of the ASX ........................................................................... 672 Listing on the ASX ....................................................................... 675 Continuous disclosure .................................................................. 675 Enforcement of listing requirements ................................................. 680 National Guarantee Fund ............................................................... 681 Mentor: Test your Knowledge ............................................... 682 Practice Questions ................................................................. 682 Essay Questions .................................................................... 682 Problems for Discussion ........................................................ 683 Guide to Problem Solving ...................................................... 684 Further Reading ..................................................................... 684
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Aim ......................................................................................... 644
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Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Financial Services, Products and Markets.)
Recent Developments ...................................................................................................................................... Australian Government Treasury
Financial System Inquiry Final Report (November 2014) Australian Securities and Investments Commission (ASIC)
RG 98: Licensing: Administrative Action against Financial Services Providers (July 2013) RG 175: Licensing: Financial Product Advisers – Conduct and Disclosure (October 2013) RG 214: Guidance on ASIC market integrity rules for ASX and ASX 24 market (November 2015) ASX
ASX Listing Rules Guidance Note 1: Apply for Admission – ASX Listings (reissued December 2015) ASX Listing Rules Guidance Note 27: Trading Policies (reissued 31 January 2015) ASX Listing Rules Guidance Note 8: Continuous Disclosure: Listing Rules 3.1 – 3.1B (reissued August 2015) Corporations Act Amendments
Corporations Amendment (Financial Advice Measures) Act 2016 (Cth)
Aim ...................................................................................................................................... At the end of this topic you should know: • what is meant by the terms “financial product” and “financial service”; • how financial service providers are regulated; • how financial markets are regulated; and • what market practices are prohibited.
Related Topics ...................................................................................................................................... Chapter 21 Fundraising; Chapter 23 Takeovers
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[22.10] One of the central aims of the legislation dealing with financial services, financial markets and financial products under Ch 7 of the Corporations Act 2001 (Cth) (Corporations Act) is to promote a fair and efficient market for a range of financial products, services and markets. Such regulation is necessary because financial products – such as securities or interests in managed investment schemes or derivatives – can be quite complex and often financial products and services are marketed to retail (that is, unsophisticated) investors who require greater disclosure. For this reason the legislation requires a significant amount of disclosure of information about the products, as well as requiring those who provide services in relation to financial products to be licensed and markets for those products to be regulated. Overall control of financial services and financial markets is vested in ASIC but Ch 7 recognises the important role played by the ASX which is a private (that is, non-government) body and company that is itself listed on the ASX. Chapter 7 was completely rewritten by the Financial Services Reform Act 2001 (Cth) (FSR Act), to give effect to recommendations by the 1997 Final Report of the Financial System Inquiry (the Wallis Report) and the Commonwealth Treasury's CLERP Paper No 6, Fundraising – Financial Markets and Investment Products (Dec 1997) (CLERP 6 Paper): see [1.80]. Participants in the financial services industry, in particular those dealing with securities, include brokers, financial and investment advisers, merchant banks, financial institutions, companies and private investors. These participants are subject to regulation under Ch 7 and under rules developed by the ASX. Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Aboriginal and Torres Strait Islander corporations formed under CATSI cannot issue financial products.
Key concepts Financial products .......................................................................................................................................................................
The regulatory scheme in Ch 7 applies to “financial products”. The term “financial product” has a general definition as well as specific inclusions and exclusions. Under the general definition (s 763A(1)) a financial product is a facility through which, or through the acquisition of which, a person: [22.20]
• makes a financial investment (see s 763B);
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• manages financial risk (see s 763C); or • makes a non-cash payment: see s 763D. An investor makes a financial investment if they give money to another person to generate a return for the investor and the investor does not have day-to-day control over the use of the money to generate returns by, for example, acquiring shares or other securities in a company. Managing financial risk includes taking out insurance or “hedging”, that is, covering a potential liability, for example, by acquiring a futures contract. Non-cash payment facilities include cheque facilities and electronic payment facilities. The general definition of financial product in s 763A(1) covers a wide range of products including: • securities; • interests in managed investment schemes; • derivatives; • insurance products; • superannuation; • deposit accounts; • payment facilities, such as debit cards; and • a margin lending facility. To avoid doubt, each of these things is also specifically included as a financial product: see s 764A. Certain products are specifically excluded from being financial products, mainly because they are regulated elsewhere – for example, credit facilities such as those provided by banks and other financial institutions: see s 765A. Securities ....................................................................................................................................................................... [22.30] Securities are financial products and therefore regulated under both Ch 7 and Ch 6D: Ch 6D is discussed in Chapter 21. For the purposes of this Chapter, the term “security” means a share, a debenture, a legal or equitable interest in a share or debenture or an option to acquire any of the above by way of initial issue (but not a subsequent transfer), a right to acquire a security (or an interest in a managed investment scheme) under a rights issue, a CGS depository interest, or a simple corporate bonds depository interest: s 761A. Previously, the definition of security included an interest in a managed investment scheme but this is no longer the case. Although securities are included within the scope of Ch 7, the intention is that offerings of shares and debentures will be subject to the disclosure regime in Ch 6D (Chapter 21) and registered managed investment schemes will be subject to the
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disclosure regime in Pt 7.9: see s 1010A. However, other provisions in Ch 7 could apply in relation to securities, for example, the licensing provisions apply to those who deal in all types of securities. Managed investment schemes .......................................................................................................................................................................
Interests in managed investment schemes are specifically included as financial products: s 764A(1)(b) and (ba). A “managed investment scheme” is defined in s 9 as a scheme with the following features: [22.40]
• any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme; and • members do not have day-to-day control over the operation of the scheme. A time-sharing scheme (typically involving the right to use resort-style accommodation) is also a managed investment scheme: s 9. Schemes such as cash management, property and equity trusts are managed investment schemes, as are schemes offering investment in forest plantations, avocado farms or film syndicates. Schemes that have more than 20 members or that are promoted by people who are in the business of promoting such schemes must be registered with ASIC and comply with the requirements of Ch 5C. A detailed discussion of those requirements is beyond the scope of this Chapter but, very briefly, such a scheme must have: • a single responsible entity to hold the scheme's property on trust for members, operate the scheme and perform the functions conferred on it by the scheme's constitution and the Corporations Act. The entity must be a public company and must be licensed under Ch 7; • a constitution that sets out the rights of members vis-à-vis the responsible entity; • a compliance plan that sets out the measures that the responsible entity will apply in operating the scheme; and • an independent compliance committee to monitor the operation of the scheme and the adequacy of the compliance plan (the independent committee is only required if fewer than half the directors are external directors – that is, do not have any prior connection with the company).
Chapter 22
• people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme;
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Derivatives .......................................................................................................................................................................
Derivatives are financial products where the value is determined by reference to something else, such as a rate or index. Certain transactions involving derivatives were previously regulated as futures contracts under former Ch 8. However, there were a range of derivatives products that were not regulated, such as derivatives traded Over-the-Counter (OTC), that is, privately rather than on a market. OTC derivatives were largely unregulated because they were primarily used by sophisticated investors who were deemed to be sufficiently proficient and knowledgeable and, therefore, not in need of consumer (ie retail) type disclosure and protection. The previous regulatory position was changed with the reforms introduced by the FSR Act. The FSR Act introduced a new concept of “functional regulation” to all financial products so that all such products are regulated in much the same way. All derivatives instruments, whether traded on an exchange such as the ASX or traded OTC are now regulated under Ch 7 as derivatives. Chapter 7 treats all derivatives as “functionally” similar. The change in regulatory focus, away from the instrument's place of trade towards the instrument's so-called “function” has meant that all financial instruments serving the same or similar function are regulated in the same or similar manner. The term derivative is defined in s 761D. An instrument will be a derivative if it is an arrangement in relation to which: [22.50]
• a party must, or may be required to, provide at some future time consideration of a particular kind to someone; • the future time is not less than the number of days prescribed by the Corporations Regulations 2001 (Cth) (Regulations) (currently at least one business day or three business days for a foreign exchange contract); and • the amount of the consideration, or value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else including, for example, one or more of the following: – an asset; – a rate (including an interest rate or exchange rate); – an index; or – a commodity. Although this definition is extremely wide it excludes products that are otherwise specifically listed as financial products in s 764A. That means, for example, if a product or transaction is a “security” it will not be a derivative even if it satisfies the definition of what constitutes a derivative. However, there may be occasions where the regulatory distinction between a security
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and derivative is blurred. Hybrid instruments which have features of both a security and a derivative can pose considerable regulatory challenges for product issuers, users and regulators, as illustrated by the decision in Macquarie Bank Ltd v ASIC (2001) 66 ALD 367. In Macquarie Bank, ASIC objected to an application made by Macquarie Bank for exemption from fundraising disclosure rules for the issue of high-yield equity notes (HYENAs). The heart of the dispute concerned the proper characterisation of HYENAs. ASIC contended that HYENAs were securities and, therefore, required fundraising disclosure under Ch 6D. Macquarie submitted that HYENAs were in fact debentures and that Macquarie as the product issuer should be granted an exemption (under s 708(19)). The Administrative Appeals Tribunal held that HYENAs were the equivalent of put options and were in substance derivatives. (At that time there was no equivalent provision requiring disclosure for offerings of derivatives). The decision in Macquarie Bank highlights the difficulty of applying generic regulation to products and services developed in a complex marketplace. The distinction between a security and other financial products is often dismissed today, given that all financial instruments and financial products are regulated in a similar manner. However, the case of Macquarie Bank serves to remind us that distinguishing financial instruments on the basis of inherent characteristics is still relevant, particularly when the legislation continues to distinguish between Ch 6D fundraising disclosure for the issue of securities and Ch 7 disclosure for everything else. A margin lending facility ....................................................................................................................................................................... [22.60] A margin lending facility allows an investor to borrow money to acquire shares or other financial products. The loan is secured by the shares or financial products acquired but there may also be other security. If an investor acquires shares and the market price falls below an agreed level the lender can require the borrower to pay an amount to restore the loan to value ratio (this is a margin call). Until 2009 margin lending was not directly regulated but following a number of spectacular corporate collapses (see Parliamentary Joint Committee on Corporations and Financial Services, “Inquiry into Financial Products and Services in Australia” (Ripoll Report) (November 2009), regulation was seen to be necessary. Under the regime introduced by the Corporations Legislation Amendment (Financial Services Modernisation) Act 2009 (Cth) “margin lending facility” is defined (s 761EA) and included in the definition of financial product so that providers of margin loans are subject to the licensing, conduct and disclosure requirements of Ch 7. One of the matters highlighted in the Ripoll Report was the unsuitability of certain products for unsophisticated (retail) clients. Clients of Opes Prime
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Group Ltd, a stockbroking and securities lending company, who entered into margin lending arrangements were apparently unaware that the document they signed to provide security for the margin loan was a transfer of legal title (a standard Securities Lending and Borrowing Agreement). Opes Prime had subsequently transferred legal title under similar arrangements to ANZ Banking Group Ltd. Following the collapse of Opes Prime in 2008, clients sought to recover their shares and claimed that ANZ should give back the shares. The Federal Court held that title had in fact passed under the Securities Lending and Borrowing Agreement to ANZ and that the borrowers did not have a right, similar to an equity of redemption under a mortgage, to demand the return of the securities: Beconwood Securities Pty Ltd v ANZ Banking Group Ltd (2008) 246 ALR 361; 66 ACSR 116. The amendments to Ch 7 in 2009 included a number of provisions directed at financial service providers assessing the suitability of retail clients to enter into margin lending arrangements: ss 985EA – 985M. A loan will be deemed unsuitable for a client if, for example, the client would be unable to comply with their financial obligations in the event of a margin call. Lenders must take reasonable steps to notify clients when a margin call is made, unless clients agree to be notified by their financial planner: s 985M. In relation to this, ASIC released Regulatory Guide RG 219: Non-Standard Margin Lending Facilities: Disclosure to Investors (November 2010). Since the release of RG 219, ASIC has monitored the market and recently released the following Media Release:
...................................................................................................................... Margin lenders improve lending standards following ASIC review Media Release 16-010, 21 January 2016
Following an ASIC review, margin lenders have moved to better address the different levels of risk for investors seeking margin loans, especially in relation to double geared margin loans. ASIC reviewed the lending practices of six margin lenders, covering 90% of the market, and found that five of the six margin lenders approved “double geared” margin loans. Double geared margin loans are where a consumer borrows money (using another asset as security, such as their home) to purchase shares, and then obtains a margin loan on these shares to purchase additional shares. Because of the extra risks associated with double gearing, the law requires margin lenders to meet responsible lending obligations. ASIC found that in certain circumstances, four of the five margin lenders who approved double geared margin loans did not take additional steps when approving such loans, despite the additional risks associated with double geared margin loans. Following ASIC’s review, one margin lender decided to cease offering double geared loans. The remaining four lenders have made several commitments to reduce risks, including ensuring that their policies have, or continue to have, the following requirements for double geared borrowers:
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Margin lenders improve lending standards following ASIC review cont. • extra buffers to allow for interest rate rises and/or changes in expenses; • lower maximum allowable loan amounts; and • lower loan to value ratios.
“ASIC is pleased with the industry’s response to our proactive review and its commitment to standards that give appropriate consideration to the potentially significant risks that a double geared investment strategy might pose to investors,” said ASIC Deputy Chair Peter Kell. “However, given the clear need for better standards, ASIC will continue to monitor the margin lending sector. Should we find inappropriate lending we will take regulatory action to address consumer risks,” he said. © Australian Securities & Investments Commission. Reproduced with permission.
Financial services ....................................................................................................................................................................... [22.70] The regulatory scheme in Ch 7 is concerned with the provision of “financial services”. According to s 766A a person provides a financial service if they:
• provide financial product advice; • deal in a financial product; or • make a market for a financial product. Providing financial product advice means providing a recommendation or statement of opinion that is intended to, or could reasonably be regarded as intended to, influence a person making a decision in relation to a financial product: s 766B. The section distinguishes between “personal advice” and “general advice”. Personal advice is given to a person and takes into account (or should take into account) the person's circumstances. All other advice is general advice. Some obligations only apply if personal advice is being given: see [22.120]. Dealing in a financial product occurs when applying for, acquiring, issuing or disposing of a financial product or arranging for a person to do any of these things: s 766C. This would include the activities of brokers buying and selling shares on behalf of clients.
Chapter 22
ASIC’s review also identified two lenders that provided double geared margin loans in circumstances where the borrower would not be able to fully service the margin loan relying only on their available income. Instead, such borrowers would need to sell assets in order to meet their ongoing interest payments. While ’asset-lend’ margin loans are not prohibited, ASIC considers that such margin loans are significantly more likely to be unsuitable. Following ASIC’s review, both margin lenders agreed to cease approving double geared asset-lend margin loans.
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Making a market for financial products means providing a facility for the trading of financial products: s 766D. This would include the market for securities provided by the ASX: see [22.260].
Regulation of financial service providers The Wallis Report in 1997 found that the provision of financial services was carried out by a number of different providers subject to different regulatory regimes. One of the key recommendations of the Wallis Report was to make the regulation of financial products and financial service providers more uniform. The Wallis Report recommended a single licensing regime and comparable disclosure requirements. People who provide financial services, such as providing advice about financial products or dealing in financial products on behalf of clients, have a number of statutory obligations. Financial service providers:
[22.80]
• must hold a licence; • must comply with disclosure and other obligations; and • must not engage in prohibited conduct. Provisions dealing with market misconduct are similar to those in operation before the introduction of the FSR Act: see [22.160].
Financial Services Licences A person who carries on a financial services business must hold an Australian Financial Services Licence (AFSL): s 911A. An important issue is whether the person is “carrying on a business”. ASIC has provided some guidance on this issue in RG 121: Doing Financial Services Business in Australia. In essence the common law applies to determine if the person is carrying on a business. ASIC notes that cases have held that the existence of system, regularity and continuity generally determine whether the activities can be characterised as “carrying on a business in Australia” (RG 121.47). Importantly s 18 of the Corporations Act provides that a person can be carrying on a business otherwise than for profit. A person may apply for a licence by lodging an application with ASIC that includes all the information required by the Regulations (reg 7.6.03). ASIC must grant an application if ASIC is satisfied that there no reason to believe that the applicant is likely to contravene the obligations of financial services licensees imposed by s 912A and there is no reason to believe that the applicant is not of good fame and character: s 913B. ASIC may only refuse to grant a licence after giving the applicant an opportunity to appear at a hearing and make submissions about the refusal: s 913B(5). The provisions relating to granting of licences were amended by the Corporations Amendment (Future of [22.90]
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Financial Advice) Act 2012 (Cth) (Future of Financial Advice Act) to implement a recommendation of the 2009 Ripoll Report to enhance ASIC's powers to scrutinise applications for licences more closely: see [22.10]. A financial services licensee may authorise a person to be a representative and provide financial services on behalf of the licensee. A representative could be an employee of the licensee or may be an independent agent of the licensee. A person who is providing financial services as a representative does not need to hold a licence: s 911A(2). Financial services licensees are responsible for the conduct of representatives where financial services are provided on which a client could reasonably be expected to rely and on which the client relied in good faith: s 917A. A financial services licensee must comply with a number of obligations: ss 912A – 912B. They include: • ensuring that the financial services covered by the licence are provided efficiently, honestly and fairly; • complying with conditions on the licence; • complying with the financial services laws; • taking reasonable steps to ensure that representatives comply with the financial services laws; • having available adequate financial, technological and human resources; • maintaining competence to provide the financial services; • ensuring representatives are adequately trained and competent; • having a dispute resolution system where financial services are provided to “retail clients” (see [22.110]); • having adequate risk management systems; and • having arrangements to compensate retail clients for losses arising from contravention by the licensee or a representative.
Disclosure and other obligations [22.100] One of the main aims of Ch 7 is to ensure that investors are provided with adequate information about the financial products and financial services they acquire. Licensees and their representatives are required to provide certain clients with prescribed disclosure documents. The obligation applies where the client is a retail client. For these purposes the legislation distinguishes between “retail clients” and “wholesale clients”: see [22.110]. The main types of disclosure documents are the Financial Services Guide and the Statement of Advice: see [22.130]-[22.140]. In certain circumstances a Product Disclosure Statement may also be required: see [22.150].
Chapter 22
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If the financial service is the issue of a security, the disclosure requirements of Ch 6D rather than the disclosure requirements of Ch 7 will apply: s 1010A (see Chapter 21). There may be situations where it is not easy to determine the nature of products that are hybrid instruments. This is because a hybrid instrument may satisfy each of the definitions of security, derivative or other investment product: see Macquarie Bank Ltd v ASIC (2001) 66 ALD 367 discussed in [22.50]. In addition to the disclosure requirements there are obligations relating to the suitability of advice about financial products and services. The Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (Cth) inserted a “best interests obligation” into Ch 7 (see [22.120]). Retail/wholesale distinction: Sections 761G and 761GA ....................................................................................................................................................................... [22.110] The reason for the distinction between retail and wholesale clients is that licensees and others are subject to greater disclosure and other obligations in relation to retail clients. The distinction is basically concerned with whether clients have the resources and knowledge to make investment decisions without the protection of the legislative requirements, such as disclosure of information. If a person satisfies certain requirements they will be a wholesale client, otherwise the person will be a retail client but the definitions differ depending on whether the product is general insurance, superannuation or other financial products. According to s 761G(7) a person will be a wholesale client in relation to financial products and services (other than insurance, superannuation, retirement savings account or certain trustee company services) if:
• the price or value of the financial product is equal to or greater than the amount specified in the Regulations (currently $500,000); • the financial product or financial service is provided for use in connection with a business that is not a small business, that is, one that employs fewer than 100 people if the employer is a manufacturer, otherwise fewer than 20 people; • the financial product or financial service is not provided in connection with a business and the client meets a wealth test specified in the Regulations (currently net assets of $2.5 million or $250,000 per annum income). If an entity or trust that acquires a financial product or a financial service is controlled by an investor who meets this wealth test the entity or trust is not a retail client: reg 7.6.02AB. This means there is consistent treatment of investors who acquire a financial product or financial service via a trust or other investment vehicle;
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• the client is a “professional investor”. That term is defined in s 9 and includes financial services licensees, registered financial corporations (such as banks) and people who have or control at least $10 million of assets (including assets held by an associate or under a trust that the person manages for investment) (see reg 7.6.02AE). Section 761GA includes a further category of wholesale, that is non-retail, investor referred to as “sophisticated investors”. The licensee must be satisfied on reasonable grounds that the investor/client has previous experience that allows the client to assess the merits and risks of the product or service, the licensee provides a written statement of reasons as to why the licensee is so satisfied and the client signs a written acknowledgement that the product or service has not been provided to them as a retail client. The Government announced in 2011 that it was considering the appropriateness of the current wholesale/retail distinction. It noted that problems with the distinction became more obvious during the recent global financial crisis (GFC). The case of Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509, highlighted the fact that wealth is not necessarily a good indicator of financial literacy. The case concerned local councils who invested in complex financial instruments such as collateralised debt obligations (CDOs) sold by Lehman Brothers. According to the councils, the risks of investments in CDOs were not adequately explained. As wholesale clients, there was no requirement for them to receive a prospectus or Product Disclosure Statement, or even general warnings on the risk of the class of investment. Treasury issued an Options Paper in January 2011, “Wholesale and Retail Clients Future of Financial Advice”, as part of the Future of Financial Advice reforms, that considered different options for identifying “retail” investors, but no legislation has been issued. Personal advice to retail clients
There are certain obligations that arise if a financial service provider is giving advice to a retail client. These obligations arise where the advice is “personal” rather than “general” advice: see [22.70]. Chapter 7 previously required a financial services licensee (or representative) to ascertain the client's objectives and their financial situation and needs, investigate and consider the options available to the client and base the advice on that consideration and investigation: former s 945A. This was referred to as the “know your client rule”. If the financial services provider knew that the advice was inaccurate or incomplete, the provider was required to warn the client about the limitations of the advice and advise that the client should consider the appropriateness of the advice before acting on it: former s 945B. [22.120]
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As a result of the Future of Financial Advice reforms enacted following recommendations of the Ripoll Report, the Corporations Amendment (Further Future of Financial Advice) Act 2012 (Cth) inserted a new Division in Pt 7.7A. The Ripoll Report had suggested imposing a statutory fiduciary rule. The new Division is not in its terms a statutory fiduciary duty but does impose an obligation to act in the “best interest” of the client and sets out more onerous requirements relating to investigation of the client's circumstances and financial needs and an express obligation to ensure that the advice given is appropriate to the client (see ss 961 – 961Q). In addition, there is a provision that requires the licensee (or representative) to identify when there may be a conflict of interest and to give priority to the client's interests: s 961J. The Corporations Amendment (Future of Financial Advice) Act 2012 and Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (Cth) also included new provisions in Ch 7 dealing with remuneration of financial advisers. The provisions deal with: • Charging ongoing fees for advice: ss 962 – 962S; and • Accepting “conflicted remuneration”: ss 963E – 963L. A financial adviser who has an ongoing financial relationship with a retail client which involves the charging of an ongoing advice fee (however described), must provide the client with an annual fee disclosure statement: s 962G. The adviser must also provide a renewal notice at least every 24 months that requires the client to respond in writing: s 962K. Furthermore, the client is able to terminate the arrangement at any time: s 962E. The legislation also bans the receipt by licensees and their representatives, and the payment by product issuers or sellers, of remuneration that could reasonably be expected to influence the financial product advice given to retail clients (“conflicted remuneration”): ss 963E to 963L. This includes traditional product commissions, volume-based benefits and non-monetary benefits. It also bans some specific types of arrangements which could result in the adviser having a conflict of interest. These include the payment of volume-based shelf-space fees by issuers, and the charging of asset-based fees to retail clients on borrowed amounts: s 964 – 964H. Financial Services Guide (FSG) .......................................................................................................................................................................
A financial services licensee (or representative) who provides a financial service to a retail client must give the client a Financial Services Guide (FSG): ss 941A and 941B. The aim of this requirement is to ensure that retail clients receive adequate information about the particular financial [22.130]
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service being offered. If the financial service being offered is the issue of new financial products, an FSG is not required but a Product Disclosure Statement will be required: s 941C, see [22.150]. There are certain specific requirements as to content: ss 942B(2) and 942C(2). This includes a statement about the types of services the licensee is authorised to provide and a statement about the client's instructions. This is subject to the overriding requirement that the level of information required is such as a reasonable person would reasonably require for the purpose of making a decision whether to acquire financial services from the provider as a retail client. A licensee does not have to include in an FSG information that has been included in the Product Disclosure Statement (PDS): reg 7.7.02A; see [22.150]. Statement of Advice (SoA) .......................................................................................................................................................................
Where a retail client is given personal advice, the provider must give the client a Statement of Advice (SoA): s 946A. This is basically a written record of the advice being given, information about the basis on which the advice was given, any remuneration received and other factors that might reasonably be expected to be capable of influencing the provider in giving advice. The level of detail of information required is that which a person would reasonably require for the purpose of making a decision whether to act on the advice provided (s 947B(3) and 947C(3)), but there are also some specific content requirements: ss 947B(2) and 947C(2). An SoA does not have to be given if the advice is “further market-related advice”: s 946B(1). This is advice given by telephone, fax or email, relating to financial products that are able to be traded on a licensed market (such as the ASX) and the client has previously been provided with an SoA. Where there is an ongoing or continuous relationship between a retail client and a financial product provider, and there are no significant changes to the client's personal circumstances, the provider does not have to provide a SoA to the client: s 946B(1). Instead, a record of advice need only be kept which includes any particulars of recommendations made by the provider to the client: s 946B(3A). The record of advice must be kept for a period of seven years: reg 7.7.09(3). Where a retail client is given general advice, no SoA is required; however, the provider must warn the client that the advice does not take account of the client's objectives, financial position or needs: s 949A. [22.140]
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Product Disclosure Statement (PDS) ....................................................................................................................................................................... [22.150] Part 7.9 specifies the disclosure requirements for most financial products, including the disclosure required at the time of initial issue (or in some cases, subsequent sale) of the financial product, periodic reporting requirements and ongoing disclosure requirements. One of the main requirements is to give retail clients a Product Disclosure Statement (PDS) when making a recommendation or at the point of issue of a financial product. This is intended to give investors information about the financial product and to enable them to compare a range of products. A PDS performs the same function as a disclosure document under Ch 6D (see Chapter 21). A PDS must be given:
• when personal advice recommending a particular financial product to a retail client is made: (s 1012A); • when an offer relating to the issue of a financial product is made to a retail client or when the product is issued: (s 1012B); or • when a financial product is offered for sale to a retail client and the sale is off-market and the seller controls the issuer (either directly or indirectly) or, in certain circumstances, where the sale occurs within 12 months of issue: (s 1012C). In addition to the specific information that must be disclosed under s 1013C – 1013DA, disclosure is also required of any other information that is actually known to the product issuer or seller, that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product: s 1013E. The information content requirements for a PDS can result in lengthy and complex documents. However, Div 5AB of Part 7.9 of the Regulations modifies Ch 7 of the Corporations Act to permit a “short-form PDS” instead. A short-form PDS provided to the client must contain core or essential information. The product issuer must provide full product information on request: reg 7.9.61AA(5) and Part 3 of Sch 10BA to the Regulations.
Prohibited market conduct There are a number of practices that are prohibited because they enable some people to obtain an unfair advantage and create a false market for products, which can result in a lack of confidence in markets for those products. The provisions are not confined to licensees and can apply to other participants in the financial markets. The FSR Act did not significantly alter these provisions apart from extending them to a wider range of financial products than securities. The following conduct is prohibited: [22.160]
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• short-selling of securities, that is, selling securities or other financial products which are not yet owned. Short-sellers sell securities or other financial products which they do not possess, in the expectation that the price will fall and that they will be able to buy-in at this lower price. During the GFC, short sellers were seen as responsible for driving down share prices which often then resulted in margin calls being made with respect to those shares. As a result, short selling was banned by ASIC and is now only permitted in more limited situations. The legislation distinguishes between “covered short selling” where the seller does not own the shares but has a presently exercisable right to vest the securities in the purchaser. This will often be because the seller has “borrowed” shares under a Securities Lending Agreement (see [22.60]). Covered short selling is permitted but the seller is obliged to report its position to ASX and to ASIC. By contrast “naked short selling” is where the seller does not have the right to vest securities in a purchaser at the time of delivery. Naked short selling is now banned, subject to one exception which is where the seller has entered into a contract to purchase securities and all that is required is payment of the purchase price or receipt of title: s 1020B; • insider trading: ss 1043A – 1043O. See [22.170] below; and • a variety of practices which can be described as “manipulation of the market” such as – – market manipulation, where a person enters into a transaction that has or is likely to have the effect of creating an artificial price for trading in financial products on a financial market: s 1041A. An example is where a person engaged as a consultant traded in shares to increase the market price and thereby increased his remuneration: ASIC v Soust (2010) 77 ACSR 98. In this case in the Federal Court, Goldberg J held that an “artificial price” meant a price created “for a purpose unrelated to achieving the outcome of the interplay of genuine market forces of supply and demand”. This view of the meaning of the term artificial price was affirmed by the High Court in DPP (Cth) v JM [2013] HCA 30. The High Court also noted that s 1041A did not require that the person had a purpose (sole or dominant) of creating or maintaining a price. This was just one way of demonstrating that the conduct was at least “likely to have the effect of creating or maintaining” the price. This also suggests that it is not necessary to demonstrate that the transaction had that effect or that anyone was worse off as a result. Section 1041A could also apply to a practice known as “churning”, that is, where a group of investors buy and sell shares from each other, giving the appearance of active
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trading in those shares and encouraging others to enter the market resulting in higher prices for those shares at which the members of the group could sell at a profit; – false trading and market rigging, which includes creating a false or misleading appearance with respect to the market or price of financial products on a financial market: s 1041B. An early case dealing with the predecessor to this section is North v Marra Developments Ltd (1981) 148 CLR 42. In that case, a firm of stockbrokers acting on behalf of a client carried out a number of transactions designed to increase the price of the client's shares as part of a proposed reconstruction. The stockbrokers subsequently sued for their fees in relation to these transactions but were unable to recover the fees as the transactions they carried out were illegal. In Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd (1998) 28 ACSR 58, a shareholder sold a substantial number of ordinary shares when it was in its interests that the average sale price of ordinary shares be minimised so as to increase the shareholder's entitlement on conversion of its preference shares. This was held to breach of the precursor to s 1041B. See also ASC v Nomura International PLC (1998) 160 ALR 246 where the parties engaged in matching orders to reduce the price. There is a further prohibition on entering into fictitious or artificial transactions that cause the price of financial products to fluctuate (s 1041C); – disseminating information about any transaction that would contravene the market misconduct provisions (s 1041D); – making false or misleading statements in relation to financial products: ss 1041E and 1041F. In R v Wright (1980) 4 ACLR 931, a director of a listed company wrote to the ASX referring to the company's ore reserves being worth a substantial amount. This caused the price of the shares to increase. The director was found guilty of an offence even though there was no evidence he had profited from the rise in the share price. In ASC v MacLeod (2000) 22 WAR 255, a report prepared by a consulting geologist for a mining company claimed that based on exploration results a certain annual profit would be made. In fact, the results did not support such a prediction and the geologist was held to have breached a similar provision; – engaging in dishonest conduct in relation to a financial product or financial services: s 1041G. “Dishonest” is determined according to the standards of ordinary people: s 1041G(2); and
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– engaging in misleading or deceptive conduct: s 1041H. Engaging in conduct is widely defined to include dealing, issuing or publishing a notice in relation to a financial product: s 1041H(2). This is a “catch-all” provision based on s 18 of the Australian Consumer Law contained in Sch 2 to the Competition and Consumer Act 2010 (Cth) (formerly s 52 of the Trade Practices Act 1974 (Cth)). Similar to s 18 of the Australian Consumer Law, contravention of s 1041H requires proof that the conduct is misleading or deceptive. In GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd (2001) 191 ALR 342, a shareholder successfully argued that failure by a company which was subject to a takeover bid to disclose certain financial information was misleading and deceptive. In National Exchange Pty Ltd v ASIC (2004) 49 ACSR 369, the lack of prominence of information about how the purchase price would be paid did not make it clear to shareholders that they were being offered less than market value and was held to be misleading or deceptive. In ASIC v Cycclone Magnetic Engines Inc [2010] QCA 71, the company (CME) made statements that it was developing a commercially viable engine which, deriving its power solely from magnets within the engine, would have no need for fuel of any kind. The Court held that, in representing to potential investors that such a machine could work, CME engaged in conduct which was misleading or deceptive. In Forrest v ASIC; Fortescue Metals Group Ltd v ASIC (2012) 247 CLR 486, the chairman of a mining company made statements that the company had entered into binding agreements with three Chinese companies to build, finance and transfer certain infrastructure for its mine. In fact the agreements were not binding and the Full Federal Court held that the statements were misleading or deceptive: AISC v Fortescue Metals Group Ltd (2011) 190 FCR 364. The High Court, on appeal, held that the statements were statements of opinion and not fact and therefore not misleading (see [11.355] and [22.300]). Another recent case involving this provision is Australian Securities & Investments Commission v Hellicar [2012] HCA 17, which involved the James Hardie Group. In February 2001, the directors approved a statement to the ASX which stated
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that the Fund it had established to provide compensation to asbestos victims had sufficient funds to meet all legitimate compensation claims. It was found at trial and on appeal to the New South Wales Court of Appeal that the statements were misleading or deceptive and the directors either knew or ought to have known that this was the case. The directors appealed to the High Court but these findings were not overturned.
Insider trading [22.170] The term “insider trading” suggests dealing by a person within the company. However, in the legislative context it is used to refer to the situation where a person who possesses price-sensitive information uses that information to make a profit when dealing in securities. Insider trading may also give rise to a breach of fiduciary duty (see Chapters 11, 12 and 13) or breach of directors' duties. There are also specific legislative provisions to deal with such activity. There have been difficulties associated with bringing actions against insider traders, especially directors of the company. Under general law, the difficulty is that directors have a duty to the company, not members, so a director who trades shares on inside information can only be sued by the company, not the loser in the trade: see Percival v Wright [1902] 2 Ch 421 and Topic 13. To overcome these difficulties, specific provisions have been included in Ch 7. The main provision is s 1043A.
SECTION 1043A(1) & (2) Prohibited conduct by person in possession of inside information (1)
Subject to this Subdivision, if: (a)
a person (the “insider”) possesses inside information; and
(b)
the insider knows, or ought reasonably to know, that the matters specified in paragraphs (a) and (b) of the definition of “inside information” in section 1042A are satisfied in relation to the information; the insider must not (whether as principal or agent): (c)
apply for, acquire, or dispose of, relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products; or
(d)
procure another person to apply for, acquire, or dispose of, relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products.
CHAPTER
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663
… (2)
Subject to this Subdivision, if: (a)
a person (the “insider”) possesses inside information; and
(b)
the insider knows, or ought reasonably to know, that the matters specified in paragraphs (a) and (b) of the definition of “inside information” in section 1042A are satisfied in relation to the information; and
relevant Division 3 financial products are able to be traded on a financial market operated in this jurisdiction; the insider must not, directly or indirectly, communicate the information, or cause the information to be communicated, to another person if the insider knows, or ought reasonably to know, that the other person would or would be likely to: (d)
apply for, acquire, or dispose of, relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products; or
(e)
procure another person to apply for, acquire, or dispose of, relevant Division 3 financial products, or enter into an agreement to apply for, acquire, or dispose of, relevant Division 3 financial products.
[Notes not reproduced.]
In summary, this means that if a person possesses information about “relevant Division 3 financial products” (defined to include securities: s 1042A) which: • a reasonable person would expect to have a material effect on the price or value of the financial products (sometimes described as “price sensitive information”); and • the information is “not generally available”, they must not trade or procure any other person to trade those financial products. There is also a prohibition on communicating the information to another person (sometimes called “tipping”), but this only applies to financial products that are traded on a financial market (for example, ASX listed securities): s 1043A(2). As already noted a person does not have to have any connection with a company in order to be an “insider” according to the section. Someone who merely overhears a conversation can be an insider as long as he or she knows, or ought to know, that the information is not generally available and that it could be price sensitive. High-profile investors, whom others will follow, technically have pricesensitive information because their investment decisions affect prices. Dealings by these people, in these circumstances, are specifically excluded from the prohibition: ss 1043H and 1043I. Also excluded from the prohibition are:
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• underwriters (s 1043C); • licensees or representatives acting on behalf of clients (s 1043K); and • companies and partnerships which have established “Chinese walls” (see [22.180]) which prevent information being passed on to other people in the organisation: ss 1043F and 1043G. Insider trading is still very difficult to prove because there are many legitimate reasons for persons trading in securities. There have been suggestions that the onus of proof should be reversed to make prosecution easier, but this runs counter to the principle that a person is innocent until proven guilty. There have recently been a number of high profile insider trading cases. For example, in March 2015, two men were convicted and sentenced to jail for 3 and 7 years for entering into transactions involving foreign exchange derivative products that resulted in estimated profits of $7m: see ASIC Media Release 15-058MR http://asic.gov.au/about-asic/media-centre/find-amedia-release/2015-releases/15-058mr-two-men-sentenced-in-australia-slargest-insider-trading-case/; and in 2016 a Sydney man was found guilty of insider trading conspiracy in relation to share trading based on information passed to him by a friend that resulted in an estimated profit of over $1m. He was sentenced to 3 years' imprisonment with a minimum period of 15 months: see ASIC Media Release 16-180MR: http://asic.gov.au/about-asic/ media-centre/find-a-media-release/2016-releases/16-180mr-oliver-curtisfound-guilty-of-insider-trading-conspiracy/. Chinese wall defence: Sections 1043F and 1043G .......................................................................................................................................................................
Chapter 7 provides a Chinese wall defence to a possible insider trading claim for corporations: s 1043F; and for partnerships: s 1043G. The Federal Court decision in ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35 examined the application of the insider trading provisions of the Corporations Act including the Chinese wall defence available under s 1043F. [22.180]
ASIC v Citigroup [22.185] ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35 (Federal Court of Australia) In this case, ASIC alleged that Citigroup, through one of its employees, sold shares in Patrick Corporation Ltd whilst in possession of insider information. It was alleged by ASIC that since Citigroup was acting as advisers for Toll Holdings Ltd in relation to Toll’s attempted takeover of Patrick, Citigroup was in possession of price-sensitive insider information and therefore could not trade shares in either Toll or Patrick. Citigroup was prosecuted by ASIC for two claims of insider trading, contrary to s 1043A of the Corporations Act.
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cont.
The Court did, however, state some reservations (at para [604]) as to the use of the Chinese wall defence in a potentially volatile trading environment: “The second insider trading claim failed because the Chinese walls defence contained in s 1043F of the Corporations Act was engaged. Nevertheless, the events which took place within Citigroup during the afternoon and evening of 19 August 2005 show that Chinese walls may not be as solid as the name implies.”
Trading by directors .......................................................................................................................................................................
ASX surveys have revealed that the insider trading laws may not be effective in preventing breaches by directors. A 2010 study (ASX Review of Trading by Directors during the “Blackout” Period – Q1 2010) found that 41% of active trades by company directors occurred during “blackout periods”, that is, typically the period between the end of the financial year (or half-year) and the publication of the company's annual (or half-yearly) results. Twelve percent of these trades were considered to be of sufficient interest by the ASX for further investigation. As a response, the ASX enacted Listing Rules 12.9-12.12, which came into effect on 1 January 2011. Under the new rules, all ASX-listed entities must implement a trading policy, and submit it to the ASX. The policy must include the entity's blackout periods, and the restrictions on trading that apply to management during this period. This is in line with recommendations by CAMAC in its 2009 “Aspects of Market Integrity Report”. The ASX's Guidance Note 27 on Listing Rules 12.9–12.12 was updated in January 2015 following market concerns that arose in October 2013 when two David Jones directors purchased shares in circumstances that appeared to be insider trading. The Guidance Note emphasises that trading policies need to be formulated to minimise the risk of actual insider trading as well as to avoid the appearance of insider trading and the significant reputational damage that may cause. The Governance Institute described the revised guidance as follows:
[22.200]
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The Federal Court, Jacobson J, concluded that the insider trading claims were not proven by ASIC. This was because the company’s employee was not an “officer” of the company as is required under s 1043F and further, Citigroup could rely on the Chinese wall defence because Citigroup had “laid down general procedures which could reasonably be expected to ensure that legal or compliance officers of Citigroup vetted any communication of potentially price sensitive information to prevent it crossing the Chinese wall”: at para [593]. According to the Federal Court (at para [592]) to satisfy the requirements of a Chinese wall defence it must be shown by the defendant that there were “arrangements that could reasonably be expected to ensure that the information was not communicated” but “the arrangements required to satisfy s 1043F(b) of the Corporations Act do not require a standard of absolute perfection.”
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Revised ASX Guidance Note 27: Trading policies Media Release, 10 February 2015 ASX has revised its Guidance Note on trading policies, with the emphasis in the new version on preventing the perception of insider trading as well as reducing the occurrence of such trading. ASX has noted that a perception of insider trading can give rise to reputational damage. The revised Guidance Note covers: • why listed entities are expected to have a trading policy • who should be restricted from trading in a listed entity’s securities • when should trading in a listed entity’s securities be restricted • what types of trading should be restricted • exceptions where trading may be permitted • the procedures a listed entity should have to grant clearances to trade. Last updated in 2012, given the emphasis on the need to not only minimise the risk of actual insider trading, but also avoid the appearance of insider trading and the reputational damage that may cause, the revised Guidance Note appears to be responding to the market concerns that arose in 2013 when the chair of David Jones approved share trading by two directors. That decision and the ensuing controversy saw the chair and the two directors resign from the board. Source: Governance Institute of Australia Ltd http://www.governanceinstitute.com.au/ news-media/news/2015/feb/revised-asx-guidance-note-27-trading-policies/
Liability for insider trading [22.210] Breach of the prohibitions can result in criminal liability, or civil liability if a person suffers loss. Breach can also result in civil penalties. The Chinese wall defence to insider trading has already been discussed at [22.180]. The insider trading prohibition contains a knowledge element that must be satisfied beyond reasonable doubt (for criminal liability) or on the balance of probabilities (civil liability). In R v Farris [2015] WASC 251, the Supreme Court of Western Australia considered whether the fault element of knowledge in s 1043A had to exist at the time of sale. The Court held that the knowledge element in s 1043A(1)(b) relates to the act of possession, not to the point of sale: if a person possesses information, that he or she knows is not generally available and is price sensitive, the prohibition on trading will apply whether or not that person consciously brings to mind that information and its nature at the time of making a decision to trade in shares. Where a person contravenes ss 1041A – 1041G or contravenes the insider trading provisions in s 1043A, they commit an offence and will be subject to the penalties set out in Sch 3: s 1311. Contravention by an individual can result in 10 years' imprisonment or a fine of 4,500 penalty units (currently equal to $810,000) or three times the profit arising from the conduct that gave
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rise to the contravention, whichever is greater. For a company, the monetary penalty is 10 times the amount for an individual (currently $8,100,000) or three times the profit of all persons that arises from the contravention or 10% of the company's annual turnover, whichever is greater. A person who contravenes s 1041H (misleading or deceptive conduct) does not commit an offence but contravention may result in civil liability under s 1041I (see below). A person who suffers loss or damage arising from the contravention of ss 1041E – 1041H may recover the amount of loss or damage by action against the person who contravened the provision or any person who was involved in the contravention whether or not there has been a conviction in respect of the contravention: s 1041I(1). For breaches of s 1041H, (misleading or deceptive conduct) this is the only remedy available. Contraventions of ss 1041A – 1041D (market manipulation) and s 1043A (insider trading) are also financial services civil penalty provisions in Pt 9.4B. The application of the civil penalty provisions introduced in 1993 enables actions to be brought where the provisions appear to have been contravened but the more onerous burden required for a criminal prosecution (that is, beyond reasonable doubt) may not be satisfied. The requisite burden of proof for civil liability provisions is on the balance of probabilities. Where the court is satisfied that a civil penalty provision has been contravened it must make a declaration and can then make the following orders on the application of ASIC: • an order to pay the Commonwealth a pecuniary penalty of up to $200,000 (or $1 million for a body corporate) if the contravention materially prejudices investors, or the corporation or scheme (or its members), or if the contravention is serious (s 1317G(1A) – (1B)); and • a compensation order for damages suffered by a person as a result of the contravention: s 1317HA. The application for a compensation order may also be made by any person who suffered damage as a result of the contravention: s 1317J(3A). There are also specific provisions dealing with compensation orders against a person who contravenes the s 1043A insider trading prohibition: s 1043L. Section 1043O also gives the court additional power to deal with insider trading. The court may make a variety of orders to ensure that insiders are denied any benefit from the insider trading activities. The orders include: • restraining the exercise of rights attached to financial products; • restraining the acquisition or disposal of financial products; • directing the disposal of financial products; • vesting the financial products in ASIC;
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• cancelling a financial services licence; or • directing a person to do or refrain from doing a specified act in order to secure compliance with any other order.
Regulation of financial markets The role of a financial market is to bring together buyers and sellers of financial products, thus enabling efficient capital resource allocation. Prior to the introduction of the FSR Act, the legislation distinguished between securities (and securities markets) and other products such as futures (and futures markets). This meant that if a product was held to be a future rather than a security, it could only be traded on a futures market. The position now is that there is a single licensing regime for financial markets (the Australian Financial Markets Licence) and a market that satisfies the licensing criteria can trade in a range of financial products. A “financial market” is defined as a facility through which offers to acquire or dispose of financial products are regularly made or accepted: s 767A. Although there are a number of markets for financial products, the focus of this Chapter is on the market for securities. The most significant market for securities is the Australian Securities Exchange (ASX) but there are also some smaller exchanges such as Chi-X Australia, the National Stock Exchange of Australia (formerly the Newcastle Stock Exchange) and the SIM Venture Securities Exchange (formerly the Bendigo Stock Exchange). Although the last two exchanges have operated for some time and cater for smaller, innovative enterprises, Chi-X (part of the Japanese financial services group Nomura) was only granted a market licence in 2011 and aims to provide real competition to the ASX. There are two markets for securities: [22.220]
1. 2.
the primary market – where the initial raising of money by way of issue of new securities occurs; and
the secondary market – where the buying and selling of previously issued securities takes place between brokers acting on behalf of their clients. A securities exchange is essentially a secondary market place for securities to be bought and sold. The ASX was established in 1987, as a result of a reorganisation of each of the exchanges in the Australian States. In 1997 it became a company limited by shares (ASX Ltd) and it is now listed company and its shares are quoted on its own exchange. The ASX also has responsibilities as a licence holder to ensure compliance with its operating rules, including the rules that apply to listed entities
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(s 792A). To avoid any conflict that might arise for the ASX in relation to self-listing, the legislation provides that the listing rules must provide for ASIC to make decisions and take action in relation to the self-listed entity (s 798C). The ASX operates a number of markets apart from the market for securities. It also operates markets in listed managed funds, equity options, warrants and interest rate securities. A subsidiary, ASX 24, operates a licensed market that deals in other financial products such as futures and options contracts over Treasury Bonds, bank bills, cash rates, ASX Equity Indices, energy and commodities (forms of derivatives). In 2006, the ASX and the Sydney Futures Exchange (SFE) merged to create one exchange trading in securities and derivatives. The merger between the two exchanges was considered to be beneficial because it would allow the ASX to develop a significant platform and market presence for listed securities and derivatives in the Asia Pacific region. Until 2010 the ASX had responsibility for ensuring compliance with its market rules (applicable to those who use the trading facilities of the ASX) and the listing rules (applicable to listed entities). In 2009 the government announced that ASIC would be taking over responsibility for supervising trading activities on licensed financial markets and on 1 August 2010 ASIC took over that responsibility pursuant to the Corporations Amendment (Financial Market Supervision) Act 2010 (Cth). The change in regulation of trading was seen as particularly important given the arrival of Chi-X as a licensed financial market as ASIC will be able to regulate all markets in the same way. The ASX retains responsibility for supervision of listed entities. As already noted, Ch 7 contains a number of provisions clarifying the responsibilities of the ASX as a listed entity and ensuring accountability to ASIC and the government in carrying out its responsibilities: ss 798C – 798E. These provisions were included in the legislation in 2001 in response to concern that an entity that aims to make a profit may not be able to fulfil its regulatory obligations in the same way. The ASX and ASIC have a memorandum of understanding concerning the ASX (October 2011) which spells out their respective roles: see [22.240] and [22.260].
Licensing of financial markets If an entity operates a financial market it must hold an Australian market licence (“AML”): s 791A. Application for an AML must be made to ASIC: s 795A. ASIC must be satisfied that the applicant will comply with obligations set out in s 792A relating to having adequate operating rules, clearing and settlement arrangements and compensation arrangements in the event of default by market participants. ASIC must also be satisfied that no individual connected to the market operator has been disqualified by ASIC as [22.230]
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being unfit to be involved in operating a market: s 795B. The grant of a licence also carries with it the continuing obligation to maintain those arrangements and to notify ASIC if it is no longer able to comply with its obligations: ss 792A and 792B. A licensee can self-list, that is, have its shares listed on its own exchange (as the ASX has done): s 798C. In such a case, the market's Listing Rules must provide for ASIC, instead of the licensee, to make decisions and to take action in relation to: • the admission of the licensee to the market's list; • the removal of the licensee from that list; and • allowing, stopping or suspending the trading on the market of the licensee's financial products. There are 16 domestic financial markets and seven overseas financial markets that have been granted an AML although many are restricted to particular products or market segments. The list of domestic and overseas financial markets that have been licensed is on the ASIC webpage: http:// www.asic.gov.au.
Role of ASIC ASIC, as the main regulator of financial services, has wide power to regulate financial markets and financial service providers. Its powers include: [22.240]
• licensing and supervision of financial service providers; • licensing and supervision of financial market operators, including advising the Minister whether to approve new financial markets and monitoring the ASX as a self-listed entity; • supervising trading activities on Australia's domestic licensed markets; and • enforcement of the laws against misconduct on Australia's financial markets. ASIC also has a role to play in the formulation of policy and aims to provide market participants with guidance on the way it administers the legislation. ASIC has released many Regulatory Guides (formerly known as Policy Statements and Practice Notes) dealing with particular aspects of the legislation. It has also released other resources, such as a Licensing Kit, to assist applicants to complete their applications for a licence. These resources are available on the ASIC website: http://www.asic.gov.au. Following criticism of ASX Ltd's dual role as a regulator of the market and as a listed company, supervision of licensed financial markets in Australia was transferred from the ASX to trading on ASIC in August 2010. The
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Corporations Amendment (Financial Market Supervision) Act 2010 (Cth) inserted a new Pt 7.2A into Ch 7. ASIC now has power to make regulations that deal with the activities and conduct of licensed markets and persons in relation to them: s 798G. This includes the power to direct an entity to suspend trading: s 798J. Under this power, ASIC has enacted the “ASIC Market Integrity Rules (ASX Market) 2010”. For further information, see RG 214: Guidance on ASIC Market Integrity Rules for ASX and ASX 24 Markets (November 2015). Although ASIC is now the regulator of trading on the ASX and related markets as well as Chi-X and other licensed markets, the market operator is obliged to provide information, give access to market facilities and generally to assist ASIC in relation to the performance of ASIC's functions: ss 792B – 792E. ASIC has signed Memoranda of Understanding (MoUs) with other regulatory bodies in relation to regulation of the securities market. For example, ASIC has signed MoUs with the Australian Competition and Consumer Commission (December 2004), the Australian Prudential Regulation Authority (May 2010) and ASX (October 2011). Those agreements set out the role of each of the regulators and provide for co-operation between the various bodies in regulation of financial markets and products. ASIC has also signed MoUs with a range of regulators from other countries under the umbrella of the International Organisation of Securities Commissions (IOSCO).
Role of APRA [22.250] Prior to 2001, the Australian Prudential Regulatory Authority (APRA) had sole responsibility for the supervision and regulation of a number of financial institutions across Australia. Following the FSR Act, APRA maintains an important role in providing prudential supervision and regulation but the regulation is now shared with ASIC to the extent that ASIC regulates financial products and financial services. APRA's prudential role is concerned with making sure that financial institutions are able to meet their commitments when they fall due. The institutions subject to prudential supervision and regulation include:
• authorised deposit-taking institutions (such as banks, building societies and credit unions); • insurance companies (including life insurance); and • the superannuation industry. APRA has responsibility for administering the following Commonwealth Acts of Parliament (commonly referred to as the “Prudential Acts”): Banking Act 1959 (Cth); Insurance Act 1973 (Cth); Life Insurance Act 1995 (Cth); and Superannuation Industry (Supervision) Act 1993 (Cth).
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In 2008, the Commonwealth Parliament passed the Financial Sector Legislation Amendment (Review of Prudential Decisions) Act 2008 (Cth) (Review of Prudential Decisions Act). The Review of Prudential Decisions Act introduced a court-based process for disqualifying an individual from operating an APRA-regulated entity. The court-based process for disqualification introduced by the Review of Prudential Decisions Act is similar in effect to the disqualification process contained in the Corporations Act. APRA can make application to the Federal Court to disqualify any individual from being or acting as a responsible person for an APRAregulated entity on “fit and proper” grounds: Review of Prudential Decisions Act, Sch 1. Previously, the disqualification process was handled and determined by APRA alone. The Federal Court has the power to disqualify an individual on fit and proper grounds from being or acting as: • a director, senior manager or auditor of an authorised deposit-taking institution (such as a bank, credit union or building society); • a director, senior manager, auditor or actuary of an insurance company (including life insurance company); and • a superannuation entity. The Federal Court can make the disqualification for a period that it considers appropriate and the disqualification is subject to the normal appeals process.
Role of the ASX The ASX (and other licensed market operators) have some regulatory functions. The ASX (and other operators) have operating rules (formerly known as Business Rules) that govern the relationship between brokers, their clients and the ASX. Those rules have effect as a binding contract between the ASX and the market participants (brokers) and between the participants, except to the extent of any inconsistency between these rules and ASIC's market integrity rules: s 793B. The Regulations specify minimum content requirements for any licensed market's operating rules. The rules must deal with eligibility to be a participant, ongoing conduct requirements, the way in which trading must be conducted, mechanisms for dispute resolution and disciplinary procedures: reg 7.2.07. The ASX can impose disciplinary sanctions for breaches of these rules. Clients who suffer loss as a result of wrongdoing by a broker can also make a claim against the National Guarantee Fund: see [22.320]. The ASX also acts as a regulator of entities (companies and trusts) that wish to be listed on the ASX. In such a case the ASX Listing Rules apply. The Listing Rules deal with such matters as admission to and removal from the List, activities and conduct of listed entities and disciplinary procedures for [22.260]
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...................................................................................................................... ASIC Pushes For More Powers As it Wants to Impose Listing Rules on ASX Damon Kitney, The Australian, 27 December 2011
The corporate regulator is pushing for more powers to impose listing rules on the Australian Securities Exchange and new market operators such as Chi-X, but has baulked at the cost of taking over responsibility for enforcing them. Following the federal government’s decision earlier this year to block Singapore Exchange’s takeover bid for ASX Limited, the federal government has been reviewing how investors could be properly protected in any future mergers and when new market operators set up in Australia. When the government blocked the ASX takeover on national interest grounds, Wayne Swan warned that Australia could lose regulatory sovereignty over “critical market infrastructure” in the deal. The Council of Financial Regulators has proposed that the Australian Securities & Investments Commission be given sweeping new powers to impose listing rules on the ASX and other operators that protect or enhance market integrity. While the plan has been broadly welcomed by industry and even the ASX itself, some investor groups have called for ASIC to also be given the power to supervise the listing rules. Last year, ASIC took over from ASX supervision of stockbroker and investment bank trading and potential legal breaches such as market manipulation. But currently the primary responsibility for enforcement of the continuous disclosure rules still resides with the ASX. In a situation where the ASX is now competing against other market operators such as Chi-X, this has raised questions about the group potentially putting commercial ambitions ahead of its regulatory responsibilities. ASIC deputy chairman Belinda Gibson told The Australian that while the regulator was keen to be given the power to make listing rules, it was wary of the cost of taking over supervision of them.
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breach of the Rules. The Listing Rules and associated Guidance Notes are available on the ASX website: http://www.asx.com.au. When an entity becomes “listed” on the ASX, its securities are “quoted”. Enforcement of the Listing Rules is discussed below: see [22.310]. Transactions involving quoted securities are settled electronically using CHESS (Clearing House Electronic Subregister System): see Chapter 9. In 2011, the Council of Financial Regulators in its Review of Financial Market Infrastructure Regulation, proposed that ASIC should be given power to direct a licensed market operator to make listing rules. The recommendation arose in the context of a proposed merger between the ASX and the Singapore Stock Exchange (SGX). The following article considers the recommendation:
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ASIC Pushes For More Powers As it Wants to Impose Listing Rules on ASX cont. “ASIC would be supportive of a power to impose listing rules on an exchange,” Ms Gibson said. “But supervision of those rules comes at a significant cost and would be a change of structure that the market would need to get comfortable with at a time of already great change.” While she declined to comment, market players have estimated the cost of the change could be up to $10 million. “It would mean serious money, lots of people and they would have to train them,” said one market player who declined to be named. ASIC is under pressure from the Treasurer to make further cost cuts as part of the government’s effort to save $2.2 billion across the federal public service. Earlier this year, ASIC cut about 80 jobs, including 50 front-line investigators, in an effort to reduce costs. ASIC chairman Greg Medcraft warned last month that the funding cuts would mean “our tolerance for risk has to rise”. In its submission to the Council of Financial Regulators, ASX said while it was not opposed to giving ASIC the power to make listing rules, “the circumstances in which this power may be exercised should be clearly set out in the Corporations Act” and “well articulated”. “This is important given the impact which these powers could have on the competitive position of Australian licensed listing venues and the commercial interests of entities listed on Australian markets,” it said. “Any such power should apply to all Australian listing markets and should not be used in a discriminatory manner.” ASX also asked for clarity on when the new powers could be exercised. The Australian Council of Super Investors said the plan reduced risks related to having a licensed market operator acquired by a foreign entity and said an “informal dialogue (was) an insufficient mechanism to protect listing standards”. But it called for the Council of Financial Regulators to consider broadening its recommendation to consider transferring to ASIC the responsibility for setting, monitoring and enforcing the listing rules. Investor advisory group Ownership Matters said transferring responsibility for setting, monitoring and enforcing all listing rules to ASIC or another independent third party would be consistent with international practice. It argued that the move would be in line with last year’s transfer of supervision of market participants to ASIC. If the additional powers are approved, Ownership Matters says it wants a “regular, open and transparent process whereby investors as well as issuers can suggest areas for improvement in the listing rules”. The Council of Financial Regulators, which is made up of the Reserve Bank, Treasury and the corporate and banking regulators, has also proposed a “fit and proper” test for owners of key institutions as part of its protection package.
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ASIC Pushes For More Powers As it Wants to Impose Listing Rules on ASX cont. The council also wants to give regulators greater powers to step in and appoint a statutory manager if a key institution is in financial difficulty. The government is now considering industry submissions.
Ultimately, the merger between ASX and SGX did not go ahead, the recommendation of the Council of Financial Regulators was not proceeded with and ASX continues to have full responsibility for the content and operation of the Listing Rules.
Not all public companies are listed. There are approximately 2.3 million companies registered in Australia, approximately 20,000 are public companies. As at April 2016, 2172 of those public companies were listed and the total market capitalisation was $1.5 trillion. Public companies seeking listing must apply to the ASX, supplying details of their activities. Bodies other than companies, for example, registered managed investment schemes, may also apply for listing. In order to be eligible for listing an entity must satisfy certain eligibility requirements. They must generally have at least 400 shareholders with holdings of the main class of securities valued at a minimum of $2,000 each. The minimum number of shareholders is 350 if at least 25% of shares are held by unrelated parties and is 300 if at least 50% of shares are held by unrelated parties. This ensures a sufficient number of buyers and sellers of the securities or units. There are also requirements as to size. The entity must satisfy either the profit test in Listing Rule 1.2 ($1 million net profit over the previous three years and $400,000 net profit over the previous 12 months), or the assets test in Listing Rule 1.3 (minimum net tangible assets of $3 million, or market capitalisation of $10 million). The ASX as a private (that is, non-government) body has a wide discretion as to whether to admit an entity to the list, but on general administrative law principles must not exercise its discretion arbitrarily. For further information about listing on the ASX, see ASX Listing Rules Guidance Note 1 (re-issued December 2015). [22.270]
Continuous disclosure ASX Listing Rule 3.1 ....................................................................................................................................................................... [22.280] One of the most important obligations imposed on listed entities is to keep the market fully informed. ASX Listing Ruling 3.1 (the General Rule) provides:
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Listing on the ASX
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Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities, the entity must immediately tell ASX that information.
The obligation is to disclose information that is “price sensitive”, that is, information that is likely to have a material effect on the price or value of the securities. The Listing Rule goes on to provide that some information does not need to be disclosed (this is sometimes referred to a “carve-out” from the continuous disclosure obligation). The wording of the exception makes it clear that the exception only applies if all of the requirements are met. Listing Rule 3.1A provides: Listing Rule 3.1 does not apply to particular information while each of the following is satisfied in relation to the information: • 3.1A.1 One or more of the following 5 situations applies: – It would be a breach of a law to disclose the information; – The information concerns an incomplete proposal or negotiation; – The information comprises matters of supposition or is insufficiently definite to warrant disclosure; – The information is generated for the internal management purposes of the entity; or – The information is a trade secret; and • 3.1A.2 The information is confidential and ASX has not formed the view that the information has ceased to be confidential; and • 3.1A.3 A reasonable person would not expect the information to be disclosed. [Notes not reproduced.]
In the past, some companies have argued that Listing Rule 3.1 did not require them to respond to rumour and speculation in the marketplace, for example, a newspaper article that mentions that a takeover for the company is imminent. However, the Listing Rules now include a further rule dealing with False Markets. Listing Rule 3.1B provides: If ASX considers that there is or is likely to be a false market in an entity's securities and asks the entity to give it information to correct or prevent a false market, the entity must give ASX that information. [Notes not reproduced.]
The ASX has issued Guidance Note 8 to assist companies in complying with Listing Rule 3.1. The Guidance Note was significantly revised in May 2013 in line with updates to the continuous disclosure Listing Rules and to provide further guidance, including on the meaning of “immediately” in Listing Rule 3.1 and the operation of the “reasonable person” test in Listing Rule 3.1A.
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• when earnings surprises for listed entities that have not published earnings guidance are market sensitive. For listed entities in this situation, ASX reaffirms that the disclosure obligation arises where the difference in earnings between the listed entity's internal projections and the analyst consensus estimate is so significant that a reasonable person would expect the information to have a material effect on the price or value of the entity's securities (that is, the Listing Rule 3.1 test), rather than necessarily applying the 5 to 10 per cent variation test recommended by ASX for listed entities who have published earnings guidance when considering whether to update that previous guidance. • When a listed entity may be required to correct analyst forecasts or consensus estimates that differ from the entity's own internal earnings projections. • When it would be appropriate for a listed entity to publish analyst forecasts or consensus estimates on the entity's relevant webpage or by market announcement, and ways to reduce the risk of this being seen as de facto earnings guidance. Corporations Act: Chapter 6CA ....................................................................................................................................................................... [22.290] Chapter 6CA (ss 674 – 678) gives statutory force to the continuous disclosure obligation imposed on listed entities. A breach of the provisions will occur if the information not disclosed is price sensitive and “not generally available”: s 674(2). Some non-listed entities are also subject to a continuous disclosure obligation under Ch 6CA (s 675(2)): see Chapter 15. Failure to comply with disclosure obligations in the Listing Rules (such as LR 3.1) can result in criminal liability under s 674(2) to which the Criminal Code (Cth) applies: s 1311. A contravention can also give rise to a pecuniary penalty order up to $1 million under the civil penalty provisions: ss 1317E, 1317G(1A) – (1B). In addition to the liability of the company, liability to a civil penalty also extends to any person involved in the contravention, such as directors, executives and advisers who participated in and had knowledge of the contravention: ss 674(2A) and 675(2A). Section 674(2B) provides a defence for a person who would otherwise have contravened s 674, if it can be shown that he or she took reasonable steps to ensure that the listed entity complied with its obligations and believed on reasonable grounds that the entity had done so. A person may also be criminally liable under s 674(2) if they aid or abet the commission of an offence by the company: s 1311 of the
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Failure to comply with Listing Rule 3.1 may result in the ASX issuing a “please explain” letter, with action ultimately being taken by ASIC. Guidance Note 8 was further revised in July 2015. The changes deal with:
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Corporations Act and s 11.2 of the Criminal Code. The High Court considered the provisions in Forrest v ASIC; Fortescue Metals Group Ltd v ASIC (2012) 247 CLR 486. This case is discussed below at [22.300]. Civil liability can also apply if the continuous disclosure obligation is contravened and a person suffers damage or loss: see for example, Grant-Taylor v Babcock & Brown Ltd (in liq) [2015] FCA 149 (Perram J) and Grant-Taylor v Babcock & Brown Ltd (in liq) [2016] FCAFC 60 (Full Federal Court). The shareholders in Grant-Taylor v Babcock & Brown Ltd (in liq) were unsuccessful in their application for damages against the company and its liquidator for breaches of s 674(2). The Full Federal Court in Grant-Taylor v Babcock & Brown Ltd (in liq) affirmed the trial judge's findings that the relevant information was not required to be disclosed pursuant to s 674 (see below [22.310]). In addition to the criminal and civil penalty consequences that can arise from a breach of s 674 (or s 675), ASIC has the power to issue an infringement notice requiring payment of a penalty of up to $100,000 and requiring the inadequate disclosure to be remedied: ss 1317DAC, 1317DAE. If the entity fails to comply with the notice then ASIC may bring civil proceedings: see RG 73: Continuous Disclosure Obligations: Infringement Notices (June 2012). Forrest v ASIC; Fortescue Metals Group Ltd v ASIC [22.300] Forrest v ASIC; Fortescue Metals Group Ltd v ASIC (2012) 247 CLR 486 (High Court of Australia) In this case, ASIC brought an action against Fortescue Metals Group Ltd (FMG) and its chairman and chief executive officer, Andrew Forrest (Forrest). In 2004, FMG and Forrest had entered into negotiations with three Chinese companies in relation to the construction of a mine in the Pilbara region, a port at Port Hedland and a railway connecting the mine to the port. Between early August and late October 2004, FMG entered into framework agreements with the three Chinese companies. In August and November 2004, FMG provided information to the ASX in the form of letters and media releases, stating that it had entered into binding agreements with the three Chinese companies to build, finance and transfer the mine, port and railway. FMG and Forrest conveyed this information through a press conference, a television interview and other reports and presentations. In 2006, ASIC commenced proceedings alleging that FMG had engaged in misleading or deceptive conduct, in contravention of s 1041H by falsely representing that the framework agreements were binding. In turn, ASIC alleged that these contraventions established that FMG had contravened its obligations under s 674. At first instance in 2009, the trial judge, Gilmour J, dismissed ASIC’s claim against FMG and Forrest. His Honour held that the statements about the framework agreements were expressions of opinion, honestly held by FMG and Forrest at the time of their making. Therefore, FMG did not breach its continuous disclosure obligations. However, on appeal in 2011, the Full Federal Court held that the trial judge had erred in finding that the statements were expressions of opinion. In their view, an
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ordinary, reasonable member of the investing public would have understood the statements to convey the historical fact that the agreements had been reached between the parties in the terms set out. The Full Court therefore found that that a breach of the continuous disclosure provisions (as well as the provision dealing with misleading or deceptive conduct) had occurred: Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364. The Full Federal Court held that Forrest was also involved in FMG’s contravention of s 674, by virtue of s 674(2A) and that Forrest was unable to rely on the defence in s 674(2B) because he was unable to point to any steps he had taken to ensure FMG’s compliance with its disclosure obligations and his communications were inconsistent with a belief that FMG had entered into binding agreements to build, finance and transfer the project’s infrastructure. However, on 2 October 2012, the High Court held that the statements relating to the legal effect of the agreements were statements of opinion and therefore not misleading or deceptive. On that basis they said it was not necessary to consider any breach of the continuous disclosure provisions.
Grant-Taylor v Babcock & Brown Ltd (in liq) [22.310] Grant-Taylor v Babcock & Brown Ltd (in liq) [2016] FCAFC 60 (Federal Court of Australia Full Court) In this case, shareholders in Babcock & Brown Ltd (BBL), a financial services firm, claimed damages against BBL for alleged breaches of the s 674(2) continuous disclosure obligations and ASX Listing Rule 3.1. The shareholders had purchased BBL shares between 21 February 2008 and 13 March 2009. They lost the value of their investment when BBL was placed in voluntary administration on 13 March 2009 and then in liquidation on 24 August 2009. The shareholders claimed that BBL breached s 674(2) and Listing Rule 3.1 during 21 February 2008 to 13 March 2009 by failing to disclose certain information to the market which was not generally available and which a reasonable person would have expected to have had a material effect on the price of BBL’s shares. The trial judge, Perram J, held that the information was not required to be disclosed and dismissed the claims: Grant-Taylor v Babcock & Brown Ltd (in liq) [2015] FCA 149. The shareholders appealed to the Full Federal Court in relation to the non-disclosure of three categories of information: • final dividends for the years 2005 to 2007 had been paid out of capital rather than profits, contrary to the then s 254T of the Corporations Act and BBL’s constitution, and its share capital had consequently been reduced contrary to s 256D; • BBL’s financial reports for 2005 to 2007 failed to disclose that final dividends had been paid out of capital and that share capital had been reduced in each financial year; • BBL was insolvent on 29 November 2008. In a unanimous decision, the Court determined that the payment of dividends out of capital contrary to the Corporations Act and to BBL’s constitution was technical and of no economic significance; the nondisclosure of the final report information was economically irrelevant; and there was no insolvency information requiring disclosure. However, the
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cont.
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cont. appeal raised important questions regarding the correct interpretation of the continuous disclosure provisions and the Listing Rules. Listing Rule 3.1, which requires disclosure if a reasonable person would expect information to have a material effect on the price or value of the entity’s shares, is essentially mirrored by s 674(2)(c)(ii). Section 677 elaborates on the s 674 (and s 675) concept of expectation of material effect. The Court confirmed that Listing Rule 3.1 “should be taken to implicitly embrace the s 677 concept” (at para [95]). That is, Listing Rule 3.1 should be read so that a reasonable person would be taken to expect information to have a material effect “if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of” the shares. Significantly, the Full Federal Court considered the meaning of “persons who commonly invest in securities” in s 677. They held that the approach taken by the Master in Riley v Jubilee Mines NL [2006] WASC 199 was incorrect: the phrase “commonly invest in securities” is not limited to shares in the type of company in question. The Court agreed with the Perram J’s rejection of the Jubilee approach, but their Honours disagreed with his construction of s 677 in two respects. First, they held that s 677 should not be confined to listed securities and, secondly, it should not be restricted to those persons who “ordinarily or usually” invest in listed securities. The Court held that the phrase “persons who commonly invest in securities” embraces frequent investors and infrequent investors, sophisticated investors and unsophisticated investors, including those “who may have an occasional interest in investing” (at para [131]). However, this difference in interpretation of s 677 did not help the appellants as the relevant non-disclosed information did not require disclosure under s 674.
Enforcement of listing requirements [22.320] Once listed on the ASX, an entity must comply with the ASX Listing Rules. Entities that fail to comply with the rules can be subject to a number of sanctions, including suspension of their securities from trading and, in the case of serious or persistent breaches, possible delisting by the ASX. ASIC as the regulator of financial markets has power to prohibit trading in a financial product on a market: s 794D. In 2011, ASX Ltd and ASIC signed an MoU “to promote cooperation, sharing of information and mutual assistance”: “Memorandum of Understanding between ASIC and ASX Ltd” (October 2011). Section 792D also requires the ASX to provide such assistance as ASIC reasonably requires for the performance of its functions. In addition to s 674 which deals with continuous disclosure (see [22.290]-[22.300]) the Listing Rules generally have been given statutory force by s 793C. This means that ASIC, the ASX or any “person aggrieved” by a failure to comply with an obligation can apply to the court regarding the failure to comply with the Listing Rules. The court may then make an order giving directions about compliance with or enforcement of the Listing Rules:
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s 793C(2). In an early case dealing with the predecessor to this section, the court held that it could not make an order about compliance once an irremediable breach of the Listing Rules had occurred: FAI Insurance Ltd v Pioneer Concrete Services Ltd (No 2) (1986) 10 ACLR 801. There is, however, another section enabling a court to make any order that it thinks fit even if a breach has already occurred: s 1101B. Interestingly, the ASX itself has never relied on these sections in cases of breach of the Listing Rules. Instead, it has relied on its own sanctions such as market pressure by the making of media releases, suspension of trading and, ultimately, delisting. Other people have applied to the courts under these sections. In Robox Nominees Pty Ltd v Bell Resources Ltd (1986) 13 ACLR 475, it was held that merely being a shareholder in a company did not mean that the person was a “person aggrieved”. The legislation was subsequently amended and s 793C(5) now provides that a person who holds financial products of the body corporate alleged to be in breach of the Listing Rules is a “person aggrieved”. As a general rule, a person who was not a shareholder at the time of breach cannot be a “person aggrieved” for the purposes of s 793C: Quancorp Pty Ltd v MacDonald (1999) 32 ACSR 50. However, a disappointed applicant for membership may have standing: Wenzel v ASX Ltd (2002) 125 FCR 570. The courts have also held that the obligation to comply with the Listing Rules does not apply if the ASX has waived compliance with the Rules: Harman v Energy Research Group Australia Ltd [1986] WAR 123.
National Guarantee Fund Chapter 7 of the Corporations Act provides that a licensed market must have an adequate compensation scheme in place if any of its participants provide financial services for retail clients who pay for those services. In the case of the ASX, the compensation arrangements are made through the National Guarantee Fund (NGF): Pt 7.5, Div 4. The NGF is administered by the Securities Exchange Guarantee Corporation (SEGC) as trustee of the NGF. SEGC is a wholly-owned subsidiary of ASX Ltd but operates independently. The NGF consists of moneys derived from those who use the trading facilities of the exchange (that is, brokers) from which compensation may be paid to those who can prove loss that is connected with a financial market that is caused by a participant, or past participant, in the market. The situations in which compensation can be claimed are set out in the Regulations. They include:
[22.330]
• a claim for an unauthorised transfer of securities: reg 7.5.53; • a claim in respect of insolvency of a broker: reg 7.5.64; or • a claim in respect of failure to transfer securities: reg 7.5.74.
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The compensation scheme only applies to investors who suffer loss as a result of wrongdoing by a broker. There is no equivalent scheme for compensation for loss suffered as a result of wrongdoing by other financial intermediaries.
Mentor: Test your Knowledge ...................................................................................................................................... (See http://www.legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of Financial Services, Products and Markets.)
Practice Questions ...................................................................................................................................... 1.
Identify three “financial products”. What types of “financial services” would be offered by stockbrokers?
2.
What is the difference between a “financial services licensee” and a “representative” of a licensee?
3.
Explain the distinction between a retail client and a wholesale client. Why is the distinction important?
4.
Explain what is meant by the “best interests obligation” (see s 961B, Corporations Act). Is it the same as a fiduciary obligation? Why is such a requirement necessary?
5.
The ASX occupies a unique position as both a regulated participant under Ch 7 and a regulator of those who are listed on the ASX. How does the ASX enforce its rules? What is the role of ASIC in this regard?
6.
Explain what is meant by the concept of “functional regulation”. Do you think it is appropriate to regulate insurance and superannuation products in the Corporations Act?
7.
Briefly explain how the Chinese wall defence in ss 1043F and 1043G may offer protection against an allegation of insider trading.
Essay Questions ...................................................................................................................................... 1.
In light of the shift to ASIC of supervision of trading on the ASX in 2010, should ASIC also be given responsibility for regulation of listed entities?
2.
Discuss the effectiveness of the continuous disclosure requirements under Ch 6C of the Corporations Act and the ASX Listing Rules. Your answer should include discussion of the Federal Court's decision in ASIC v Fortescue Metals Group Ltd (2011) 274 ALR 731 and the High Court’s decision in Forrest v ASIC; Fortescue Metals Group Ltd v ASIC [2012] HCA 39: see [22.300].
CHAPTER
22
FINANCIAL SERVICES, PRODUCTS AND MARKETS
683
1.
2.
Whopper Mining Co (WMC) is a large Australian mining company, listed on the ASX. It is frequently mentioned as a possible takeover target for US mining interests. The board of directors of WMC has issued statements in the past indicating that it will not welcome any takeover bids. In July 2015, the board was asked to meet with representatives of Alcorn Mining Co (Alcorn), a US mining company. At that meeting, the board was told that Alcorn would consider making a takeover bid at a very generous price subject to carrying out a review of WMC's activities. The board decided to consider the proposal. On 12 July, a story appeared in the “Business” section of The Age newspaper claiming that a takeover bid was imminent. The ASX asked WMC to make an announcement concerning the story to the market but WMC responded that it had nothing to disclose at that stage. A week later, Alcorn announced a bid for all the shares in WMC. (a) Has WMC breached ASX Listing Rule 3.1 or Ch 6CA of the Corporations Act? (b)
What action can the ASX take?
(c)
What action can ASIC take?
Investment bank specialist, AMG Ltd, is currently involved in advising on a proposed takeover between two listed transport companies STT Ltd and BCK Ltd. In the takeover, AMG Ltd is advising STT Ltd. The merger discussions are at a preliminary stage. Both STT Ltd and BCK Ltd will make their respective announcement to the ASX in the next few days. Meanwhile, one of AMG's employees, Jock, part of the broking division of AMG Ltd, decides to purchase for himself and his clients a significant stake in both STT Ltd and BCK Ltd. Employees of the broking division of AMG have little or no involvement with the employees in the mergers and acquisitions division. However, the division heads are required to attend group meetings of AMG Ltd, which are held each month. ASIC is considering taking action against AMG Ltd and Jock for insider trading under s 1043A of the Corporations Act. (a) Advise whether STT Ltd has breached any of its obligations under Ch 6CA of the Corporations Act and ASX Listing Rule 3.1. (b)
Advise whether ASIC will succeed in its prosecution of AMG Ltd and Jock for insider trading under s 1043A of the Corporations Act.
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Problems for Discussion ......................................................................................................................................
684
CORPORATIONS LAW: IN PRINCIPLE
(c)
Advise whether AMG Ltd and Jock can rely on any relevant defences.
Guide to Problem Solving ...................................................................................................................................... Is there a breach of ASX listing rule 3.1?
Consider: (a)
Is the entity subject to the ASX Listing Rules?
(b)
What is the threshold test for determining whether information should be disclosed?
(c)
Do any of the exceptions apply?
What action can the ASX take?
Consider the role of the ASX in regulating listed entities. Can the ASX impose any penalties on an entity that breaches the Listing Rules or on the directors of such an entity? What action can ASIC take?
Consider the role of ASIC in relation to possible breaches of the listing rules under Ch 6CA in particular.
Further Reading ...................................................................................................................................... Argent J “Requiring Proof of Individual Reliance to Establish Causation in Disclosure-based Shareholder Class Actions: The Role of Principle and Policy” (2016) 34 C&SLJ 87 Austin J “Government to the Rescue: ASIC Takes the Reins of the Stock Markets” (2010) 28 C&SLJ 444 Austin RP and Ramsay IM Ford, Austin and Ramsay's Principles of Corporations Law, 16th ed, LexisNexis, 2015, [9.600]-[9.650] (insider trading) Australian Government, Corporations and Markets Advisory Committee (CAMAC), “Insider Trading Report” (November 2003) available at http:// www.camac.gov.au Australian Securities Exchange (ASX), “ASX Position Paper: ASX's Role in Australia's Financial Regulatory Framework” (May 2008) Black A “Insider Trading and Market Misconduct” (2011) 29 C&SLJ 313 Bloch M, Weatherhead J and Webster J “The Development and Enforcement of Australia's Continuous Disclosure Regime” (2011) 29 C&SLJ 253
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685
Chapple LL, Clarkson P and Peters C “Impact of the Corporate Law Economic Reform Program Act 1999 on Initial Public Offering Prospectus Earnings Forecasts” (2005) 45 Accounting and Finance 67 Ciro T “The Regulation and Market Organisation of Financial Derivatives: An Australian Perspective Part 1” (2002) 4 Journal of International Financial Markets Law and Regulation 92 Ciro T “The Regulation and Market Organisation of Financial Derivatives: An Australian Perspective Part 2” (2002) 4 Journal of International Financial Markets Law and Regulation 126 Ciro T and Fox M “Financial Service Providers in Australia: Managing Conflicts of Interest” (2006) 17 International Company and Commercial Law Review 6 Goldwasser V “The Enforcement Dilemma in Australian Securities Regulation” (1999) 27 Australian Business Law Review 482 Klotz E “Misleading or Deceptive Conduct in the Provision of Financial Services: An Empirical and Theoretical Critique of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth)” (2015) 33 C&SLJ 451 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 19 North G “Continuous Disclosure in Australia: The Empirical Uncertainties” (2011) 29 Company and Securities Law Journal 394 Puig G “The Insufficiency of Legal Redress Against the Decisions of the Australian Stock Exchange” (2000) 18 C&SLJ 516 Rubenstein S “The Regulation and Prosecution of Insider Trading in Australia: Towards Civil Penalty Sanctions for Insider Trading” (2002) 20 C&SLJ 89 Steele S “Lessons (to be) Learnt from the Opes Prime Insolvency” (2008) 32 MULR 1127
Chapter 22
CHAPTER
CHAPTER 23 .......................................................................................................
Takeovers Useful Websites ..................................................................... 687 Aim ......................................................................................... 687 Related Topic ......................................................................... 688 Principles ............................................................................... 688 Introduction ............................................................................... 688 Restrictions on takeovers ............................................................... 690 Main takeover methods ................................................................. 694
Requirements for a market bid ........................................................ 702 Truth in takeovers ........................................................................ 703 Other provisions .......................................................................... 705 Compulsory acquisitions: Chapter 6A ............................................... 707 Substantial holding disclosure: Chapter 6C ........................................ 708 Liability for false or misleading statements ......................................... 711 Defensive conduct ....................................................................... 712 Regulators ................................................................................. 713 Mentor: Test your Knowledge ............................................... 717 Practice Questions ................................................................. 717 Essay Questions .................................................................... 717 Problems for Discussion ........................................................ 718 Guide to Problem Solving ...................................................... 719 Further Reading ..................................................................... 720
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Takeovers.)
Aim ...................................................................................................................................... At the end of this topic you should be able to: • describe the main allowable takeover methods and their differences;
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Requirements for an off-market bid .................................................. 698
688
CORPORATIONS LAW: IN PRINCIPLE
• outline generally the information required to accompany takeover offers and responses; and • explain briefly the sanctions against contravention of the takeover provisions.
Related Topic ...................................................................................................................................... Chapter 22 Financial Services, Products and Markets
PRINCIPLES Introduction A “takeover” is the acquisition of sufficient shares to gain control of a company. Chapter 6 of the Corporations Act 2001 (Cth) (Corporations Act) restricts acquisitions of shares that result in a person acquiring more than 20% of the voting power in a company. In this Chapter we use the expressions “bidder” and “target”. A “bidder” is the person or company seeking to acquire shares or other securities in the target. The “target” is the company which is the subject of a takeover bid. If the directors of the target welcome the bid, it is referred to as a “friendly” takeover. If the directors of the target do not welcome the bid, it is referred to as a “hostile” bid. In such a case the target may undertake defensive actions to try to thwart the bid: see defensive conduct, discussed in [23.290]. Another method of obtaining control of a company is to undertake a scheme of arrangement under s 411. This has become an increasingly common method of acquisition in the past few years. It is only used to acquire 100% of the shares in the company and can usually only be used in a friendly takeover because the process is carried out by the target company.
[23.10]
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Corporations registered under CATSI cannot issue shares or debentures. Types of control .......................................................................................................................................................................
It is important to distinguish different types of control. For instance, a bidder might wish to acquire all the shares in the company (total control). There may be a number of reasons for wanting total control, for example, there will be no need to deal with minority interests, but the main reason is [23.20]
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Why make a takeover bid? ....................................................................................................................................................................... [23.30]
Takeovers occur for various reasons. For example, a bidder may
wish to: • take advantage of a favourable share price or surplus cash or valuable assets; • acquire a competitor or secure a distribution or sales network (vertical or horizontal integration); • expand in new areas (growth through diversification); • take advantage of accumulated tax losses (although this is not always possible) or other tax considerations; or • take advantage of the target's listed status and use that vehicle to run the acquirer's business. As previously noted, Ch 6 applies to acquisitions of shares that result in a person acquiring more than 20% of the voting power in a company. The legislative requirements are an attempt to ensure fair and equal treatment to all shareholders. Acquisitions of shares below that threshold are not restricted. Regulation .......................................................................................................................................................................
The main aim of the legislation is not to prohibit takeovers, but to ensure that all target shareholders have access to relevant information and the opportunity to sell on equal terms. Without restrictions on takeovers, small shareholders would often be excluded from obtaining the same price for their shares as the bidders would deal only with large shareholders in order to [23.40]
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usually to take advantage of tax treatment for wholly-owned groups of companies. Under current tax laws, a wholly-owned corporate group may be treated as a single taxpayer under the consolidation rules that came into force on 1 July 2002. This means that transactions between members of the group, such as payments for goods or services or receipts, such as dividends, will not give rise to any tax consequences. As a result, considerable tax savings will be enjoyed. If a bidder seeks to acquire total control, it is normal to include a condition (a minimum acceptance condition, see [23.160]) that the offer must result in the bidder being entitled to 90% of the shares. Once 90% is reached, the compulsory acquisition provisions can be used: see [23.260]. Sometimes the bidder will only require sufficient shares to give it voting control – that is, more than half of the voting shares. In this case, the bidder may make the offer subject to a minimum acceptance condition of, say, 51%. The bidder acquires effective control of the company but does not have to pay for all the shares. In some companies, effective control may even pass with a lesser percentage, particularly if the shareholding is widely spread.
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obtain voting control. Small shareholders would not be informed about the identity and credentials of bidders and would have no say about the change of management. They would also be unsure of the company's future and whether to keep their shares or not. As part of the information process, the provisions relating to substantial shareholders and requirements for disclosure of beneficial ownership aim to ensure early warning of an impending takeover: see Chapter 9. If it is likely that a bidder will acquire less than 100%, then shareholders can decide whether they would be happy with a different person (or company) in control and, if not, they can sell their shares. Despite the reasons for restricting share acquisitions, some commentators believe regulation of takeovers is unnecessary because: • proper regulation is either impossible to achieve or produces as many problems as it overcomes; • regulation interferes with market forces, causing inefficiencies; and • there is nothing wrong with large shareholders receiving preferential treatment. Share acquisitions may also be regulated by other Commonwealth legislation including the Foreign Acquisitions and Takeovers Act 1975 (Cth), Broadcasting Services Act 1992 (Cth), Insurance Acquisitions and Takeovers Act 1991 (Cth) and Financial Sector (Shareholdings) Act 1998 (Cth).
Restrictions on takeovers General prohibition ....................................................................................................................................................................... [23.50] The general rule is that a person is prohibited from acquiring a relevant interest in voting shares above the threshold limit of 20% of the issued capital. Twenty per cent is an arbitrary figure, chosen because it is assumed that a person with less than that proportion cannot exercise control over the company.
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Section 606 is the key section.
SECTION 606(1) Prohibition on certain acquisitions of relevant interests in voting shares Acquisition of relevant interests in voting shares through transaction entered into by or on behalf of person acquiring relevant interest A person must not acquire a relevant interest in issued voting shares in a company if: (a) the company is: (i)
a listed company; or
(ii)
an unlisted company with more than 50 members; and
(b)
the person acquiring the interest does so through a transaction in relation to securities entered into by or on behalf of the person; and
(c)
because of the transaction, that person’s or someone else’s voting power in the company increases: (i) from 20% or below to more than 20%; or (ii)
from a starting point that is above 20% and below 90%.
Note 1: Section 9 defines “company” as meaning a company registered under this Act. Note 2: Section 607 deals with the effect of a contravention of this section on transactions. Sections 608 and 609 deal with the meaning of “relevant interest”. Section 610 deals with the calculation of a person’s voting power in a company. Note 3: If the acquisition of relevant interests in an unlisted company with 50 or fewer members leads to the acquisition of a relevant interest in another company that is an unlisted company with more than 50 members, or a listed company, the acquisition is caught by this section because of its effect on that other company.
In other words, the prohibition applies to an acquisition which takes a person over the 20% limit, or which increases a person's holding to any percentage between 20% and 90%. By way of example, this section prohibits a person from acquiring a “relevant interest” in issued voting shares in a company if, as a result of that acquisition, either A or B as shown below occurs.
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(1)
692
CORPORATIONS LAW: IN PRINCIPLE
The person must acquire the interest through a transaction. A person will be taken to enter into a transaction if they enter into or become a party to an agreement, or if they exercise an option to have shares or securities allotted (that is, the option relates to unissued shares or securities): s 64. Key concepts in the prohibition are relevant interest and voting power. Relevant interests
In determining whether a person has a relevant interest, the basic rule is that they will have a relevant interest if they are the holder of the securities, or they have the power to vote or to dispose of the securities: s 608(1). Joint holders of shares will each have a relevant interest. Relevant interests may also be held through bodies corporate. This can arise where a person has more than 20% of the voting power in the body corporate or where the person controls the body corporate. In such cases the person will have the same relevant interest as the body corporate: s 608(3). For example, if:
[23.60]
That is: • A controls B Co (or has more than 20% of the voting power in B Co); and • B Co has a relevant interest in C Co; then • A will have the same relevant interest in C Co, that is, 10% of voting power. A person will be taken to “control” a body corporate if they have the capacity to determine the outcome of decisions about the body's financial and operating policies: s 608(4). A relevant interest can also arise in anticipation of agreements. Where a person has a relevant interest in securities and enters into an agreement, gives or is given an enforceable right, or grants or is granted an option in relation to issued securities, the other party to the transaction will be deemed immediately to have a relevant interest in the securities: s 608(8). This means that the relevant interest can arise before performance of the agreement, enforcement of the right or exercise of the option. There are also a number of situations where the legislation states that no relevant interest arises. They include situations where the parties have entered into an agreement conditional on shareholder approval under s 611,
CHAPTER
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Item 7 (discussed at [23.110]) and where pre-emptive rights (that is, rights of first refusal in relation to securities) are granted under the constitution of the body: s 609(8). Voting power [23.70] Having explained when a relevant interest is acquired, not all such acquisitions will breach s 606. Section 606 is only concerned with acquisitions of relevant interests in issued voting shares which result in an increase in a person's voting power. A person's voting power in a body corporate is determined under s 610 as follows:
• person's and associates' votes is the total number of votes attached to all voting shares in the body corporate that the person or an associate has a relevant interest in; and • total votes in body corporate is the total number of votes attached to all voting shares in the body corporate. For example, if T Co has 10,000 shares that are all voting shares and A (and A's associates) have a relevant interest in 1,000 voting shares, A's voting power in T Co is 10%. In Queensland North Australia Pty Ltd v Takeovers Panel (2015) 230 FCR 150, it was held that the number of votes attached to voting shares is to be determined by reference to the company's constitution, which usually prescribes voting rights. The number of votes is not affected by a deed poll or an agreement with a third party limiting the exercise of the voting rights. Associates
The term “associate” is very broadly defined (ss 10 – 16). Where the relevant person is a company, a director or secretary will be an associate. Related companies such as a parent, a subsidiary or a co-subsidiary, as well as directors and secretary of those related companies will be associates. A person is also an associate of another person if they control the relevant person or have entered, or propose to enter, into an agreement for the purpose of influencing the composition of the body's board or conduct of the body's affairs. [23.80]
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where:
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CORPORATIONS LAW: IN PRINCIPLE
Exceptions to the general prohibition .......................................................................................................................................................................
There are a number of exceptions to the s 606 prohibition: s 611. Some of the exceptions permit an acquisition of shares, provided certain requirements are met. The most important is:
[23.90]
• an acquisition that results from the acceptance of an offer under a takeover bid. • Other significant exceptions include: • an acquisition of no more than 3% every six months – known as a “creeping takeover”; • an acquisition which gains approval from the general meeting of the target; and • an acquisition of shares (the downstream acquisition) through the acquisition of a relevant interest in another company (the upstream company), where the upstream company is listed on the ASX or a foreign exchange approved by ASIC. These four exceptions are dealt with under “Main takeover methods”: see [23.100]-[22.130]. A number of other exceptions deal with what might be described as inadvertent acquisitions – where the acquirer is clearly not trying to acquire control. They include: • an acquisition of shares that results from an issue of shares under a disclosure document (s 611, Item 12, see Chapter 21); • an acquisition of shares under a compromise or arrangement approved by the court, for example, a court-approved scheme of arrangement under s 411 (s 611, Items 17 and 18); and • an acquisition of shares under a will: s 611, Item 15. An acquisition of shares in a target which is an unlisted company with no more than 50 members is not subject to Chapter 6: s 606(1)(a)(ii).
Main takeover methods Creeping takeovers ....................................................................................................................................................................... [23.100] The bidder is allowed to acquire not more than 3% every six months: s 611, Item 9. This is permitted only if the bidder has been entitled to more than 19% of the shares for a continuous period of at least six months. This means that if a bidder is entitled to 18%, they would need to get to more than 19% and then after 6 months, could acquire another 3%. The bidder is not required to
CHAPTER
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disclose any information to the shareholders of the target. This is referred to as “creeping” because of the length of time it would take to obtain any real control. In a large company, less than 20% can give the holder a right to one or more board positions. In 2012, Gina Rinehart acquired almost 19% of shares in Fairfax Media Ltd following criticism of the editorial direction of newspapers run by Fairfax. It was reported that the company was not prepared to offer her a seat on the board of Fairfax Media on the basis that she had not agreed to accept the principle of editorial independence. The case gave rise to a call to abolish the creeping takeover rule on the basis that it supported aggressive stake building. Treasury released a scoping paper in 2013 but no legislation was forthcoming. In 2013, ASIC released revised guidance on a range of takeover matters, including creeping takeovers:
RG 6.48…. The 3% creep exception was originally introduced as an alternative procedure to a takeover bid–allowing persons who may be seeking to acquire a level of control over an entity to do so through gradual increases in their interests over time. The purpose of the exception at the time of its introduction was to limit the speed with which control of companies could be acquired other than by formal takeover or similar procedures that ensure equality of opportunity. A key premise underlying the rationale for permitting only gradual increases in voting power under the exception is that any change in control should occur slowly enough for those affected to make informed decisions in response: see also RG 6.55–RG 6.58. RG 6.49 In the absence of any other changes to a person’s voting power and the voting capital of a company, the 3% creep exception allows a person to increase their holding by 3% every six months from a starting point above 19%. However, the exception is not designed to automatically allow a person to make unrestricted acquisitions of 3% every six months irrespective of the circumstances. The exception is cast in terms of two basic features, which depend on voting power over time: (a)
voting power must have been maintained above 19% for a continuous period of six months prior to any acquisition in reliance on the exception; and
(b)
the extent to which a person may increase their interests under the exception depends on the voting power of the relevant person or persons as at the date six months prior to the acquisition.
…. RG 6.51 One result of the particular formulation of the 3% creep exception is that it is not cumulative with the other exceptions in s 611. For example, to determine today how far a person’s voting power is above the level it was six months prior (and therefore how much further a person may be able to “creep”), the following must be counted: (a) any voting shares or interests
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Regulatory Guide RG 6 Takeovers: Exceptions to the general prohibition (June 2013)
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CORPORATIONS LAW: IN PRINCIPLE
cont. acquired in the previous six months under a rights issue to which the exception in item 10 applied; and (b) any other securities contributing to voting power. Similarly, acquisitions as an underwriter or sub-underwriter in reliance on item 13 must also be counted. RG 6.52 We will not give relief to allow a holder to exclude from the 3% calculation in item 9(b) securities or interests acquired in reliance on other exceptions in s 611. Allowing a holder to acquire a further 3% immediately following an acquisition under another exception in s 611 does not promote the policy underlying the 3% creep exception, which is premised on a gradual increase in voting power over time. …. RG 6.57 Creeping acquisitions and strategies may have a significant impact on the market for securities in the relevant entity and the decision making of other investors and interested parties. Full and ongoing compliance with the substantial holding and other disclosure requirements is therefore essential to ensuring that acquisitions under the 3% creep exception take place: (a) as far as practicable, in an efficient, competitive and informed market: s 602(a); and (b) in accordance with the underlying policy of the 3% creep exception, which is premised on gradual and open increases in voting occurring slowly enough for those affected to make informed decisions (see RG 6.48). RG 6.58 Acquisitions made in reliance on the 3% creep exception may give rise to unacceptable circumstances if a failure by the acquirer to comply with their disclosure or other obligations means that the acquisition may not have occurred in a fully informed market. We may apply to the Takeovers Panel if an acquirer purports to rely on the 3% creep exception in these circumstances.
Acquisitions approved by a general meeting .......................................................................................................................................................................
A bidder can acquire shares if the acquisition is agreed to by a resolution passed at a general meeting of the target at which no votes are cast by: [23.110]
• the bidder; • the seller; or • any associates (ss 10 to 16) of either the bidder or the seller (s 611, Item 7); (for discussion of who is an associate, see [23.80]). A bidder who wishes to rely on this exception must provide certain information to shareholders to ensure that the decision whether to approve the acquisition is an informed one. The requirement that no votes be cast by the bidder or the seller (or their associates) effectively means that the exception cannot be used if a bidder wishes to acquire all the outstanding shares in a company, but ASIC has
CHAPTER
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697
indicated that it may grant approval in some cases: see ASIC RG 74: Acquisitions Approved by Members (Dec 2011), [RG 74.53]-[RG 74.55]. Downstream acquisitions .......................................................................................................................................................................
An acquisition of a relevant interest in one company that arises as a result of an acquisition of a relevant interest in another company may be exempt. The acquisition of the relevant interest in the downstream company will be exempt provided the upstream company is: [23.120]
• listed on a prescribed financial market, for example, the ASX; or
Chapter 23
• listed on a foreign exchange approved by ASIC: s 611, Item 14. A list of approved foreign exchanges is in Legislative Instrument, ASIC Corporations (Approved Foreign Financial Markets) Instrument 2015/1071. For example, if A acquires more than 20% of the shares in B Co and B Co has a relevant interest in C Co:
then s 608(3) would normally apply so that A would also acquire the same relevant interest as B Co in C Co. The acquisition of a relevant interest in C Co is referred to as a “downstream acquisition”. However, where B Co (the upstream company) is listed on the ASX or an approved exchange, the exemption applies so that the acquisition by A does not breach s 606. ASIC's Regulatory Guide RG 71: Downstream Acquisitions (updated May 2012) discusses the purpose of the exemption and how it operates. ASIC notes that it has discretion to modify provisions of Ch 6 to permit acquisitions in circumstances that are not strictly within the exemption. It states that it will not do so if the purpose of the upstream acquisition is to obtain control of the downstream company. Takeover bids ....................................................................................................................................................................... [23.130] Probably the most important exception to the prohibition in s 606 is an acquisition of shares that results from acceptance of an offer under a takeover bid: s 611, Item 1. This means that provided the bidder has complied with the requirements of the legislation relating to the making of a takeover bid, any resulting acquisition is permitted. There are two types of takeover bids:
698
CORPORATIONS LAW: IN PRINCIPLE
• an off-market bid for quoted or unquoted securities; or • a market bid, only available for quoted securities, that is where the company is listed on the ASX. Chapter 6 contains detailed requirements for an offer to be made under a takeover bid. The requirements differ depending on whether the bid is an “off-market bid” or “market bid” and are outlined below.
Requirements for an off-market bid An off-market bid is basically an offer in writing and can be used whether the securities are quoted on the ASX or not. It is the most common type of bid. The requirements for an off-market bid generally reflect principles that are sometimes referred to as “the Eggleston principles” (Eggleston being the name of the Chair of the Committee that originally formulated the principles in 1969). Those principles are now set out as the purposes of Ch 6 in s 602. [23.140]
SECTION 602 Purposes of Chapter The purposes of this Chapter are to ensure that: (a)
the acquisition of control over: (i)
the voting shares in a listed company, or an unlisted company with more than 50 members; or
(ii)
the voting shares in a listed body; or
(iii) the voting interests in a listed managed investment scheme; takes place in an efficient, competitive and informed market; and (b)
the holders of the shares or interests, and the directors of the company or body or the responsible entity for the scheme: (i) know the identity of any person who proposes to acquire a substantial interest in the company, body or scheme; and (ii)
have a reasonable time to consider the proposal; and
(iii)
are given enough information to enable them to assess the merits of the proposal; and
(c)
as far as practicable, the holders of the relevant class of voting shares or interests all have a reasonable and equal opportunity to participate in any benefits accruing to the holders through any proposal under which a person would acquire a substantial interest in the company, body or scheme; and
(d)
an appropriate procedure is followed as a preliminary to compulsory acquisition of voting shares or interests or any other kind of securities under Part 6A.1.
Note 1: To achieve the objectives referred to in paragraphs (a), (b) and (c), the prohibition in section 606 and the exceptions to it refer to interests in
CHAPTER
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“voting shares”. To achieve the objective in paragraph (d), the provisions that deal with the takeover procedure refer more broadly to interests in “securities”.
The issue of what constitutes a substantial interest under s 602 was considered by the Federal Court: Glencore International AG v Takeovers Panel (2005) 220 ALR 495; and Glencore International AG v Takeovers Panel (2006) 151 FCR 77. In both Glencore decisions, Emmett J of the Federal Court held that equity swaps that had been acquired by Glencore over securities in another listed company and takeover target, Austral Coal Ltd, did not amount to a substantial interest within the meaning of s 602. The Federal Court decisions overturned the Takeovers Panel's findings, in two instances (Re Austral Coal Limited 02 (R) [2005] ATP 16; Re Austral Coal Limited 02 (RR) [2005] ATP 20), that Glencore, by reason of the position it held with equity swaps in the securities of Austral Coal Ltd, did in fact have a substantial interest and was required to disclose its interests to the market, see further [23.270]. Section 602A, inserted by the Corporations Amendment (Takeovers) Act 2007 (Cth) as a result of the decisions in the Glencore cases further elaborates on what it is meant by the concept of a “substantial interest” in s 602.
SECTION 602A Substantial interest concept (1)
A reference in this Chapter to a substantial interest in a company, listed body or listed managed investment scheme is not to be read as being limited to an interest that is constituted by one or more of the following: (a)
a relevant interest in securities in the company, body or scheme;
(b)
a legal or equitable interest in securities in the company, body or scheme; a power or right in relation to:
(c)
(i)
the company, body or scheme; or
(ii)
securities in the company, body or scheme.
(2)
A person does not have a substantial interest in the company, body or scheme for the purposes of this Chapter merely because the person has an interest in, or a relationship with, the company, body or scheme of a kind prescribed by the regulations for the purposes of this subsection.
(3)
The regulations may provide that an interest of a particular kind is an interest that may constitute a substantial interest in a company, listed body or listed managed investment scheme for the purposes of this Chapter.
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Note 2: Subsection 92(3) defines “securities” for the purposes of this Chapter.
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Requirements ....................................................................................................................................................................... [23.150] Section 617 provides that an off-market takeover bid must relate to securities in a particular class. This means that if there are separate classes of shares, separate offers will need to be made. Offers made under a takeover bid must be on the same terms: s 619. The offer period (that is, the period during which shareholders may accept offers) must be for a minimum of one month and a maximum of 12 months: s 624. An off-market bid may be either a full bid, that is, a bid for all the shares in the bid class, or a partial bid: s 618. A partial bid must be for a specified proportion of all shareholders' shares. For example, if a bidder wishes to acquire say 50% of the shares of a company, they could make an offer to acquire a proportion from each shareholder. The proportion chosen will need to be higher than 50% because all shareholders may not accept. This creates uncertainty for the bidder and so partial bids are not common in practice.
Conditions .......................................................................................................................................................................
An offer under an off-market bid may be subject to conditions. Common types of conditions include “minimum acceptance” conditions, that is, a condition that the bid will fail unless the bidder receives acceptances from a specified minimum proportion of shareholders. The specified percentage may be 51%, that is, enough to give the bidder effective/voting control, or 90%, enough to enable the bidder to compulsorily acquire the remaining shares and obtain total control. Other common types of conditions include approval conditions. For example, a foreign bidder may make a bid conditional on approval from the Foreign Investment Review Board (FIRB) under the Foreign Acquisitions and Takeovers Act 1975 (Cth). Some types of conditions are prohibited. These include conditions that depend on: [23.160]
• the bidder's opinion (s 629); • maximum acceptance conditions (that is, that the bid will fail if more than a specified percentage accept) (s 626); or • conditions that allow the bidder to acquire securities from some, but not all, shareholders who accept the offer (that is, discriminatory conditions): s 627.
CHAPTER
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701
Consideration .......................................................................................................................................................................
Under an off-market bid, a bidder may offer any form of consideration. This may include cash, securities or a combination of cash and securities: s 621(1). The minimum consideration that may be offered is the amount provided (or agreed to be provided) by the bidder (or an associate) in the four months preceding the bid: s 621(3). In other words, a bidder cannot offer $1.50 per share and then two months later make a takeover bid at $1.20 per share: see RG 163: Takeovers: Minimum bid price principle: s 621. There are also restrictions on offering any benefits to shareholders that are not offered to all shareholders: s 623; and see [23.250]. This implements the purpose stated in s 602(c): see [23.140]; and Takeovers Panel, Guidance Note 21: Collateral Benefits (Apr 2008). [23.170]
Information to be provided to shareholders [23.180] One of the most important requirements for a takeover bid is the obligation to provide certain information. This obligation applies to the bidder and the target.
Bidder’s statement [23.190] Section 636 sets out the content requirements for a bidder's statement. The statement must include:
• the identity of the bidder; • in relation to any cash consideration offered, details of: – amounts held by the bidder; and – arrangements under which cash will be provided by another person; • if securities are offered as consideration – all material that would be required for a prospectus for an offer of those securities under ss 710 – 713 (or for simple corporate bonds ss 713C – 713E) in Ch 6D; • details of the bidder's intentions regarding: – the continuation of the target's business; – any major changes to the target's business; and – the future employment of the target's present employees; and • any other information that is material to the making of a decision whether to accept the offer and that is known to the bidder. This could include, for example, information about a parent company. For an off-market bid, the statement must also state that the bidder's statement has been lodged with ASIC, but that ASIC takes no responsibility for its content.
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.......................................................................................................................................................................
702
CORPORATIONS LAW: IN PRINCIPLE
Target’s statement
Section 638 contains the content requirements for the target's statement. However, rather than containing a list of matters that must be included, it provides that the target's statement must include all information that shareholders and their advisers “would reasonably require to make an informed assessment whether to accept the offer under the bid”. Section 640(1) requires that an expert's report accompany the target's statement if:
[23.200]
• the bidder is connected with the target; or • the bidder is already entitled to 30% or more of the shares. The expert must report on whether the takeover offer is “fair and reasonable”. ASIC's Regulatory Guides RG 111: Content of expert reports and RG 112: Independence of experts provide guidance on the commissioning and preparation of experts' reports.
Requirements for a market bid A market bid is basically an announcement on a financial market (such as the ASX) that the bidder is willing to acquire all shares in the target at a stated price. This type of bid will only be available to a bidder where the target is listed. A market bid is subject to many of the same requirements as an off-market bid. There are also some requirements that only apply to a market bid. For example, a market bid must be for all securities in a particular class. It must relate to all securities in the bid class that exist or will exist at any time in the bid period: s 617(3). A market bid must be a full bid, that is, unlike the situation with an off-market bid, it is not possible to make a partial bid: s 618(3). A market bid must also be unconditional (s 625(1)) and the consideration may only be cash (s 621(2)), reflecting the fact that the offers are made on the exchange. A bidder making a market bid must prepare a statement (the bidder's statement), although there are some differences as to what must be disclosed (see s 636(1)(k) and (l)) and the target must prepare a statement (the target's statement): s 638. [23.210]
[23.220] TABLE 23.1 Main differences between off-market and market bids Type of target Partial bid Consideration Conditions
Off-market bids Listed or unlisted Yes Cash and/or securities Generally yes, but some types of conditions not permitted
Market bids Listed only No Cash only No
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This table highlights that there is less flexibility in the form a market bid can take – cash only, no conditions. This is one of the issues a bidder's advisers would consider in determining which form of takeover method to recommend to their client.
Truth in takeovers [23.230] Before we leave the issue of information to be provided to shareholders, consider the purposes outlined in s 602 (see [23.140]) in the light of the following ASIC guidance on last and final statements, which are statements made by market participants (bidders, targets and substantial holders) that they will or will not do something in the course of the bid:
...................................................................................................................... ASIC Regulatory Guide 25 Takeovers: false and misleading statements
Underlying principles RG 25.9 Market participants that make a last and final statement should be held to it, as with a promise. Holders of securities in the target are entitled to expect that market participants will act consistently with their last and final statement. Some market participants have even cited the legal significance of their last and final statement to reinforce it. (Of course, the statement has legal significance regardless of whether the market participant cites it.) RG 25.10 Where a bidder makes a last and final statement to press holders to accept its offer, then departs from this statement, the statement may: (a)
mislead holders – the statement has the tendency to lead holders and the market into error (see Parkdale Custom Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191); or
(b)
coerce holders into accepting early, so that the holders’ opportunity to benefit from the change of control is not reasonable or equal (see s 602(c)).
RG 25.11 In addition, if a market participant makes a last and final statement and departs from it, the following purposes behind Chapter 6 may be undermined: (a)
that the acquisition of control takes place in an efficient, competitive and informed market (see s 602(a)) – an informed market maintains market integrity, which promotes the confidence of investors; and
(b)
that holders are given enough information to enable them to assess the merits of the proposal (see s 602(b)).
Holders will be misinformed about what the market participant will or will not do in the course of the bid.
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….
704
CORPORATIONS LAW: IN PRINCIPLE
ASIC Regulatory Guide 25 cont. RG 25.12 The market participant makes the last and final statement voluntarily. It should assume the risk for its statement. It can protect itself by a clear qualification. [Footnotes not reproduced.] © Australian Securities & Investments Commission. Reproduced with permission.
[23.240] The Takeovers Panel has also released Guidance Notes dealing with changes made to the information provided in takeover documents indicating that failure to provide clear and unambiguous information can amount to “unacceptable circumstances”: see [23.310].
...................................................................................................................... Takeovers Panel, Guidance Notes 4 and 5
Takeovers Panel Guidance Note 4: Remedies General Revised on 27 May 2015 Background 1.
This guidance note has been prepared to assist market participants understand the Panel’s approach to remedies generally. The examples are illustrative only and nothing in the note binds the Panel in a particular case.
2.
If the Panel makes a declaration of unacceptable circumstances, it may make orders: (a) to protect rights or interests affected by the unacceptable circumstances or (b)
to ensure (as far as possible) that a bid proceeds as if the unacceptable circumstances had not occurred.
3.
The Panel may not make an order directing a person to comply with a requirement of Chapter 6, 6A, 6B or 6C.
4.
The Panel may make interim orders. These can be to the same effect as final orders, can operate for up to 2 months and do not require a declaration of unacceptable circumstances to be made first.
5.
The Panel does not seek to punish when deciding on a remedy. But the remedy may adversely affect a person, provided it is not unfairly prejudicial. In addition, a declaration, [order] or other statement (for example, reasons) may expressly or impliedly involve a reprimand of a party or adviser.
Guidance Note 5: Specific Remedies – Information Deficiencies Revised on 1 October 2008 Introduction … 2.
The Panel’s primary focus is on the quality and accessibility of information for target shareholders and the market. Complete,
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Takeovers Panel, Guidance Notes 4 and 5 cont. accurate and relevant information is fundamental to Australian takeover regulation. This is reflected throughout Chapter 6 and in the Panel’s approach. 3.
In this guidance note the Panel discusses possible responses to information deficiencies, namely: (a) restraining dispatch of documents until corrected and (b)
4.
subsequent corrective disclosure.
This guidance note should be read with GN 4 Remedies – General.
[Footnotes not reproduced.]
Other provisions Under s 654A, the bidder must not sell shares in the target during a takeover unless a rival bid is made. This is to prevent manipulation of the market price. Bidders must not provide extra benefits as inducements to particular target shareholders: s 623. This is to ensure equal treatment of all target shareholders consistent with the purposes of Ch 6 stated in s 602: see [23.140]. The rule applies even where the extra benefit relates to the purchase of shares other than the target's, and where consideration is provided by the bidder's parent: Sagasco Amadeus Pty Ltd v Magellan Petroleum Australia Pty Ltd (1993) 177 CLR 508. The predecessor of s 623 (s 698 of the Corporations Law) has been the subject of consideration in a number of cases: see Boral Energy Resources Ltd v TU Australia (Queensland) Pty Ltd (1998) 43 NSWLR 638; and Aberfoyle Ltd v Western Metals Ltd (1998) 84 FCR 113. See also RG 9: Takeover bids (Section E – Collateral benefits). An offer can generally only be withdrawn with ASIC's written consent: ss 652B, 652C. However, certain variations may be permitted – for example, an increase in the offer price: s 649B (for a market bid), s 650B (for an off-market bid) or to extend the offer period: s 649C (market bid), s 650C (off-market bid). A person who publicly proposes to make a takeover bid for securities must make offers within two months of the proposal on the same or substantially the same terms: s 631(1). It is a criminal offence to announce a takeover bid if the person knows, or is reckless as to whether, a bid will or will not be made or is reckless as to whether they will be able to fund their obligations under the bid: s 631(2); see also ASIC v Mariner (2015) 327 ALR 95. In ASIC v Mariner, Beach J held that the “reckless” test is a subjective test, and s 631(2) does not require certain or guaranteed funding to be in place when the public proposal is made. His Honour noted (at para [244]) that the consistent theme in the legislative history of s 631(2) is that the legislature “intended to prevent the
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[23.250]
706
CORPORATIONS LAW: IN PRINCIPLE
announcement of a takeover where the person had little if any intention of following through with it.” Contravention of either of the above provisions can also result in civil liability: s 670E. However, it will be a defence if the person making the proposal establishes that they could not reasonably be expected to comply, either because they were unaware of particular circumstances, or because circumstances have subsequently changed through no fault of their own: s 670F. In 2012, a case involving retailer David Jones Ltd demonstrated that a bidder, in particular an off-shore bidder, may be able to influence the market and then claim that circumstances have changed.
...................................................................................................................... ASIC Confirms Investigation into EB Bid for David Jones Blair Speedy, The Australian, 3 July 2012
THE Australian Securities and Investments Commission (ASIC) confirmed that it was examining the proposed $1.65 billion takeover offer that played havoc with David Jones’s stock. In a statement today, ASIC said that it had been monitoring the bid developments closely since it was made public by David Jones on Friday. “Consistent with its usual practice, ASIC is looking at potential issues regarding disclosure and trading in David Jones stock both by domestic and international parties,” the markets regulator said. “ASIC’s priority is to ensure market integrity is maintained and that markets are fair, orderly and transparent and that, if there has been a breach of the law, those responsible are held to account.” Shares in the retailer were trading up 1.3 per cent at $2.36 each today. A spokeswoman for David Jones today said representatives from the company met with ASIC yesterday and that it was co-operating fully with the regulator. “David Jones was the one that initiated contact with ASIC and the ASX (Australian Securities Exchange),” the spokeswoman said. “We raised our concerns with both organisations about the letters we received and their authenticity.” Questions over the bid’s credibility were fuelled after it was widely reported in Australia that EB Private Equity’s website didn’t include any phone-contact details, or information on previous deals it may have been involved in. On the website, EB Private Equity said it is a real-estate investor and developer, and a private-equity partner, with a presence in Britain and Luxembourg. EB Private Equity’s website has since been updated with a new statement concerning David Jones. The EB statement said: “Our intention was to hold preliminary discussions with the David Jones board while financial partners continued to be approached. Recent unfounded, inaccurate and ill-informed publicity around our proposal has made it difficult for these discussions to take place.”
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707
ASIC Confirms Investigation into EB Bid for David Jones cont. “Our proposal was made in an effort to engage with the board. However, the board has made it clear it does not intend to engage in these discussions based on our proposal. This is our only statement on this matter and we are not giving further interviews and comment in any way.” Yesterday, institutional shareholders were split over David Jones’s decision to disclose the approach from mystery British firm EB Private Equity, despite having serious doubts about whether the company existed. DJs belatedly imposed a trading halt on its shares yesterday afternoon, after watching them surge as much as 19 per cent on Friday to a three-month high, in order to announce that EB had withdrawn its proposal.
Compulsory acquisitions: Chapter 6A Chapter 6A accepts that once a person reaches a certain level of ownership, the person should be able to access the administrative and other advantages, such as tax advantages, associated with full ownership. Where a bidder (with associates) has relevant interests in 90% or more of the shares, and the bidder has acquired at least 75% of the shares that the bidder offered to acquire, the bidder may compulsorily acquire the outstanding shares: s 661A. Within one month of the end of the bid period, the bidder must give notice to the remaining shareholders that it intends to acquire the shares. The terms of the compulsory acquisition must be the same as under the takeover bid. A minority shareholder may apply to the court for an order that the securities not be compulsorily acquired. The court can make such an order if it is satisfied that the consideration is not fair value for the shares: s 661E. The onus will be on the applicant to show that the offer is unfair: Teh v Ramsay Centauri Pty Ltd (2002) 42 ACSR 354. This may be difficult if a significant number of other shareholders have accepted the offer. In Austrim Nylex Ltd v Kroll (2002) 170 FLR 265 and Energex Ltd v Elkington (2003) 47 ACSR 442, the courts considered whether the price offered to minority shareholders constituted “fair value” as required by s 667C. The courts held that the price offered should be based on market value at the time of the compulsory acquisition and should not include a premium reflecting benefits or cost savings associated with acquiring 100% of the company.
[23.260]
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More than 25 million shares were traded on Friday, and another 10 million yesterday as the share price gave up almost all its 14 per cent gain, in an extraordinary story that focuses corporate Australia’s attention on continuous disclosure rules.
708
CORPORATIONS LAW: IN PRINCIPLE
The legislation is also concerned that minority shareholders not be “locked in” as a minority. Section 662A provides that a bidder and its associates who have relevant interests in at least 90% of the shares must offer to buy out the remaining holders of the shares. The legislation also contains powers of compulsory acquisition which are not confined to the making of a successful takeover bid. Section 664A provides that a person who has “full beneficial interests” in at least 90% of the shares in a company (compared with someone who acquires 90% under a takeover bid) may compulsorily acquire the outstanding securities within six months of acquiring that threshold. The expression “full beneficial interest” is not defined but would appear to require ownership rather than just relevant interests in securities.
Substantial holding disclosure: Chapter 6C One of the requirements that extends to a person or company that acquires a substantial holding is that the person or entity must provide disclosure to the company in question as well as the market operator: s 671B. Section 9 defines a substantial holding to be 5% or more of the total number of issued voting shares. The purpose of disclosure under s 671B is to keep the company, as well as the market, informed of any possible takeover activity. The information that must be given with a substantial holding notice is contained in s 671B(3). Breach of the substantial holding disclosure requirement under s 671B exposes the person or entity to a compensation order under s 671C (and to criminal liability under s 671B(1A)). ASIC's Regulatory Guide RG 5: Relevant interests and substantial holding disclosure (reissued November 2013) discusses substantial holding disclosure. The Takeovers Panel considered the application of the substantial interest/ holding concept in Re Austral Coal Limited 02 (RR) [2005] ATP 20. In that case, the Takeovers Panel was asked to consider the use of equity swaps. Glencore International AG held 4.99% of the issued capital in Austral Coal Ltd. Glencore purchased a form of derivative, cash settled swaps, over a further 7.4% of the issued capital. Glencore did not disclose its interests in Austral Coal Ltd, arguing that it was not required to do so under Ch 6C because the equity swaps did not give Glencore control over Austral securities and it held only 4.99% of the issued capital. Since its holding was less than the 5% substantial holding requirement, it was not required to formally notify Austral Coal Ltd nor the ASX. Only after Glencore acquired more of the issued capital in Austral Coal Ltd through on-market trades did it lodge substantial holding notices with the ASX. On the issue of whether Glencore was required to disclose its interests under the swap agreements the Takeovers [23.270]
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709
Panel disagreed with Glencore's submissions and held, at para [256], that Glencore's swap exposure gave Glencore:
On application to the Federal Court seeking judicial review of the Takeovers Panel's decision, the Federal Court overturned the Takeover's Panel ruling and held that Glencore did not have a substantial interest in the securities of Austral Coal Ltd: Glencore International AG v Takeovers Panel (2006) 151 FCR 77. According to Emmett J in the Federal Court, the Takeovers Panel had erred in concluding that Glencore had acquired a substantial interest in Austral's shares by reason of the equity swaps Glencore had purchased. Consequently, the Takeovers Panel had erred in concluding that Glencore's non-disclosure of its equity swaps in the securities of Austral Coal Ltd amounted to unacceptable circumstances under s 657A. Following the Federal Court decisions in Glencore and the subsequent amendment to the Corporations Act (s 602A, introduced by the Corporations Amendment (Takeovers) Act 2007 (Cth) see [23.140]), the Takeovers Panel issued a Guidance Note on the treatment of equity derivatives:
...................................................................................................................... Takeovers Panel, Guidance Note 20
Takeovers Panel Guidance Note 20: Equity Derivatives Issued 11 April 2008 Disclosure 35. 36.
Adequate disclosure of equity derivatives should enable the market to fully understand the nature of the taker’s long position. In deciding whether the level of disclosure gives rise to unacceptable circumstances, the Panel will take into account whether the following information has been disclosed (as applicable): a. identity of the taker (but not the writer) b.
relevant security
c.
price (including reference price, strike price, option price etc as appropriate)
d.
entry date
e.
number of securities to which the derivative relates
f.
type of derivative (e.g. contract for difference, cash settled put or call option)
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a degree of de facto power to prevent the banks from disposing of the hedge shares. Although not enough to give rise to relevant interests over those shares, the banks' economic incentive not to dispose of the shares has enabled Glencore to prevent Centennial from achieving compulsory acquisition. Glencore's degree of control over disposal of the hedge shares and the aggregate size of Glencore's swap exposure and its direct holding are such that it is appropriate to consider Glencore's position as one substantial interest for the purposes of sections 602 and 657A.
710
CORPORATIONS LAW: IN PRINCIPLE
Takeovers Panel, Guidance Note 20 cont. g.
any material changes to information previously disclosed to the market
h.
long equity derivative positions held by the taker and its associates, its relevant interests and its associates’ relevant interests (and the identity of all associates referred to) short equity derivative positions that offset physical positions
i.
Example 1: a taker might “rent” voting power by acquiring physical securities and simultaneously taking offsetting short equity derivative positions to avoid market exposure. Example 2: A substantial holding of, say, 10% that is disclosed but subsequently a short equity derivative contract is entered for, say, 5%. j.
37.
short positions of more than 1% that have been acquired after a long position is disclosed, whether by notice or substantial holding notice (ie, the taker should update its disclosure with reference to the short position).
The Panel does not think that the market would normally need to be informed:
38.
a.
of positions in derivatives by lodgment of a formal substantial holder notice (ASIC Form 603 and 604), unless otherwise required because of an interest in physical securities or
b.
of standard ISDA documentation, which is lengthy and sufficiently well known.
Disclosure may be made: a.
as a note annexed to a substantial holding notice, where lodged or
b.
by written notice to the company if a substantial holding notice is not required.
39.
In considering whether timely and adequate disclosure has been made, the Panel will take into account the disclosure time frames established by the Act for substantial holding notices – that is, within 2 business days of becoming aware or, in a bid period, by 9.30 am on the next trading day.
40.
Disclosure is likely to be price sensitive. Therefore, the Panel expects that the company would disclose any written notice received by it to ASX.
41.
Entry into an equity derivative may be a multi-stage process, especially if the writer is providing exposure to the taker only after it has established adequate hedging …
42.
The fact that a derivative is multi-staged may mean that disclosure is required as it is progressively increased, regardless of when the formalities are completed. Normally, the Panel will take the view that a taker is only required to disclose the exposure it has firm. This is similar to a buyer not being required to disclose its order, only its acquisitions.
[Footnotes not reproduced.]
CHAPTER
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In the Takeovers Panel decision Re BioProspect Ltd 02 [2008] ATP 6, the Panel was asked to hear and determine, inter alia, an application by clients of Opes Stockbroking that the ANZ Bank had breached its obligations for failing to disclose a substantial holder notice in relation to its interest in BioProspect Ltd. Following the collapse of Opes Stockbroking, ANZ had acquired 25.559% of the issued capital of BioProspect Ltd and at the time of acquiring the interest, ANZ failed to notify the ASX that it had a substantial interest in BioProspect, as required under Ch 6C. The Takeovers Panel noted that it had sought and received undertakings from ANZ (in Re BioProspect Ltd 01 [2008] ATP 8) that it would not sell any securities in BioProspect Ltd until it provided the ASX and BioProspect with a substantial shareholder notice in relation to its interests in the company. The Panel considered that the application did not come within the unacceptable circumstances requirements of s 657A.
Sections 670A – 670D impose criminal and civil liability on certain people for false or misleading material in documents and statements issued in conjunction with takeover bids. Section 670A deals with misleading statements in, or omissions from, documents associated with takeover bids, such as the bidder's statement or the target's statement. A contravention of s 670A(1) is a criminal offence, but only if the misleading statement or omission is “materially adverse” from the point of view of the holder of securities to whom the document was given: s 670A(3). The term “materially adverse” is not defined. Those who may be liable for loss or damage include: [23.280]
• the bidder and its directors; • the target and its directors; and • a person, such as an expert, who consented to have a statement included in the document or on which a statement made in the document is based: s 670B. Directors and experts must be careful to avoid liability. Directors of targets often face a difficult situation: they are asked to make recommendations to their shareholders but a recommendation to sell might mean the loss of their directorships. A recommendation to hold may, on the other hand, be seen as a self-protection strategy rather than an impartial assessment of what is best for the company and/or the shareholders.
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Liability for false or misleading statements
712
CORPORATIONS LAW: IN PRINCIPLE
Defensive conduct [23.290] Directors are under a duty to act bona fide in the interests of the company and to use their powers for their proper purpose: see Chapters 11 and 12. Any action taken by directors of a target to thwart or delay a takeover bid is subject to these overriding principles. The Takeovers Panel has released a Guidance Note GN 12: Frustrating Action (revised on 18 July 2014) that notes that action taken by a target to frustrate a bid may give rise to a declaration of unacceptable circumstances: see [23.330]. A distinction is sometimes drawn between:
(a)
(b)
“defence strategies” – where long term planning is undertaken to ward off takeover bids (for example, putting in place inter-company shareholdings, amendment of internal rules to prevent partial bids etc); and
“defence tactics” – where the defensive action is in response to an actual or impending bid (for example, criticising the bid, redeploying company assets etc). It is more likely that action taken by directors once a bid has been announced will be challenged. Directors should be aware that their actions may be interpreted as a breach of their fiduciary duties and/or may give rise to a declaration of unacceptable circumstances by the Takeovers Panel: see [23.330]. A very common defence tactic in the past was for directors of the target to challenge the adequacy and accuracy of the bidder's statement in the courts. The jurisdiction of the courts during the takeover bid has been removed, so this defence tactic can no longer be used to delay or frustrate a bid. A party may now apply to the Takeovers Panel if it believes the bidder's statement is defective, but the speed of the Panel in making determinations means that this is no longer an effective delaying tactic (see [23.310]). In the takeover battle for Australian Leisure and Hospitality Group Ltd by Bruandwo Pty Ltd (Bruandwo) (a joint venture between the Bruce Mathieson Group and Woolworths), the target initially applied to the Panel for relief on 20 July 2004, claiming that the bidder's statement was defective. The Panel considered the matter and made orders concluding the matter on 13 August 2004 when the bidder agreed to provide more information: Re Australian Leisure & Hospitality Group Limited 01 [2004] ATP 19. On 27 August 2004, Bruandwo made an application alleging that the target's statement was defective. The matter was resolved on 8 September 2004 when the target agreed to make changes to its statement: Re Australian Leisure & Hospitality Group Ltd 02 [2004] ATP 21.
23
TAKEOVERS
713
A target may also exhort shareholders, both privately and publicly, to reject a bid the directors believe is not appropriate. For example, in 2004 the large mining company WMC Resources received a bid from Xstrata, a Swiss-based resource company. WMC believed that the bid was inadequate. It wrote to its shareholders and on 30 November 2004 made a public announcement, headed “WMC says that Xstrata's offer is materially inadequate”, in which its board recommended that shareholders take no action in response to Xstrata's bid. WMC maintained that Xstrata's bid was subject to too many conditions and failed to take into account the full extent of the company's current and future value. The announcement also informed WMC shareholders that it would send them a target statement as a formal and more detailed response to the Xstrata bidder's statement. (The bid subsequently lapsed when BHP Billiton made a higher offer that was ultimately successful.) In some cases a rival bidder may be encouraged to make an alternative bid. If the target encourages the rival bidder, the term “white knight” is used: see Appendix 1 – Glossary. In the case involving Australian Leisure and Hospitality Group Ltd, a rival bidder, CMM Hotel and Retail Investments Pty Ltd (CMM) (a joint venture between Coles Myer Ltd and Macquarie Bank Ltd), entered the battle. CMM also sought relief from the Takeovers Panel alleging unacceptable circumstances against Bruandwo. The dispute was later resolved and the shareholders were able to consider the competing bids: Re Australian Leisure & Hospitality Group Ltd 03 [2004] ATP 25. Bruandwo was ultimately successful in acquiring control of Australian Leisure and Hospitality Group Ltd.
Regulators Powers of ASIC ....................................................................................................................................................................... [23.300] ASIC has the power to exempt people from compliance with, or to modify the operation of, the takeover provisions: s 655A. If an exemption is given on a condition, the court may enforce compliance with that condition. In exercising its powers of exemption and modification, ASIC must consider the purposes of Ch 6 set out in s 602: see [23.140]. As already noted, those purposes refer to the need to ensure adequate information, reasonable time and equal opportunity for the target's shareholders. A decision of ASIC to exempt or modify under s 655A may be reviewed by the Takeovers Panel on an application by a person affected by the decision: s 656A.
Chapter 23
CHAPTER
714
CORPORATIONS LAW: IN PRINCIPLE
Powers of the Takeovers Panel .......................................................................................................................................................................
The Takeovers Panel (formerly the Corporations and Securities Panel) is a body established under the legislation with a specific role to play in relation to adjudication of disputes involving takeovers. It is a peer review body, whose membership is made up of experienced practitioners and legal experts in corporate takeovers and corporations regulation. The powers of the Takeovers Panel were considerably expanded in 1999, so that it now takes the place of the courts as the main forum for resolving disputes arising from a takeover during the bid period: s 659AA. One of the reasons for this change was the belief that parties often resorted to the courts during a takeover as a tactic to delay or frustrate a bid. It was thought that it would be more efficient and less time-consuming if disputes were referred to a specialist body rather than a court. [23.310]
Takeovers Panel: Non-judicial powers and functions
In 2007 the jurisdiction of the Takeovers Panel to hear and determine matters under s 657A was challenged in the High Court in Attorney-General (Cth) v Alinta Ltd (2008) 233 CLR 542. In Alinta, the High Court overruled the decision of the Full Court of the Federal Court: Australian Pipeline Ltd v Alinta Ltd (2007) 159 FCR 301. At issue in the original case, Australian Pipeline Ltd v Alinta Ltd (2007) 159 FCR 301, was whether an on-market acquisition of a parcel of shares representing 10.25% of the issued capital of Australian Pipeline Trust's stapled securities constituted “unacceptable circumstances” under s 657A. The Takeovers Panel concluded that Alinta's acquisition of shares in Australian Pipeline Trust did constitute unacceptable circumstances. Alinta appealed the Takeovers Panel decision to the Federal Court and later to the Full Court of the Federal Court, where Alinta challenged the Takeovers Panel jurisdiction to hear and determine applications under s 657A. The challenge was based on the argument that s 657A conferred a judicial power on the Takeovers Panel which was contrary to Ch III of the Commonwealth Constitution. The Full Court of the Federal Court, by majority, agreed with Alinta's submission and held that s 657A was constitutionally invalid because it conferred a Commonwealth judicial power on the Takeovers Panel, which was not a court. The Commonwealth Attorney-General appealed to the High Court. The High Court held that s 657A does not confer a Commonwealth judicial power on the Takeovers Panel and was therefore not invalid under the Constitution. [23.320]
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TAKEOVERS
715
First, whilst policy choices are inevitably involved in many decisions made in the courts, the broad policy criteria that the Act requires the Panel to address in discharging its functions are such as to be more appropriate to, and characteristic of, an administrative decision than a judicial decision … They are not inherently judicial. Secondly, the limitation on the commencement of court proceedings, which weighed so heavily for the majority in the Full Court, is temporary, not permanent. It is neither absolute nor unrestricted … Thirdly, the width of the Panel's powers makes it clear that it is expected that the Panel, by its decisions, will create new rights and obligations and not simply determine conclusively (as a court might do) controversies over past suggested contraventions of the Act. Fourthly, contrary to the conclusion of the majority in the Full Court, the determination by the Panel of the rights and obligations of the contesting parties under s 657A(2)(b) of the Act remains no more than a “basis for determining what rights and obligations should be created in the future”. … Fifthly, care has been taken in drafting the provisions of the Act to avoid any suggestion that the Panel enforces its own orders. It is left to the courts to make orders to ensure compliance with the Panel's determinations. Necessarily, this involves the court concerned in a judicial decision, not a mere formality.
Following the High Court's decision in Attorney-General (Cth) v Alinta Ltd (2008) 233 CLR 542, the Takeovers Panel issued a media release (“MR No 105/2007: Attorney-General (Commonwealth) vs Alinta Ltd: High Court Appeal Allowed” (Dec 2007)) confirming that the Takeovers Panel would continue to hear and determine applications for declarations of unacceptable circumstances under s 657A. Unacceptable circumstances: s 657A [23.330] An application for a declaration of unacceptable circumstances may be made by the bidder, the target, ASIC or any person whose interests are affected by the relevant circumstances: s 657C. Following the Federal Court's decisions in Glencore International AG v Takeovers Panel (2005) 220 ALR 495 and Glencore International AG v Takeovers Panel (2006) 151 FCR 77 (see above at [23.140]), s 657A was amended with the aim of providing greater certainty to the Takeovers Panel to hear and determine applications for unacceptable circumstances. The Corporations Amendment (Takeovers) Act 2007 (Cth) amended s 657A(2)(b) by giving to the Panel jurisdiction to declare circumstances unacceptable having regard to the
Chapter 23
According to the High Court in Attorney-General (Cth) v Alinta Ltd (2008) 233 CLR 542, the Takeovers Panel is not a judicial body exercising judicial functions. Kirby J (at [40]-[44]) held that the Takeovers Panel powers under s 657A were non-judicial:
716
CORPORATIONS LAW: IN PRINCIPLE
purposes of Ch 6 and the objectives set out in s 602 in addition to power to act where there is an acquisition of a substantial interest or there is likely to be a contravention of the Act. The intention of the amendment was to provide the Panel with a wider power to give effect to the spirit and objectives of Ch 6 and s 602. The amendment to s 657A(2)(b) ensures that the Panel can make a declaration of unacceptable circumstances in relation to the affairs of a takeover target, where circumstances or conduct are unacceptable having regard to s 602 even though there is no likelihood of a contravention. A declaration of unacceptable circumstances can only be made if the circumstances relate to matters set out in s 657A(2), that is, the control of a company, the acquisition of a substantial interest in a company, the purposes of Ch 6 or a breach of the takeover provisions. The term “unacceptable circumstances” is not defined but s 657A does direct the Takeovers Panel to take into account the s 602 objectives (which includes the extended definition of a “substantial interest” in s 602A) (see also [23.140]) as well as the other requirements of Ch 6. The Panel has issued a Guidance Note: GN 1: Unacceptable Circumstances (September 2010) that includes examples of unacceptable circumstances. They include: • An information deficiency; • A false market in securities the subject of a bid; • The lockout of rival bids; • Departure from a “truth in takeovers” statement; • Failure to disclose the intentions of the bidder; • Deflating the price for shares that are the subject of the bid; or • Frustrating a bid. Where the Panel has made a declaration of unacceptable circumstances, it has wide powers to make orders, such as orders restraining the exercise of voting or other rights attached to the securities or directing a person to dispose of securities. Powers of the court ....................................................................................................................................................................... [23.340] As already noted, the Panel is the main forum for resolving disputes about a takeover bid during the bid period. During that period, only ASIC, Ministers and statutory bodies may commence court proceedings: s 659B. The Panel may refer a question of law arising in proceedings before it to the court: s 659A. After the end of the bid period, the court may make certain orders where the Panel has refused to make a declaration and the court determines that
CHAPTER
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TAKEOVERS
717
conduct contravenes the legislation or constitutes unacceptable circumstances. However, the only type of orders the court can make are orders that a person pay an amount of money (by way of damages, account of profits, pecuniary penalty or otherwise): s 659C.
Mentor: Test your Knowledge ...................................................................................................................................... (See http://www.legal.thomsonreuters.com.au/browse/mentor multiple choice questions and answers on the Topic of Takeovers.)
for
Practice Questions ...................................................................................................................................... 1.
What are the main exceptions to the prohibition in s 606?
2.
List three differences between an off-market bid and a market bid.
3.
Briefly describe the information required in: – a target's statement.
4.
Give examples of how the legislation achieves the purposes set out in s 602.
5.
Briefly explain what is meant by the concept “substantial interest” under s 602A.
6.
Briefly explain how shares may be compulsorily acquired under s 661A.
7.
Describe the powers of the Takeovers Panel during a takeover bid.
8.
Explain what is meant by the term “unacceptable circumstances” as set out in s 657A.
Essay Questions ...................................................................................................................................... 1.
Do you agree with the High Court's decision in Attorney-General (Cth) v Alinta Ltd (2008) 233 CLR 542 that the Takeovers Panel is not a court within the meaning of the Commonwealth Constitution? What is the difference between judicial functions and the functions being exercised by the Takeovers Panel?
2.
Chapter 6 is primarily concerned with voting shares in large companies. It also considers some transactions in securities more broadly (e.g. it permits the making of takeover bids for securities and not just voting shares). Should a court take into account any other interests (such as derivatives as defined in Chapter 7 – see Chapter 22) that are purchased by a bidding company in the takeover target? Your answer
Chapter 23
– a bidder's statement; and
718
CORPORATIONS LAW: IN PRINCIPLE
should take into account the Federal Court decisions in Glencore International AG v Takeovers Panel (2005) 220 ALR 495 and Glencore International AG v Takeovers Panel (2006) 151 FCR 77, amendments introduced by the Corporations Amendment (Takeovers) Act 2007 (Cth) and any relevant determinations issued by the Takeovers Panel.
Problems for Discussion ...................................................................................................................................... 1.
2.
Wallis Ltd (Wallis), a large Australian retailer listed on the ASX, has been looking to acquire businesses consistent with its diverse retailing profile. For example, it is interested in acquiring control of a listed company, Duff Beer Ltd (Duff) which sells a range of beer products through a number of retail outlets. If it decides to acquire shares in Duff it will do so through a wholly-owned subsidiary, Beer Bottlers Ltd (Beer Bottlers). Beer Bottlers has acquired 18% of the shares in Duff, on market, in recent months at prices ranging from 80 cents to $1.10 per share. One of the directors of Duff, Dan, holds approximately 18% of the shares in the company. The directors of Wallis believe that if Dan accepts their offer they will be assured of ultimately obtaining control. Advise the directors of Wallis on the following matters: (a) How should they proceed to acquire enough shares to give them control of Duff? (b)
Can the directors enter into discussions with Dan with a view to getting his tacit acceptance for any acquisition?
(c)
Are there any restrictions on the price that must be paid for any further acquisitions?
(d)
If a bid is made by Beer Bottlers, will the documentation need to refer to matters that pertain to Wallis?
BXB Ltd, a mining company listed on the ASX begins to purchase shares in a rival mining company San Jose Ltd. BXB Ltd manages to purchase 4.99% of the listed securities in San Jose. BXB engages an investment bank to advise how it can gain greater control of San Jose without disclosing its interests to the market. The investment bank instructs BXB to purchase a number of equity swaps in San Jose. BXB's direct interest in San Jose remains at 4.99% but through its purchase of equity swaps, BXB manages to lift its indirect stake to 25% of San Jose. BXB does not disclose its 25% interest in San Jose to the market, or to San Jose. Advise whether BXB is in breach of any of the takeover provisions under the Corporations Act.
CHAPTER
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TAKEOVERS
719
Guide to Problem Solving ...................................................................................................................................... (a) What is meant by control?
This may be important in deciding whether to include any conditions if a takeover bid is made. Consider: • total control; or • effective or voting control (that is, 50% or some lesser percentage). Will the proposed acquisition breach the prohibition in s 606? State the prohibition. Consider: • what shares does the bidder have a relevant interest in? (s 608); and • will an indirect interest, such as an interest in derivatives, be relevant? How should the bidder proceed? Consider the following allowable means of acquiring shares under Ch 6 of the Corporations Act. • s 611, Item 9 creeping takeover – limited to 3% in six months; • s 611, Item 7 acquisition approved by general meeting of target – may not be appropriate if wish to acquire all the shares; and • s 611, Item 1 takeover bid (off-market bid or market bid) – must prepare a bidder's statement. Consider the differences between off-market and market bids. A market bid may not always be appropriate – for example, if a bidder wants to include conditions or provide non-cash consideration. (b) Could the discussions breach the prohibition?
• Section 608(8) provides that a relevant interest in shares can arise in anticipation of agreements. The relevant interest may arise before any agreement is performed. • Consider whether having discussions will involve entering into an agreement in relation to the shares. • The directors may be liable: – under Ch 6 for false or misleading statements; – for breach of director's duties (Chapters 11, 12 and 13); – for a declaration of unacceptable circumstances: see ss 657A, 602 and 602A.
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• will the proposed acquisition take the bidder above the 20% threshold?
720
CORPORATIONS LAW: IN PRINCIPLE
(c) Are there any restrictions on price?
Consider s 621(3). (d) Information requirements
The requirements for the content of a bidder's statement are contained in s 636(1). Consider (a) and (m) in particular.
Further Reading ...................................................................................................................................... Armson E “Handing the Corporate Reins to Creditors: The Role of the Takeovers Panel in the Pasminco Administration” (2002) 25 UNSWLJ 651 Armson E “The Frustrating Action Policy: Shifting Power in the Takeover Context” (2003) 21 C&SLJ 487 Armson E “An Empirical Study of the First Five Years of the Takeovers Panel” (2005) 27 Sydney Law Review 665 Armson E “Working with Judicial Review: The New Operation of the Takeovers Panel” (2009) 33(3) Melbourne University Law Review 657 Austin RP and Ramsay IM Ford, Austin and Ramsay's Principles of Corporations Law, 16th ed, LexisNexis Butterworths, 2015, Ch 23 Bednall T and Ngomba V “ASIC and the Takeovers Panel” (2011) 29 C&SLJ 355 Bentvelzen L and Yong L “Case Closed on Equity Swaps? The Glencore Decisions” (2006) 24 C&SLJ 323 Calleja N “The Equality Principle and Prohibited Benefits in Takeovers” (1999) 27 ABLR 342 Calleja N “The Panel's Reluctance to Declare Circumstances Unacceptable” (2001) 19 C&SLJ 323 Calleja N “The New Takeovers Panel – A Better Way?” Takeover Panel, CCH Australia Ltd and University of Melbourne, Centre for Corporate Law and Securities Regulation, 2002 Callum C and Law L “Soft Information Disclosure Requirements under the Corporations Law” (2001) 29 ABLR 149 Colla A “Some Salutary Lessons from the Panel on Keeping “a Safe Distance between Friends” and on “Material Adverse Change” Conditions” (2011) 29 C&SLJ 46 da Silva Rosa R, Kingsbury M and Yermack D “Evaluating Creeping Acquisitions” (2013) 37 Sydney Law Review 38 Farnik J “Expanding the Jurisdiction of the Takeovers Panel in the Aftermath of Glencore: A New Chapter Begins?” (2008) 26 C&SLJ 517 Gallery G, Hirst S and Law L “When will a Forecast be Required in Takeover Documents? Applying Relevance and Reliability” (2001) 19 C&SLJ 26
23
TAKEOVERS
721
Langley R “Information Access Denied … Is the Australian Takeovers Market Really “Efficient, Competitive and Informed”?” (2009) 27 C&SLJ 344 Levy R Takeovers Law and Strategy, 4th ed, Thomson Reuters, 2012 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Ch 18 Mayanja J “The Equal Opportunity Principle in Australian Takeover Law and Practice: Time for Review?” (2000) 12 Australian Journal of Corporate Law 1 Mayanja J “No-shop, No-talk and Break-up Fee Agreements in Merger and Takeover Transactions: The Case for Fresh Regulatory Approach” (2002) 14 Australian Journal of Corporate Law 1 Mescher B “Powers of the Takeovers Panel and their Effect upon ASIC and the Court” (2002) 76 ALJ 119 Pathak N ““Public to Private” Takeover Bids” (2003) 21 C&SLJ 295 Rogers J “Compulsory Acquisition under Pt 6A.2 and Its Implications for Minority Shareholders” (2003) 31 ABLR 97 Rogers J “Minimum Price Rule in Takeovers: Does the Minimum Price Rule Promote the Equal Opportunity Principle at the Expense of a More Efficient Market for Corporate Control” (2004) 22 C&SLJ 87 Rogers N “When Can Target Directors Legitimately Frustrate a Takeover Bid?” (1994) 12 C&SLJ 207 von Nessen P, Weeks R and Hutson J “Listed Property Trusts and Management Entrenchment: Is Takeover Regulation Alone the Answer?” (2003) 16 Australian Journal of Corporate Law 1 Walsh E “Judging the Takeovers Panel” (2002) 20 C&SLJ 435
Chapter 23
CHAPTER
CHAPTER 24 .......................................................................................................
External Administration Useful Websites ..................................................................... 723 Recent Developments ............................................................ 723 Aim ......................................................................................... 724 Related Topics ....................................................................... 724 Principles ............................................................................... 725 Introduction ............................................................................... 725 Receivership ............................................................................... 744 Schemes of arrangement .............................................................. 748 Mentor: Test your Knowledge ............................................... 749 Practice Questions ................................................................. 749 Essay Questions .................................................................... 749 Problem for Discussion .......................................................... 750
Further Reading ..................................................................... 755
Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of External Administration.)
Recent Developments ...................................................................................................................................... Cases
Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509 Carey v Korda [2012] 45 WAR 181 Re Nine Entertainment Group Ltd (No 1) [2012] FCA 1464 Re Nine Entertainment Group Ltd (No 2) [2013] FCA 40 Southern Engineering Services Pty Ltd (in liq) [2014] NSWSC 1882 Grant Samuel Corporate Pty Ltd v Fletcher: JP Morgan Chase Bank, National Association v Fletcher [2015] HCA 8 Legislation
Insolvency Law Reform Act 2016 (Cth)
Chapter 24
Guide to Problem Solving ...................................................... 751
724
CORPORATIONS LAW: IN PRINCIPLE
Introduced in February 2016, this Act has made significant reforms to insolvency laws in Australia. The Act has amended the ASIC Act, the Corporations Act and the Bankruptcy Act. Broad changes include: • One category only for “corporate insolvency practitioner”, where the distinction between official and registered practitioners is no longer made; • Corporate insolvency practitioners requisite experience reduced from 5 years to 3 years; • Amendments to registration requirements for corporate insolvency practitioners; • Increases in penalties for corporate insolvency practitioners who do not hold required indemnity and fidelity insurances; • Changes to remuneration for corporate insolvency practitioners; • Increased powers for ASIC in the monitoring and auditing of administrations conducted by corporate insolvency practitioners; and • Changes to creditors rights in external administrations including the removal of a corporate insolvency practitioner and the appointment of a replacement via an ordinary resolution.
Aim ...................................................................................................................................... At the end of this topic you should know: • the options available when a company is in financial difficulty; • the phases in the voluntary administration process; and • how administrators, controllers and liquidators are appointed and the nature of their respective powers and duties.
Related Topics ...................................................................................................................................... Chapter 11 Directors' Duties – Part 1 Duty of Care, Skill and Diligence; Chapter 12 Directors' Duties – Part 2 Good Faith and Proper Purpose; Chapter 13 Directors' Duties – Part 3 Conflict of Interest and Disclosure; Chapter 14 Members' Rights and Remedies; Chapter 20 Loan Capital
CHAPTER
24
EXTERNAL ADMINISTRATION
725
PRINCIPLES Introduction [24.10] There are several ways of dealing with companies in financial difficulties. They are:
• voluntary administration; • receivership with the appointment of a receiver or controller; • liquidation (or winding up); and • a creditors' scheme of arrangement. Terminology commonly used in explaining these processes includes: • creditor: a person (including a company) that is owed money by the company; • secured creditor: a creditor of the corporation, if the debt owing to the creditor is secured by a security interest: s 51E, Corporations Act.
• insolvent: the solvency of a company is determined by reference to what is sometimes described as a “cash flow” test – a company may have many valuable assets that together exceed its debts, but if it cannot easily turn those assets into cash (by sale or borrowing) and does not otherwise have enough cash to pay its day to day expenses, it will be insolvent. See s 95A of the Corporations Act:
SECTION 95A Solvency and insolvency (1)
A person is solvent if, and only if, the person is able to pay all of the person’s debts, as and when they become due and payable.
(2)
A person who is not solvent is insolvent.
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• secured Interest: a term used to describe certain types securities that may be given by a company over its property (see Chapter 20 and the definition of “security interest” in s 51A of the Corporations Act 2001 (Cth) (Corporations Act)) which notes that a security interest means (a) a PPS Act security interest; or (b) a charge, lien or pledge; and
726
CORPORATIONS LAW: IN PRINCIPLE
Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)
Chapter 11—External administration of the CATSI Act. The Registrar of ORIC has a number of regulatory and enforcement powers under the CATSI Act. In order to monitor the governance of a company, the Registrar may conduct the following: • Examination: a regular assessment of the governance standards of corporation. • Compliance notices: corporations that do not comply with the CATSI Act or the rule book may be issued with warnings. • Special administrations: where corporation has difficulty in resolving internal problems and/or there is no further recourse by directors of the corporation, the Registrar of ORIC can take steps to assist the corporation. • Liquidation - where the Registrar may provide support to collapse and deregister corporations which, inter alia, cease to operate. An example of where the Registrar assisted a corporation in deadlock through special administration is in relation to Gulf Savannah NT Aboriginal Corporation. Extract from the ORIC’s website: http:// oric.gov.au/publications/media-release/restructure-breaks-deadlock-gsnt.
.................................................................................................................. MR1516-21 – Restructure breaks deadlock at GSNT
The Registrar of Indigenous Corporations, Anthony Beven, today announced the end of the special administration of the Gulf Savannah NT Aboriginal Corporation (GSNT). The corporation was established in 2013 as a joint venture between the Mabunji Aboriginal Resource Indigenous Corporation (Mabunji) and the Mungoorbada Aboriginal Corporation (Mungoorbada). Based in Borroloola in the Gulf region of the Northern Territory, GSNT delivers essential services to the region through the Commonwealth-funded Community Development Programme (CDP). In February 2016, following a dispute between its corporate members, the corporation wrote to the Registrar requesting help. On 26 February 2016 the Registrar appointed Mr Gerry Mier and Mr Tony Jonsson from the Queensland-based firm of Grant Thornton Australia as the special administrators of the corporation. To resolve the deadlock the special administrators changed the corporation’s rule book by introducing a more conventional structure based on individual membership. “The dispute between its former corporate members placed GSNT’s operations at serious risk,” said Mr Beven. “The changes made by the
CHAPTER
24
EXTERNAL ADMINISTRATION
727
MR1516-21 – Restructure breaks deadlock at GSNT cont. special administrators have enabled GSNT to once again focus on the important employment and training services it provides to the community.” The special administrator also introduced a new staffing structure and an independent director position to the GSNT board. The new board of directors will meet for the first time on 8 June 2016. The Registrar will monitor the corporation closely over the next 12 months and will provide corporate governance training to the new directors as soon as practical.
Voluntary administration .......................................................................................................................................................................
The object of voluntary administration is to give a company in financial difficulties (or its business) a chance of survival or, if this is not possible, to maximise the return to its creditors. For this reason, it is a popular form of external administration, particularly for the directors of a financially distressed company: s 435A, Corporations Act. [24.20]
Object of Part The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a)
maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b)
if it is not possible for the company or its business to continue in existence--results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
If a company in voluntary administration is able to trade out of its difficulties then it is usually because the creditors vote for a deed of company arrangement (DOCA) under which they agree to defer or reduce (or both) the debts owed by the company. Where this does not occur, it may be because a secured creditor appoints a receiver who usurps the role of the administrator, or because the creditors vote for liquidation.
Chapter 24
SECTION 435A
728
CORPORATIONS LAW: IN PRINCIPLE
Appointment of an administrator .......................................................................................................................................................................
Under voluntary administration, ss 436A – 436C will be appointed by:
[24.30]
an
administrator,
under
• the directors: s 588H(5)(6); or • a company liquidator or provisional liquidator; or • a creditor who has a security interest in the company An administrator must be a registered liquidator (s 1282, Corporations Act) who is independent of the company: ss 448A – 448D and 436DA, Corporations Act. The administrator's appointment must be publicised in a relevant manner and notice lodged with ASIC. See https://www.insolvencynotices.asic.gov.au. A company under administration (or deed of company arrangement) must disclose that fact in all public documents (by adding to its name, “administrator appointed” or “under deed of company arrangement” – as the case may be): s 450E, Corporations Act. The administrator's job is to investigate the financial position of the company and decide on a course of action that is in the best interests of the creditors: s 438A, Corporations Act.
SECTION 438A Administrator to investigate affairs and consider possible courses of action As soon as practicable after the administration of a company begins, the administrator must: (a) (b)
investigate the company’s business, property, affairs and financial circumstances; and form an opinion about each of the following matters: (i) whether it would be in the interests of the company’s creditors for the company to execute a deed of company arrangement; (ii)
whether it would be in the creditors’ interests for the administration to end;
(iii)
whether it would be in the creditors’ interests for the company to be wound up.
CHAPTER
24
EXTERNAL ADMINISTRATION
729
Administrator as agent of the company .......................................................................................................................................................................
In order to carry out the investigation, the administrator effectively displaces the directors, whose powers are suspended (s 437C, Corporations Act), and is given wide powers to take control of the company's business: ss 437A and 442A, Corporations Act. The administrator effectively takes on the role as agent of the company and has wide ranging powers to carry on the business of the company. This can sometimes take many years. For example, the administration of Ansett took nearly 10 years to complete. See KordaMentha 2011, The battle to save Ansett, at Our Stories (http:// www.kordamentha.com/our-stories/ansett-australia).
[24.40]
Creditors Meetings .......................................................................................................................................................................
An administrator must within 30 business days of the commencement of administration, hold two creditors meetings. The first meeting is to be held within the first 8 days: s 436E(2), Corporations Act; and the second meeting is held generally within the first 25 days from the commencement of the administration: s 439A(5)(b), Corporations Act.
SECTION 436E Purpose and timing of first meeting of creditors (1)
The administrator of a company under administration must convene a meeting of the company’s creditors in order to determine: (a) whether to appoint a committee of creditors; and (b)
(2)
if so, who are to be the committee’s members.
The meeting must be held within 8 business days after the administration begins.
SECTION 439A Administrator to convene meeting and inform creditors (1)
The administrator of a company under administration must convene a meeting of the company’s creditors within the convening period as fixed by subsection (5) or extended under subsection (6). …
(5)
The convening period is:
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[24.50]
730
CORPORATIONS LAW: IN PRINCIPLE
(a)
if the day after the administration begins is in December, or is less than 25 business days before Good Friday–the period of 25 business days beginning on: (i) that day; or (ii)
(b)
if that day is not a business day–the next business day; or otherwise–the period of 20 business days beginning on: (i) the day after the administration begins; or (ii)
(6)
if that day is not a business day–the next business day.
The Court may extend the convening period on an application made during or after the period referred to in paragraph (5)(a) or (b), as the case requires.
At the second meeting the creditors pass a resolution under s 439C of the Corporations Act which will set out: • the execution of a deed of company arrangement (DOCA;) or • the commencement of a winding up; or • the ending of the administration with control reverting back to the company directors. The time limits imposed for the steps in the voluntary administration are stringent. Some of the time limits can be extended by application to the court (including the 20 business day limit for the second meeting: s 439A(6), Corporations Act) but courts will not encourage extensions: see Mann v Abruzzi Sports Club Ltd (1994) 12 ACLC 137 and the factors relevant to granting an extension Re Riviera Group Pty Ltd (admins apptd) (recs & mgrs apptd) (2009) 72 ACSR 352. The administrator must submit a detailed report to creditors (s 439A(4), Corporations Act) when giving notice of the second meeting, including a statement of the administrator's opinion about each of the options referred to in s 438A of the Corporations Act. Voting at meetings of creditors is by simple majority of those present (in person and by proxy) and voting. If a poll is demanded (see Chapter 10), a resolution will be carried if it receives the support of a majority of creditors voting where those creditors also control more than half of the debt owed by the company. If the majority of those present and voting vote one way, and those controlling more than half of the debt owed by the company vote the other, the Chair (usually the administrator) has the casting vote: reg 5.6.21, Corporations Regulations 2001 (Cth).
CHAPTER
24
EXTERNAL ADMINISTRATION
731
Rights of substantial secured party .......................................................................................................................................................................
A secured party with a security interest over the whole or substantially the whole of a company's property who has that interest perfected, within the meaning of the Personal Property Securities Act 2009 (Cth), at the time the enforcement starts, plays an important role in a voluntary administration. In addition to having power to appoint an administrator, a person who holds a substantial perfected security interest must be given notice of the appointment of an administrator on the next business day after the appointment: s 450A(3), Corporations Act. A substantial secured party can effectively opt out of the administration by enforcing its secured interest either before the administrator is appointed, or at any time within the first 13 business days of the administration (the decision period): ss 9 and 441A, Corporations Act.
[24.60]
Protection from creditors .......................................................................................................................................................................
This is one of the most important features of the voluntary administration procedure, as it enables the administrator to assess the future viability of the company without the distraction of creditors chasing debts, repossessing equipment and so on. During the period of administration, the company is protected from actions by creditors – there is a moratorium or “freeze” on creditors bringing court actions, winding up proceedings and other claims: ss 440A – 440G, Corporations Act. The moratorium even extends to claims under a guarantee given by a director or a relative of a director: s 440J, Corporations Act. Owners of property in the possession of the company (for example, a landlord or the lessor of a vehicle or a piece of machinery) and those with securities over property of the company are, with exceptions, also affected by the moratorium. The exceptions are: • substantial secured party with a perfected interest under the PPS Act; and • secured creditors and owners who act before the administration begins, and where perishable property is involved: ss 441A – 441G, Corporations Act. Subject to the terms of any deed of company arrangement entered into by the company and creditors, the moratorium will end, and all rights of creditors will be restored, after the conclusion of the second meeting of creditors.
Chapter 24
[24.70]
732
CORPORATIONS LAW: IN PRINCIPLE
Liabilities of administrators .......................................................................................................................................................................
Administrators are officers of the company, with all the liabilities that entails: see Chapters 11, 12 and 13. Administrators are also personally liable for certain categories of debts incurred during the administration period.
[24.80]
SECTION 443A General debts (1)
The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for; (a)
(2)
services rendered; or
(b)
goods bought; or
(c)
property hired, leased, used or occupied, including property consisting of goods that is subject to a lease that gives rise to a PPSA security interest [for meaning see s 51] in the goods; or
(d)
the repayment of money borrowed; or
(e)
interest in respect of money borrowed; or
(f)
borrowing costs.
Subsection (1) has effect despite any agreement to the contrary, but without prejudice to the administrator’s rights against the company or anyone else.
An administrator is also liable, from the period beginning more than five business days after the administration began, for payments under arrangements entered into before the administration began relating to the use of property owned by someone else, such as rented premises or leased equipment. However, payments under pre-existing obligations can be avoided or limited by the administrator ceasing to use the property and serving a notice on the owner: ss 443A – 443B, Corporations Act. See Carey v Korda [2012] 45 WAR 181 where a number of rights and obligations of an administrator were explained and clarified. Administrator’s indemnity ....................................................................................................................................................................... [24.90] Administrators have a right of indemnity out of the assets of the company for all debts for which they are liable: s 443D, Corporations Act. Further, the right of indemnity enjoyed by an administrator has priority over
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all other debts of the company (with certain exceptions relating to secured creditors), and is itself secured by a lien over the company's property: ss 443E – 443F, Corporations Act. Deed of Company Arrangement (DOCA) .......................................................................................................................................................................
If, at the second meeting, the creditors decide on a deed of arrangement, (DOCA) an administrator (usually the originally appointed administrator) must draw up the deed according to s 444A of the Corporations Act. The deed must be authorised and executed by the company and the administrator according to s 444B of the Corporations Act. The statutory moratorium or “freeze” on the company's liabilities ends with the second meeting of creditors. A moratorium will exist under a deed of company arrangement only to the extent that the deed itself provides. It is important to distinguish clearly between these two phases of an administration – one relying on statute and the second relying, in essence, on contract. Note, the DOCA can only limit the rights of secured creditors, owners and lessors to the extent that: [24.100]
• the relevant secured creditor, owner or lessor votes in favour of the deed (or the court otherwise orders): s 444D(2) and (3), Corporations Act. In theory, a deed of company arrangement can discriminate between different creditors or categories of creditors. However, as a general rule, a deed that provides for distributions among creditors that departs significantly from the regime that would apply under a winding up is likely to be susceptible to an application to the court by the creditor(s) concerned that it be terminated: s 445D, Corporations Act; and Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 70 FCR 34; Expile Pty Ltd v Jabb's Excavations Pty Ltd (2004) 22 ACLC 667; Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220. In Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509, the court held that a DOCA could not bind creditors to give up rights as against third parties. Employees must be considered if a deed is contemplated and the deed must contain a provision that they are given at least an equal priority to what they receive in winding up. The employees at a meeting or the court can waive this requirement: s 444DA(1) and (2), Corporations Act.
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• it contains provisions affecting those rights; and
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Section 447A(1) – the administrator’s “cure-all” ....................................................................................................................................................................... [24.110] Section 447A(1) of the Corporations Act is an unusual provision that appears to confer on the courts a wide-ranging power to adapt the operation of Pt 5.3A of the Corporations Act to suit the needs of a particular administration.
SECTION 447A(1) General power to make orders (1)
The Court may make such orders as it thinks appropriate about how this Part is to operate in relation to a particular company.
Administrators have shown an increasing tendency to resort to this section to overcome the strict application of time limits and to mould Pt 5.3A of the Corporations Act to better suit the needs of administrations of large corporate groups, such as Ansett and Pasminco. Although doubts have been expressed about the full ambit of the power, these were considered in the decision of the High Court in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270. Australasian Memory v Brien [24.115] Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 (High Court of Australia) FACTS: The administrators convened (in the sense of gave notice of) the second meeting of creditors of the company within the 21-day “convening period” (as previously required), but the date nominated for the holding of the meeting was not “within five business days of the end of the convening period” (as previously required): s 439A(2). Instead, it was held eight days before the end of the period. The meeting was adjourned for about three weeks and the creditors then resolved that the company be wound up. The liquidators later served statutory demands on two debtors of the company, who applied to have the demands set aside by attacking the validity of the resolutions that effected the appointment of the liquidators. The liquidators sought to overcome the procedural defect in the holding of the meeting by resort to (among other things) s 447A. It was argued that, because s 439A(6) made provision for the variation of the meeting timetable, the otherwise general provision of s 447A(1) should not be construed as having permitted the making of orders for variation in circumstances other than those that were provided in s 439A(6). DECISION: In a unanimous decision, the High Court (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ) held that nothing on the face of s 447A suggested that it should be read down. In its terms, it enables the making of orders which alter the way in which “this part is to operate in relation to a particular company”. The High Court upheld the order of the court below that had the effect of altering the requirement imposed by s 439A(2) to hold the meeting after the end of the convening period. The
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cont.
court also found that, while the section looked to the future, this requirement did not prevent the making of orders with future effect but in respect of past matters or events. The court left open the question of whether the section could be used in a way that affected rights that had already vested.
Transition to winding up
.......................................................................................................................................................................
The company and its creditors may resolve to wind up the company at various stages of the administration – for example, at the second creditors' meeting or at a meeting terminating the deed of arrangement. Transition to winding up can also occur under s 446A of the Corporations Act when certain deadlines are not met. Section 446A of the Corporations Act deems the company to have taken the steps required to implement a voluntary winding up.
[24.120]
Liquidation (Winding Up) .......................................................................................................................................................................
Most companies that go into liquidation are hopelessly insolvent. The process of liquidating a company is also known as “winding up”. Parts 5.4 – 5.9 of the Corporations Act 2001 (Cth) cover winding up requirements. The administration of the winding up process is undertaken by a liquidator: ss 1279, 1282 and 1283, Corporations Act. Types of Winding Up .......................................................................................................................................................................
[24.135]
There are two types of winding up:
• compulsory or by court order: ss 459A – 489E, Corporations Act; or • voluntary: ss 489F – 511, Corporations Act Sections 513 – 581 of the Corporations Act contain provisions relating to both kinds. Sections 588C – 588Z of the Corporations Act provide mechanisms that enable liquidators to improve returns to creditors in a winding up (notably, through recovery of voidable transactions and by insolvent trading claims against directors). Sections 589 – 600H of the Corporations Act provide for offences and contain some important miscellaneous provisions applicable to winding up and certain other forms of external administration. Voluntary winding up ....................................................................................................................................................................... [24.140]
There are two forms of voluntary winding up:
• by members: ss 495 and 496, Corporations Act; and
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[24.130]
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• by creditors: ss 497 – 500, Corporations Act. Sections 490 – 494 and 501 – 511 of the Corporations Act contain provisions relating to both forms. The type of voluntary winding up depends on whether the company is solvent. For a members' voluntary winding up the company must be solvent. A special resolution resolving to wind up the company must be passed: s 491, Corporations Act. The members can then appoint a liquidator: s 495, Corporations Act. Usually, the liquidator is a registered liquidator but in a members' voluntary winding up of a proprietary company, the liquidator need not be and can be an officer of the company: s 532(4), Corporations Act. The directors have to attest to the company's ability to pay its debts and must lodge a declaration and statement of affairs with ASIC: s 494, Corporations Act. A creditors' voluntary winding up occurs when the company is insolvent. To initiate a creditors' voluntary winding up, the company must convene both a meeting of members and a meeting of creditors. In most cases, the creditors will appoint the liquidator and control the liquidator's conduct. A members' voluntary winding up can become a creditors' voluntary winding up if it is discovered (usually by the liquidator) that the company cannot pay its debts. The voluntary administration provisions establish a mechanism under which a company under administration or deed of company arrangement can, on certain given events, move into a creditors' voluntary winding up. Under that mechanism, the company is deemed to have held the necessary meetings of members and creditors: s 446A, Corporations Act. Compulsory or by Court Order ....................................................................................................................................................................... [24.150] There are two types of compulsory or court winding up – winding up “in insolvency” and winding up “on other grounds”. Thus, not all companies wound up by the court are insolvent. But the reality is that the vast majority are insolvent, and most of these proceedings are initiated with the service of a statutory demand under s 459E of the Corporations Act.
Winding up in insolvency [24.160] Section 459P of the Corporations Act lists the people who can apply to the court to have the company wound up because of insolvency. Included are the company itself, creditors, liquidators and provisional liquidators, members and ASIC. (Members come under the definition of “contributory” contained in s 9 of the Corporations Act). Leave of the court may have to be obtained.
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The application procedure is set out in s 459Q of the Corporations Act. Applicants must advertise that they have filed an application and give notice to ASIC. Most applications are made by creditors on the basis that the company is insolvent. Under s 459C(2) of the Corporations Act a company is presumed to be unable to pay its debts if (among others) one of the events below occurs up to three months before the application is made: • the company fails to comply with a statutory demand; • a judgment order in favour of creditor is not satisfied; or • a receiver and manager is appointed under the terms of an instrument relating to a circulating security interest. A statutory demand is a demand in the prescribed form requiring the company to pay a debt that is due and payable to the creditor at the time the demand is served. The debt must be for the statutory minimum of $2,000 or more. The company is presumed insolvent if the creditor serves the demand (in the manner required by s 109X of the Corporations Act) and the company fails, within 21 days after service, to: • pay the sum demanded; • apply to the court to have the demand set aside: s 459F, Corporations Act. Applications to have a statutory demand set aside are regulated by ss 459G – 459N of the Corporations Act and will usually rely on a genuine dispute as to whether the debt is owing, or an off-setting claim. The consequences of failing to apply (within the 21 days) to have the demand set aside are very serious. The company is effectively prevented from opposing any subsequent winding up application, except by proving it is solvent (that is, able to pay its debts as and when they become due and payable): s 459S, Corporations Act. The significant divergence of views between courts on whether the 21-day period could be extended using s 1322 of the Corporations Act was finally resolved in the negative by the High Court in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. Other grounds [24.170] Petitioners listed in s 462(2) of the Corporations Act may apply to the court to have the company wound up if one of the grounds contained in s 461 is established. Grounds such as oppression of the minority (s 461(1)(e) – (g), Corporations Act) are dealt with in Chapter 14. Other grounds include:
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• make arrangements to pay which satisfy the creditor; or
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CORPORATIONS LAW: IN PRINCIPLE
• the company passes a special resolution to compulsorily wind up (s 461(1)(a), Corporations Act); • the company fails to commence business or ceases operations for a year or more (s 461(1)(c), Corporations Act); • the company has no members (s 461(1)(d), Corporations Act); • ASIC reports that the company should be wound up (s 461(1)(h), Corporations Act); and • the court is of the opinion that it is “just and equitable” that the company be wound up (s 461(1)(k), Corporations Act).
SECTION 462 Standing to apply for winding up (1)
A reference in this section to an order to wind up a company is a reference to an order to wind up the company on a ground provided for by section 461.
(2)
Subject to this section, any one or more of the following may apply for an order to wind up a company: (a) the company; or (b)
a creditor (including a contingent or prospective creditor) of the company; or
(c)
a contributory; or
(d)
the liquidator of the company; or
(e)
ASIC pursuant to section 464; or
(f)
ASIC (in the circumstances set out in subsection (2A)); or
(h)
APRA.
Effect of winding up On creditors
After commencement of winding up, any disposal of the company's property, other than exempt dispositions, is void: s 468(1), Corporations Act. This can mean hardship for people who are not aware that winding up has commenced – for example, a person who has paid for goods in cash but not yet received them. The liquidator holds the goods and the creditor then has to stand in line with all other creditors. Under s 468(3) of the Corporations Act, the court has a discretion to validate transactions. Secured creditors' rights are unaffected, but other creditors cannot enforce any judgments or orders. Legal proceedings can only be brought against the company with leave of the court. [24.180]
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On the company
The company continues to exist as a legal entity, but cannot carry on business except for the purpose of winding up. All company documents must bear the words “in liquidation” after the name of the company. In both a voluntary and compulsory winding up, the directors lose their powers to manage the company. The liquidator manages the company: s 471A, Corporations Act. Members cannot transfer shares: s 468A(1), Corporations Act [24.190]
On members [24.200] Members will not be able to transfer their shares unless the court or liquidator approves: s 468A(1), Corporations Act; and any alterations to their status will be void: s 468A(8), Corporations Act. Members lose the power to exercise control over the management of the business such as their power to remove directors or change the name of the company. Members will lose their rights to take action for oppressive conduct (see Chapter 14) although s 536(1) of the Corporations Act gives access for complaint to the courts or ASIC. On employees
Publication of a winding up order under a compulsory winding up serves as a notice of dismissal on employees: see Re General Rolling Stock Co (1872) 7 Ch App 646. The liquidator can waive this for a limited period. Under a voluntary winding up, the employees are not necessarily dismissed: see Re Matthew Bros [1962] VR 262.
On contracts
Contracts will remain on foot until the liquidator performs, repudiates or disclaims them, s 568 of the Corporations Act, although it is possible that the terms of the contract have contemplated the eventuality of liquidation. The court can make orders to discharge or rescind contracts involving the liquidated company: s 568(9), Corporations Act.
[24.220]
Powers and duties of liquidators
In general terms, the liquidator controls the company. As an agent of the company the liquidator is bound by fiduciary duties which are supplemented by s 232 of the Corporations Act, given that the liquidator is also an officer of the company. A liquidator must act “faithfully and fairly”. See Corporate Affairs Commission v Harvey [1980] VR 669.
[24.230]
They also have a duty of care and diligence and as such must preserve existing assets, collect assets then realise them: s 477, Corporations Act; Pace v Antlers Pty Ltd (in liq) (1998) 80 FCR 485; 26 ACSR 490.
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[24.210]
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CORPORATIONS LAW: IN PRINCIPLE
Next, all the assets – including, for example, amounts recovered from voidable transactions – must be distributed: • first, to secured creditors; • secondly, to preferential creditors – principally, debts and remuneration of the liquidator (and any administrators) and employee claims (s 556, Corporations Act); and • finally, to general unsecured creditors in equal shares: s 555, Corporations Act. The remainder, if any, is distributed to shareholders according to the constitution. If the constitution is silent, they share equally in a voluntary liquidation: s 501, Corporations Act. Voidable transactions and insolvent trading Voidable transactions
“Voidable transactions” are governed by a series of inter-linking definitions and related provisions under which a liquidator can recover money paid to creditors and reverse uncommercial dealings. An “unfair preference” is a payment to a creditor which puts the creditor in a better position than he or she would have been in if, at the time of the payment, the company had been wound up and the creditor was forced to prove for the debt in the liquidation: s 588FA, Corporations Act. An “uncommercial transaction” is defined by reference to a test of reasonableness: s 588FB, Corporations Act.
[24.240]
Both unfair preferences and uncommercial transactions will be “insolvent transactions” if they occur when the company is insolvent or if they cause insolvency: s 588FC, Corporations Act. Finally, whether an “insolvent transaction” will be a “voidable transaction” (that is, void as against the liquidator) depends on how long before the winding up commenced it was entered into: s 588FE, Corporations Act. For example, an unfair preference that is an “insolvent transaction” will be voidable if it was entered into in the period of six months before the winding up commenced and an uncommercial transaction has a two year window if it does not involve related parties or an obstruction to creditors' rights.
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“Unfair loans” (that is, loans made at extortionate interest rates or bearing extortionate fees or charges) are voidable regardless of how long before winding up they were entered into: ss 588FD and 588FE(6), Corporations Act. Defences to a voidable transaction claim
A creditor or other person facing a claim by a liquidator that a transaction is a voidable transaction, can rely on a defence with several elements, the most difficult of which is establishing that the creditor or person had no reason to “suspect” insolvency: s 588FG, Corporations Act. Although it is not strictly a “defence” to a voidable transaction claim, creditors having regular dealings with a company that goes into liquidation often seek to avoid the claim on the basis that the transaction concerned is part of a “continuing business relationship”. The most common form of such a relationship is usually called a “running account”. The running account argument developed out of a line of cases recognising that where a creditor has a regular trading relationship with a company, though the company may be paying debts owing to the creditor from time to time, the creditor, in return for those payments, is adding value to the company by continuing to supply goods or services. That concept is enshrined in the legislation: s 588FA(3), Corporations Act. There has been some doubt about whether the codification of the running account concept has altered the general operation of the principle developed in the earlier line of cases. While some of those doubts have been cleared up in more recent times, debate continues, particularly in relation to tax debts: see Airservices Australia v Ferrier (1996) 185 CLR 483 (High Court); and Sands & McDougall Wholesale Pty Ltd (in liq) v Federal Commissioner of Taxation [1999] 1 VR 489.
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[24.250]
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CORPORATIONS LAW: IN PRINCIPLE
[24.260] Figure 24.1: Identifying voidable transactions ....................................................................................................
Insolvent trading
Liquidators (and ASIC) may also take action against directors who allow the company to trade when it is insolvent – see Chapter 11. Insolvent trading is a breach of s 588G Corporations Act: see [11.520]–[11.600]. Similar provisions give liquidators the power to pursue a holding company in circumstances where one of its subsidiaries has engaged in insolvent trading: s 588V, Corporations Act. Section 588M of the Corporations Act empowers liquidators to bring most of the insolvent trading claims. However, individual creditors can bring claims in certain instances, with the consent of the liquidator or in default of the liquidator bringing a claim: ss 588R – 588U, Corporations Act. [24.270]
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Matters applicable to voidable transactions and insolvent trading [24.280]
In both voidable transaction proceedings and insolvent trading
claims: • liquidators have the benefit of certain presumptions about the fact of insolvency (s 588E, Corporations Act); and • the court has wide powers to order compensation to be paid to the company by the creditor, director or other party sued: ss 588FF, 588K, 588M and 588W, Corporations Act
Inter-relationship between the forms of external administration ....................................................................................................................................................................... [24.290] Figure 24.2 at [24.300] below depicts the more typical courses that a company in financial difficulty may take. It is important to note, however, that:
• there are exceptions and variations to the possibilities shown in the flowchart; and • a company that goes into liquidation or receivership is not always in financial difficulty. The flowchart also shows how the various courses interrelate – for example, a receiver may be appointed during the course of a voluntary administration; a liquidator may be appointed while a company is in receivership.
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These voidable transactions and insolvent trading claims can be pursued using “litigation insurance”. This is a form of insurance product available to liquidators. The insurer underwrites the cost of proceedings, in return for a share of the proceeds. There has also been a greater incidence of liquidators selling other claims that the company may have against directors or third parties. These types of arrangements have generally received the endorsement of the courts: see Re Movitor Pty Ltd (in liq) (1996) 64 FCR 380; and UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (No 2) (1996) 14 ACLC 1,610 (and at first instance at UTSA Pty Ltd v Ultra Tune Australia Pty Ltd (No 2) (1996) 14 ACLC 1,262).
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[24.300] Figure 24.2: Courses taken by companies in financial difficulties ....................................................................................................
Notes: 1.
A liquidator also has the power to appoint an administrator, in which case the course would switch from “Liquidator appointed” to “Administration” and then continue from there.
2.
It is unusual for a company to survive a receivership. The more typical course is that depicted by the other arrow – namely, a creditor applying to court for a winding up order, either during or after the receivership.
Receivership [24.310] Receivership is an insolvency procedure. In general terms, a receiver is appointed to collect and receive debts and other assets. Provisions regulating receivers are found in ss 416 – 434G of the Corporations Act. Receivers can be appointed by the court or by a creditor. Where a receiver has been appointed, their primary role will be to sell enough of a company's assets subject to a security interest to repay any debts owed to the secured creditor. A receiver may also be appointed to take control over a specific piece of corporate property (collateral) that is subject to a security interest (for example – one perfected under the Personal Property and Securities Act 2009 (Cth) (PPS Act) which is subject to a loan).
Distinguishing different types of controllers .......................................................................................................................................................................
Part 5.2 of the Corporations Act 2001 (Cth) refers to receivers and other controllers. In practice, there are three different types of people that come within the definition of “controller” (s 9, Corporations Act): [24.320]
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a receiver, or receiver and manager, of that property; or
(b)
anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a security interest; and has a meaning affected by paragraph 434F(b) Corporations Act (which deals with 2 or more persons appointed as controllers). Receiver
The least common form of controller is a person appointed with power only to “receive” and not also to “manage”. It is that limitation on power that distinguishes this type of “controllership”. It is very unusual for a bank or other secured creditor to appoint someone who only has power to receive. A receiver appointed by a court is more likely to have power only to receive. [24.330]
Receiver and manager
The most common is a receiver and manager. The principal distinguishing features of a receiver and manager are that they: [24.340]
• are an officer and (usually) the agent of the company to which they have been appointed; and
Those in possession or control of that property
The next most common type of receiver appointed is anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a security interest. For example, most security interests will include provisions under which the holder of the security interest can enforce that security interest either by appointing a receiver and manager to take possession of the assets of the company, or by themselves going into possession. If the holder of the security interest is a bank or financial institution, it will not be practical for that bank itself to take possession so it will usually appoint an agent to do so. [24.350]
Reporting requirements .......................................................................................................................................................................
The Corporations Act 2001 (Cth) also defines a “managing controller” – as the term suggests, it includes a receiver and manager but not a receiver. Section 90 of the Corporations Act explains when a “receiver” is also a “manager”. Managing controllers have slightly more stringent reporting obligations than other controllers: for example, s 421A, Corporations Act.
[24.360]
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• have power to manage the company (hence “and manager”).
746
CORPORATIONS LAW: IN PRINCIPLE
Receivers and managers (unlike other controllers) are “officers of a company”: s 9, Corporations Act (see also Chapter 11). All forms of “controllership” must be acknowledged in public documents as part of the company's name (for example, “receivers and managers appointed” or “controller acting”): s 428, Corporations Act. Appointment .......................................................................................................................................................................
Appointment by the secured party
The security interest usually provides for the appointment of a controller if the company defaults in payment. Other events, such as the company ceasing to carry on business, failing to provide financial reports or becoming insolvent, may also trigger appointment under the security interest. Once appointed, the controller collects the property secured by the security interest, sells it and distributes the proceeds to the secured party. The appointment of a controller must comply strictly with the terms of the security interest. If it does not, the appointment may be invalid, which means that the controller becomes a trespasser and every act of the controller in getting in and selling the property of the company is unlawful. The consequences of this both for the controller and the bank that appointed the controller can be extremely serious. Any questions concerning the validity of an appointment can be resolved by an application to the court under s 418A of the Corporations Act. Most controllers will have an indemnity from the secured party in respect of any invalidity in appointment and any other liability they may incur in carrying out their duties. However, the indemnity will not cover any breach of duty or negligence.
[24.370]
Appointment by the court [24.380]
The court may also appoint a receiver or receiver and manager:
• upon application by ASIC or an “aggrieved person” under s 1323(1) of the Corporations Act; or • where the court thinks it “just and convenient”: s 37, Supreme Court Act 1986 (Vic) (and equivalent provisions in other States). (See also the rules of court that set out how the application for appointment is made and the mechanisms for supervising the appointment: for example, O 39, Supreme Court (General Civil Procedure) Rules 2015 (Vic).) A court-appointed receiver is an “officer of the court” and not an agent or an officer of the company for the purposes of the Corporations Act 2001 (Cth). The decision of the Full Court of the Victorian Supreme Court in Bond Brewing Holdings Ltd v National Australia Bank Ltd [1991] 1 VR 386 set
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significant limitations on the circumstances in which a court should order the appointment of receivers, at least in Victoria. In most cases, a receiver is appointed by the court to preserve or administer a particular fund or asset, and then only if the court is satisfied that an injunction prohibiting dealing with that fund or asset is not a sufficient protection. It is now very uncommon for a court to appoint a receiver to an entire company. Effect of appointment
The appointment of a receiver and manager (or other managing controller) does not affect the legal personality of the company, nor does it displace the board of directors. The appointment, however, does affect the ability of the board to run the company: see Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782. Although a privately appointed receiver and manager will generally take directions from the secured party, the security instrument will ordinarily provide that the receiver and manager acts as agent of the company. This particular form of agency means that many of the actions of a receiver and manager become the responsibility of the company, not the secured party. This is why a secured creditor (who may want the person they appoint to manage the company) generally prefers to appoint a receiver and manager rather than their own agent. However, the agency will usually terminate when a liquidator is appointed to the company, unless the receiver gets the consent of the liquidator or an order of the court permitting the receiver to retain that status. The termination of the agency does not, however, affect the receiver's ability to exercise most of the receiver's powers: s 420C, Corporations Act. Powers and duties of controllers .......................................................................................................................................................................
Privately appointed controllers derive their powers from the charge instrument. Court-appointed receivers are given powers by the court. In addition, s 420 of the Corporations Act sets out numerous powers that a receiver will have, unless the charge instrument or the court order provides otherwise. Under ss 429 – 430 of the Corporations Act, controllers can obtain information in order to get in the company's assets. Section 431 of the Corporations Act entitles receivers to inspect any books that relate to the secured property, at any reasonable time. A privately appointed controller also has duties to the company to act in good faith and, more specifically, to take all reasonable care that the property is not sold below market value where it has a market value or otherwise for the best price reasonably obtainable: s 420A, Corporations Act. [24.400]
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[24.390]
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CORPORATIONS LAW: IN PRINCIPLE
Controllers also have various administrative duties relating to notices of appointment, bank accounts, maintenance of records and so on. The primary function of a privately appointed controller is to sell enough of the assets of the company to repay the bank or other secured creditor that appointed them. However, the proceeds of sale of certain assets must first be used to repay categories of “priority claims” (such as wages, leave entitlements and superannuation of employees of the company): s 433, Corporations Act. Liability of receivers .......................................................................................................................................................................
Under ss 419 – 419A of the Corporations Act, receivers will be liable for certain debts incurred during the course of the receivership. Those debts are, in essence, the same as those for which an administrator is personally liable. Liability can also arise by reason of a receiver and manager's status as an officer of the company: see ss 180 – 184 and 598, Corporations Act. Section 423 of the Corporations Act deals specifically with breaches of duty by receivers. Under s 1321 of the Corporations Act any person aggrieved by an act or omission of a receiver may apply to the court for redress. [24.410]
Schemes of arrangement Creditors’ scheme of arrangement [24.420] Creditors' schemes of arrangement have never been common and, following the introduction of voluntary administrations, are increasingly rare. Implementing a creditors' scheme of arrangement requires at least two applications to court, lengthy documentation and separate meetings of various categories or “classes” of creditors. Such schemes are expensive and cumbersome. They are to be contrasted with schemes of arrangements with members, which continue to be an important tool in effecting the reorganisation or amalgamation of solvent companies. Members’ scheme of arrangement [24.430] Schemes of arrangement are used in company reconstructions and can be used in situations of insolvency. In the reconstruction scenario, arrangements are made with members, not creditors (although creditors are given consideration where the scheme involves a reduction of capital). The procedures to be adopted for creditors' schemes of arrangement are set out in ss 411 and 412 of the Corporations Act. A company, a member or a director may apply to the court for an order that a meeting of creditors (or classes of creditors) be convened so as to initiate a scheme. If the company is being wound up, the liquidator also may apply. Prior notice must be given to
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ASIC. If a meeting is ordered, the company must send an explanatory statement and other relevant information to those entitled to attend: s 412, Corporations Act. The scheme becomes binding only if approved by both the required majority of creditors (usually 75%) and the court: s 411(4), Corporations Act. The scheme comes into effect after a copy of the court order approving it is lodged with ASIC: s 411(10), Corporations Act. The complex procedural requirements and court involvement make creditors' schemes of arrangement cumbersome, slow and expensive. They are, therefore, rarely suited to a company facing a financial crisis.
Mentor: Test your Knowledge ...................................................................................................................................... (See http://www.legal.thomsonreuters.com.au/browse/mentor for multiple choice questions and answers on the Topic of External Administration.)
1.
Who has power to appoint an administrator?
2.
What debts of a company in administration is the administrator personally liable to pay? Who does the administrator look to for repayment?
3.
How can an administrator avoid liability for payments under an arrangement entered into before the administration began, relating to the use of property owned by someone else (for example, leased equipment)?
4.
What are the three things that can happen when a voluntary administration ends?
5.
What distinguishes a “managing controller” from other controllers?
6.
Who must have the leave of the court before applying for an order that an insolvent company be wound up?
7.
What are the defences and other arguments available when a liquidator seeks to recover a voidable transaction?
Essay Questions ...................................................................................................................................... 1.
Do secured and unsecured creditors have too much protection under the Corporations Act at the expense of other stakeholders such as members, employees and customers?
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Practice Questions ......................................................................................................................................
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2.
“The test for insolvent trading under the Corporations Act is biased in favour of the liquidator and creditors”. Do you agree with the quotation? If so, should the bias be retained or removed?
Problem for Discussion ...................................................................................................................................... Albert Side took over his father's funeral business in the early 1980s and soon set about updating its products and image. He changed the name of the principal operating company to “The Other Side Pty Ltd” (TOS) and, within a few years, TOS had: • 10 funeral parlours throughout Australia, all of which are rented; • a substantial quantity of equipment (including hearses and cremators) leased from finance companies and secured by personal guarantees from Albert and his wife; and • three subsidiaries, as follows: – Dearly Departed Pets Pty Ltd (Pets); – Creative Coffins and Stonemasonry Pty Ltd (Coffins); and – TOS Embalming and Cryogenics (Cryogenics). After the Global Financial Crisis, it was much harder to persuade people to spend money on funerals for pets so Pets has been running at loss for several years. This is unlikely to change in the foreseeable future. Coffins is a very profitable business and operates out of a factory in Geelong that it owns outright. However, most of its profits have been drained off to cover the losses in Pets and to fund the start-up costs in Cryogenics. Those start-up costs have been substantial so, for the time being, Cryogenics is a significant drain on the rest of the TOS group. But independent marketing consultants have reported that the future for the cryogenics industry is very promising and, as one of the few suppliers of these services in the Australia, there is a realistic prospect that in one or two years, the investment in Cryogenics will pay substantial dividends. TOS itself is profitable but only just. It too is suffering from the drain on funds caused by Pets and Cryogenics and its Eighties image is starting to pale with the customers. The group is financed by loans totalling $10 million from Eastpac Bank (Eastpac). Eastpac has security in the form of security interests over all the assets of each company, except the Coffins' factory site. The local manager of Eastpac agreed to release this from the bank's charge when Albert told him the group was planning to enter into a sale and lease-back arrangement to raise
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Guide to Problem Solving ...................................................................................................................................... Options available to a company in financial difficulty
A director of a company in financial difficulty must act cautiously. A director who knows or suspects that the company is insolvent but continues to allow the company to trade in the hope that things will improve is putting his or her own personal assets at risk: s 588G, Corporations Act. The options open to directors are to: • resolve that the company is insolvent or likely to become insolvent and that an administrator be appointed (s 436A, Corporations Act); • approach a secured creditor (if any) who may then seek the appointment of a receiver and manager; • cause the company to apply or (with the leave of the court) themselves apply for a winding up order (s 459P, Corporations Act); or • initiate a members' voluntary liquidation: s 491, Corporations Act. The options for a secured creditor holding a security interest over the company are to:
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more funds. This has not yet been implemented. The loans from Eastpac are also secured by personal guarantees from Albert and his wife. Albert is concerned that he may not be able to keep things afloat long enough for the profits from Cryogenics to come on stream. He is particularly worried about his personal exposure under the guarantees he and his wife have given and about the welfare of his employees who have been very loyal during difficult times. TOS has been late in the payment of rent on its flagship parlour in Sydney each month for the last seven months but has managed to find the necessary funds, usually at about the time the second threatening letter has arrived. One or two of the cheques sent to the landlord have bounced the first time they were presented. His debt of $2,090 to the local church choir is very overdue. One of the choristers is a law student and has helped the vicar to prepare and send a statutory demand. The 21 days expired yesterday. Albert has approached an insolvency practitioner who has in turn sought your assistance in advising Albert about what he should do. One option he is considering is selling the Geelong factory site to his family company for less than its full market value. You are asked to advise Albert about his options and what factors might influence the ultimate outcome of any decision he takes. In particular, your advice should consider what Eastpac Bank is likely to do.
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• appoint a receiver and manager or other controller as permitted under the security instrument; or • if the security interest is over the whole, or substantially the whole, of the assets of the company, appoint an administrator: s 436C, Corporations Act. Creditors generally can apply to the court for a winding up order. For the course each of these options might take, see generally, Figure 24.2 at [24.300]. Considerations relevant to receivership or a winding up order
There will be no further exposure for directors once a secured creditor appoints a receiver and manager or a trade creditor applies successfully to wind up the company. But there is little or no chance of the company surviving either of those procedures. Receivers do not have the benefit of any moratorium or “freeze” on claims that would: • delay enforcement procedures (such as a winding up application); and • provide an opportunity to negotiate with owners of property in the possession of the company before they act to repossess the property or evict the company (in the case of rented premises). Receivership
A secured creditor who has power to do so might choose to act to recover its debt despite the effect on the company and its employees and other unsecured creditors. Generally, a receiver and manager: • is only concerned to realise sufficient assets to repay the secured creditor; and • will therefore target the better, more saleable assets. The assets left over (if any) are unlikely to be salvageable. Winding up
There may be funds available to a liquidator by bringing claims for insolvent trading or to recover a voidable transaction, that will not be available in a voluntary administration (the administration provisions in Pt 5.3A of the Corporations Act do not give power to an administrator of a company or of a deed of company arrangement to bring these claims). It is not part of the function of a liquidator to carry on the business in an attempt to preserve it: s 477, Corporations Act.
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Considerations relevant to administration Protection of a company’s property during an administration
The statutory moratorium that applies while a company is in administration is extensive. It effectively delays: • the commencement or continuation of a winding up application (ss 440A and 440D, Corporations Act); • a lessor from taking steps to recover leased premises or equipment (s 440B(3), Corporations Act); and • claims under personal guarantees given by directors or their spouses: s 440J, Corporations Act. Rights of secured parties, owners and lessors in a voluntary administration: Section 441A, Corporations Act
A secured party with a security interest over the whole, or substantially the whole, of the property of a company may enforce that security interest provided that:
• the secured party acts either before the administrator is appointed, or during the “decision period”: s 441A, Corporations Act. “Decision period” means the period beginning on the day when the secured party receives notice of the appointment or when the administration begins and ending at the end of the 13th business day after that day: s 9, Corporations Act. A deed of company arrangement (DOCA) will not prevent a secured creditor from realising her or his security unless: • the deed so provides and the secured creditor votes in favour of the deed, or • the court orders: s 444D(2), Corporations Act. There are restrictions placed on a court in making an order limiting the rights of secured creditors: s 444F, Corporations Act. Administrator’s report to creditors: Section 439A, Corporations Act
The documents which must accompany the notice of the second meeting of creditors are set out in s 439A(4), Corporations Act as follows: • a report by the administrator about the company's business, property, affairs and financial circumstances; • a statement setting out the administrator's opinion about each of the following matters: – whether it would be in the creditors' interests for the company to execute a deed of company arrangement;
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• the enforcement covers all the property of the company subject to the security interest; and
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CORPORATIONS LAW: IN PRINCIPLE
– whether it would be in the creditors' interests for the administration to end; and – whether it would be in the creditors' interests for the company to be wound up; • and her or his reasons for those opinions; and such other information known to the administrator as will enable the creditors to make an informed decision about each matter; and • if a deed of company arrangement (DOCA) is proposed – a statement setting out details of the proposed deed. In the statement about winding up, the administrator should, if practicable, look at what assets would be available to a liquidator. These may include potential claims to recover voidable transaction and insolvent trading claims. If these claims are substantial, the creditors may vote for the company to go into liquidation so the claims can be pursued, rather than vote for a proposed deed of company arrangement. Voidable transactions: Sections 588FA-588FE
The transactions below are voidable at the liquidator's option: • unfair preferences (s 588FA, Corporations Act); • uncommercial transactions (s 588FB, Corporations Act); and • unfair loans: s 588FD, Corporations Act. For unfair preferences and uncommercial transactions, the company must have been insolvent at the time the transactions took place: s 588FC, Corporations Act. Consider the application of the provisions relating to a “continuous business relationship” (running account): s 588FA(3), Corporations Act. The “relation-back day” for a liquidation consequent upon a resolution of creditors of a company in administration, is the date the administrator was appointed: ss 9 and 513C, Corporations Act. The maximum relation-back periods from s 588FE of the Corporations Act are: • unfair preferences – six months; • uncommercial transactions – two years; • unfair loans – indefinite; • insolvent transactions with related parties – four years; • insolvent transactions intended to defeat creditors – 10 years; and • unreasonable director-related transaction – four years. Defences under s 588FG of the Corporations Act:
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• good faith; and • no reasonable grounds for suspecting insolvency (objective test); and • valuable consideration given.
Agardy P “Administrators, Trading and Risk” (2002) 10 Insolv LJ 164 Anderson C “Decision making in Voluntary Administration” (2004) 22 C&SLJ 163 Anderson C and Morrison D “Applications for Advice from Courts by Insolvency Practitioners” (2007) 25 C&SLJ 406 Anderson C and Morrison D The Australian corporate rescue provisions: how do they compare? (2013) in Omar, Paul (Ed.) International Insolvency Law: Reforms and Challenges. Ashgate Publishing, London, pp 159-188 Atkins S “Public Policy: the Law's Guardian in the Clash between Insolvency and Maintenance in the Context of Litigation Funding Arrangements” (2004) 12 Insolv LJ 41 Austin RP and Ramsay I Ford's Principles of Corporations Law, 16th ed, LexisNexis Butterworths, 2014, Chs 25-28 Barlow K “Voidable Preferences and the Running Account – The High Court Reconsiders” (1998) 26 ABLR 82 Dickfos J “Improving Outcomes for Creditors: Balancing Efficiency with Creditor Protections” (2008) 16 Insolv LJ 84 Duns J ““Insolvency”: Problems of Concept, Definition and Proof” (2000) 28 ABLR 22 Frost-Drury A, Greinke A and Shailer G “Financial Differences Between Voluntary Administrations and Liquidations” (1998) 6 Insolv LJ 153 Harris J “Corporate Group Insolvencies: Charting the Past, Present and future of “Pooling” Arrangements” (2007) 15 Insolv LJ 78 Herzberg A, Bender M and Gordon-Brown L “Does the Voluntary Administration Scheme satisfy its Legislative Objectives? An Exploratory Analysis” (2010) 18 Insolv LJ 181 Keay A “Finding a Way Through the Maze that is the Law of Statutory Demands” (1998) 16 C&SLJ 122 Lipton P, Herzberg A and Welsh M Understanding Company Law, 18th ed, Thomson Reuters, 2015, Chs 22-25 McColl S “Voluntary Administrations: How Well are they Working?” (2001) 12 Australian Journal of Corporate Law 194 McCormack G and Hargovan A “Australia and the International Insolvency Paradigm” (2015) 37 Sydney L. Rev. 389
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Further Reading ......................................................................................................................................
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Routledge J “Part 5.3A of the Corporations Law (Voluntary Administration): Creditors' Bargain or Creditors' Dilemma?” (1998) 6 Insolv LJ 127
Glossary References to section numbers are to section numbers in the Corporations Act, unless indicated otherwise. References to other definitions are to definitions in this Glossary, unless indicated otherwise. AASB Australian Accounting Standards Board. A board established under the ASIC Act to draft accounting standards. ABN Australian Business Number, under the new tax system introduced on 1 July 2000, all individuals, partnerships and companies that carry on business in Australia must have an ABN. accounting standards a set of rules specifying the accounting methods and judgments which can be used to prepare financial statements and reports. account of profits a civil remedy consisting of a court order against a person (eg, a director) who has breached duties imposed by equity law. It requires the wrongdoer to disgorge or hand over to another person (ie, the company), the profits made as a result of her or his breach. ACN Australian Company Number; ASIC ascribes an ACN to every company upon registration. actual authority
authority that is either “express” or “implied” authority.
ad valorem duty a government tax calculated at a percentage of the consideration involved.
AFSL Australian financial services licence. Must be held by persons who carry on a financial services business. A licensee may authorise representatives (employees or agents) to provide financial services on behalf of the licensee. A representative does not need to hold a licence. See Topic 22. agent for the mortgagee in possession where the holder of a mortgage or other security enforces that security by appointing an agent (such as an insolvency practitioner or estate agent) to take physical possession of the secured property or assets. AGM annual general meeting. A meeting of the members of the company held each year to consider, amongst other things, financial reports and appointment of directors. Only public companies are required by s 250N to hold an AGM, but the constitution (or practice) of a proprietary company may provide for such a meeting. all ordinaries index an index of Australian share prices, based on the weighted average of the current prices of over 300 listed companies allotment of shares a binding contract between the company and an applicant for shares under which the applicant promises to take (and pay for) the number of shares allotted to her or him by the company.
Glossary
AFML Australian financial markets licence. Must be held by an entity that operates a financial market, eg ASX.
758
CORPORATIONS LAW: IN PRINCIPLE
alternate director a person appointed by a director to take her or his place on the board for a period of time. The alternate director attends board meetings when the director who appointed her or him cannot attend the meeting. apparent authority (sometimes referred to as ostensible authority) authority is conferred because the company has “held out” or represented that a particular person has authority to act on its behalf. arbitrage the simultaneous buying of a security in market A at a low price and selling in market B at a higher price to make a profit. articles of association the internal rules of a company registered prior to 1 July 1998, now called the “constitution”. Model sets of articles were contained in Tables A and B of Sch 1 of the pre-1 July 1998 Corporations Law. Articles continue to apply as the company’s constitution unless repealed in their entirety: ss 135 and 1415. ASC Australian Securities Commission. National companies regulator established by the Corporations Law Scheme. From 1 July 1998, renamed ASIC and invested with additional powers and responsibilities. ASIC Australian Securities and Investment Commission. Established and governed by the Australian Securities and Investments Commission Act 1989 (Cth). As well as a role in relation to the financial services sector, ASIC administers and enforces the Corporations Act on a national basis. ASIC Act the Australian Securities and Investments Commission Act 2001 (Cth) which came into operation on 15 July 2001. how the Australian Securities and Investments Commission Act 1989 (Cth) was cited, replaced by the Australian Securities and Investments Commission Act 2001 (Cth) which came into operation on 15 July 2001.
ASIC Law
ASX is short for Australian Securities Exchange Ltd. The ASX is a company incorporated by legislation. In 1997, the ASX “demutualised”, that is it converted to a company limited by shares. The ASX is a stock exchange and it operates a stock market through wholly-owned subsidiaries in the six Australian State capital cities. audit an examination of an entity’s financial reports by a qualified auditor to confirm that the accounts were prepared in accordance with AASB accounting standards and give a true and fair view of the entity’s financial position and performance during the relevant reporting year or half-year. authorised capital (also referred to as nominal capital) the maximum number of shares which a company was permitted to issue without obtaining approval from the shareholders prior to 1 July 1998. This restriction was removed by the Company Law Review Act 1998 (Cth). automated trading system (ATS) trading by computers which link the stock markets. back-door listing the process by which a company which is already listed on the stock exchange is acquired as a vehicle to promote the acquirer’s activities. This is quicker and cheaper than obtaining listing.
GLOSSARY
759
balance sheet a statement of a company’s equity, assets and liabilities as at a particular date (eg, the last day of the company’s financial year). bear a person who considers that prices are falling. A bear attacks and claws the market down. The opposite is a bull. bear market
a market which is falling.
beneficiary a person entitled to receive the benefit of a legal right or property held by another person — eg, where shares are held “on trust” for a child, the child is the beneficiary. The person who holds the shares is the trustee. beta a measure to evaluate company shares. The higher the beta the more speculative the stock. bidder the person seeking to acquire shares in the company by one of the methods permitted by Ch 6. bidder’s statement a statement to be prepared by a bidder making a takeover bid. It must contain information specified in s 636. black knight opposite of white knight and means a company or person displaying perhaps some hostility to the existing board but who wishes to make a takeover offer which in itself is unacceptable. block sales
sales of large parcels of shares.
blue chip stock a gambling term where the highest valued chips were coloured blue. It now means companies which are of such financial repute that the chances of liquidation are remote. board meeting meeting of the board of directors of the company. The board of directors and the members in general meeting are the two principal decision-making organs of the company.
bona fide
a company’s directors as a collective body.
to have honest intentions.
bonds debt instruments, often issued by governments. bonus share a share given by the company to a member, usually proportionate to her or his existing shareholding and requiring no fresh consideration to be provided by her or him — such shares usually result from a capitalisation of net profits. books of a company include a register, any other record of information, accounts or accounting records, however complied, recorded or stored, and a document: s 9. broker (or stockbroker) person who buys and sells securities on behalf of another. Until 1997, this term referred to persons who were members of the ASX but following “demutualisation” of the ASX, this is no longer necessarily the case. See Topic 22. bubble dates back to the South Seas Bubble in England in the early 1800s when a speculative frenzy developed which came to an abrupt halt when the bubble burst.
Glossary
board of directors
760
bull
CORPORATIONS LAW: IN PRINCIPLE
an optimist in the market who believes that the market is rising.
bull market a market which is on the rise. business judgment a decision to take or not take action in a matter relevant to the company’s business operations. business judgment rule a law which provides a form of defence to directors sued in relation to a business judgment which they made. The defence applies only to breaches of the directors’ duty of care and skill under general law and statute: s 180(2). Business Regulation Advisory Group (BRAG) consists of representatives of peak business groups, and acts as an advisory group to CLERP. business rules rules which regulate conduct of those who trade on the ASX, also referred to as operating rules. buy-back obligation obligation imposed on the manager of a managed investment scheme prior to 1998 to redeem a member’s interest. There are now more restricted rights to withdraw from a scheme. call a demand made on a member by the company to pay up the amount remaining or part of the amount remaining unpaid on her or his shares. call option an option contract which enables the holder to require the grantor to sell to the holder a specified commodity or securities at a set price (called the strike price) on or before the set expiry date. CAMAC Corporations and Mergers Advisory Committee (formerly CASAC, Companies and Securities Advisory Committee). A body established pursuant to the ASIC Act to advise the Commonwealth Treasurer on the administration of the Corporations Act and any requirements for legislative reform. capital maintenance a doctrine of company law which requires a company to preserve its share capital for the protection of the interests of creditors and members of the company. certificate of registration certificate issued by ASIC to certify the registration of a company: see ss 118(1) and 1274(7A). chair (also known as the chairperson or chairman) the director who is in charge of board of directors. The chair will normally conduct the board meetings and general meetings of the company. Depending on the company’s internal rules, the chair may also exercise a casting vote in the event of a voting deadlock at board or members’ meetings. charge a form of equitable mortgage taken over all or part of the assets or business of a company (or both) as security for a loan or other obligation. chargee the person (usually a bank or other financial institution) that is given the charge by the company.
GLOSSARY
761
CHESS is the acronym for Clearing House Electronic Subregister System. This system provides for the electronic transfer of securities listed on the ASX within three business days after the trade date. It also provides guaranteed payment and delivery. See also SEATS. Chinese wall in financial organisations a “wall” which separates dealing and advising sections, eg of a stockbroker, in order to avoid the broker being placed in a conflict of interest situation. churning the buying and selling of securities at the same time in order to create an appearance of market activity. circulating resolution a resolution circulated by the directors (s 248A(1)) or the members (s 249A(2)) whereby they each sign to indicate their agreement to the resolution contained therein. Used as an alternative to a meeting. civil penalties (see Pt 9.4B) a court order prohibiting a person from managing a corporation and/or payment of a fine of up to $200,000 for a breach of certain provisions of the Corporations Act, but where no criminality (or dishonest intent) is involved. civil penalty provisions the statutory provisions which attract a particular kind of statutory penalty (called a civil penalty) when they are breached. civil remedies remedies available to companies and/or their members for harms suffered by them by reason of wrongs committed by either the directors, other officers or the company itself. They include declarations, injunctions, damages, accounts of profits, termination or rescission of unfair contracts to which they are party. Civil remedies are provided by both the general law and statute.
class of shares a category of shares which have particular rights or benefits attaching to the shares in the category which are different to the rights and benefits attaching to other shares issued by the company. class orders orders made by ASIC in relation to a particular class of companies, disclosing entities or registered schemes relieving them, their directors and/or auditors from having to comply with the financial recording and reporting obligations in Ch 2M. clearing the transferring of title including the preparation of the necessary paperwork. clearing house an organisation providing centralised clearing facilities for the market. They often provide guarantees of performance to and on behalf of members of the market. CLERP Corporate Law Economic Reform Program. Established in March 1997 to initiate corporate law reform — taking over from the Corporations Law Simplification Program. CLERP operates under the auspices of the Commonwealth Treasury and consults with business, industry and consumer bodies (in particular, the Business Regulation Advisory Group). It has overseen the enactment of the Company Law
Glossary
class action legal actions where several plaintiffs join forces and bring their actions as one proceeding against a common defendant.
762
CORPORATIONS LAW: IN PRINCIPLE
Review Act 1998 (Cth), and the CLERP Act 1999 (Cth) which made substantive changes to the areas of fundraising, director’s duties and corporate governance, accounting standards and takeovers. committee of creditors the committee of creditors of a company in administration sometimes appointed at the first meeting of creditors: see s 436E. Unlike the committee of inspection in a liquidation, the committee of creditors in an administration has no power to direct the administrator or formally approve certain actions of the administrator. It essentially only acts as a sounding board for the administrator. committee of inspection the committee, usually comprising representatives of the creditors of a company in liquidation (but sometimes also including representatives of shareholders), are sometimes appointed by the creditors and shareholders to supervise the conduct of liquidation: see ss 548 – 552. common law damages a civil remedy consisting of a court order requiring a person who has committed a wrong to compensate another person who has suffered loss or damage by reason of that wrong. The reference to “common law” damages is intended to distinguish damages from other forms of compensation available. See equitable compensation. common seal a seal or stamp that bears the company’s name and ACN: see s 123. The seal is equivalent to the company’s signature and may be used on important company documents. A company does not have to have a common seal or to use it when it executes a document. If it is used, its affixation must be witnessed by the people or person specified in s 127(2). company limited by guarantee a company formed on the principle of having the liability of its members limited to the respective amounts that the members undertake to contribute to the property of the company if it is wound up: ss 9 and 517. company limited by shares a company formed on the principle of having the liability of its members limited to the amount (if any) unpaid on the shares held respectively by them: ss 9 and 516. compulsory acquisition the process by which a bidder who becomes entitled to 90% of the shares in a company can acquire the remaining shares. Recently expanded: see Topic 23. compulsory winding up a winding up by the court because the company is insolvent or on other grounds (eg, oppression). consolidated financial statements the financial statements prepared for a group of related entities as required by AASB accounting standards. The statements draw together the financial statements of each entity within the group in order to provide a collective summary of the financial position and performance of the entire group. constitution internal rules of a company which can be adopted on or after registration.
GLOSSARY
763
constructive notice (in the company law context) was a general law doctrine pursuant to which a person was deemed to have notice of all the company’s public documents. Section 130 has the effect of abolishing this doctrine except in relation to charges registered with ASIC. continuous disclosure the obligation to disclose material information about the entity’s activities on a continuous basis to ASIC and, where the entity is listed, to the ASX. contributory a person liable to contribute to the assets of a company in the event of its being wound up. It usually refers to a shareholder. See also the more detailed definition in s 9. control defined as the capacity to determine the outcome of decisions about a company’s financial and operating policies: s 50AA. controller the generic term used to describe all forms of receivers, receivers and managers, mortgagees in possession and their agents. convertible notes debentures or notes which allow the holder to convert them into shares at a later date. Co-operative Scheme a formal agreement between the States and the Commonwealth that operated between 1978 and 1991. It implemented a national company law regime by way of the States and the Commonwealth adopting uniform legislation. For the first time a national regulator (the NCSC) was established although day-to-day administration still rested with State Corporate Affairs Commissions (CACs).
corporate veil the barrier that separates the company (as a separate legal person) from the people who formed it, and from those who become its members. Often the people who control the company want the “veil” of incorporation to protect them from personal liability to creditors in the event that the company fails. Corporations Act 2001 the Commonwealth statute that came into operation on 15 July 2001 to replace the Corporations Law. Corporations Law from 1 January 1991 until 2001, in any State and the Northern Territory (NT), meant the legislation adopted by that State (or NT) entitled Corporations ([name of the particular State or the NT]) Act 1990. The Australian Capital Territory (ACT) was governed by the Corporations Act 1989 (Cth) which was amended in 1990. Because of constitutional limitations, it was necessary for each State and the NT to adopt the Commonwealth’s model for the ACT, rather than Commonwealth legislation applying throughout Australia. However, the effect of the package of Acts adopted pursuant to an agreement between all the States, the NT and the Commonwealth, was that, effective from 1 January 1991, uniform companies legislation applied throughout Australia. The Acts provided that they were to be cited as “the Corporations Law” regardless of which particular State or Territory’s legislation
Glossary
corporate governance a “catch-all” term used for referring to management issues in corporations and the mechanisms by which corporate management can be supervised and made accountable to its members, employees, creditors and the community. The study of corporate governance is an examination of the theories and practice of corporate management. It is a very broad topic.
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CORPORATIONS LAW: IN PRINCIPLE
was involved, and reference to “the Corporations Law” also included a reference to the regulations and application orders: Corporations ([name of the particular State or the NT]) Act 1990 and Corporations Act 1989 (Cth), ss 1 and 8A. The Corporations Law has been replaced by the Corporations Act 2001 (Cth) that came into operation on 15 July 2001. creditors’ scheme of arrangement a little-used procedure by which a company in financial difficulty can reorder its affairs and come to an arrangement that will bind all of its creditors (see ss 410 – 415A), now effectively superseded by the voluntary administrations procedure. Note that members’ schemes of arrangement are still used reasonably regularly to effect the reorganisation or amalgamation of solvent companies. creditors’ voluntary winding up a winding up of an insolvent company initiated by a resolution of members. A company that moves from voluntary administration into winding up is deemed to have taken the steps necessary to implement a creditors’ voluntary winding. This is now by far the most common way in which a creditors’ voluntary winding up is initiated. creeping takeover the acquisition of up to 3% of shares in a company every six months by a person entitled to at least 19% of shares: s 611. Such an acquisition is an exception to the prohibition in s 606. crossing where the one broker acts for both the buyer and seller of shares (also known as “marriage” or “crossed” trade). cumulative dividends dividends which accumulate if the company does not pay any or the full dividend in a particular year. cumulative preference shares entitle the holder to a fixed annual dividend which if not paid for one year is carried forward and ranks ahead of ordinary shareholders’ dividends. de facto director a person who acts in the position of director but who has not been validly appointed as a director. dealer person who buys and sells securities, generally as agent for another but can also act as principal. debenture a written acknowledgment of indebtedness by a company. See also the detailed definition in s 9. debt
liabilities or moneys owing to creditors.
decision period (in relation to a voluntary administration) the period of 10 days following the appointment of a voluntary administrator during which any substantial chargees can act to enforce their charge and thereby effectively take control of the company. A substantial chargee that does not act within the decision period cannot later enforce their charge during the voluntary administration period without the leave of the court or the consent of the administrator. declaration of trust a civil remedy consisting of a court order declaring that certain property or rights belonging to one person are in fact held on trust for another person.
GLOSSARY
765
declaration a civil remedy consisting of a court order declaring that an action taken by the company or its directors is invalid and of no legal effect. deed of company arrangement creditors of a company in voluntary administration can vote in favour of the company executing a “deed of company arrangement”. It is the contract that governs the dealings of the company once the voluntary administration comes to an end and will often include provisions under which the creditors agree to accept less than the full amount of what is owing in satisfaction of all claims and/or a delay in the repayment of those debts. defence strategies bids.
long term planning by potential targets to ward off takeover
defence tactics action by a target in response to an actual or imminent takeover bid. delist (a company) remove a company from the official stock exchange list and from quotation. deregistration the process by which a company is removed by ASIC from the register of companies and thereby ceases to exist: see Ch 5A. This can happen because the company applies to be deregistered, because the company is presumed to have ceased to carry on business (usually because it has failed for some time to file statutory returns) or at the conclusion of the winding up. It is the corporate equivalent of death. derivatives a range of products where the value of the contract is dependent on the value of the underlying physical market — eg, shares, bills, etc.
directors’ report a report for the financial year or half-year of an entity which includes information about the entity’s operations, activities of the directors, directors’ remuneration and interests in the entity’s securities held during the relevant reporting year or half-year. disclosing entity a body whose securities are traded on stock exchanges: ss 111AA – 111AX. For example, listed public companies. They are subject to continuous disclosure rules. disclosure document a formal document used in connection with an offer for securities by a company in order to comply with the requirements of Ch 6D. disgorge where a person hands over profits made by them because they are not legally entitled to keep the profits. dividend reinvestment scheme where a company permits its members to forego the payment of dividends in return for new shares issued to them, usually at a discount to market value. dividend yield that share.
the dividend declared on a share divided by the market value of
Glossary
director a person who is a member of the board of directors. Defined in s 9, and includes a person occupying or acting in the position of director (whether or not validly appointed) and a person in accordance with whose directions directors are accustomed to act.
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CORPORATIONS LAW: IN PRINCIPLE
dividends
a share of the company’s profits paid to members.
Dow Jones Index measures the average price of shares on the New York Stock Market by taking the average of the closing prices of 30 representative stocks such as chemicals and steel. downside risk the risk that prices might fall. downstream acquisition an acquisition of a relevant interest in shares in a company as a result of acquiring a relevant interest in another company (the upstream company). May be an exception to the prohibition in s 606: see s 611, item 14. due diligence refers to the process of checking a disclosure document for accuracy and completeness. There is a due diligence defence provided for liability in relation to a disclosure document: see ss 731 – 733. emoluments the amount or value of any money, consideration or benefit given to a director of an entity in connection with the management of the entity’s affairs. entity a collective noun used to refer to a variety of business structures. Subject to circumstances in which the noun is used, it includes a company, a partnership, a trust, a managed investment scheme and a natural person. equal capital reduction a capital reduction which applies to every ordinary shareholder in proportion to the number of ordinary shares which they hold. equitable compensation a civil remedy similar to common law damages but for breach of duties deriving from equitable principles. Also known as equitable damages. equity an accounting term: the amount of capital available to be distributed between the members of the company after payment of the company’s liabilities. equity capital
the capital contributions made by shareholders.
equity market share market or stock market. ex means “without”. Shares bought ex rights or ex dividends do not entitle the purchaser to the rights or dividends. exchange-traded option an option contract, ie, a right to buy (a call option) or sell (a put option) issued shares at a specified price. Could also refer to options in respect of currency, commodities or a stock index option. Such rights can be traded on the Australian Options Market (AOM), a wholly-owned subsidiary of the ASX. excluded offers offers of securities which do not require a disclosure document. executive director a person who is both a director and a full-time employee of the company. executive officer a person who takes part in the management of a company, who may or may not be a director of the company.
GLOSSARY
767
expert’s report a report prepared by an “expert”, defined in s 9 as a person whose profession or reputation gives authority to a statement made by that person. Such a report may be included in a disclosure document (see s 716 and Topic 20) and may be required for a takeover: see Topic 23. The expert must give consent. express authority authority that is stated orally or in writing — eg, in the internal rules or in a resolution of the board of directors. expropriation any procedure by which one person takes, removes or reduces property (eg, shares) or rights attaching to property (eg, voting rights attaching to shares) belonging to another person. extract of particulars the statement sent to every company by ASIC each year on the company’s review date containing the details about the company that are recorded on ASIC’s registers. extraordinary general meeting company that is not the AGM.
a general meeting of the members of the
fiduciary duties the duties of loyalty and good faith owed by a fiduciary to her or his principal — eg, by a director to her or his company. fiduciary relationship in broad terms, it is a relationship where a person (eg, a director) is appointed to or assumes to act for the benefit of another person (eg, a company) in circumstances where the appointment gives the appointed person powers which could be exercised to the detriment of the other person (eg, the members). fiduciary a person (eg, a director) in a fiduciary relationship with another person (eg, a company). fifty leaders index ASX share price index based on the 50 leading stocks.
financial product refers to a range of investment and other products subject to regulation under Ch 7, inserted by the Financial Services Reform Act 2001 (Cth). See Topic 22. financial service refers to a range of services offered in relation to financial products such as advising and dealing in such products. See Topic 22. financial service licensee a person who provides financial services must hold an AFSL (Australian financial service licence). financial service provider a person who provides financial services and is subject to regulation under Ch 7. See Topic 22. financial report a report for the financial year or half-year of an entity which includes the financial statements, notes to the statements and a director’s declaration about the statements and notes, for the relevant reporting year or half-year.
Glossary
final dividends a dividend paid to shareholders at the end of a company’s financial year from the profits disclosed by the company’s financial reports.
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CORPORATIONS LAW: IN PRINCIPLE
financial year the first financial year of a company can last for a period of up to 18 months from the day on which the entity is registered. Thereafter the financial years are 12 months long, starting from the end of the previous financial year. fire sale
a sale of assets conducted under distressed circumstances (eg, liquidation).
firm the collective name used for the members of a partnership (eg, Partnership Act 1958 (Vic), s 8). fixed charge a charge over a specifically identified asset or group of assets that operates to prohibit any sale or other dealing with that asset or those assets without the express consent of the chargee. flexible trust an investment via a trust where the investments are not stated but are left to the discretion of the managers (opposite of fixed trust). float refers to a new company which offers its shares for sale to the public, sometimes referred to as an IPO (initial public offering). floating charge a charge created by a company over moveable or intangible assets (eg, trading stock and debtors) that only becomes a fixed charge on default. foreign company a company incorporated outside Australia. Foreign Investment Review Board (FIRB) government body which must approve any proposed acquisition by foreigners if the foreigners would obtain control of an Australian company. formal takeover an offer to acquire shares which complies with the requirements of Pt 6.3 Div 1: s 611. Such an acquisition is an exception to the prohibition in s 606. franked dividends tax.
dividends on which the company has already paid income
fraud on the minority a situation where the majority members of a company abuse their voting power at the general meeting in order to gain a benefit for themselves at the expense of the minority members. FSG Financial Services Guide. Information that must be given to a retail client by a financial service provider who provides a financial service. FSR Act Financial Services Reform Act 2001. The Commonwealth statute putting the new financial services regime into place. This legislation commenced on 11 March 2002. full bid
a takeover bid for all shares in a target (cf partial bid).
futures contract an agreement to buy and sell a specified quantity of something at a specified future delivery date. The main trading in futures occurs in commodities like wool, shares in particular listed companies, the all ordinaries share price index of the ASX, bank bills and Commonwealth Treasury bonds. futures market the market on which futures contracts are traded. gearing
the ratio of a company’s debt to equity.
GLOSSARY
general advice
769
advice other than personal advice.
general law duties duties arising under the general law. general law obligations obligations arising under the general law. general law remedies the range of civil remedies available under the general law to persons affected by wrongs done to them by others. See civil remedies. general law and equity.
judge-made law or case law. Includes principles from common law
general meeting meeting of members of the company entitled to attend and vote thereat. The members in general meeting and the board of directors are the two principal decision-making organs of the company. gilt-edged securities government securities and blue chip stock which are regarded as risk-free investments. golden handshake a payment by a company to recognise long and faithful services rendered by employees or a payment made by the company to compensate employees for early and perhaps forced retirement. golden parachute shares or cash or options to purchase shares for top executives; often associated with takeovers where top executives may be made redundant by the raider. greenmail where a person acquires a significant shareholding in a potential takeover target, hoping to be bought out at higher than market price. half-year
the first six months of a company’s financial year.
holding company company which controls a subsidiary company; the parent company of a group of companies. See further the definitions of “control”, “subsidiaries” and “related bodies corporate” in s 9, ss 46 – 50 and s 50AA. holdings statement see share certificate. implied authority authority that arises by association with a particular position within the company — eg, the position of managing director carries with it certain implied or usual powers. incorporated association a not-for-profit association incorporated by registration under a State or Territory Associations Incorporation Act. incorporation the process of becoming a body corporate. For companies incorporated under the Corporations Act, “incorporation” occurs upon registration by ASIC: s 119. independent directors in broad terms, are non-executive directors who do not have any past or present commercial relationship with the company of a material
Glossary
hedging using positions in one market to limit exposure to price movements by taking offsetting positions in another. This minimises risk and is a form of insurance.
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CORPORATIONS LAW: IN PRINCIPLE
nature — eg, as a major supplier or customer of the company, employee of the company, director or employee of a holding or subsidiary company etc. indoor management rule a general law rule that assists an outsider who is seeking to rely on the validity of an act of a company — eg, enforce a contract that has been executed purportedly on the company’s behalf. The rule enables a person, who deals in good faith with a company, to assume that acts within a company’s constitution and powers have been properly and duly performed, without further inquiry as to whether acts of internal management have been regular. It is also known as the “rule in Turquand’s case”. initial share capital the share capital of a company at the time of its registration. injunction a civil remedy consisting of a court order either preventing a person from taking an action, requiring them to cease taking an action, or requiring a person to take a particular action. inside information information which is not generally available to the public and if it were, a reasonable person would expect it to have a material effect on the price or value of financial products: see s 1042A. insider a person who possesses inside information. insider trading making use of inside information by trading — ie, buying or selling financial products or by procuring another person to trade. May also include passing on the information to another — ie, communicating. See s 1043A and Topic 22. insolvency practitioner a qualified accountant who is usually also a member of the Insolvency Practitioners Association of Australia and practices predominantly in the insolvency area. Most senior insolvency practitioners are registered liquidators under the Corporations Act and some are also nominated Official Liquidators of the various State and Territory Supreme Courts. insolvent a company is insolvent if it is unable to pay all its debts as and when they fall due: s 95A. The test of insolvency usually looks at the financial resources (including the capacity to borrow or sell assets) available to pay existing and future debts (ie, the “cash flow” test), rather than an excess of assets over liabilities (ie, the “balance sheet” test). insolvent trading where the directors or the holding company (or both) allow the company to continue to trade and incur debts after the point at which they know or suspect that the company is insolvent: ss 588G and 588V. insolvent transaction a transaction entered into or given effect to by a company at a time when the company is already insolvent or where, because of the transaction, the company becomes insolvent: s 588FC. institutional investors these consist of large life assurance companies and superannuation and mutual funds, eg AMP. interim dividends dividend paid in the interim period between the annual presentation to the general meeting of the company’s financial reports.
GLOSSARY
771
internal rules the rules governing the internal affairs of the company which are comprised of a constitution and/or replaceable rules and any special resolutions that modify the constitution. issue price the amount determined by a company as payable for its shares at the time of their issue by the company. issued share capital that part of a company’s share capital which has been issued. large proprietary company see small proprietary company and note ASIC’s discretion (under s 342(2) – (3)) to relieve a proprietary company from audit requirements. legal standing the standing to take a legal action against another person in relation to wrongs committed by that person. letter of comfort a letter issued by a company on behalf of its subsidiary in support of a borrowing — usually not legally binding. leveraged where an amount of money smaller than the face value of the instrument is used to control the instrument, — eg, a futures contract is leveraged because the deposit paid to secure the contract is significantly less than the value of the subject matter of the futures contract. limited partnership a partnership consisting of both general and limited partners. A limited partnership must be registered (eg, Partnership Act 1958 (Vic), Pt 3). liquidation liquidator
winding up of a company. See also winding up. person charged with responsibility of winding up a company.
listed public companies a public company which is listed on the stock exchange. listed registered scheme a registered scheme listed on the stock exchange. Listing Rules rules issued by the ASX which must be followed if listing is to be obtained and maintained. loan capital capital.
debt capital — ie, borrowings, of a company as opposed to its share
locked in a description of shareholders who may have difficulty in selling their shares (eg, after a takeover) or in the case of a proprietary company, where there are restrictions on the transfer of shares. majority members members of a company who hold the majority of votes to be cast at a general meeting of the company. managed investment scheme an investment scheme where investors make contributions which are pooled together and invested in a common enterprise or
Glossary
listed company company with securities traded on the ASX. The securities of a listed company are referred to as quoted securities.
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CORPORATIONS LAW: IN PRINCIPLE
investment: s 9 — eg, a time-sharing arrangement or unit trust. The participants are not involved in the day-to-day running of the scheme. management banning order order made by a court or, in special circumstances, ASIC, banning a person from being involved in the management of a company for a period of time up to five years: ss 206D, 206E and 206F. managing controller a controller of a company who is appointed with power to manage the company (including a receiver and manager). managing director director of company appointed to deal with daily management of the company. market manipulation practices which involve interference with the operation of the market for financial products, eg, churning or market rigging. market value the value that the market places on the company and in turn, its securities. marketable parcel exchange.
smallest parcel of shares that can be traded on a stock
maximum acceptance condition a condition in a takeover bid that the bid will lapse if acceptances exceed a certain percentage. Such conditions are not permitted: s 626. member a person or company that appears on the company’s register of members. Generally, the words member and shareholder are used interchangeably but, because companies limited by guarantee do not have share capital, the terms are not entirely synonymous. members’ voluntary winding up a winding up of a solvent company initiated by a resolution of members. memorandum of association one of the two constitutional documents of a company registered prior to 1 July 1998 (the other being the articles of association). Abolished by the Company Law Review Act 1998 (Cth) but existing memoranda are preserved under s 1415. Now called a constitution. merchant bank a financial institution which provides specialist financial services such as advising companies on takeovers, underwriting, arranging long term finance, advising on foreign exchange dealings. minimum acceptance condition a condition in a takeover bid that the bid will lapse unless acceptances exceed a specified number or percentage. Such conditions are permitted in a formal takeover bid. minority members members of a company who hold the minority of votes to be cast at a general meeting of the company. moratorium the term used to describe the “freeze” on claims by creditors of a company during the period of a voluntary administration. Note that the moratorium ceases immediately following the second creditors meeting. Any constraints on creditors thereafter must be provided for in any deed of company arrangement that the creditors are prepared to accept.
GLOSSARY
773
mortgage debenture is a debenture secured by a first registered mortgage over land owned by the company. mortgagee (in possession) where the holder of a mortgage or other security enforces that security by itself taking physical possession of the secured property or assets. mum’s and dad’s shares in companies that are regarded as long-term reliable investments which give a reasonable dividend. mutual fund
a unit trust.
National Guarantee Fund established under the Corporations Act and operated by the SEGC (Securities and Exchange Guarantee Corporation) an independent subsidiary of the ASX. Contributions are made by brokers and claims against the fund may be made by clients who suffer loss as a result of wrongdoing by a broker. NCSC National Companies and Securities Commission. A (former) national body established under the Co-operative Scheme with responsibility for formulating policy and regulating the securities industry and the futures industry. The day-to-day administration of the Scheme was delegated by the NCSC to State Corporate Affairs Offices (CACs). negative pledge an undertaking by a borrower that it will not grant charges in favour of other creditors without the prior written consent of the lender. no liability company a company formed on the principle that the members are not bound to pay any calls made on the shares and if a call is not paid, the shares will be forfeited: ss 254Q – 254R. nominal capital
see authorised capital.
nominee director a person appointed as director on the understanding that he or she will represent the interests of a particular member(s) at board meetings. The represented member may be an individual, another company (ie, a parent or subsidiary company) or a corporate group. non-executive director a part-time director of a company who is not an employee of the company. Sometimes also loosely referred to as “independent” directors, but see independent directors. not-for-profit/non-profit association (the terms are interchangeable) an association (whether incorporated or not) of people formed to pursue common objects or purposes that are not trading purposes and do not involve making pecuniary profits or gains to be passed on to members. odd lot
a parcel of shares which is less than a marketable parcel.
Offer Information Statement a type of disclosure document to assist small to medium business enterprises raise funds. The Statement can be used where the amount to be raised is $5 million or less.
Glossary
nominee someone who acts on behalf of another in buying or selling securities in order to protect the identity of the other. Where shareholders live overseas, banks sometimes act as their nominees.
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CORPORATIONS LAW: IN PRINCIPLE
officer a director, secretary, receiver and manager, administrator, liquidator, trustee of a company or a shadow officer, namely, any person who makes or participates in making decisions that affect the company’s business, has the capacity to affect its financial standing or, in accordance with whose instructions or wishes, the directors are accustomed to act: s 9. on-market takeover announcement.
a term sometimes used to refer to a takeover
ordinary resolution resolution passed by at least 50% of votes cast by members entitled to vote on the resolution at a general meeting. ordinary shares called “ordinary” because no special rights attach to them. See, by comparison, preference shares. organic theory (in relation to companies), is a theory for the attribution of liability, particularly with regard to liability for crimes and tortious acts. The theory provides that where the people who act for the company and who commit the act in question can be regarded as the “directing mind and will” of the company, their acts will be treated as acts of the company itself (cf vicarious liability). ostensible authority see apparent authority. paid up share capital that portion of a company’s issued share capital which has been paid up by the shareholders. par value a fixed value assigned to shares at the time of registration (eg, 50 cents), bearing no true relation over time to the real value of the shares. The use of par value as a method of share valuation was abolished by the Company Law Review Act 1998 (Cth). Shares valued previously by reference to par value are now valued by reference to their issue price. pari passu
a Latin expression meaning of equal ranking.
partial bid a takeover bid for a specified proportion of all shareholders’ shares in the target. Popular in 1980s but not very common now. participating preference shares entitle shareholders to a stated dividend each year and then participation in any profits after ordinary shareholders have had their dividends. partnership a relationship between person carrying on business in common with a view to profit: eg, Partnership Act 1958 (Vic), s 5(1) (similar definitions in other State and Territory Partnership Acts). PDS Product Disclosure Statement. Disclosure document required for issue or sale of financial products other than securities. See Topic 22. penalty unit the method of calculating the penalty applicable to offences under the Corporations Act. A penalty unit is defined in s 4AA of the Crimes Act 1914 (Cth) and as at December 2004, one penalty unit equates to $110. penny dreadfuls speculative shares which are lowly priced, often in the areas of mining or oil. The term owes its origin to cheap, sensationalist novels.
GLOSSARY
per capita
775
per head.
personal action a legal action taken by a member alleging that the member’s personal rights have been injured by the wrongful actions of the company and/or its directors. A member has legal standing to bring a personal action. personal advice advice given to a person, which takes into account the person’s circumstances. See Topic 22. phoenix company a colloquial term used to describe a company that has failed, leaving behind unpaid creditors but, soon after, the same business “rises from the ashes” with the same controllers etc, operating under the guise of a new company which then disclaims the debts of the old company. poison pill tactic certain pre-existing promises which will come into effect should a hostile bidder gain a certain level of voting power within a target company. poll when votes are counted on the basis of a vote per share, rather than on a show of hands: see ss 250E and 250H. These are replaceable rules so there may be other relevant provisions in a company’s constitution. pre-emptive right a provision or rule which requires a company to act in a particular manner when exercising company powers. For example, s 254D requires directors issuing shares of a particular class to first offer them proportionately to existing members of the class. preference shares a class of shares where the holders have priority over ordinary shareholders with respect to dividend payments and often to the assets in a winding up. pre-registration contract a contract entered into purportedly on behalf of a yet-to-be-registered company. See ss 131 – 133.
profile statement a type of disclosure document. The statement may only be used if ASIC permits. The statement will allow a comparison of similar investment products but a prospectus must also be prepared and made available to investors if they request it. profit and loss statement a statement of the revenues earned and expenses incurred by a company during a particular period (eg, the company’s financial year). promoter person who procures or, in some situations, a person who will profit from, the formation or floatation of a company. proprietary vs public an important distinction under the Corporations Act which has a number of consequences with respect to such matters as the marketing of securities, reporting and accounting obligations, and responsibilities of directors. See the definitions of “proprietary company” and “public company” in s 9 and, for proprietary companies, see also s 45A(1). See also small proprietary company and large proprietary company.
Glossary
primary market market where new finance (capital) is raised by corporations and governments by issuing securities.
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CORPORATIONS LAW: IN PRINCIPLE
prospectus a type of disclosure document issued in connection with an offer of securities by a public company. Sometimes referred to as a standard full disclosure prospectus: see disclosure document. provisional liquidation sometimes where there is a real and genuine concern that the assets of a company will be dissipated or otherwise prejudiced in the period between the commencement of an application for a winding up order and the hearing and determination of the application (which can be several weeks) a court will appoint a liquidator “provisionally” to preserve the company and its assets until that hearing and determination. During that period, the company is described as being in “provisional liquidation” and the liquidator as the “provisional liquidator”. public officer (in relation to incorporated associations) person appointed to serve as a point of contact between an incorporated association, the government and the community at large. quorum
minimum number of people necessary to constitute a valid meeting.
quoted securities securities traded on the ASX. See listed company. raid an attempt by one company to acquire shares in another company very quickly in order to gain control or become a dominant shareholder. raider (corporate raider) a company which raids in order to gain control or become a dominant shareholder. rally an upward movement in share prices often after prices have gone down. ratification (in relation to directors’ duties) a resolution passed by a general meeting of the company ratifying the actions or decisions made by a director which would otherwise amount to a breach of the director’s duties to the company. If the ratification is effective, it relieves the director of any civil liability for her or his wrongful actions. receiver a person appointed by a chargee or mortgagee (ie, a secured creditor) or by the court to get in and “receive” all or certain parts of the assets and business of the company. A receiver does not have power to manage the assets or carry on the business. The receiver may also be empowered to sell the assets or in some cases (more common with court appointments) will be required simply to hold and preserve the assets pending the hearing and determination of the relevant proceeding in the court. receiver and manager a receiver who also has power to manage the assets or carry on the business of the company. redeemable preference shares preference shares of a company which can be redeemed by the company. reduction of capital a transaction by which a company returns capital to its shareholders. The transaction can take many forms including the cancellation of shares, the reduction of the issue price of shares, swapping shares with debt instruments and/or reducing shareholders’ liability to pay calls on partly paid shares. registered charge
a charge registered with ASIC pursuant to s 262(1).
GLOSSARY
777
registered office every company is required to notify ASIC of an address in Australia where communications and notices for the company can be sent: ss 142 and 60ICT. registered scheme a managed investment scheme registered by ASIC. registrable Australian body bodies such as building societies, incorporated associations, co-operatives and credit unions that are required to register under Pt 5B.2 Div 1. Note: “ARBN” means Australian Registered Body Number. related party transaction a transaction by a public company or a “child entity” under which a financial benefit is given to a “related party” defined in Ch 2E. Related party transactions must be disclosed and approved by the general meeting of the company before they are legally effective. relation-back day the last day of the period set for the purposes of working out whether a particular transaction is a voidable transaction. It will usually be the date that the application for a court winding up was commenced or, if the winding up has followed immediately after a voluntary administration or deed of company arrangement, it will be the day that the administrator was appointed: ss 9 and 513A – 513C. relevant interest a person will have a relevant interest in a share if they have the right to vote or to dispose of the share: see s 608. replaceable rules sections of the Corporations Act which deal with internal matters and that operate unless displaced by a constitution. The relevant sections are listed in s 141. replacement disclosure document a new disclosure document issued where there has been a significant change to the information in the original disclosure document: s 719.
responsible entity the public company with overall responsibility for operating a managed investment scheme. Subject to statutory duties. retail client a client of a financial service provider who is not a wholesale client. The distinction is significant because greater obligations are imposed on those who provide financial services to retail clients. reverse takeover where a bidder makes an offer to acquire shares in a large company for a share consideration which will result in the shareholders in the large company becoming the majority holders in the bidder. May be used as a means of back-door listing. review date the date (usually the anniversary of the company’s registration) on which ASIC sends the company an extract of particulars. rigging transactions entered into directly or indirectly which affect the price of securities for the purpose of encouraging others to move into the market. Riggers then sell for a profit.
Glossary
representative action a legal action by a member or group of members on behalf of all members to enforce a personal right belonging to all members.
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CORPORATIONS LAW: IN PRINCIPLE
rights issue an offer by the company to existing shareholders on a pro rata basis (ie, according to the number of shares already held) to purchase shares at a named price on a named date. If renounceable, shareholders are not obliged to take up the issue but rights are able to be sold or given to another. roll over the renewal or rearrangement of a loan on its expiry date. Now also refers to lump sums received on retirement which are placed into government-approved investments and which later provide income for the recipient. Romalpa clause a provision in a contract for the supply of goods which states that title in the goods will not transfer until after the goods have been paid for (named after the case which introduced the concept). scrip
share certificate.
scrip dividend issued instead of a cash dividend. A company will issue bonus shares to existing shareholders on a pro rata basis. SEATS stands for Stock Exchange Automated Screen Trading System which is an electronic system that enables trading in securities listed on the ASX to occur from a broker’s office via a computer link. When a buy bid and a sell bid match, a trade will be completed and the details of the sale automatically recorded, based on each broker’s identification number. secondary market once securities (shares, debentures and bonds) have already been issued they are part of the secondary market. securities generally refers to shares and debentures and legal and equitable interests in shares and debtentures: s 92. The meaning may vary depending on which Chapter of the Corporations Act applies: see, eg, s 761A re Ch 7. securities hawking making unsolicited offers of securities, prohibited by s 736. selective reduction equal reduction.
a capital reduction which does not satisfy the definition of an
senior manager a person, other than a director or secretary, who makes decisions affecting the business of the company or has the capacity to affect the company’s financial standing. shadow director a person not formally appointed as a director but in accordance with whose instructions or directions, the directors are accustomed to act: s 9. shadow officer a person not formally appointed as an officer but who makes decisions affecting the business of the company, has the capacity to affect the company’s financial standing or in accordance with whose instructions or directions, the directors are accustomed to act: s 9. share buy-back a transaction by which a company buys back its own shares from existing shareholders. There are many different types of share buy-back, including equal access, employee share scheme, minimum holding, on-market and selective buy-backs. share capital the sum of funds contributed to the company by its members in return for the issue to them of shares in the company.
GLOSSARY
779
share certificate certificate issued to the person or company whose name appears on the company’s register of members. Note that certificates are no longer issued to shareholders of companies listed on the ASX. Instead, a shareholder of a listed company will receive a holdings statement. See also CHESS. share options options to buy shares in a company at a particular price which lapse unless exercised by a particular date. share premium the excess (if any) between the par value of a share and the issue price of a share. Share premiums no longer exist because the concept of par value has been abolished. See par value. share split the division of existing shares to give shares a smaller face value. share swap primarily a defensive mechanism where shares are exchanged by companies to thwart possible takeovers. shareholder a person who holds shares in the company. See also member. shares the interest of the shareholder in the company. See also cumulative preference shares, ordinary shares, preference shares, participating preference shares and redeemable preference shares. shark repellent a provision in the internal rules providing for a bidder’s voting power to be depreciated. Cannot be used in respect of listed shares because the Listing Rules in respect of ordinary shares in listed companies do not allow differential voting rights for ordinary shares. short-form prospectus a disclosure document which is shorter than the standard full disclosure prospectus because it refers to material lodged with ASIC instead of setting it out in the prospectus itself.
short-term money market a market where large amounts of money are lent and borrowed for usually less than six to 12 months. Simplification Program the Corporations Law Simplification Program was established in 1993 under the auspices of the Commonwealth Attorney-General. Its main objective was to simplify the then Corporations Law to make it capable of being more easily understood by users. In fact, the reforms implemented as a result of the Simplification Program went to several fundamental underlying concepts. Before the Simplification Task Force was disbanded in March 1997 (replaced by CLERP), its work had resulted in the enactment of the First Corporate Law Simplification Act 1995 (Cth). The Second Corporate Law Simplification Bill formed the basis of the Company Law Review Act 1998 (Cth) and the Third Simplification Proposals covered matters implemented by the CLERP Act 1999 (Cth). sleeping partner a partner who contributes money or property to a partnership who does not take any active part in managing its business. Small Business Guide a plain English guide that summarises the main rules in the Corporations Act that apply to proprietary companies limited by shares: Pt 1.5.
Glossary
short selling selling securities that a person does not yet own. Short sellers hope that the price will fall and that they will be able to buy in at the lower price prior to settlement. Short selling is only permitted in certain circumstances.
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CORPORATIONS LAW: IN PRINCIPLE
small proprietary company proprietary companies are classified under the Corporations Act as either “small” or “large” by applying certain objective tests of size and value to the business: s 45A(2) – (3). The distinction is important because more stringent reporting and auditing obligations are imposed on large proprietary companies. small-scale offerees exception a disclosure document is not required where offers of securities are made to no more than 20 persons within 12 months. SoA
Statement of Advice. A written record of advice given to a retail client.
sophisticated offerees exception one of the exclusions from the requirement to prepare a disclosure document. Investors may be considered sophisticated by virtue of the size of the investment (at least $500,000) or their wealth (net assets of at least $2.5 million or gross annual income of $250,000) or their general investment experience. special resolution a resolution passed by at least 75% of votes cast by members of a company (or an incorporated association) entitled to vote on the resolution at a general meeting, of which notice has been given in accordance with s 249L(c): s 9 (and, eg, Associations Incorporation Act 1981 (Vic), s 29). speculative issues mineral exploration.
where there is an element of greater risk than usual such as in
stag a person who subscribes for a new issue and then sells immediately at higher prices in order to make a quick profit. standard full disclosure prospectus issuing securities: see prospectus.
the basic disclosure document required for
statement of cash flows a statement summarising a company’s inflows and outflows of cash during a particular period (eg, the company’s financial year). statutory demand the name given to the form of demand on a company for the repayment of a debt that, if not met, can give rise to a presumption that the company is insolvent: s 459E. statutory derivative action a derivative action permitted by the Corporations Act Pt 2F.1A. statutory duties
duties imposed by the Corporations Act.
statutory obligations obligations imposed by the Corporations Act. statutory remedies the range of civil remedies provided by the Corporations Act to companies and their members against persons who harm them by contravening the Corporations Act. stock exchange the market place in which shares, government bonds and other fixed interest securities are traded. stockbroker a person whose business consists of buying and selling securities for clients for a fee.
GLOSSARY
781
stop loss order where a client orders her or his stockbroker to sell stock if it falls to a set level. This enables the client to limit losses. stop order an order which can be made by ASIC to stop the issue of securities where ASIC believes that the prospectus does not comply with the Corporations Act requirements. strike price exercised.
in the futures industry, the price a trader will pay when the option is
substantial chargee a chargee that holds one or more charges or other securities so that it effectively has a charge over the whole or substantially the whole of a company’s assets. “Substantially the whole” is considered to mean that the charge does not omit any asset that is material to the ongoing viability of the business of the company. A substantial chargee has power to appoint a voluntary administrator or to circumvent the voluntary administration process by appointing a receiver and manager during the decision period. Note that it does not matter whether there are one or more other charges in priority to the charge in question, so long as it encompasses the whole or substantially the whole of the assets of the company. substantial shareholder any person or company that holds 5% or more of any class of voting shares in a company listed on the ASX: s 671B. supplementary disclosure document information provided during the life of a disclosure document to update information or cure a defect. It must be lodged with ASIC and must accompany any subsequent issue of the disclosure document: s 719. Sydney Futures Exchange (SFE) conducts a market for trading in futures.
takeover defences refers to long-term measures (strategies) or short-term measures (tactics) adopted by companies in order to protect themselves from the threat of takeover or to attempt to thwart a takeover bid — eg, by revision of dividend policy or entering into service agreements with senior officers. takeover the acquisition of sufficient shares to gain control of a company. taker target
one who buys an option contract. the company which is the subject of a takeover bid.
target statement a statement to be prepared by a target company when it receives a takeover bid. Must contain specified information: s 638. tipping communicating information concerning listed securities to another: see insider trading. tombstone advertisement in connection with advertising an offer of securities, an advertisement that states that a disclosure document will be available and that applicants will need to complete an application form. total control where a person holds all the shares in a company.
Glossary
takeover announcement an offer to acquire shares on the ASX which complies with the requirements of Pt 6.4: s 611. Such an acquisition is an exception to the prohibition in s 606.
782
CORPORATIONS LAW: IN PRINCIPLE
transaction-specific prospectus a disclosure document which is less onerous to prepare because it only needs to contain information about the particular offer being made. May be used by an entity subject to continuous disclosure. ultra vires beyond the powers of the company. Sometimes used in a broader sense to describe unauthorised actions of directors or an abuse of power by the directors or members. unacceptable circumstances an acquisition or conduct which occurs in circumstances specified in s 657A that enables the Takeovers Panel to make any of the orders listed in s 657D. uncommercial transaction a transaction that a reasonable person in the company’s circumstances would not have entered into (eg, a sale of property at an undervalue): s 588FB. unfair loan a loan to a company involving an extortionate rate of interest or levels of charges and fees that are extortionate. unfair preference a transaction between a company and a creditor of the company where the creditor receives from the company in respect of an unsecured debt more than the creditor would have received if, at the time of the transaction, the company were wound up and the creditor were required to prove for the debt in the liquidation — ie, the interests of that creditor have been “preferred” over those of other unsecured creditors. unincorporated association a group of people who have come together to pursue a common object or purpose. A partnership is an unincorporated association but the term is more usually applied to a not-for-profit association. unit trusts trusts which result from numbers of small investors pooling money. A trustee is appointed who acts on their behalf. In a public unit trust a management company administers the trust and the investors are known as unit holders. Trusts may be cash management trusts (where the money is channelled into the highyielding money market), equity trusts, mortgage trusts or property trusts. unlimited liability company a company formed on the principle of having no limit to the liability of its members to contribute to the property of the company if it is wound up: s 9. unlisted shares shares not listed on the stock exchange. unsecured note is a debenture which is unsecured by any charge over company property. vicarious liability (in relation to companies) is a theory for the attribution of liability, particularly with regard to liability for crimes and tortious acts. The theory provides that the company is liable for the acts of its employees or agents (cf organic theory). voidable transaction a transaction is “voidable” by a liquidator if it is an unfair loan made at any time before the day on which the winding up began, or if it is an unfair preference or an uncommercial transaction entered into at a time when the
GLOSSARY
783
company was insolvent or because of which the company became insolvent (ie, also an insolvent transaction) entered into during certain specified periods ending in the relation-back day: s 588FE. voidable a contract which can be brought to end or rescinded by one of the contracting parties because it was entered into in circumstances which are in contravention of general law or statutory obligations. voluntary administration is the relatively short period (usually about 28 days) between the date on which a voluntary administrator is appointed to a company by the directors, by a substantial chargee or by the liquidator or provisional liquidator, and the second meeting of creditors of the company. At that second meeting of creditors, the creditors vote on whether the administration should end and the company revert to the control of the directors, execute a deed of company arrangement or the company by wound up. During the period, there is a moratorium on claims by creditors and the administrator must investigate the affairs of the company and provide a report and recommendation to creditors for the purposes of their second meeting. voluntary winding up the term used to describe all forms of winding up that are not initiated by an order of the court. voting control where a person holds a majority of the shares in a company which carry the right to vote in general meetings of the company. voting power the total number of votes attached to all voting shares in a company that a person (and associates) has a relevant interest in. Wall Street
the New York Stock Exchange.
warehousing in a takeover situation the raider may ask another company to hold (store) shares on its behalf until required.
wholesale client a person will be a wholesale client in relation to financial products other than insurance if the price or value of the products is greater than $500,000, or if the client meets a wealth test or is a professional investor (s 9) or conducts a business that is not a “small business”. See retail client. winding up the process by which the assets of a company are collected and sold and its business and affairs concluded, with the proceeds being applied first among the creditors in accordance with the strict priorities in s 556 and any balance left over paid to the shareholders. The company is then deregistered and ceases to exist. Winding up can be either compulsory (ie, court ordered) or voluntary. In each case, the company may or may not be insolvent. window dressing presenting the balance sheet in the most favourable light to create a good impression.
Glossary
white knight one who comes to the rescue in a takeover by saving the target company from the unwanted raider.
Table of cases AAPT Ltd v Cable & Wireless Optus Ltd (1999) 17 ACLC 974 ............... 7.316, 7.320 AISC v Fortescue Metals Group Ltd (2011) 190 FCR 364 ............................... 22.160 ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd (recs & mgrs apptd) [1991] 2 Qd R 360 ........................................................................... 7.30 ANZ Executors & Trustee Co Ltd v Qintex Ltd (1990) 8 ACLC 791 ............... 12.120, 12.130 ASC v AS Nominees (1995) 62 FCR 504 .......................................................... 12.50 ASC v Donovan (1998) 28 ACSR 583 .................................. 11.210, 11.270, 11.410 ASC v Fairlie (1993) 11 ACLC 669 ................................................................. 15.360 ASC v Gallagher (1993) 11 WAR 105 ............................................................. 11.400 ASC v MacLeod (2000) 22 WAR 255 ............................................................. 22.160 ASC v Nomura International PLC (1998) 160 ALR 246 .................................. 22.160 ASIC v Adler (2002) 168 FLR 253 ..... 6.290, 11.90, 11.210, 11.215, 11.220, 11.250, 11.270, 11.320, 11.350, 11.400, 11.440, 11.460, 11.500, 12.255, 13.120, 13.130, 13.250, 18.450, 18.460, 18.500 ASIC v Australian Investors Forum (No 2) (2005) 53 ACSR 305 ...................... 11.270 ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35 ............................................................................................... 22.180, 22.185 ASIC v Cycclone Magnetic Engines Inc [2010] QCA 71 ................................. 22.160 ASIC v Mariner (2015) 327 ALR 95 ................................................................ 23.250 ASIC v NRMA (2002) 43 ACSR 451 ............................................................... 10.130 ASIC v Plymin (2003) 175 FLR 124 .............. 6.290, 11.210, 11.540, 11.570, 11.580 ASIC v Rich (2003) 174 FLR 128 ................ 11.270, 11.320, 11.340, 11.350, 11.420 ASIC v Rich (2004) 50 ACSR 500 ................................................................... 11.420 ASIC v Somerville (2009) 77 NSWLR 110 ...................................................... 21.240 ASIC v Soust (2010) 77 ACSR 98 ................................................................... 22.160 ASIC v Vines (2003) 182 FLR 405 ..................................................... 11.250, 11.430 ASIC v Vines (2003) 48 ACSR 282 ..................................................... 11.270, 11.340 ASIC v Vines (2006) 58 ACSR 298 ........................................ 11.314, 11.320, 11.430 ASIC v Vines (2007) 62 ACSR 1 ......................................................... 11.330, 11.350 ASIC v Vines (2007) 63 ACSR 505 ................................................................. 11.430 ASIC v Vizard (2005) 145 FCR 57 ....................................................... 6.290, 13.130 AWA Ltd v Daniels (1992) 10 ACLC 933 .................. 11.312, 11.380, 11.400, 11.420 AXA Asia Pacific Holdings Ltd v Direct Share Purchasing Corp Pty Ltd [2009] FCAFC 15 ......................................................................................... 9.74 Aberfoyle Ltd v Western Metals Ltd (1998) 84 FCR 113 .................... 21.100, 23.250 Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344 ............................ 14.180 Adams v ASIC (2003) 46 ACSR 68 ................................................................... 6.290 Addstead Pty Ltd (in liq) v Liddan Pty Ltd (1997) 70 SASR 21 ............... 7.30, 12.50, 12.120 Adler v ASIC (2003) 179 FLR 1 ....... 6.290, 11.210, 11.215, 13.250, 18.450, 18.500 Adler v DPP (Cth) (2004) 149 A Crim R 378 ..................................... 11.200, 11.220 Advance Bank Australia Ltd v Fleetwood Star Pty Ltd (1992) 10 ACLC 703 ....... 7.90, 7.130, 7.160 Advent Investors Pty Ltd v Goldhirsch (2001) 19 ACLC 580 .......................... 14.240 Aequitas Ltd v AEFC Leasing Pty Ltd (2001) 19 ACLC 1,006 ........... 8.20, 8.30, 8.40, 8.50 Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 ........ 11.565 Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 73 FCR 161 .............. 14.540, 14.550 Airservices Australia v Ferrier (1996) 185 CLR 483 ......................................... 24.250 Al-Shennag v Statewide Roads Ltd [2008] NSWCA 300 ..................................... 4.90
Cases
A
786
CORPORATIONS LAW: IN PRINCIPLE
Allco Funds Management v Trust Company (RE services) Ltd [2014] NSWSC 1251 ........................................................................................... 12.320 Allen v Atalay (1993) 12 ACLC 7 ................................................................... 14.540 Allen v Feather Products Pty Ltd (2008) 65 ACSR 642 ....................................... 4.90 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 ................................... 14.150 Allied Mining & Processing Ltd v Boldbow Pty Ltd (2002) 169 FLR 369 .......... 6.260 Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676 .......................................................................................................... 20.160 Ansons Pty Ltd v Merlex Corporation Pty Ltd (2001) 162 FLR 443 .................. 6.310 Ariadne Australia Ltd, Re [1991] 2 Qd R 377 ................................................. 10.130 Arkin v Tridon Australia Pty Ltd (2002) 43 ACSR 610 ....................................... 6.310 Armstrong world industries (Australia) Pty Ltd v Parma [2014] FCA 743 ........ 14.550 Arthur Young & Co v WA Chip & Pulp Co Pty Ltd [1989] WAR 100 ............... 15.500 Ashton Millson Investments Ltd v Colonial Ltd (2001) 162 FLR 145 ................ 9.186 Attorney-General (Cth) v Alinta Ltd [2007] HCATrans 308 ............................... 1.300 Attorney-General (Cth) v Alinta Ltd (2008) 233 CLR 542 ..................... 1.70, 23.320 Attorney-General (NSW) v Australian Fixed Trusts Ltd [1974] 1 NSWLR 110 .......................................................................................................... 21.100 Austral Coal Limited 02 (R), Re [2005] ATP 16 ............................................... 23.140 Austral Coal Limited 02 (RR), Re [2005] ATP 20 ................................ 23.140, 23.270 Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 ................ 24.110, 24.115 Australia & New Zealand Banking Group Ltd v Australian Glass & Mirrors Pty Ltd (1991) 9 ACLC 702 ........................................................................ 7.160 Australia and New Zealand Banking Ltd v Frenmast Pty Ltd [2013] NSWCA 459 ...................................................................................... 7.60, 7.120 Australian Capital Television Pty Ltd v Minister for Transport & Communications (1989) 7 ACLC 525 ................................................ 7.90, 7.240 Australian Innovation Ltd v Petrovsky (1996) 21 FCR 218 ................. 10.300, 11.320 Australian Leisure & Hospitality Group Limited 01, Re [2004] ATP 19 ............ 23.290 Australian Leisure & Hospitality Group Ltd 02, Re [2004] ATP 21 ................... 23.290 Australian Leisure & Hospitality Group Ltd 03, Re [2004] ATP 25 ................... 23.290 Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 ...... 12.200, 12.248 Australian Pipeline Ltd v Alinta Ltd (2007) 159 FCR 301 ....................... 1.70, 23.320 Australian Securities & Investments Commission v Chemeq Ltd (2006) 234 ALR 511 ................................................................................................. 6.80 Australian Securities & Investments Commission v Citrofresh International (2007) 164 FCR 333 ................................................................................. 11.145 Australian Securities & Investments Commission v Citrofresh International Ltd (No 2) (2010) 77 ACSR 69 ................................................................. 11.145 Australian Securities & Investments Commission v Hellicar [2012] HCA 17 .... 11.310, 11.316, 11.400, 22.160 Australian Securities & Investments Commission v Maxwell [2006] NSWSC 1052 ........................................................................................... 11.145 Australian Securities & Investments Commission v Narain (2008) 169 FCR 211 .......................................................................................................... 11.145 Australian Securities & Investments Commission v Vizard (2005) 145 FCR 57 .............................................................................................................. 13.90 Australian Securities & Investments Commission v Warrenmang Ltd [2007] FCA 973 ........................................................................................ 11.145 Australian Securities Commission v Deloitte Touche Tohmatsu (1996) 70 FCR 93 ..................................................................................................... 14.570 Australian Securities Commission v Gallagher (1993) 11 WA R 105 ................ 11.320 Australian Securities and Investments Commission v Axis International Management Pty Ltd (2011) 81 ACSR 631 ............................................... 21.100 Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364 ................................................... 11.355, 22.300
TABLE OF CASES
787
Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201 ..................................................... 11.355 Australian Securities and Investments Commission v Healey [2011] FCA 717 ............................................................................................. 11.344, 11.346 Australian Securities and Investments Commission v Macdonald (No 11) (2009) 230 FLR 1 ..................................................................................... 11.380 Australian Securities and Investments Commission v Mariner Corporation Ltd [2015] FCA 589 .................................................................................. 11.505 Australian Securities and Investments Commission v Wellington Capital Ltd [2012] FCA 1140 .................................................................................... 9.20 Australian and International Pilots Association v Qantas Airways Ltd [2011] FWAFB 3706 ................................................................................................. 4.90 Austrim Nylex Ltd v Kroll (2002) 170 FLR 265 ............................................... 23.260 Automatic Self Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 ........................................................................................................... 6.50 Automotive & General Industries Ltd, Re [1975] VR 454 ................................. 13.40 Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd (2004) 51 ACSR 147 ................................................................................................... 8.120 Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd (2005) 55 ACSR 1 ....................................................................................................... 8.145
B J McAdam Pty Ltd v Jax Tyres Pty Ltd (No 3) [2012] FCA 1438 ..................... 8.130 BNY Trust Company of Australia Ltd v Banksia Finance and Leasing Co Pty Ltd [2013] NSWSC 1776 .............................................................................. 7.60 Bailey v Mandala Private Hospital (1988) 6 ACLC 43 ..................................... 12.244 Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399 ............................................................................................... 5.250, 14.210 Bamford v Bamford [1970] Ch 212 .................................................... 13.290, 14.90 Bank of New Zealand v Fiberi Pty Ltd (1992) 10 ACLC 1557 ................ 7.130, 7.160 Bank of New Zealand v Fiberi Pty Ltd (1993) 12 ACLC 48 .................... 7.130, 7.160 Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 232 ............................. 7.130 Barnes v Addy (1874) LR 9 Ch App 244 ............................................. 7.120, 12.250 Barron v Potter [1914] 1 Ch 895 ....................................................................... 6.50 Bay v Illawarra Stationery Supplies (1986) 4 ACLC 429 ..................................... 8.90 Beck v Tuckey Pty Ltd (2004) 49 ACSR 555 ...................................... 10.140, 10.150 Beconwood Securities Pty Ltd v ANZ Banking Group [2008] FCA 594 ............ 16.30, 16.35 Beconwood Securities Pty Ltd v ANZ Banking Group Ltd (2008) 246 ALR 361; 66 ACSR 116 ...................................................................................... 22.60 Bell v Lever Bros [1932] AC 161 .................................................................... 13.100 Belmont Finance Corp Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 .......................................................................................................... 18.450 Bennetts v Board of Fire Commissioners of New South Wales (1967) 87 WN (Pt 1) (NSW) 307 .............................................................................. 12.140 Berlei-Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150 .............................. 12.160 BioProspect Ltd 01, Re [2008] ATP 8 ............................................................. 23.270 BioProspect Ltd 02, Re [2008] ATP 6 ............................................................. 23.270 Biodiesel Producers Ltd v Stewart [2007] FCA 722 ........................... 17.290, 17.295 Birch v Cropper (1889) 14 App Cas 525 ....................................................... 17.150 Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 ............................................................................................................ 2.160 Bisan Ltd v Cellante (2002) 173 FLR 310 .......................................... 10.120, 10.140 Bishopsgate Investment Management Ltd (in liq) v Maxwell (1993) 11 ACLC 3128 .............................................................................................. 12.248 Bodum v DKSH Australia Pty Ltd (2011) 280 ALR 639; [2011] FCAFC 98 ....... 11.505
Cases
B
788
CORPORATIONS LAW: IN PRINCIPLE
Bond v R (2000) 201 CLR 213 .......................................................................... 1.70 Bond Brewing Holdings Ltd v National Australia Bank Ltd [1991] 1 VR 386 .... 24.380 Boral Energy Resources Ltd v TU Australia (Queensland) Pty Ltd (1998) 43 NSWLR 638 .............................................................................................. 23.250 Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 .................................. 9.40 Boston Deep Sea Fishing & Ice Co v Ansell (1888) LR 39 Ch D 339 ................. 13.60 Bothranch Pty Ltd v Monitronix Ltd (1989) 7 ACLC 443 ................................... 9.80 Bradley Egg Farm Ltd v Clifford [1943] 2 All ER 378 ........................................ 2.290 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1990) 9 ACLC 324 .............................................................................. 7.90, 7.160, 7.180 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991) 10 ACLC 253 ....................................................................................... 7.180, 7.280 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 .............................................................................................. 5.220, 7.90 Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 ...................... 4.80, 4.90 Bright Pine Mills Pty Ltd, Re [1969] VR 1002 ................................................. 14.350 Brightwell v RFB Holdings Pty Ltd (in liq) (2003) 171 FLR 464 .......... 14.240, 14.260 Brunninghausen v Glavanics (1999) 46 NSWLR 538 ............................ 12.50, 14.70 Burland v Earle [1902] AC 83 .......................................................................... 19.60 Burton v Palmer [1980] 2 NSWLR 878 .......................................................... 18.450
C CSR Ltd, Re (2010) 183 FCR 358 ..................................................... 18.130, 18.135 Cambridge Credit Corp Ltd v Hutcheson (1985) 3 ACLC 263 ....................... 15.500 Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437 .............. 13.220, 13.230 Cameron v Hogan (1934) 51 CLR 358 ................................................. 2.300, 2.510 Cannon Street Pty Ltd v Karedis [2004] QSC 104 .......................................... 14.270 Canny Gabriel Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 ............................................................................... 2.90 Capricornia Credit Union Ltd v ASIC [2007] FCAFC 112 .................................. 5.200 Carabelas v Scott (2003) 177 FLR 334 .......................................................... 13.330 Carew-Reid v The Public Trustee (1996) 14 ACLC 1106 ..................................... 9.85 Carey v Korda [2012] 45 WAR 181 .................................................................. 24.80 Carlton Cricket & Football Social Club v Joseph [1970] VR 487 ............ 2.280, 2.290 Carpenter v Pioneer Park Pty Ltd (in liq) (2004) 51 ACSR 245 ....................... 14.260 Caveat Pty Ltd v Baillie (2002) 21 ACLC 42 ................................................... 14.180 Celtic Capital Pty Ltd v Cityview Corporation Ltd [2010] WASC 357 ............. 16.125 Centro and ASIC v Rich (2009) 236 FLR 1 ..................................................... 11.505 Cescastle Pty Ltd v Renak Holdings Ltd (1991) 9 ACLC 1333 ........................ 14.180 Chan v Zacharia (1984) 154 CLR 178 ............................................................. 2.160 Chapman v E-Sports Club Worldwide Ltd (2001) 19 ACLC 213 ........ 14.240, 14.270 Charlton v Baber (2003) 47 ACSR 31 .................................. 14.260, 14.270, 14.305 Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62 ............................... 12.130 Chen v Butterfield (1996) 7 NZCLC 261,086 .................................................... 4.80 Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 4 ACLC 711 ............................................................................................................ 12.50 Chew v The Queen (1992) 173 CLR 626 ....................................................... 13.120 Chew Investment Australia Pty Ltd v General Corporation of Australia Ltd (1987) 6 ACLC 87 .................................................................................... 10.300 Chinese Cultural Club Limited, Re (2004) 183 FLR 33 ................................... 10.300 Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577 .............. 11.270, 11.410 City Equitable Fire Insurance Co Ltd, Re [1925] Ch 407 ...... 11.340, 11.342, 13.320 Claremont Petroleum NL v Cummings (1992) 10 ACLC 1,685 ...................... 11.400 Cody v Live Board Holdings Ltd [2014] NSWSC 78 .......................... 17.200, 17.205 Coleman v Myers [1977] 2 NZLR 225 ............................................................. 12.50
TABLE OF CASES
789
Colorado Products Pty Ltd (in provisional liq), Re (2014) 101 ACSR 233 [2014] NSWSC 789 .................................................................................. 12.250 Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220 ......... 24.100 Commonwealth Bank v Friedrich (1991) 9 ACLC 946 ....................... 11.340, 11.550 Compaction Systems Pty Ltd, Re [1976] 2 NSWLR 477 ................................. 10.310 Consolidated Media Holdings Ltd, Re [2012] FCA 1186 ................................ 10.200 Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541 ............................................................................................................ 2.110 Cook v Deeks [1916] 1 AC 554 ..................... 11.170, 13.80, 13.83, 13.140, 14.100 Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 ................................ 10.120, 10.125 Cordiant Communications (Australia) Pty Ltd v Communications Group Holdings Pty Ltd (2005) 194 FLR 322 ....................................................... 10.300 Corporate Affairs Commission v Harvey [1980] VR 669 ................................. 24.230 Correa v Whittingham (No 3) [2012] NSWSC 526 .......................................... 7.120 CostaExchange Ltd, Re; Elkington v CostaExchange Ltd [2011] VSC 501 ...... 18.110, 18.115 Cox v Coulson [1916] 2 KB 177 ........................................................................ 2.90 Cox v Hickman (1860) 8 HL Cas 268; 11 ER 431 ............................................... 2.90 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72 ................................................................... 7.200 Creasey v Breachwood Motors Ltd (1992) 10 ACLC 3,052 ................................ 4.90 Credit Corporation Australia Pty Ltd v Atkins (1999) 17 ACLC 756 ................ 11.540 Cribb v Korn (1911) 12 CLR 205 ..................................................................... 2.100 Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1976) 1 ACLR 361 ................................................................................... 14.590 Czerwinski v Syrena Royal Pty Ltd (No 1) (2000) 18 ACLC 337 ..................... 14.180
D & H Bunny Pty Ltd v Atkins [1961] VR 31 .................................................... 2.140 DC of T v Clark (2003) 57 NSWLR 113 ................... 11.340, 11.540, 11.550, 11.580 DCT v Austin (1998) 28 ACSR 565 .................................................................. 6.150 DCT v Casualife Furniture International Pty Ltd (2004) 9 VR 549 ................... 14.640 DCT v Portinex Pty Ltd (2000) 34 ACSR 391 ................................................. 10.300 DJE Constructions Pty Ltd v Maddocks [1982] 1 NSWLR 5 ............................ 18.450 DPP (Cth) v JM [2013] HCA 30 ..................................................................... 22.160 DVT Holdings Ltd v Bigshop.com.au Ltd (2002) 42 ACSR 378 ...................... 10.130 Daniels v Anderson (1995) 37 NSWLR 438 .............. 7.290, 11.170, 11.240, 11.270, 11.312, 11.320, 11.350, 11.380, 11.410, 11.480, 15.500 Daniels v Daniels [1978] 2 WLR 73 .................................................................. 14.90 Darby, Re [1911] 1 KB 95 .................................................................................. 4.90 Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 ACLC 154 .................... 12.100 Darvall v North Sydney Brick & Tile Co Ltd (1989) 15 ACLR 230 ................... 18.430 David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 ................................................................................................... 24.160 David Jones Ltd, Re [2014] FCA 530 .............................................................. 10.200 Dempster v Mallina Holdings Ltd (1994) 13 WAR 124 ................................... 11.400 Dempster v National Companies & Securities Commission (1993) 9 WAR 215 .......................................................................................................... 18.450 Dernacourt Investments Pty Ltd, Re (1990) 20 NSWLR 588 .......................... 14.480 Deveraux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 4 ACLC 12 ............................................................................................................ 10.210 Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421 ............................. 11.170, 13.120 Ding v Sylvania Waterways Ltd (1999) 46 NSWLR 424 .................................... 5.190 Director of Public Prosecutions (Cth) v Northcote [2014] NSWCCA 26 .......... 6.290, 13.166
Cases
D
790
CORPORATIONS LAW: IN PRINCIPLE
Dodge v Ford Motor Co 204 Michigan Supreme Court Reports 459 (1919) ........................................................................................................ 19.70 Duke Group Ltd (in liq) v Pilmer (1999) 73 SASR 64 ....................................... 13.40 Dungowan Manley Pty Ltd v McLaughlin [2012] NSWCA 180 ...................... 17.280 Dungowan Manly Pty Ltd v McLaughlin [2012] NSWCA 180 ........................ 17.285 Duomatic Ltd, Re [1969] 2 Ch 365 .................................................... 5.200, 10.310 Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2014] VSCA 326 ...................................................................................... 20.170 Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 ............................................. 10.125
E E H Dey Pty Ltd (in liq) v Dey [1966] VR 464 ................................................. 18.450 East West Promotions Pty Ltd, Re (1986) 4 ACLC 84 ..................................... 14.370 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 ............... 5.90, 14.610, 14.613, 14.650 Eden Energy Ltd v Drivetrain USA Inc [2012] WASC 192 .................................. 7.120 Edmonds v Blaina Furnaces Co (1887) 36 Ch D 215 ....................................... 20.50 Edwards v A-G (NSW) (2004) 60 NSWLR 667 ............................................... 13.330 Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd (1987) 78 ALR 193 ............................................................................................................ 11.50 Elliott v ASIC (2004) 10 VR 369 ................... 6.290, 11.210, 11.540, 11.570, 11.580 Emlen Pty Ltd v St Barbara Mines Ltd (1997) 15 ACLC 1107 ......................... 14.550 Energex Ltd v Elkington (2003) 47 ACSR 442 ................................................ 23.260 Environment Protection Authority v Caltex Refining Co Pty Ltd (1993) 178 CLR 477 .............................................................................................. 7.360 Equitable Fire Insurance Co [1925] 1 Ch 407 ................................................ 11.320 Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 ........................................................................... 4.110, 7.30, 12.120, 12.130 Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 ............ 8.40, 8.50 Ernest v Nicholls (1857) 6 HL Cas 401 ............................................................ 7.250 Esanda Finance Corp Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 ............................................................................................. 15.510, 15.520 Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2004) 22 ACLC 667 .................... 24.100
F FAI Insurance Ltd v Pioneer Concrete Services Ltd (No 2) (1986) 10 ACLR 801 .......................................................................................................... 22.320 Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd (1998) 28 ACSR 58 ............................................................................................................ 22.160 Farrow Finance Co Ltd (in liq) v Farrow Properties Pty Ltd (in liq) [1999] 1 VR 584 ..................................................................................................... 12.130 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 ......... 13.80, 14.410 Fiore v Carlton Football Club Ltd (2002) 21 ACLC 145 .................................. 10.150 Firmin v Gray & Co Pty Ltd [1985] 1 Qd R 160 ............................................. 18.450 Fitzsimmons v The Queen (1997) 15 ACLC 666 .............................................. 13.40 Forkserve Pty Ltd v Jack and Aussie Forklift Repairs Pty Ltd (2001) 19 ACLC 299 ................................................................................................ 13.100 Forrest v ASIC; Fortescue Metals Group Ltd v ASIC (2012) 247 CLR 486 ....... 11.350, 11.355, 22.160, 22.290, 22.300 Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 ............................................. 14.220 Fox v Gadsden Pty Ltd (2003) 46 ACSR 713 .................................................... 6.310 Fraser v NRMA Ltd (1995) 55 FCR 452 .......................................................... 10.210 Fry v Oddy [1998] VSCA 26 ............................................................................ 2.210 Furs Ltd v Tomkies (1936) 54 CLR 583 .................................... 13.40, 13.60, 13.180
TABLE OF CASES
791
G G Jeffery (Mens Store) Pty Ltd, Re (1984) 2 ACLC 421 .................................. 14.460 GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd (2001) 191 ALR 342 ................................................................................................... 22.160 Gamble & Mann v Hoffman (1997) 15 ACLC 1314 ....................................... 11.410 Gambotto v WCP Ltd (1995) 182 CLR 432 ........ 5.200, 6.270, 9.40, 14.50, 14.110, 14.125, 14.130, 14.380, 14.560, 16.20, 17.320 Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239 ............. 13.80 General Rolling Stock Co, Re (1872) 7 Ch App 646 ....................................... 24.210 Geneva Finance Ltd v Resource and Industry Ltd (2002) 169 FLR 152 ............ 12.50, 12.120 George Raymond Pty Ltd, Re (2000) 18 ACLC 85 ......................................... 14.400 Gerard Cassegrain & Co Pty Ltd (in liquidation) v Cassegrain [2013] NSWCA 455 ............................................................................................. 12.300 Gilford Motor Co Ltd v Horne [1933] Ch 935 ................................................... 4.90 Gladstone Pacific Nickel Ltd, Re [2011] NSWSC 1235 ................................... 14.275 Glavanics v Brunninghausen (1996) 14 ACLC 345 .......................................... 12.50 Glencore International AG v Takeovers Panel (2005) 220 ALR 495 .... 23.140, 23.330 Glencore International AG v Takeovers Panel (2006) 151 FCR 77 .... 23.140, 23.270, 23.330 Gluckstein v Barnes [1900] AC 240 .......................................................... 8.40, 8.50 Gold Ribbon (Accountants) P/L v Sheers (2005) 23 ACLC 1,288 ....... 11.410, 11.500 Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335 ............ 11.410 Goldberg v Jenkins (1889) 15 VLR 36 .............................................................. 2.110 Golden Gate Petroleum Ltd, Re (2010) 77 ACSR 17 ...................................... 21.100 Goozee v Graphic World Group Holdings Pty Ltd (2002) 170 FLR 451 .......... 14.270 Grant-Taylor v Babcock & Brown Ltd (in liq) [2015] FCA 149 ........... 22.290, 22.310 Grant-Taylor v Babcock & Brown Ltd (in liq) [2016] FCAFC 60 ......... 22.290, 22.310 Gratton v Carlton Football Club Ltd (2004) 187 FLR 25 ................................ 10.150 Green v Bestobell Industries Pty Ltd [1982] WAR 1 ................................. 4.90, 13.80 Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512 ................................ 17.230 Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 ......................................... 12.90 Gregor v British-Israel-World Federation (NSW) (2002) 41 ACSR 641 ............ 14.630 Griffin, Re; ex parte Board of Trade (1890) 60 LJQB 235 ................................... 2.90 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 .............................. 6.200 Ground & Foundation Supports Pty Ltd v GFS Management Services Pty Ltd (2003) 21 ACLC 506 .......................................................................... 14.500 Grove v Flavel (1986) 43 SASR 410 .................................................... 12.50, 12.120 Guerinoni v Argyle Concrete & Quarry Supplies Pty Ltd (1999) 34 ACSR 469 .......................................................................................................... 14.650 Guinness plc v Saunders (1990) 8 ACLC 3061 ............................................... 11.170
H (restraint order), Re [1996] 2 All ER 391 ......................................................... 4.90 HNA Irish Nominee Ltd v Kinghorn [2010] FCA 311 ...................................... 17.215 HNA Irish Nominee Ltd v Kinghorn [2010] FCAFC 57 ...................... 17.210, 17.215 HPM Pty Ltd v Fear (2002) 171 FLR 12 ......................................................... 14.295 Hamerhaven Pty Ltd v Ogge [1996] 2 VR 488 ................................................. 2.190 Hanel v O’Neill (2003) 180 FLR 360 ................................................................ 2.220 Hardcastle v Advanced Mining Technologies Pty Ltd [2001] FCA 1846 ............ 6.310 Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 ....................................................... 11.490, 12.240, 12.248 Harman v Energy Research Group Australia Ltd [1986] WAR 123 ................... 22.320 Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 ......................... 11.170, 13.120 Harvey v Harvey (1970) 120 CLR 529 ............................................................. 2.180
Cases
H
792
CORPORATIONS LAW: IN PRINCIPLE
Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782 ............................................................................................... 24.390 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 ......... 15.510, 21.320 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 ............................... 7.180, 7.200 Herrman v Simon (1990) 8 ACLC 1,094 ........................................................ 10.310 Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915] 1 Ch 881 ....................................................................................................... 5.250 Hickman v Kent or Romney Marsh Sheep-breeders’ Association [1915] 1 Ch 881 ..................................................................................................... 14.210 Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 All ER 350 ............ 13.100 Hogg v Cramphorn Ltd [1967] Ch 254 ......................................................... 13.290 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 ....................................................................................................... 11.50 House of Fraser Plc v ACGE Investments Ltd [1987] AC 387 .......................... 17.230 Howard v Mechtler (1999) 17 ACLC 632 ...................................................... 10.120 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 .............. 12.240, 12.242, 12.244 Hudgell Yeates & Co v Watson [1978] QB 451 ................................................ 2.200 Humes Ltd v Unity APA Ltd (No 1) [1987] VR 467 ......................................... 10.130 Hungerfords v Walker (1989) 171 CLR 125 ....................................................... 4.80 Hurley v BGH Nominees Pty Ltd (No 2) (1984) 37 SASR 499 .......................... 12.50 Hurley v NCSC (1993) 11 ACLC 443 ............................................................. 11.400 Hydrocool Pty Ltd v Hepburn (No 4) [2011] FCA 495 ................................... 13.135
I IMF (Australia) Ltd v Sons of Gwalia Ltd (Administrator Appointed) (2005) 143 FCR 274 ................................................................................................ 9.76 IWave Pty Ltd v Break O’Day Business Enterprise Board Inc [2004] TASSC 43 .............................................................................................................. 2.330 Incat Australia Pty Ltd v ASIC (2000) 33 ACSR 462 ............................. 2.680, 15.370 Independent Quarries Pty Ltd, Re (1993) 12 ACLC 159 ................................... 9.100 Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 ..................................... 4.110 Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) (2007) 63 ACSR 1 ......................................................................... 21.320 Isak Constructions (Aust) Pty Ltd v Faress (2003) 47 ACSR 224 ........ 14.260, 14.270
J Japan Abrasive Materials Pty Ltd v Australian Fused Materials Pty Ltd (1998) 16 ACLC 1172 .............................................................................. 12.160 Jeffree v NCSC [1990] WAR 183 .................................................................... 13.120 Jenkins v Bennett [1965] WAR 42 .................................................................... 2.200 John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 .................................. 6.50 Jordan v Avram (1997) 141 FLR 275 ................................................. 10.300, 10.305
K Kandelka Management Pty Ltd v Pisces Group Ltd (2009) 76 ACSR 113 ....... 17.178 Karam v Australia & New Zealand Banking Group Ltd (2000) 18 ACLC 590 ............................................................................................. 14.240, 14.270 Keenfern Pty Ltd v Thorlock International Ltd (2002) 20 ACLC 1,322 ............ 14.180 Kelly v Kelly (1990) 64 ALJR 234 ...................................................................... 2.170 Kempsey Shire Council v Slade [2015] NSWLEC 135 ......................................... 4.90 Kendall v Hamilton (1879) 4 App Cas 504 ...................................................... 2.120 Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183 ................... 11.540, 13.330
TABLE OF CASES
793
Keyrate Pty Ltd v Hamarc Pty Ltd (2001) 38 ACSR 396 ................................. 14.270 Kingston Cotton Mill Co (No 2), Re [1896] 2 Ch 279 ................................... 15.500 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 .............. 7.30, 11.170, 12.50, 12.120, 13.180, 13.300 Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103 .............................................................................................................. 7.60 Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 .......... 12.240, 12.244, 12.246, 14.620, 16.120 Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16 .......................................................................... 7.130, 7.160 Krecichwost v The Queen [2012] NSWCCA 101 ............................................ 13.160 Kwok v The Queen (2007) 64 ACSR 307 .......................................... 11.220, 13.160
L L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225 ............................................................................................ 21.320 LK Bros Pty Ltd v Collins [2004] QSC 026 ................................... 7.75, 7.140, 7.200 Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 ............................ 11.260 Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 70 FCR 34 ................................................................................................ 24.100 Law v Law [1905] 1 Ch 140 ............................................................................ 2.160 Leaney v Olmstead Pty Ltd (1994) 51 FCR 240 ............................................... 9.100 Leeds and Hanley Theatres of Varieties Ltd (No 1), Re [1902] 2 Ch 809 ............. 8.50 Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509 .............. 22.110, 24.100 Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 ............. 7.280 Levin v Clark [1962] NSWR 686 .................................................................... 12.140 Linton v Telnet Pty Ltd (1999) 17 ACLC 619 .................................... 12.120, 12.130 Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555 ....................... 11.250 Little and Australian Securities Commission, Re (1996) 14 ACLC 1,730 ........... 3.140 Lloyd v Grace Smith & Co [1912] AC 716 ....................................................... 7.330 Loch v John Blackwood Ltd [1924] AC 783 ................................................... 14.640 Lyford v Commonwealth Bank of Australia (1995) 13 ACLC 900 ....................... 7.30 Lyford v Media Portfolio Ltd (1989) 7 ACLC 271 ............................................... 7.80 Lyford & Glenisia Investments Pty Ltd v Commonwealth Bank of Australia (1995) 13 ACLC 900 ................................................................................ 12.120 Lynch v Stiff (1943) 68 CLR 428 ...................................................................... 2.150
MDA National Ltd v Medical Defence Australia Ltd [2014] FCA 954 .............. 10.200 MG Corrosion Consultants Pty Ltd v Gilmour [2014] FCA 990 ...................... 12.250 MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31 ................ 14.280 MIA Group Ltd, Re (2004) 50 ACSR 29 ......................................................... 12.280 Macaura v Northern Assurance Co Ltd [1925] AC 619 ............................. 4.10, 4.50 Macleod v R (2003) 214 CLR 230 ..................................................................... 4.10 Macquarie Bank Ltd v ASIC (2001) 66 ALD 367 .................................. 22.50, 22.100 Maddocks v DJE Constructions Pty Ltd (1982) 148 CLR 104 ........................... 16.90 Maggacis, Re [1994] 1 Qd R 59 ...................................................................... 2.510 Majestic Resources NL v Caveat Pty Ltd [2004] WASCA 201 .......................... 14.180 Malos v Malos (2003) 44 ACSR 511 .............................................................. 14.620 Mamouney v Soliman (1992) 10 ACLC 1674 ................................................ 14.560 Mann v Abruzzi Sports Club Ltd (1994) 12 ACLC 137 ..................................... 24.50 Manpac Industries Pty Ltd v Ceccatini (2002) 20 ACLC 1,304 ....................... 11.580 Marengo Mining Ltd (No 2), Re [2012] FCA 1498 ........................................ 10.200 Markwell Bros Pty Ltd v CPN Diesels (Qld) Pty Ltd [1983] 2 Qd R 508 .......... 11.170
Cases
M
794
CORPORATIONS LAW: IN PRINCIPLE
Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd (2001) 38 ACSR 404 .......................................................................................................... 12.130 Marson Pty Ltd v Pressbank Pty Ltd [1990] 1 Qd R 264 ...................... 13.80, 13.130 Martyn v Gray (1863) 14 CB (NS) 824; 143 ER 667 ........................................ 2.140 Massey v Wales (2003) 57 NSWLR 718 ............................................................. 6.50 Master Grocers’ Association of Victoria v Northern District Grocers Co-operative Ltd [1983] 1 VR 195 .............................................................. 2.310 Matthew Bros, Re [1962] VR 262 .................................................................. 24.210 McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129 .............. 14.550 McLaughlin v Daily Telegraph Newspaper Co (No 2) (1904) 1 CLR 243 ............ 9.80 McLaughlin v Dungowan Manly Pty Ltd [2010] NSWSC 187 ............. 5.260, 17.285 McNamara v Flavel (1988) 13 ACLR 619 .......................................... 13.130, 13.135 Megevand, Re; Ex parte Delhasse (1878) 7 Ch D 511 ....................................... 2.90 Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350 ............................ 14.100 Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103 .................................. 2.115 Meridian Global Funds Management Asia Ltd v Securities Commission (1995) 13 ACLC 3,245 .................................................................... 7.316, 7.320 Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128 ......... 14.550 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 ...... 11.540, 11.580, 11.590 Metyor Inc v Queensland Electronic Switching Pty Ltd [2003] 1 Qd R 186 .... 14.270 Milburn v Pivot Ltd (1997) 78 FCR 472 ......................................................... 18.450 Miles v Sydney Meat Preserving Co Ltd (1912) 12 SR (NSW) 98 ..................... 19.70 Mills v Mills (1938) 60 CLR 150 .............................. 11.110, 12.110, 12.180, 12.230 Mogul Stud Pty Ltd, Re [2012] NSWSC 1639 .................................................... 9.72 Monitronix Ltd, Re (1987) 5 ACLC 1063 ....................................................... 16.120 Moran v Moranco Enterprises Pty Ltd (1996) 14 ACLC 1669 ......................... 16.120 Mordecai v Mordecai (1988) 12 NSWLR 58 .................................................. 13.100 Morley v ASIC (2010) 81 ACSR 285; [2010] NSW CA 331 ............................... 11.90 Morris v Kanssen [1946] AC 459 ..................................................................... 7.220 Mortimer v Proto Resources & Investments Ltd [2015] FCA 654 ................... 10.120 Mousell Bros Ltd v London & North Western Railway Co [1917] 2 KB 836 ...... 7.330 Movitor Pty Ltd (in liq), Re (1996) 64 FCR 380 ............................................. 24.280 Myers v Aquarell Pty Ltd (in liq) [2000] VSC 429 ......................... 7.75, 7.110, 7.140
N NCR Australia Pty Ltd v Credit Connection Pty Ltd (in liq) [2004] NSWSC 1 ................................................................................................................ 7.170 NRMA v Bradley (2002) 42 ACSR 616 ..................................... 6.50, 10.130, 10.300 NRMA v Parker (1986) 6 NSWLR 517 ................................................... 6.50, 10.130 NRMA v Parkin (2004) 49 ACSR 386 ............................................................. 10.130 NRMA v Parkin (2004) 60 NSWLR 224 .......................................................... 10.130 NRMA v Snodgrass (2002) 170 FLR 175 ........................................................ 10.240 NRMA v Snodgrass (2002) 42 ACSR 371 ....................................................... 10.130 NRMA v Spragg (2001) 161 FLR 243 ............................................... 10.130, 10.300 NRMA Association Ltd, Re [2003] FCAFC 206 ................................................ 10.130 NRMA Association Ltd, Re; Lavercombe v Auscott Ltd (2006) 202 FLR 390 .... 10.300 NRMA Ltd v Scandrett (2002) 171 FLR 232 ...................................... 10.120, 10.130 NRMA Ltd v Snodgrass (2001) 37 ACSR 382 ......................... 5.150, 10.120, 10.130 NRMA Ltd v Snodgrass (2001) 52 NSWLR 383 ................................. 10.120, 10.130 NRMA Ltd (No 1), Re (2000) 156 FLR 349 .................................................... 14.110 Nagle v Feilden [1966] 2 QB 633 .................................................................... 2.300 Nagler v H Volski & Co Pty Ltd (in liq) (No 2) (2001) 20 ACLC 431 ............... 10.300 Natcomp Technology Australia Pty Ltd v Graiche (2001) 19 ACLC 1,117 ........ 6.150 National Australia Bank Ltd v Perkins (1999) 17 ACLC 1,665 ................ 7.100, 7.180
TABLE OF CASES
795
National Commercial Banking Corp of Australia Ltd v Batty (1986) 160 CLR 251 ..................................................................................................... 2.130 National Education Advancement Programs Pty Ltd v Ashton (1996) 14 ACLC 30 ..................................................................................................... 3.110 National Exchange Pty Ltd v ASIC (2004) 49 ACSR 369 .................... 11.505, 22.160 New South Wales v Commonwealth (1990) 169 CLR 482 ........................ 1.30, 1.40 Ngurli Ltd v McCann (1953) 90 CLR 425 .............................. 12.244, 13.300, 14.90 Niord Pty Ltd v Adelaide Petroleum NL (1990) 54 SASR 87 ............................. 9.100 Noel Tedman Holdings Pty Ltd, Re [1967] Qd R 561 ........................ 10.150, 10.155 North v Marra Developments Ltd (1981) 148 CLR 42 ................................... 22.160 North West Transportation Co Ltd v Beatty (1887) 12 App Cas 589 .............. 13.180 Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146 ..... 7.130, 7.180, 7.210, 7.230, 7.240 Northwest Capital Management v Westate Capital Ltd [2012] WASC 121 ..... 10.120
O O’Brien v Sporting Shooters Association of Australia (Vic) [1999] 3 VR 251 ........ 9.76 O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 ................ 11.170 O’Neill v Phillips [1999] 1 WLR 1092 ............................................................ 14.490 On the Street Pty Ltd v Cott (1990) 101 FLR 234 .......................................... 13.100 Onslow Salt Pty Ltd, Re (2003) 45 ACSR 322 ................................... 16.120, 17.120 Oris Funds Management Ltd v National Australia Bank Ltd [2003] VSC 315 ................................................................................................... 7.80, 7.140 Oswal v Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) [2013] FCAFC 9 ......................................................................................... 6.310 Overton Holdings Pty Ltd, Re [1985] WAR 224 .............................................. 14.360
Pace v Antlers Pty Ltd (in liq) (1998) 80 FCR 485; 26 ACSR 490 .................... 24.230 Pacific Acceptance Corp Ltd v Forsyth (1970) 92 WN (NSW) 29 ................... 15.500 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 .................................... 7.100 Pancontinental Mining Ltd v Goldfields Ltd (1995) 13 ACLC 577 .................. 21.120 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 ............................................................................. 6.200, 7.210 Parke v Daily News Ltd [1962] Ch 927 ................................ 12.150, 12.155, 14.100 Parker v Tucker; Re Purcom No 34 Pty Ltd (In Liq) [2010] FCA 263 ............... 11.320 Parra Wirra Gold & Bismuth Mining Syndicate No Liability v Mather (1934) 51 CLR 582 ....................................................................................... 8.20 Pathirana v Pathirana [1967] 1 AC 233 ........................................................... 2.210 Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1 ................................................................ 4.130, 4.150 Paul A Davies (Aust) Pty Ltd (in liq) v P A Davies [1983] 1 NSWLR 440 ............. 13.70 Pavlides v Jensen [1956] Ch 565 ..................................................................... 14.90 Peckham v Moore [1975] 1 NSWLR 353 ......................................................... 2.290 Pender v Lushington (1877) 6 Ch D 70 .............................................. 14.10, 14.210 Percival v Wright [1902] 2 Ch 421 ........................................ 11.110, 12.40, 22.170 Perkins v National Australia Bank Ltd (1999) 30 ACSR 256 .............................. 7.180 Permanent Building Society v McGee (1993) 11 ACSR 260 ............................. 13.40 Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 ............... 11.160, 11.250, 11.320, 11.400, 12.220 Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1 .................................... 13.86 Peters v The Queen (1998) 192 CLR 493 ............................ 11.220, 13.160, 13.163 Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457 ......................... 14.70 Pierce v Mills & Co [1920] 1 Ch 77 ............................................................... 12.244 Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 ..................................... 13.40
Cases
P
796
CORPORATIONS LAW: IN PRINCIPLE
Pine Vale Investments Ltd v McDonnell & East Ltd (1983) 1 ACLC 1294 ....... 12.248 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 .............. 4.110 Plashett Pastoral Co Pty Ltd, Re (1969) 90 WN (Pt 1) (NSW) 295 .................. 17.150 Polkinghorne v Holland (1934) 51 CLR 143 .................................................... 2.130 Pottie v Dunkley [2011] NSWSC 166 ............................................................ 14.270 Powell v Fryer (2001) 159 FLR 433 ................................................................ 11.580 Pozzebon (Trustee) v Australian Gaming and entertainment Ltd [2014] FCA 1032 ................................................................................................. 20.180 Praetorin Pty Ltd v TZ Ltd [2009] NSWSC 1237 ............................................ 14.185 Presidential Security Services of Australia Pty Ltd v Brilley [2008] NSWCA 204 ............................................................................................................ 7.330 Property Force Consultants Pty Ltd, Re [1997] 1 Qd R 300 ............................ 11.410 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354 ....................................................................................................... 14.40 Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd (1996) 14 ACLC 679 ....................................................................................... 7.130, 7.160
Q QRxPharma Limited (Administrators Appointed), Re [2015] FCA 1140 .......... 14.670 Qintex Australia Finance Ltd v Schroders Australia Ltd (1991) 9 ACLC 109 ...... 4.110 Qintex Ltd (No 2), Re (1990) 8 ACLC 811 ....................................................... 7.200 Quancorp Pty Ltd v MacDonald (1999) 32 ACSR 50 ..................................... 22.320 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 ................................... 7.140 Queensland Mines Ltd v Hudson (1978) 18 ALR 1 ............................. 13.86, 13.180 Queensland North Australia Pty Ltd v Takeovers Panel (2015) 230 FCR 150 ............................................................................................................ 23.70
R R v Byrnes (1995) 183 CLR 501 .................................................................... 13.130 R v Donald [1993] 2 Qd R 680 ...................................................................... 13.120 R v Farris [2015] WASC 251 ........................................................................... 22.210 R v Ghosh [1982] 2 All ER 689 ...................................................................... 13.163 R v Hughes (2000) 202 CLR 535 ....................................................................... 1.70 R v Wright (1980) 4 ACLR 931 ...................................................................... 22.160 RGC Ltd, Re (1998) 29 ACSR 445 .................................................................... 18.70 RTP Holdings Pty Ltd v Roberts (2000) 36 ACSR 170 ..................................... 14.270 Rafferty v Madgwicks [2012] FCAFC 37 .......................................................... 8.145 Ragless v IPA Holdings Pty Ltd [2012] SASC 203 ............................................ 14.270 Re Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd [2013] NSWSC 852 ..................................................................... 20.200, 20.205 Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 ...... 11.170, 13.40, 13.50, 13.53, 13.80, 13.140, 13.180, 13.290 Renato Evangelisti Nominees Pty Ltd v EEC (1990) Pty Ltd (in liq) (1995) 13 ACLC 1378 .............................................................................................. 4.50 Repatriation Commission v Harrison (1997) 78 FCR 442 ................................... 4.80 Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 51 SASR 177 ........................................................... 13.300, 14.50, 14.90 Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 1 ACLC 1333 ................ 20.140 Rich v ASIC (2004) 220 CLR 129 .............................. 6.290, 11.200, 13.150, 13.155 Riley v Jubilee Mines NL [2006] WASC 199 .................................................... 22.310 Riviera Group Pty Ltd (admins apptd) (recs & mgrs apptd), Re (2009) 72 ACSR 352 ................................................................................................... 24.50 Roberts v Coussens (1991) 25 NSWLR 171 ..................................................... 9.186 Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882 ............. 14.390, 19.70 Robinson v Ashton (1875) LR 20 Eq 25 ........................................................... 2.170
TABLE OF CASES
797
Robox Nominees Pty Ltd v Bell Resources Ltd (1986) 13 ACLR 475 ............... 22.320 Roden v International Gas Applications (1995) 125 FLR 396 .......................... 13.230 Roumanus v Orchard Holdings (NSW) Pty Ltd (In Liq) [2012] FCA 775 ......... 14.670 Rowland v Meudon Pty Ltd [2008] NSWSC 381 ........................................... 14.185 Royal British Bank v Turquand (1856) 119 ER 886 ........................................... 7.230 Ruut v Head (1996) 20 ACSR 160 ................................................................. 14.650
S & Y Investments (No 2) Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1986) 44 NTR 14 .................................................................. 7.310 SAJ v The Queen [2012] VSCA 243 ................................................................ 13.163 SAQ and ASIC, Re (2005) 55 ACSR 243 ......................................................... 15.370 SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552 ............................. 13.86 SRKKK and ASIC, Re (2002) 42 ACSR 551 ........................................... 2.680, 15.370 Sagasco Amadeus Pty Ltd v Magellan Petroleum Australia Pty Ltd (1993) 177 CLR 508 ............................................................................................ 23.250 St George Ltd v Commissioner of Taxation [2008] FCA 453 ............... 20.30, 20.230 Salomon v Salomon & Co Ltd [1897] AC 22 ........... 4.30, 4.33, 8.40, 16.60, 16.180 Salt Asia Holdings Pty Ltd, Re (2004) 49 ACSR 38 ............................. 16.120, 17.120 Saltdean Estate Co Ltd, Re [1968] 1 WLR 1844 ............................................. 17.230 Sands & McDougall Wholesale Pty Ltd (in liq) v Federal Commissioner of Taxation [1999] 1 VR 489 ......................................................................... 24.250 Sanford v Sanford Courier Service Pty Ltd (1986) 5 ACLC 394 ........... 14.370, 19.70 Scott Group Ltd v McFarlane [1978] 1 NZLR 553 .......................................... 15.510 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] 3 AC 324 ........ 12.140, 14.350 Segenhoe Ltd v Akins (1990) 29 NSWLR 569 ................................... 15.500, 19.150 Shafron v Australian Securities and Investments Commission [2012] HCA 18 ............................................................................................... 11.320, 11.325 Shamsallah Holdings Pty Ltd v CBD Refrigeration & Airconditioning Services Pty Ltd (2001) 19 ACLC 517 ............................................ 14.390, 19.70 Sheahan v Verco (2001) 79 SASR .................................................................. 11.320 Sheahan v Verco (2001) 79 SASR 109 ........................................................... 11.410 Shears v Phosphate Co-operative Co Australia Ltd (1989) 7 ACLC 812 .......... 14.380 Shum Yip Properties Development Ltd v Chatswood Investment & Development Co Pty Ltd (2002) 166 FLR 451 ............................. 14.240, 14.420 Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927] 2 KB 9 ............... 6.270 Silver Lake Resources Ltd, Re [2012] FCA 32 .................................................. 21.100 Sixty-Fourth Throne Pty Ltd v Macquarie Bank (1996) 130 FLR 411 ..... 7.130, 7.160 Smart Company Pty Ltd (In Liq) v Clipsal Australia Pty Ltd [2011] FCA 35 ..... 14.285 Smartec Capital Pty Ltd v Centro Properties Ltd [2011] NSWSC 495 ............. 14.185 Smith v Yarnold [1969] 2 NSWR 410 .................................................... 2.280, 2.290 Smith & Fawcett Ltd, Re [1942] Ch 304 .............................................. 9.180, 12.60 Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116 .......... 4.50, 4.90 Solomon Pacific Resources NL v Acacia Resources Ltd (1996) 19 ACSR 238 .... 21.120 Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160 ......... 14.660, 14.663, 14.670 Sons of Gwalia Ltd v Margaretic (2007) 232 ALR 232 ...................................... 1.100 South Australia v Clark (1996) 66 SASR 199 .......................... 11.270, 11.410, 13.40 Southern Real Estate Pty Ltd v Dellow (2003) 87 SASR 1 ............................... 13.100 Spargos Mining NL, Re (1990) 3 WAR 166 .................................................... 14.320 Spies v The Queen (2000) 201 CLR 603 ............................................. 12.50, 12.120 Spreag v Paeson Pty Ltd (1990) 94 ALR 679 ...................................................... 4.80 Stapp v Surge Holdings Pty Ltd (1999) 17 ACLC 896 .................................... 14.620 State Revenue, Commissioner of v Viewbank Properties [2004] VSC 127 ......... 8.130 Stewart v Normandy NFM Ltd (2000) 18 ACLC 814 ....................................... 6.310 Story v Advance Bank Australia Ltd (1993) 31 NSWLR 722 ..................... 7.90, 7.130
Cases
S
798
CORPORATIONS LAW: IN PRINCIPLE
Sunburst Properties Pty Ltd (in liq) v Agwater Pty Ltd [2005] SASC 335 ......... 7.100, 7.140 Superbee Pty Ltd, Re (1989) 7 ACLC 418 ...................................................... 14.630 Supercar International Holdings Ltd v Sommers; Tinkler Group Holdings Pty Ltd v Sommers [2011] NSWSC 336 ........................................................ 5.35 Swaledale Cleaners Ltd, Re [1968] 1 WLR 1710 .............................................. 9.186 Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313 ......................... 14.270 Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 ........................ 12.50, 12.120, 13.300
T Tallglen Pty Ltd v Optus Communications Pty Ltd (1998) 146 FLR 380 ........ 18.450, 18.460 Taxation (Cth), Commissioner of v Whitford’s Beach Pty Ltd (1982) 150 CLR 355 ....................................................................................................... 4.80 Taylor (Trustee) Re Kwok v Goldana Investments Pty Ltd (Receivers and Managers appointed) (No 2) [2015] FCA 947 .............................................. 9.72 Teh v Ramsay Centauri Pty Ltd (2002) 42 ACSR 354 ..................................... 23.260 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 ............................... 7.310, 7.313 The Swan Brewery Co Ltd (No 2), Re (1976) 3 ACLR 168 .............................. 16.120 Thomas v HW Thomas Ltd (1984) 2 ACLC 610 ............................................. 14.470 Thomas Marshall (Exports) Ltd v Guinle [1978] 3 WLR 116 ............................. 13.90 Thorby v Goldberg (1964) 112 CLR 597 ....................................................... 12.280 Tiger Investment Co Ltd, Re (1999) 158 FLR 321 .......................................... 18.160 Titlow v Intercapital Group (Australia) Pty Ltd (1996) 65 FCR 449 ................... 9.100 Tivoli Freeholds Ltd, Re [1972] VR 445 .......................................................... 14.650 Tomanovic v Global Mortgage Equity Corp Pty Ltd [2011] NSWCA 104 ....... 14.510, 14.600, 14.650 Totex-Adon Pty Ltd v Marco (1982) 1 ACLC 228 ............................................. 13.70 Totex-Adon Pty Ltd, Re [1980] 1 NSWLR 605 ................................... 10.150, 10.250 Tourprint International Ltd v Bott (1999) 17 ACLC 1,543 .............................. 11.580 Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 .......................................... 8.20, 8.50 Trafalgar West Investments Pty Ltd v Superior Lawns Australia Pty Ltd [2012] WASC 460 ..................................................................................... 14.190 Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488 ........................................................................... 11.170, 13.40 Trevor v Whitworth (1887) 12 App Cas 409 ............................ 18.20, 18.25, 18.220 Tummon Investments Pty Ltd (in liq), Re (1993) 11 ACLC 1139 ...................... 7.200 Turnbull v NRMA (2004) 186 FLR 360 ............................................. 10.130, 14.430 Twycross v Grant (1877) 2 CPD 469 ................................................................. 8.20
U UTSA Pty Ltd v Ultra Tune Australia Pty Ltd (No 2) (1996) 14 ACLC 1,262 ..... 24.280 UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (No 2) (1996) 14 ACLC 1,610 ....................................................................................................... 24.280 Ubertini v Saeco International Group SpA (No 4) [2014] VSC 47 ................... 14.515 United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 ............... 2.90, 2.330 United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514 ...... 14.180 Unity APA Ltd v Humes Ltd (No 2) [1987] VR 474 ......................................... 14.180 Universal Telecasters (Qld) Ltd v Guthrie (1978) 18 ALR 531 ......................... 21.260 University of Sydney v Objectivision Pty Ltd [2015] FCA 1528 ........................... 4.90
V Van Reesema v Flavel (1992) 10 ACLC 291 ......................................... 15.90, 15.360
TABLE OF CASES
799
Vanfox Pty Ltd, Re [1995] 2 Qd R 445 ........................................................... 10.300 Vermillion Resources Pty Ltd v Gibbins Investments Pty Ltd [2011] FCAFC 149 ............................................................................................................ 5.200 Vero Insurance Ltd v Kassem [2010] NSWSC 838 ................................. 7.100, 7.110 Victor Battery Co Ltd v Curry’s Ltd [1946] Ch 242 ........................................ 18.450 Vines v Australian Securities & Investments Commission (2007) 62 ACSR 1 .... 11.310, 11.314 Vrisakis v ASC (1993) 9 WAR 395 ...................................................... 11.270, 11.400 Vrisakis v Australian Securities Commission (1993) 9 WAR 395 ....................... 11.480
Wakim, Re; ex parte McNally (1999) 198 CLR 511 ................................... 1.70, 1.80 Walker v Hungerfords (1987) 49 SASR 93 ................................................ 4.80, 4.90 Walker v Wimborne (1976) 137 CLR 1 .............. 4.110, 7.30, 12.50, 12.120, 12.130 Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326 .............. 5.35 Wambo Mining Corp Pty Ltd v Wall Street (Holding) Pty Ltd (1998) 16 ACLC 1601 ................................................................................. 18.450, 18.460 Wan Ze Property Development (Aust) Pty Ltd, Re [2012] NSWSC 722 .......... 14.295 Waters v Winmardun Pty Ltd (1990) 9 ACLC 238 ............................................ 9.183 Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459 ............... 14.450 Webb v Earle (1875) 20 Eq 556 .................................................................... 17.130 Weinstock v Beck [2011] NSWCA 228 .............................................. 17.170, 17.175 Weinstock v Beck [2013] HCA 14 .................................................................. 14.565 Wenzel v ASX Ltd (2002) 125 FCR 570 .......................................................... 22.320 Westchester Financial Services Pty Ltd v Acclaim Exploration NL (1999) 32 ACSR 499 ................................................................................................... 18.70 Westgold Resources NL v Precious Metals Australia Ltd (2002) 171 FLR 20 ........ 9.76 Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157 .... 12.250 Whitby Land Co Pty Ltd v Li [2014] FCA 806 ................................................ 17.178 White v Bristol Aeroplane Co Ltd [1953] Ch 65 ............................................. 17.230 White Star Line, Re [1938] 1 All ER 607 ......................................................... 16.180 Whitehouse v Capital Radio Network Pty Ltd (2004)13 Tas R 27 ................... 10.300 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 ................. 12.230, 12.244 Wilcox v Kogarah Golf Club (1995) 14 ACLC 421 ........................................... 5.150 Will v United Lankat Plantations Co Ltd [1914] AC 11 ................................... 17.130 Williams v Hursey (1959) 103 CLR 30 ............................................................. 2.270 Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 912 ....................... 10.20 Wilson v Meudon Pty Ltd [2005] NSWCA 448 ............................................... 17.285 Wimborne v Brien (1997) 15 ACLC 793 .......................................................... 4.110 Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 18 ACLC 665 ........... 14.110 Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144 ........... 14.110, 18.160, 18.165, 18.170 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 ............. 13.290, 14.90 Wise v Perpetual Trustee Co Ltd [1903] AC 139 .............................................. 2.280 Wondoflex Textiles Pty Ltd, Re [1951] VLR 458 .............................................. 14.620 Woolworths Ltd v GetUp Ltd [2012] FCA 726 ............................................... 10.120 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 .............................................. 13.220 Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd (No 9) [2010] WASC 44 .................................................................................................... 2.160
Y Yazbek v Aldora Holdings Pty Ltd (2003) 45 ACSR 53 .................................... 10.300 Yenidje Tobacco Co Ltd, Re [1916] 2 Ch 426 ................................................ 14.630 Yorke v Lucas (1985) 158 CLR 661 ................................................................ 21.240
Cases
W
Table of statutes Aboriginal Councils and Associations Act 1976: 2.10 Pt IV: 2.10 Pt III: 2.10 Australian Consumer Law s 18: 22.160 Australian Securities Commission Act 1989: 1.150 Australian Securities and Investments Commission Act 2001: 1.10, 1.80, 1.100, 1.150, 1.170, 1.190, 1.200, 1.280, 15.530 s 12: 1.200 s 12DA: 14.663 s 50: 1.170, 14.230, 14.570 ss 50A to 50E: 15.380 s 127(2C): 15.380 ss 146 to 168: 1.290 Pt 14: 1.200 Australian Securities and Investments Commission Amendment (Corporations and Markets Advisory Committee Abolition) Bill 2014: 1.290 Banking Act 1959: 22.250 Bankruptcy Act 1924 s 95(4): 7.140 Broadcasting Services Act 1992: 23.40 Business Names Registration Act 2011: 1.190 Business Names Registration (Transitional and Consequential Provisions) Act 2011: 1.190 Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012: 1.100 Commonwealth of Australia Constitution Act: 1.30, 1.70 s 51(xx): 1.30 Ch III: 23.320 Companies Code 1981 Sch 3: 5.130
Company Law Review Act 1998: 1.110, 5.20, 5.120, 7.140, 15.20 Company Law Review Bill 1997: 18.110, 18.130 Competition and Consumer Act 2010: 3.140, 21.260 Sch 2: 22.160 Sch 2, item 18: 15.530 Sch 2, s 18: 3.140 Corporate Amendment (Simple Corporate Bonds and Other Measures) Act 2014: 21.80 Corporate Law Economic Reform Program Act 1999: 1.120, 11.40, 11.505, 13.320, 14.240, 16.70, 21.10 Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004: 1.140, 1.260, 1.310, 6.80, 11.40, 11.150, 15.20, 16.70 Corporate Law Economic Reform Program Bill 1998: 14.240, 14.270 Corporations (Aboriginal and Torres Strait Islander) Act 2006: 1.350, 2.10, 3.10, 4.10, 5.10, 8.10, 10.10, 11.10, 12.10, 13.10, 16.10, 17.10, 18.10, 19.10, 20.10, 21.10, 22.10, 23.10, 24.10 ss 1 to 25: 1.350 ss 265-1 to 265-25: 12.10, 13.10 s 694-40: 2.10 Ch 2: 3.10, 4.10 Ch 3: 15.20 Ch 4: 9.10, 14.10, 17.10 Ch 7: 15.20 Ch 8: 14.10 Ch 10: 15.20 Ch 11: 24.10 Ch 12: 9.10 Ch 13: 14.10 Ch 14: 14.10 Pt 2-3: 3.10 Pt 2-5: 8.10 Pt 2-5, Div 42: 4.10 Pt 3-2: 5.10, 6.10 Pt 3-3: 3.10 Pt 3-5: 7.10, 8.10 Pt 3-6: 7.10
Statutes
COMMONWEALTH
802
CORPORATIONS LAW: IN PRINCIPLE
Corporations (Aboriginal and Torres Strait Islander) Act 2006 — cont Pt 3-8: 7.10 Pt 4-4: 8.10, 14.10 Pt 4-4, Div 172: 17.10 Pt 6: 6.10 Pt 6-4: 12.10, 13.10 Pt 6-6: 2.10, 13.10 Pt 6, Div 57: 6.10 Pt 10-5: 14.10, 15.20 Pt 17-3, Div 700: 2.10 Div 6-15: 9.10 Div 6-20: 10.10 Div 29: 3.10 Div 29-5: 3.10 Div 37: 2.10 Div 57: 5.10 Div 57-5, item 26: 15.20 Div 57-5, item 36: 15.20 Div 60: 5.10 Div 63: 5.10 Div 66: 5.10 Div 69: 5.10 Div 72: 5.10 Div 77-5: 3.10 Div 99: 7.10 Div 99-1: 7.10 Div 104: 7.10 Div 265-1: 11.10 Div 265-5: 12.10 Div 265-10: 13.10 Div 265-15: 13.10 Div 265-25: 12.10, 13.10 Div 265-30: 12.10, 13.10 Div 268: 13.10 Div 472: 15.20 Div 531: 11.10 Div 576-25: 14.10 Div 689: 16.10 Corporations Act 1989: 1.40, 1.50 Corporations Act 2001: 1.10, 1.80, 1.100, 1.160, 1.170, 1.190, 1.280, 1.290, 1.330, 1.350, 2.50, 2.80, 2.250, 2.360, 2.420, 2.470, 2.477, 2.490, 2.560, 2.610, 2.630, 2.640, 2.680, 2.690, 3.10, 3.20, 3.60, 3.80, 3.110, 3.150, 3.170, 4.10, 4.50, 4.70, 4.100, 4.110, 4.160, 5.10, 5.20, 5.40, 5.70, 5.150, 5.210, 5.240, 5.250, 5.260, 6.30, 6.50, 6.130, 6.140, 6.150, 6.170, 6.190, 6.200, 6.210, 6.230, 6.290, 6.310, 7.30, 7.140, 7.230, 7.316, 7.340, 7.350, 8.20, 9.10, 9.40, 9.110, 9.120, 10.10, 10.100, 10.110,
10.160, 10.220, 10.230, 11.40, 11.100, 11.130, 11.145, 11.150, 11.160, 11.180, 11.314, 11.320, 11.330, 11.350, 11.355, 11.380, 11.430, 12.10, 12.30, 12.50, 12.170, 13.40, 13.150, 13.170, 14.10, 14.20, 14.40, 14.110, 14.130, 14.140, 14.150, 14.160, 14.170, 14.520, 14.530, 14.550, 14.680, 15.10, 15.30, 15.170, 15.310, 15.380, 15.440, 15.450, 15.470, 15.530, 16.10, 16.20, 16.40, 16.210, 17.170, 17.175, 17.300, 18.10, 18.30, 18.70, 18.100, 18.130, 18.190, 18.210, 18.250, 18.320, 18.360, 18.420, 18.450, 18.500, 20.10, 20.20, 20.40, 20.50, 20.80, 20.100, 20.130, 20.180, 20.220, 22.40, 22.180, 22.250, 22.310, 24.360, 24.380 s 2F.1: 11.180 s 5F: 3.30 s 9: 2.360, 2.590, 2.600, 2.610, 2.620, 2.630, 3.30, 3.40, 3.110, 3.150, 4.70, 4.100, 5.20, 5.160, 6.150, 7.240, 8.60, 8.70, 9.50, 9.120, 10.230, 11.90, 11.290, 13.250, 14.565, 15.40, 15.90, 16.170, 17.280, 17.290, 18.350, 18.360, 18.370, 20.50, 20.70, 20.130, 21.100, 21.110, 21.200, 22.40, 22.110, 23.270, 24.60, 24.160, 24.320, 24.360 s 9(b)(i): 11.90 s 9(b)(ii): 11.90 s 9A: 21.110 ss 10 to 16: 23.80, 23.110 s 18: 22.90 s 29B(3): 18.240 s 45A: 2.690 s 45A(1): 2.630 s 45A(2): 15.40, 15.120 ss 45A(2) to (4): 2.660 s 45A(3): 15.40, 15.120 s 46: 4.100 s 50: 4.100 s 50AA: 4.100, 4.160, 13.250 s 51A: 24.10 s 51E: 24.10 s 53: 13.190 s 57A: 2.360 s 64: 23.50 s 64A: 18.250 s 66A: 21.110 s 68A(3): 7.130 s 68A(3)(e): 7.110 s 79: 11.565, 21.240
Corporations Act 2001 — cont s 82A: 6.150 s 88A: 3.110 s 88A(1)(a): 3.110 s 90: 24.360 s 92: 15.40 s 95A: 11.520, 24.10 s 100: 3.100, 3.160 s 109X: 24.160 ss 111AA to AX: 15.40 s 111AC: 15.50 s 111AE: 15.50 s 111AE(1A): 15.50 s 111AE(1): 15.50 s 112(1): 2.620 s 112(2): 2.610 s 112(2)(b): 2.610, 5.120, 5.210 s 113: 2.700, 9.10, 21.20 s 113(1): 2.630 s 113(3): 2.630, 21.20 s 114: 9.10 s 115: 2.80, 2.240, 2.270, 2.350 s 117(2): 3.70 s 117(2)(k): 16.50 s 117(2)(m): 2.600 s 118(1): 3.80 s 119: 3.70, 4.10, 8.90, 8.120 s 120(1): 9.20 s 122: 8.70 s 123(1): 3.110, 7.75 s 124: 4.10, 5.120, 5.210, 5.230, 19.20 s 124(1): 17.285, 20.20 s 124(1)(a): 12.240, 16.10 s 124(1)(a) to (h): 5.210 s 124(1)(f): 2.350 s 124(2): 5.210 s 125: 2.610, 5.210, 5.220 s 125(1): 5.210, 16.200 s 125(2): 5.210 s 125(6): 7.60 s 126: 7.60 s 127: 7.60, 7.75, 7.110 s 127(1): 7.75, 7.110 s 127(1)(b): 7.75 s 127(2): 7.75, 7.110 s 127(2)(c): 7.75 s 127(4): 7.75 s 128: 7.90, 7.120, 7.140 s 128(1): 7.90 ss 128(1) to (2): 7.80 s 128(2): 7.90 s 128(3): 7.120, 7.260, 7.290 s 128(4): 7.120, 7.130, 7.140, 7.260 ss 128 to 129: 7.20, 7.50, 7.130, 7.140 ss 128 to 130: 7.50
803
s 129: 7.60, 7.80, 7.90, 7.100, 7.130, 7.140, 7.170, 7.260 s 129(1): 7.230 s 129(2): 7.100 s 129(2)(b): 7.100 s 129(2) to (3): 7.110 s 129(3): 6.210, 7.100, 7.180, 7.220 s 129(3)(b): 7.100 s 129(5): 7.60, 7.100, 7.110 s 129(5) to (6): 7.110 s 129(6): 7.100, 7.110 s 129(8): 7.100 s 130: 7.250 s 131: 8.120, 8.130, 8.145, 8.150 s 131(1): 8.130, 8.160 s 131(1) to (2): 8.120 s 131(2): 8.140, 8.160 s 131(2) to (3): 8.150 s 131(3): 8.140, 8.160 s 131(3)(c): 8.140 s 131(4): 8.130, 8.140, 8.160 ss 131 to 133: 8.120 s 132: 8.150, 8.160 s 133: 8.120 s 134: 5.20 ss 134 to 136: 5.30 s 135(1): 5.70, 5.100, 5.140 s 135(2): 5.180 s 135(3): 5.250 s 136: 5.35 s 136(1): 5.35 s 136(2): 5.70, 5.160, 6.270 s 136(3): 5.170 s 136(3) to (4): 5.190 s 136(5): 3.160, 5.70, 5.140 s 137: 5.170 s 140: 5.150, 14.210 s 140(1): 5.150, 5.250, 14.10, 14.210 s 140(1)(b): 6.270 s 140(2): 5.190, 5.250 s 141: 5.40 s 142: 3.100, 3.150, 3.160, 15.290 s 142(2): 3.150 ss 142 to 144: 3.160 ss 142 to 146: 3.160 s 143: 3.160 s 144: 3.110 s 145: 3.100 s 146: 3.150, 3.160, 15.290 s 147(1): 3.140 s 147(1)(c): 3.140 ss 148 to 149: 2.630, 3.120 s 150: 2.600, 3.130 ss 150 to 151: 5.210 s 152: 3.120 s 153(2): 3.110 ss 153 to 155: 3.110
Statutes
TABLE OF STATUTES
804
CORPORATIONS LAW: IN PRINCIPLE
Corporations Act 2001 — cont s 162: 2.700 ss 163 to 164: 2.700 s 164(3): 7.130 s 164(3)(e): 7.110 s 164(4)(b): 7.130 s 165(3): 2.700 s 168: 3.150, 9.70, 20.60 s 169: 9.70 s 169(2): 3.160 s 169(5A): 9.110 s 172: 3.150, 9.70 s 173: 3.100, 3.150, 3.160, 9.74, 9.78 s 173(1): 9.70, 9.76, 9.78 s 173(3): 9.74 s 173(3A): 9.74, 9.78 s 175: 9.72, 9.80, 9.100, 14.170 s 176: 9.90 s 177: 9.76, 9.78 s 177(1AA): 9.78 ss 178A to 178B: 3.150 s 178C: 3.150 s 179: 6.200 s 179(1): 11.90 s 180: 11.40, 11.100, 11.145, 11.320, 11.510, 11.565, 12.310 s 180(1): 11.90, 11.145, 11.200, 11.215, 11.240, 11.270, 11.280, 11.290, 11.316, 11.320, 11.325, 11.346, 11.355, 11.380, 11.420, 11.500, 11.505, 11.550, 11.560, 11.565 s 180(2): 11.480, 11.490, 11.500, 11.505, 11.510, 11.560 s 180(3): 11.490, 11.500 ss 180 to 182: 11.145 ss 180 to 183: 11.190, 13.150 ss 180 to 184: 6.80, 24.410 s 181: 11.100, 11.215, 11.510, 11.565, 12.70, 12.190, 12.300, 12.310 s 181(1): 12.255 ss 181 to 184: 12.30 s 182: 11.100, 11.510, 12.310, 13.110, 13.120, 13.135, 13.320 s 182(1): 13.135 s 182(2): 6.290, 13.135, 13.166 ss 182 to 183: 6.80, 11.215 ss 182 to 184: 13.20 s 183: 11.100, 11.510, 13.90, 13.130, 13.135, 13.320 s 183(1): 13.135
s 184: 11.100, 11.220, 11.565, 12.70, 12.190, 12.255, 13.160, 13.166 s 184(1): 11.230 s 184(2): 6.290, 11.230, 13.163, 13.166 s 184(2)(a): 13.160 s 184(3): 6.290, 11.230, 13.90 s 187: 12.130, 12.140, 12.255 s 188: 1.100, 3.150, 6.200, 6.320, 11.620 s 188(1): 6.200 s 189: 11.440, 11.470, 11.505 s 189(b)(ii): 11.470 ss 189 to 190: 12.290 s 190: 11.440, 11.460 s 190(2): 11.460 s 191: 10.20, 13.190, 13.200, 13.210 s 191(1): 13.190, 13.210, 13.230 s 191(2): 13.210 s 191(2)(b): 13.210 s 191(3): 13.190 s 191(4): 13.230 s 191(5): 13.190, 13.210 ss 191 to 194: 13.20 s 192: 13.210, 13.230 s 192(7): 13.230 s 193: 13.210 s 194: 5.50, 13.200, 13.210, 13.240 s 195: 10.20, 10.30, 13.20, 13.240 s 195(4): 13.240 s 197(1): 2.220 s 198A: 5.50, 6.20, 6.50, 11.20, 12.170 s 198B: 5.50 s 198C: 5.50, 6.160, 6.180, 7.200, 11.450, 12.170, 12.290 s 198D: 11.440, 11.460, 12.290 s 198E: 5.100, 6.60 s 198E(1): 5.100, 7.190 s 198F: 6.310 s 198F(2): 6.310 s 199A: 13.320 s 199A(1): 13.320 s 199A(2): 13.320 s 199A(3): 13.320 s 199B: 13.320 s 199C: 13.320 ss 200A to 200J: 13.20 s 201A: 6.170 s 201B(1): 6.190 s 201B(2): 6.190 s 201D: 6.190 s 201F: 6.60, 6.180 s 201G: 5.50, 6.30, 6.180 s 201H: 5.50, 6.180 s 201J: 5.50, 6.180, 6.220, 7.200
Corporations Act 2001 — cont s 201K: 5.50, 6.160, 6.180, 10.20, 11.450 s 201L: 3.150, 6.240, 15.290 s 201M: 6.210, 7.220 s 202A: 5.50, 6.220, 10.85 s 202B: 6.240 s 202C: 6.220 s 203A: 5.50, 6.250 s 203C: 5.50, 6.250 s 203C(a): 5.180 s 203D: 6.260, 6.270, 10.220 s 203D(2): 6.260, 10.220 s 203D(3): 6.260 s 203D(4)(a): 6.260 s 203D(4)(b): 6.260 s 203E: 6.260 s 203F: 5.50 s 204A: 3.70 s 204A(1): 6.180, 6.200 s 204A(2): 6.200 s 204E: 6.210 s 204F: 5.50 s 205B: 3.150, 6.240, 15.290 s 205C: 6.240 s 205F: 6.240 s 205G: 13.20, 13.240, 15.230 s 206A: 6.280, 6.290 s 206B: 6.290 s 206B(1): 6.190 s 206B(2): 6.190 s 206B(3): 6.190 s 206B(4): 6.190 s 206C: 6.290, 11.210, 11.346 s 206C(1): 11.145 s 206D: 6.290 s 206E: 6.290 s 206F: 6.300, 11.150 s 206F(5): 6.280 s 206G: 6.190, 6.280 s 207: 13.250 s 208: 11.565, 13.250 s 208(1): 11.565 s 209: 13.250 s 209(1): 13.250 s 209(2): 13.250 s 209(3): 13.250 s 210: 13.250 ss 210 to 216: 11.565 ss 211 to 212: 13.250 s 213: 13.250 s 215: 13.250 ss 217 to 227: 11.565, 13.250 s 228: 13.250 s 229: 13.250 s 229(2): 13.250 s 229(3): 13.250 s 231: 9.20, 9.100, 14.320
805
s 231(b): 9.20 s 232: 14.10, 14.80, 14.310, 14.330, 14.340, 14.440, 14.600, 24.230 s 232(d): 14.515 s 232(e): 14.515 ss 232 to 235: 14.230 s 233(1): 14.515, 14.600 s 234: 14.320 s 236: 14.10, 14.80, 14.230, 14.240, 14.260, 14.285, 14.305 s 236(1) (a): 14.270 s 236(2): 14.240 s 236(3): 14.220, 14.240 s 237: 14.10, 14.230, 14.240, 14.270, 14.280, 14.305 ss 237(1) to (3): 14.270 s 237(2): 14.270 s 237(2)(a): 14.305 s 237(2)(b): 14.270, 14.305 s 237(2)(c): 14.270, 14.305 s 237(2)(d): 14.270, 14.305 s 237(2)(e): 14.305 s 237(3): 14.280 s 239: 14.290 s 242: 14.295 s 245C(6): 17.220 s 246B: 17.215, 17.285, 17.290, 17.295, 17.300, 17.310, s 246B(1): 16.210, 17.260, 17.270 s 246B(1)(a): s 246B(2): 16.210, 17.260, 17.290, s 246B(3): 17.350 ss 246B to 246G: 16.210, 17.190 s 246C: 17.200, 17.220, , 19.80 s 246C(1): 17.220, 17.300 s 246C(2): 17.220, 17.300 s 246C(5): 17.220 s 246C(6): 17.210 s 246D: 14.170, 16.210, 17.310, 17.320, s 246D(2): 17.310 s 246D(3)(a): 17.340 s 246D(3)(b): 17.340 s 246D(5): 17.310, s 246E: 17.340 s 246F: 16.210, 17.350 s 246G: 16.210 s 246AA(1)(b): 14.320 s 247A: 14.170 s 247A(1): 14.185 s 247D: 5.50 s 248A: 5.50, 10.20, 10.30 s 248B: 10.40, 10.170 s 248C: 5.50, 10.30 s 248D: 10.20 s 248E: 5.50, 10.30 s 248F: 5.50, 10.30
Statutes
TABLE OF STATUTES
806
CORPORATIONS LAW: IN PRINCIPLE
Corporations Act 2001 — cont s 248G: 5.50, 10.30 s 249A: 10.70 s 249B: 10.170, 10.250 s 249C: 5.50, 10.120 s 249D: 10.120, 10.130, 10.140, 14.10, 14.430 s 249D(1): 10.130 s 249D(1)(b): 10.130 ss 249D to 249E: 10.130 s 249F: 10.120, 10.140 s 249G: 10.120, 10.150, 10.155, 10.250 s 249H: 10.230 s 249H(1): 10.190 s 249H(2): 10.190, 10.220 ss 249H(3) to (4): 10.220 ss 249H to 249HA: 18.180 s 249J: 10.200 s 249J(1): 10.190 s 249J(2): 5.50 s 249J(3)(cb): 5.50 ss 249J(3) to (5): 10.200 s 249J(4): 5.50 s 249J(5): 5.50 s 249K: 10.190 s 249L: 10.210 s 249L(1)(c): 10.230 s 249L(2): 10.210 s 249L(2)(a): 10.85 s 249L(3): 10.210 s 249M: 5.50 s 249N(1): 10.240 s 249O(1): 10.240 s 249P: 10.240 s 249Q: 10.120, 10.130 s 249R: 10.120, 10.125 s 249S: 10.70, 10.260 s 249T: 5.50 s 249T(1): 10.250 s 249T(2): 10.250 s 249T(3) to (4): 10.250 s 249U: 5.50 s 249W(2): 5.50 s 249X: 5.50, 5.80, 10.290 s 249X(1A): 10.280 ss 249X to 250D: 10.280 s 249CA: 10.120 s 249HA: 10.190, 10.230 s 250C(2): 5.50 s 250E: 5.50, 10.270 s 250E(1): 17.140 s 250F: 5.50 s 250G: 5.50 s 250J: 5.50 ss 250K to 250L: 10.270 s 250L: 14.10 s 250L(1): 10.270
s 250L(2): 10.270 s 250M: 5.50, 10.270 s 250N: 3.160, 10.70, 15.280 s 250N(1): 10.70 s 250N(4): 10.70 s 250P: 10.70 s 250R: 10.85 s 250R(1): 10.80 s 250R(1)(a): 10.85 s 250R(2): 10.85 s 250R(3): 10.85 s 250R(4): 10.85 s 250S(1): 10.90 s 250T: 10.90 s 250T(1): 10.90 ss 250BB to 250BD: 10.280 s 250PA: 10.90, 15.450 s 250RA: 10.90, 15.450 s 250SA: 10.85, 10.90 s 250PAA: 10.70 s 251A: 10.20, 10.260 s 251B: 3.150 s 251AA: 3.160 s 252G: 16.20 s 253C: 16.20 s 254A: 17.120 s 254A(1)(b): 16.40, 17.50 s 254A(1)(c): 2.590 s 254A(2): 10.270, 17.50, 17.120, ss 254A(2)(a) to (d): 17.175 s 254A(3): 17.170 ss 254A to 254Y: 16.10 s 254B: 10.270, 16.40 s 254B(1): 17.10 s 254C: 16.140 s 254D: 5.50, 5.80, 16.190, 16.220, 17.250 s 254D(4): 16.220 s 254E: 16.120, 16.125, 17.120, s 254G(1): 17.180 s 254J: 17.170 s 254K: 17.170, 17.175, 17.178 s 254M: 2.610 s 254M(1): 16.170 s 254Q(1): 2.610 s 254T: 1.100, 19.120, 19.130, 19.150, 22.310 s 254T(1)(a): 19.100 s 254T(1)(b): 19.110 s 254T(1)(c): 19.120 s 254T(2): 19.100 s 254U: 5.50, 19.20, 19.50, 19.60 s 254V(1): 19.140 s 254V(2): 19.140 s 254W: 16.20, 19.80 s 254W(1): 19.80 s 254W(2): 5.50, 5.80, 19.80
Corporations Act 2001 — cont s 254X: 3.150, 15.290, 16.50, 16.100 s 254Y: 3.150, 15.290, 18.390 s 256A: 18.30, 18.40, 18.300 ss 256A to 256E: 18.70, 18.280 s 256B: 9.50, 14.110, 18.110, 18.115, 18.165, 18.180, 18.200 s 256B(1): 18.80 s 256B(1)(a): 18.90, 18.100, 18.110, 18.115, 18.120, 18.165 s 256B(1)(b): 18.90, 18.130, 18.135 s 256B(1)(c): 18.90, 18.140, 18.165 s 256B(2): 18.150, 18.160 s 256B(2)(a): 18.160 s 256C: 9.50, 18.165, 18.170 s 256C(1): 18.150, 18.180 s 256C(2): 18.160, 18.180 s 256C(2)(a): 18.160 s 256C(2)(b): 18.160 s 256C(3): 18.170, 18.180 s 256C(4): 18.90, 18.180 ss 256C(4) to (5): 18.170 s 256C(5): 18.180 s 256D: 18.500, 22.310 s 256D(1): 18.115 s 256E: 18.190, 18.420 s 257A: 18.270, 18.290 s 257A(a): 18.300 ss 257A to 257J: 18.200, 18.270, 18.280 s 257B(1): 18.380 s 257B(2): 18.330 s 257B(4): 18.380 ss 257B(6) to (7): 18.340 ss 257B to 257J: 18.300 s 257C: 18.165, 18.390, 18.400 s 257D: 18.390, 18.410 s 257E: 18.390 s 257F: 18.390, 18.400, 18.410 s 257G: 18.390 s 257H: 18.390 s 257J: 18.420, 18.500 s 258A: 18.200 ss 258A to 258F: 18.70, 18.200 s 258D: 18.200 s 258E(1)(a): 18.200 s 258E(1)(b): 18.200 s 258E(2): 18.200 s 258E(3): 18.200 s 258F: 18.50, 18.200 s 259A: 18.30, 18.210, 18.220, 18.230 s 259A(a): 18.230 s 259A(b): 18.230 s 259A(c): 18.230 s 259A(d): 18.230
ss 259A to 259D: 18.220 s 259B: 18.210 s 259B(2): 18.240 s 259B(4): 18.240 s 259B(5): 18.240 s 259C: 18.210, 18.250 s 259D: 18.210, 18.250 s 259D(1): 18.250 s 259D(3): 18.250 s 259E: 18.210, 18.250 s 259F: 18.500 s 260A: 18.30, 18.40, 18.430 s 260A(1)(a): 18.460 s 260A(1)(a)(i): 18.440 s 260A(1)(a)(ii): 18.440 s 260A(1)(b): 18.470 s 260A(2): 18.450 s 260B: 18.460, 18.470 s 260C: 18.480 s 260D: 18.500 s 260D(2): 4.70 s 260E: 18.500 s 262: 20.180 s 263: 20.180 s 266: 20.180 s 267: 20.180 s 283AA: 20.100 s 283AB: 20.100 s 283AC(1): 20.100 s 283AC(2): 20.100 ss 283BA to 283CE: 20.110 s 283BB(a): 20.110 s 283BB(c): 20.110 s 283BH: 20.70 s 283BH(1): 20.70 s 283BH(2): 20.70 s 283BH(3): 20.70 s 283BI: 20.110 s 283CB(a): 20.110 s 283CB(b): 20.110 s 283CE: 20.110 s 283DA: 20.100 s 283DA(a): 20.100 s 283DA(b): 20.100 s 285(1): 15.60 s 285(3)(c): 15.170 s 286: 15.80, 15.170 s 286(1): 15.90 s 286(2): 15.90 ss 286 to 291: 3.160 s 288: 15.90 s 290: 6.310 s 290(1): 6.310 s 290(2): 6.310 s 292: 15.80, 15.100, 15.180 s 292(1): 2.670 s 292(1)(a): 15.110 s 292(2): 2.670, 15.120, 15.390
807
Statutes
TABLE OF STATUTES
808
CORPORATIONS LAW: IN PRINCIPLE
Corporations Act 2001 — cont s 292(2)(b): 3.160 s 293: 3.160, 15.120, 15.130, 15.150, 15.280 ss 293 to 294: 15.390 s 294: 3.160, 15.120 s 295: 15.140 s 295(3)(c): 15.160 s 295(4): 15.170 s 295(5): 15.170 s 295A: 15.170 ss 295 to 297: 15.450 s 295HA: 15.280 s 296: 4.110, 15.160, 15.170, 15.450 s 296(1): 15.150 s 296(1A): 15.150 ss 296 to 297: 15.160 s 297: 15.140, 15.170, 15.450 s 298(1AA): 15.180 s 299: 15.180, 15.190 s 299A: 1.100, 15.180, 15.190 s 300: 15.180, 15.200 s 300(2): 15.200 s 300(10): 3.160, 10.20, 15.220 ss 300(10) to (11): 3.160 s 300(11): 15.230 s 300(11B): 15.410 s 300(11D): 15.410 ss 300(11) to (11E): 15.230 s 300A: 6.220, 6.240, 15.180, 15.230 s 300A(1)(c): 15.230 s 301: 15.80, 15.130 s 301(2): 15.130 s 302: 15.110, 15.130 s 303: 15.450 s 304: 15.450 s 305: 15.450 s 306: 15.240 s 306(3): 15.240 s 307: 15.450 s 307A: 15.450 s 307C: 15.180 s 307C(5A): 6.100 s 307C(5B): 6.100 s 307C(1): 15.410 s 307C(5)(c): 6.100 ss 307 to 313: 15.450 s 308: 15.450 s 308(1): 15.460 s 308(2): 15.460 s 309: 15.450 s 311: 4.50, 15.450, 15.470 s 311(4): 15.470 s 313(2): 15.450 s 314: 15.250, 15.260 s 314(2): 15.250
s 315: 15.270 s 315(1): 15.280 s 315(2): 15.280 s 315(3): 15.280 s 315(4): 15.280 s 316: 15.260 s 316(2)(e): 15.250 s 317: 10.85, 15.280 s 319: 15.300 s 319(2): 15.300 s 319(3)(a): 15.280 s 319(4): 15.300 s 320: 15.300 s 323D: 15.100 s 323D(2A): 15.100 s 323DA: 15.350 s 324AA: 15.400 s 324CI: 15.410 s 324CJ: 15.410 s 324DA: 15.410 ss 324DA to 324DD: 15.430 s 324DAA: 15.430 s 324DAB: 15.430 s 325: 15.390 s 327A: 15.390 s 327A(1A): 15.390 s 327B(1A): 15.390 ss 327B(2A) to (2C): 6.100 s 327B(2A) to (2C): 15.420 s 327B(2): 15.420 s 328A: 15.390 s 329: 10.220 s 329(1): 15.420 s 329(1A): 10.220 s 329(5): 15.420 s 334: 15.150 s 335: 15.150 s 340: 15.370 s 341: 15.370 s 342(1): 2.680 s 342(2): 2.680 s 342(3): 2.680 s 344: 15.90, 15.160, 15.360 s 344(1): 11.346, 15.360 s 345A: 15.310 s 345A(1): 3.150 s 346A: 15.310 s 347A: 15.320 s 347B: 3.150, 15.320 s 347C: 3.150 ss 349A to 349D: 3.150 s 411: 10.160, 18.135, 21.110, 23.10, 23.90, 24.430 s 411(1): 18.135 s 411(4): 24.430 s 411(10): 24.430 s 412: 24.430 s 414: 14.110
Corporations Act 2001 — cont ss 416 to 434G: 24.310 s 418A: 24.370 ss 419 to 419A: 24.410 s 420: 6.310, 24.400 s 420A: 24.400 s 420C: 24.390 s 421: 6.310 s 421A: 24.360 s 423: 24.410 s 426B(1)(b): s 428: 24.360 ss 429 to 430: 24.400 s 431: 24.400 s 433: 24.400 s 434F(b): 24.320 s 435A: 24.20 ss 436A to 436C: 24.30 s 436E(2): 24.50 s 436DA: 24.30 s 437A: 24.40 s 437C: 24.40 s 438A: 24.30, 24.50 s 439A(2): 24.115 s 439A(4): 24.50 s 439A(5)(b): 24.50 s 439A(6): 24.50, 24.115 s 439C: 24.50 ss 440A to 440G: 24.70 s 440J: 24.70 s 441A: 24.60 ss 441A to 441G: 24.70 s 442A: 24.40 ss 443A to 443B: 24.80 s 443D: 24.90 ss 443E to 443F: 24.90 s 444A: 24.100 s 444B: 24.100 s 444D(2): 24.100 s 444D(3): 24.100 s 444DA(1): 24.100 s 444DA(2): 24.100 s 445D: 24.100 s 446A: 24.120, 24.140 s 447A: 24.115 s 447A(1): 24.110, 24.115 ss 448A to 448D: 24.30 s 450A(3): 24.60 s 450E: 24.30 ss 459A to 489E: 24.135 s 459C(2): 24.160 s 459E: 24.150 s 459F: 24.160 ss 459G to 459N: 24.160 s 459P: 24.160 s 459Q: 24.160 s 459S: 24.160 s 461: 14.230, 24.170
809
s 461(1): 11.180, 14.40, 14.170, 14.580 s 461(1)(a): 24.170 s 461(1)(c): 24.170 s 461(1)(d): 24.170 s 461(1)(e): 14.590 ss 461(1)(e) to (g): 14.580, 24.170 ss 461(1)(f) to (g): 14.600 s 461(1)(h): 24.170 s 461(1)(k): 5.260, 14.580, 14.610, 14.616, 24.170 s 462: 14.230 s 462(2): 24.170 s 468(1): 9.190, 24.180 s 468(3): 9.190, 24.180 s 468A(1): 24.190, 24.200 s 468A(8): 24.200 s 471A: 24.190 s 477: 24.230 ss 489F to 511: 24.135 ss 490 to 494: 24.140 s 491: 24.140 s 493A: 9.190 s 494: 24.140 s 495: 24.140 s 496: 24.140 ss 497 to 500: 24.140 s 501: 24.230 ss 501 to 511: 24.140 ss 513 to 581: 24.135 ss 514 to 529: 16.170 s 516: 2.590, 16.170 s 517: 2.600 s 532(4): 24.140 s 533(1): 6.300 s 536(1): 24.200 s 555: 24.230 s 556: 24.230 s 563A: 1.100, 14.670 s 568: 24.220 s 568(9): 24.220 s 574: 4.100, 4.160 s 579E: 4.100, 4.160 s 579E(1)(b)(i): 4.90 s 579E(12): 4.100, 4.160 ss 588C to 588Z: 24.135 s 588E: 15.90, 24.280 s 588G: 7.140, 11.190, , 11.500, 11.510, 11.520, 11.560, 11.570, 11.580, 11.590, 12.120, 18.190, 19.120, 19.150, 24.270 s 588G(1A): 4.70, 4.140 s 588G(2): 11.550 s 588G(2)(b): 11.550 s 588G(3): 11.220, 11.230, 11.570 ss 588G to 588M: 4.70 ss 588G to 588M(2): 11.570
Statutes
TABLE OF STATUTES
810
CORPORATIONS LAW: IN PRINCIPLE
Corporations Act 2001 — cont ss 588G to 588Z: 18.510 s 588H: 11.590, 11.600 s 588H(4): 11.580 s 588H(5)(6): 24.30 s 588K: 24.280 s 588M: 11.180, 24.270, 24.280 s 588M(3): 11.570 ss 588R to 588U: 24.270 s 588V: 24.270 ss 588V to 588X: 4.70, 4.110 s 588W: 24.280 s 588FA: 24.240 s 588FA(3): 24.250 s 588FB: 24.240 ss 588FB to 588FF: 4.70 s 588FC: 24.240 s 588FD: 24.240 s 588FE: 24.240 s 588FE(6): 24.240 s 588FF: 24.280 s 588FF(1): 7.30 s 588FG: 24.250 s 588FH: 8.70 s 588FL: 20.180 s 588FL(2): 20.180 s 588FP: 4.70, 7.30 s 588FDA: 4.70 ss 589 to 600H: 24.135 s 596A: 11.180 s 596B: 11.180 s 597: 11.180 s 598: 11.180, 24.410 s 600H: 14.670 s 601CB: 3.110 s 601EB: 15.40 s 601FC: 6.320, 11.620 s 601FD(1)(f)(i): 11.565 s 601FD(1)(f)(iv): 11.565 s 601FD(3): 11.346, 11.565 s 601LC: 11.565 s 602: 23.140, 23.230, 23.250, 23.300, 23.330 s 602(c): 23.170 s 602A: 23.140, 23.270, 23.330 s 606: 23.50, 23.70, 23.90, 23.120, 23.130 s 606(1)(a)(ii): 23.90 s 608(1): 23.60 s 608(3): 23.60, 23.120 s 608(4): 23.60 s 608(8): 23.60 s 609(8): 23.60 s 610: 23.70 s 611: 23.60, 23.90, 23.100, 23.110, 23.120, 23.130 s 617: 23.150 s 617(3): 23.210
s 618: 23.150 s 618(3): 23.210 s 619: 23.150 s 621(1): 23.170 s 621(2): 23.210 s 621(3): 11.505, 23.170 s 623: 23.170, 23.250 s 624: 23.150 s 625(1): 23.210 s 626: 23.160 s 627: 23.160 s 629: 23.160 s 631(1): 23.250 s 631(2): 23.250 s 631(2)(b): 11.505 s 636: 23.190 s 636(1)(k): 23.210 s 636(1)(l): 23.210 s 638: 23.200, 23.210 s 640(1): 23.200 s 649B: 23.250 s 649C: 23.250 s 650B: 23.250 s 650C: 23.250 s 652B: 23.250 s 652C: 23.250 s 654A: 23.250 s 655A: 23.300 s 656A: 1.300, 23.300 s 657: 1.70 s 657A: 1.300, 23.270, 23.320, 23.330 s 657A(2): 23.330 s 657A(2)(b): 1.70, 1.300, 23.330 s 657C: 23.330 s 657D: 1.300 s 659A: 23.340 s 659B: 23.340 s 659C: 23.340 s 659AA: 23.310 s 661A: 23.260 s 661E: 23.260 s 662A: 23.260 s 664A: 23.260 s 667C: 23.260 s 670A: 23.280 s 670A(1): 23.280 s 670A(3): 23.280 ss 670A to 670D: 23.280 s 670B: 23.280 s 670E: 23.250 s 670F: 23.250 s 671B: 9.120, 23.270 s 671B(1A): 23.270 s 671B(3): 23.270 s 671C: 23.270 s 672A(2): 9.110 s 673: 1.300
Corporations Act 2001 — cont s 674: 11.355, 14.663, 15.330, 15.340, 22.290, 22.300, 22.310, 22.320 s 674(1): 15.340 s 674(2): 15.340, 22.290, 22.310 s 674(2)(c)(ii): 22.310 s 674(2A): 15.340, 22.290, 22.300 s 674(2B): 22.290, 22.300 ss 674 to 678: 3.160, 22.290 s 675: 3.160, 14.663, 15.330, 22.290, 22.310 s 675(2): 22.290 s 675(2A): 22.290 s 677: 22.310 s 700: 21.100 s 700(2): 21.100 s 702: 16.240 s 704: 16.70 s 705: 21.40, 21.90 s 706: 16.70, 21.100, 21.110 s 707(2): 21.100 s 707(3): 21.100 s 707(4): 21.100 s 707(5): 21.100 s 708: 21.100, 21.110, 21.330 ss 708(1) to (7): 21.110 s 708(8): 16.70, 21.200 ss 708(8) to (10): 21.110 s 708(10): 21.200 s 708(11): 21.110, 21.200 s 708(12): 21.110 s 708(13): 21.110 s 708(14): 21.110 s 708(15): 21.110 s 708(16): 21.110 s 708(17): 21.110 s 708(17A): 21.110 s 708(18): 21.110 s 708(19): 21.110, 22.50 s 708(20): 21.110 s 708(21): 21.110 s 708A: 21.100, 21.110 s 708A(5)(a): 21.110 s 708AA: 21.50, 21.100, 21.110, 21.130 s 709: 21.50, 21.70 s 709(1A): 21.160 s 710: 16.70, 21.120 s 710(1): 16.70 s 710(2): 21.120 s 710(3): 21.120 ss 710 to 713: 23.190 ss 710 to 715: 21.180, 21.220 ss 710 to 716: 21.120 s 711: 16.70, 21.120 s 711(7)(b): 21.170 s 712: 21.50, 21.120
811
s 713: 21.50, 21.130 s 713(5): 21.130 s 713A: 21.80 s 713B: 21.80 s 713B(5): 21.80, 21.170 s 713C: 21.160 ss 713C to 713E: 23.190 s 713D: 21.160 s 713E: 21.160 s 714: 21.150 s 714(1)(e)(ii): 21.170 s 715(1): 21.140 s 715(1)(f)(ii): 21.170 s 715A: 21.120, 21.210 s 716: 21.120 s 718: 21.170 s 719: 21.180 s 719(1): 21.180 s 719A: 21.80, 21.180 s 723(1): 16.100, 21.120 s 723(2): 16.100 s 723(3): 16.100, 21.120 s 724: 16.125 s 727(1): 21.220 s 727(2): 21.120 s 727(3): 21.170, 21.220 s 727(4): 21.220 s 728: 8.70, 21.210, 21.220, 21.230, 21.240, 21.250 s 728(2): 21.220 s 728(3): 21.180, 21.230 s 729: 8.70, 21.260 s 729(1): 21.240 s 731: 21.260 s 732: 21.270 s 733(1): 21.280 s 733(2): 21.280 s 733(3): 21.280 s 733(4): 21.280 s 734(2): 21.190 s 734(2A): 21.190 s 734(3): 21.190 s 734(5)(a): 21.190 s 734(5)(b): 21.190 s 734(6): 21.190 ss 734(7)(a) to (e): 21.190 s 736: 21.200 s 736(2): 21.200 s 738: 21.200 s 738A: 21.330 s 738G: 21.330 s 738H: 21.330 s 738J: 21.330 s 738K: 21.330 s 738L: 21.330 s 739: 21.210 s 741(1): 21.210 s 761A: 22.30
Statutes
TABLE OF STATUTES
812
CORPORATIONS LAW: IN PRINCIPLE
Corporations Act 2001 — cont s 761D: 16.240, 22.50 s 761G(7): 22.110 s 761EA: 22.60 s 761GA: 22.110 s 763A(1): 22.20 s 763B: 22.20 s 763C: 22.20 s 763D: 22.20 s 764A: 22.20, 22.50 s 764A(1)(b): 22.40 s 764A(1)(ba): 22.40 s 765A: 22.20 s 766A: 22.70 s 766B: 22.70 s 766C: 22.70 s 766D: 22.70 s 767A: 22.220 s 769A: 7.340 s 769B: 7.340 s 769B(1): 7.350 s 769B(3): 7.320 s 791A: 22.230 s 792A: 22.220, 22.230 s 792B: 22.230 ss 792B to 792E: 22.240 s 792D: 22.320 s 793B: 22.260 s 793C: 22.320 s 793C(2): 22.320 s 793C(5): 22.320 s 794D: 22.320 s 795A: 22.230 s 795B: 22.230 s 798C: 22.220, 22.230 ss 798C to 798E: 22.220 s 798G: 22.240 s 798J: 22.240 s 911A: 22.90 s 911A(2): 22.90 s 912A: 22.90 ss 912A to 912B: 22.90 s 913B: 22.90 s 913B(5): 22.90 s 917A: 22.90 s 923B: 9.78 s 941A: 22.130 s 941B: 22.130 s 941C: 22.130 s 942B(2): 22.130 s 942C(2): 22.130 s 946A: 22.140 s 946B(3A): 22.140 s 946B(1): 22.140 s 947B(2): 22.140 s 947B(3): 22.140 s 947C(2): 22.140 s 947C(3): 22.140
s 949A: 22.140 s 961J: 22.120 ss 961 to 961: 22.120 s 962E: 22.120 s 962G: 22.120 s 962K: 22.120 ss 962 to 962S: 22.120 ss 963E to 963L: 22.120 ss 964 to 964H: 22.120 s 985M: 22.60 ss 985EA to 985M: 22.60 s 1010A: 22.30, 22.100 s 1012A: 22.150 s 1012B: 22.150 s 1012C: 22.150 ss 1013C to 1013DA: 22.150 s 1013E: 22.150 ss 1019D(1)(a) to (d): 9.78 s 1019G: 1.100 s 1020B: 22.160 s 1041A: 22.160 ss 1041A to 1041D: 22.210 ss 1041A to 1041G: 22.210 s 1041B: 22.160 s 1041C: 22.160 s 1041D: 22.160 s 1041E: 22.160 ss 1041E to 1041H: 22.210 s 1041F: 22.160 s 1041G: 22.160 s 1041G(2): 22.160 s 1041H: 11.145, 11.355, 11.505, 14.663, 22.160, 22.210, 22.300 s 1041H(1): 11.145 s 1041H(2): 22.160 s 1041I: 22.210 s 1041I(1): 22.210 s 1042A: 22.170 s 1043A: 22.170, 22.185, 22.210 s 1043A(1)(b): 22.210 s 1043A(2): 22.170 ss 1043A to 1043O: 22.160 s 1043C: 22.170 s 1043F: 22.170, 22.180, 22.185 s 1043G: 22.170, 22.180 s 1043H: 22.170 s 1043I: 22.170 s 1043K: 22.170 s 1043L: 22.210 s 1043O: 22.210 s 1070A: 9.130, 16.20 s 1070A(1): 9.180 s 1070A(1) to (2): 9.40 s 1071B: 9.140 s 1071B(2): 9.140 s 1071B(5) to (10): 9.50 s 1071E: 9.186
Corporations Act 2001 — cont s 1071F: 9.180, 9.186, 14.190 s 1072A: 5.50, 9.130 s 1072B: 5.50, 9.130 s 1072D: 5.50, 9.130 s 1072E(9): 9.110 s 1072E(11): 9.110 s 1072F: 5.50, 9.130 s 1072F(1): 9.140 ss 1072F to 1072G: 9.180 s 1072G: 5.50, 5.80, 9.130 s 1072H: 9.110 s 1075A: 9.150 s 1091G: 1.100 s 1101B: 22.320 s 1274(7A): 3.80 s 1279: 24.130 s 1280: 15.400 s 1282: 24.30, 24.130 s 1283: 24.130 ss 1299A to 1299B: 15.400 s 1300: 3.100, 3.160 s 1300(3): 9.70 s 1303: 6.310 s 1306: 9.70, 15.90 s 1308: 15.360, 15.480 s 1309: 15.360, 15.480 s 1311: 15.340, 20.100, 20.110, 21.230, 22.210, 22.290 s 1312: 7.350, 21.230 s 1316A: 7.360 s 1317E: 11.210, 11.346, 12.255, 15.90, 15.160, 22.290 s 1317G: 11.145, 11.210, 11.346, 13.150 ss 1317G(1A) to (1B): 22.210, 22.290 s 1317H: 11.180, 11.210, 18.190, 18.500 s 1317J(3A): 22.210 s 1317L: 13.150, 13.155 s 1317P: 11.200, 11.220 s 1317S: 13.56, 13.330 s 1317EB: 11.590 s 1317HA: 22.210 s 1317DAC: 15.340, 22.290 s 1317DAE: 22.290 s 1318: 13.56, 13.135, 13.330 s 1321: 24.410 s 1322: 10.300, 14.40, 14.230, 14.565, 21.100, 24.160 s 1322(2): 14.560 ss 1322(2) to (3B): 10.300 s 1322(4): 10.130, 10.300, 10.305, 14.565 s 1322(4)(a): 14.565 s 1323(1): 24.380
813
s 1324: 5.250, 11.180, 13.230, 14.40, 14.170, 14.230, 14.530, 14.540, 14.550, 17.320, , 18.510 s 1324(1): 14.520 s 1324(4): 14.550 s 1324(10): 14.530 s 1325A: 18.200 s 1344: 3.110 s 1415: 5.140 r 256B(1): 18.130 Ch 2C: 3.160 Ch 2D: 5.40 Ch 2E: 4.100, 6.220, 11.215, 13.20, 13.240, 13.250 Ch 2H: 16.10 Ch 2J: 18.20, 18.40, 18.60, 18.500, 18.510 Ch 2K: 20.195 Ch 2M: 15.20, 15.30, 15.40, 15.60 Ch 5: 10.10, 20.180 Ch 5C: 22.40 Ch 5D: 1.100 Ch 6: 6.240, 21.110, 23.10, 23.30, 23.90, 23.120, 23.130, 23.250, 23.300, 23.330 Ch 6A: 14.110, 23.260 Ch 6C: 23.270 Ch 6D: 2.630, 8.40, 16.70, 16.240, 21.10, 21.30, 21.40, 21.50, 21.110, 21.180, 21.210, 21.220, 21.330, 22.30, 22.50, 22.100, 22.150, 23.190 Ch 7: 1.100, 6.120, 16.240, 21.10, 21.70, 22.10, 22.20, 22.30, 22.40, 22.50, 22.60, 22.70, 22.100, 22.120, 22.150, 22.170, 22.180, 22.220, 22.330 Ch 7, Pt 7.2A: 22.240 Ch 22: 21.10 Pt 1.2A: 3.150, 3.160, 15.50 Pt 1.5: 2.640 Pt 2A.2: 3.70 Pt 2B.6: 3.120 Pt 2D.1: 5.260, 6.190, 6.200, 8.60, 11.80, 11.90, 11.130, 11.180, 11.570, 13.330, 14.550 Pt 2D.2: 6.220, 6.240, 13.240 Pt 2D.3: 6.170, 6.220 Pt 2D.5: 6.220, 6.240 Pt 2D.6: 4.50, 6.280 Pt 2F.1: 5.190, 5.260, 6.220, 6.270, 9.100, 12.100, 13.300, 14.40, 14.170, 14.310, 14.330, 14.613, 17.320, 18.230, 18.510, 19.70, 19.80, 20.40
Statutes
TABLE OF STATUTES
814
CORPORATIONS LAW: IN PRINCIPLE
Corporations Act 2001 — cont Pt 2F.1A: 6.50, 8.60, 14.10, 14.40, 14.220, 14.240 Pt 2F.2: 5.190, 10.160, 14.40, 17.190, 17.200, 17.230 Pt 2G: 10.10 Pt 2G.1: 10.10 Pt 2G.2: 10.10, 10.60 Pt 2G.3: 3.150, 3.160 Pt 2H.5: 19.10 Pt 2J.2: 4.110, 9.10 Pt 2J.3: 11.215 Pt 2M: 3.160 Pt 2M.2: 15.360, 15.370 Pt 2M.3: 15.360, 15.370 Pt 2M.3, Div 2: 3.160 Pt 2M.4A: 15.380 Pt 2N: 3.160 Pt 2N.2: 3.150 Pt 5.1: 21.110 Pt 5.2: 24.320 Pt 5.3A: 14.663, 24.110 Pts 5.4 to 5.9: 24.130 Pt 5.8A: 4.70, 4.140 Pt 5B.2, Div 1: 3.30 Pt 5B.2, Div 2: 3.40 Pt 5B.3: 3.120 Pt 6C.2: 9.110 Pt 7.5, Div 4: 22.330 Pt 7.6: 6.120 Pt 7.7A: 22.120 Pt 7.9: 21.110, 22.30, 22.150 Pt 7.10: 1.100 Pt 7.10, Div 3: 13.20 Pt 9.4: 7.350 Pt 9.4B: 15.340, 15.360, 22.210 Pt 9.4AAA: 11.150 Pt 10.1: 5.140 Sch 3: 7.350, 20.100, 21.230, 22.210
Corporations Amendment (Further Future of Financial Advice Measures) Act 2012: 22.100, 22.120
Corporations Amendment (Corporate Reporting Reform) Act 2010: 1.100
Corporations (Fees) Amendment Act 2011: 1.100
Corporations Amendment (Crowd-sourced Funding) Bill 2015: 21.30, 21.330
Corporations (Fees) Regulations 2001: 3.150
Corporations Amendment (Financial Advice Measures) Act 2016: 1.100 Corporations Amendment (Financial Market Supervision) Act 2010: 1.100, 1.210, 22.220, 22.240 Corporations Amendment (Further Future of Financial Advice) Act 2012: 22.120
Corporations Amendment (Future of Financial Advice) Act 2012: 22.90, 22.120 Corporations Amendment (Future of Financial Advice Measures) Act 2012: 1.100 Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011: 1.100, 6.230 Corporations Amendment (Improving Accountability on Termination Payments) Act 2010: 1.100 Corporations Amendment (Insolvency) Act 2007: 4.100, 4.160 Pt 5.6, Div 8: 4.100, 4.160 Corporations Amendment (No 1) Act 2010: Corporations Amendment (No 1) Act 2010: 1.100 Corporations Amendment (Phoenixing and Other Measures) Act 2012: 1.100, 4.50 Corporations Amendment (Proxy Voting) Act 2012: 1.100, 10.85 Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014: 1.100 Corporations Amendment (Sons of Gwalia) Act 2010: 1.100, 14.670 Corporations Amendment (Takeovers) Act 2007: 23.140, 23.270, 23.330
Corporations Law: 1.50, 1.60, 1.70, 1.80, 1.90, 1.110, 1.120, 1.310, 13.150, 16.130 s 129(2): 7.160 s 129(3): 7.160 s 129(6): 7.160 s 164(3)(b): 7.160 s 164(3)(c): 7.160 s 164(3)(e): 7.160 s 229(3): 13.130
TABLE OF STATUTES
Corporations Law Amendment (Employee Entitlements) Act 2000: 4.140 Corporations Legislation Amendment (Audit Enhancement) Act 2012: 1.100 Corporations Legislation Amendment (Deregulatory and Other Measures) Act 2015: 1.100 Corporations Legislation Amendment (Derivative Transactions) Act 2012: 1.100 Corporations Legislation Amendment (Financial Reporting Panel) Act 2012: 1.100 Corporations Legislation Amendment (Financial Services Modernisation) Act 2009: 1.100, 6.120, 22.60 Corporations Legislation Amendment (Simpler Regulatory System) Act 2007: 6.100, 13.250 Corporations Regulations 2001: 1.100, 22.50, 22.110, 22.260, 22.330 s 7.5.74: 22.330 reg 1.0.13: 3.150 reg 1.1.01: 9.74 reg 2A.1.01: 2.80 reg 2B.6.03: 3.110 reg 2C.1.03: 9.78 reg 2C.1.04: 9.78 reg 5.6.21: 24.50 reg 5B.3.03: 3.110 reg 6D.2.04: 21.160 reg 6D.2.05: 21.160 reg 6D.2.06: 21.160 reg 7.2.07: 22.260 reg 7.5.53: 22.330 reg 7.5.64: 22.330 reg 7.6.02AB: 22.110 reg 7.6.02AE: 22.110 reg 7.6.03: 22.90 reg 7.7.02A: 22.130 reg 7.7.09(3): 22.140 reg 7.9.61AA(5): 22.150 reg 12.8.06: 9.78
Pt 7.9, Div 5AB: 22.150 Sch 2: 3.70 Sch 6: 3.140 Sch 6, reg 6203: 3.140 Sch 7, reg 7004: 3.110 Sch 10BA, Pt 3: 22.150 Corporations and Financial Sector Legislation Amendment Act 2013: 1.100 Corporations and Other Legislation Amendment (Trustee Companies and Other Measures) Act 2011: 1.100 Criminal Code: 7.340, 22.290 s 11.2: 22.290 s 12.1(2): 7.340 s 12.2: 7.340 s 12.3(1): 7.340 s 12.3(2)(d): 7.340 s 12.4(2): 7.340 Criminal Code Act 1995: 7.340 s 3: 7.340 s 137.1: 9.78 s 137.2: 9.78 Cross-Border Insolvency Act 2008: 1.130 Fair Entitlements Guarantee Bill 2012: 4.140 Federal Court of Australia act 1976 s 23: 14.550 Financial Sector Legislation Amendment (Review of Prudential Decisions) Act 2008: 1.240, 22.250 Sch 1: 1.240, 22.250 Sch 2: 1.240 Sch 3: 1.240 Sch 4: 1.240 Financial Sector (Shareholdings) Act 1998: 23.40 Financial Services Reform Act 2001: 16.70, 21.70, 22.10 First Corporate Law Simplification Act 1995: 1.110 Foreign Acquisitions and Takeovers Act 1975: 23.40, 23.160 Income Tax Assessment Act 1997 s 181: 12.320 Insolvency Law Reform Act 2016: Insurance Acquisitions and Takeovers Act 1991: 23.40
Statutes
Corporations Law — cont s 232(2): 13.130 s 254E: 16.125 s 698: 23.250 s 723(3): 16.125 s 724(1)(b): 16.125 s 724(2): 16.125 First Schedule: 5.130
815
816
CORPORATIONS LAW: IN PRINCIPLE
Insurance Act 1973: 22.250
NEW SOUTH WALES
Life Insurance Act 1995: 1.190, 21.110, 22.250
Associations Incorporation Act 2009: 2.420
Medical Indemnity (Prudential Supervision and Product Standards) Act 2003: 1.190
Civil and Administrative Tribunal Act 2013 Pts 2-1 to 2-4: 2.10
National Consumer Credit Protection Act 2009: 1.190
Partnership Act 1892 s 1: 2.40 s 5: 2.115 s 12: 2.115
Native Title Act 1993: 1.350 Native Title (Prescribed Bodies Corporate) Regulations 1999: 1.350 Personal Liability for Corporate Fault Reform Act 2012: 1.100, 6.320 Personal Property Securities Act 2009: 1.100, 4.20, 4.70, 20.10, 20.120, 20.240, 24.60 s 12: 20.170 s 12(5): 20.170 s 19: 20.200 s 20: 20.200 s 55: 20.195 ss 164 to 166: 20.190 s 267: 20.180 Personal Property Securities (Corporations and Other Amendments) Act 2010: 1.100, 20.120 Personal Property Securities (Corporations and Other Amendments) Act 2011: 1.100, 20.120 Personal Property and Securities Act 2009: 24.310 Retirement Savings Accounts Act 1997: 1.190 Second Corporate Law Simplification Bill 1996: 1.110 Superannuation Industry (Supervision) Act 1993: 1.190, 22.250 Superannuation (Resolution of Complaints) Act 1993: 1.190 The Corporations Amendment (Sons of Gwalia) Act 2010: 1.100 Trade Practices Act 1974: 21.260 s 52: 14.663
Protection of the Environment Operations Act 1997 s 105(1): 4.90
QUEENSLAND Associations Incorporation Act 1981: 2.420 Partnership Act 1891 s 5: 2.40 s 8: 2.115 s 15: 2.115
SOUTH AUSTRALIA Associations Incorporation Act 1985 s 40B: 2.480
VICTORIA Associations Incorporation Act 1981 s 16: 2.350 Associations Incorporation Reform Act 2012: 2.420, 2.435, 2.450, 2.475 s 1: 2.450 s 5: 2.430 s 6: 2.430 s 7(3): 2.430 s 9: 2.440, 2.510 ss 10 to 15: 2.490 s 15(1): 2.420 s 22: 2.430 s 23: 2.440 s 24: 2.470 s 28: 2.460 s 29: 2.420 s 29(2): 2.440 s 33: 2.420 s 46: 2.510 s 47: 2.430 s 49: 2.450 s 50: 2.450 s 52: 2.440, 2.477 s 55: 2.510
TABLE OF STATUTES
Associations Incorporation Regulations 2009: 2.430, 2.450 Co-operatives Act 1996: 2.435 Companies (Victoria) Code 1981 s 539: 10.300 Federal Courts (Consequential Amendments) Act 2000 Pt 4: 1.70 Legal Profession Act 2004 Pt 2.7: 5.210 Partnership Act 1958: 2.60 s 3: 2.90 s 4: 2.60 s 5: 2.40, 2.90 s 6: 2.90, 2.430 ss 6(2) to (3): 2.90 s 6(3): 2.90 s 8: 2.70 s 9: 2.110, 2.115
ss 9 to 12: 2.110 s 11: 2.435 s 13: 2.120 s 14: 2.130 s 15: 2.130 s 16: 2.115, 2.130 s 18: 2.140 s 21: 2.190 s 21(3): 2.190 s 23: 2.160 s 24: 2.170 ss 24 to 26: 2.170 s 25: 2.170 s 28(1): 2.160 s 28(2): 2.160 s 28(3): 2.160 s 28(4): 2.160 s 28(5): 2.160 s 28(6): 2.160 s 28(7): 2.160 s 28(8): 2.160 s 29: 2.160 s 32: 2.160 s 33: 2.160 s 34: 2.160 s 35: 2.160 ss 36(a) to (b): 2.200 s 36(c): 2.200 s 37: 2.200 s 38: 2.200 s 39: 2.200 s 40: 2.190 s 40(2): 2.190 s 41: 2.210 s 42: 2.210 s 43: 2.210 s 46: 2.210 s 47: 2.430, 2.435 s 48: 2.210 Supreme Court Act 1986 s 37: 24.380 Supreme Court (General Civil Procedure) Rules 2015 O 17: 2.80 O 39: 24.380 Trade Unions Act 1958: 2.435
UNITED KINGDOM Companies Act 1862: 18.25 Trade Descriptions Act 1968: 7.313 s 24(1): 7.313
Statutes
Associations Incorporation Reform Act 2012 — cont s 63: 2.470 s 64: 2.450 s 67(1): 2.510 s 67(2): 2.510 s 67(3): 2.510 ss 72 to 78: 2.460 ss 82 to 87: 2.450 s 89: 2.470 s 90(2): 2.475 s 90(3): 2.475 s 90(4): 2.475 s 90(5): 2.475 s 90(6): 2.475 s 92: 2.477 s 93: 2.477 s 95: 2.477 s 96: 2.477 s 98: 2.477 s 99: 2.477 s 102: 2.470 ss 109 to 115: 2.490 s 111(4): 2.500 s 125: 2.540 s 126: 2.540 s 127: 2.540 Pt 9: 2.530 Pt 13: 2.477 Pt 14: 2.477 Sch 1: 2.430, 2.450
817
A
ABN — see Australian Business Number (ABN) Aboriginal and Torres Strait Islander corporations audit, [15.20] business structures, [2.10] classes of shares, [17.10] coming into existence, [4.10] corporate liability, [7.10] Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth), [1.350] directors’ duties — see Directors’ duties dividends, [19.10] division of powers, [6.10] external administration, [24.10] financial reports, [15.20] fundraising, [21.10] loan capital, [20.10] meetings, [10.10] members rights and remedies, [14.10] membership of company, [9.10] gender composition, [9.10] personalised internal rules, [5.10] promoters, and, [8.10] Registrar of Indigenous Corporations Bunurong Land Council, and, [11.10] calling general meeting, [10.10] Canberra housing corporation, and, [6.10] external administration, and, [24.10] Githabul Nation Aboriginal Corporation, and, [12.10] Kempsey Medical Service, and, [11.10] Minimbah School, and, [6.10] North Australian Aboriginal Family Violence Legal Service Aboriginal Corporation (NAAFVLS), and, [13.10] registration, [2.10], [3.10] “indigeneity requirement”, [3.10] separate legal entity, as, [4.10] share capital, [16.10] transactions affecting, [18.10] takeovers, [23.10] ACCC — see Australian Competition and Consumer Commission (ACCC) Accounting standards, [1.100], [1.120], [1.170], [1.260], [2.660], [2.690], [11.348], [19.100] compliance, [15.150] financial reporting, [15.140], [15.170], [15.460]
margin lending reforms, [6.120] ACN — see Australian Company Number (ACN) Administrator — see also Voluntary administration agent of company, as, [24.40] appointment notice to ASIC, [24.40] report to creditors, [24.40] substantial secured party, rights of, [24.60] complaints regarding, [24.40] creditors’ meetings, [24.50] deed of company arrangement, [24.100] indemnity, [24.90] investigation of affairs, [24.40] liabilities, [24.80] liquidator, [24.300] Patrick Stevedores case, [4.120], [4.150] powers and role, [24.40] reliance on s 447A(1), [24.110], [24.115] case law, [24.115] Advertisements disclosure documents, and, [21.190] Annual general meeting (AGM) — see also General meeting — see also Members’ meeting auditor — see Auditor conduct, [10.90] directors’ obligations regarding, [10.80] frequency, [10.70] listed company, [10.70], [10.90] matters considered at, [10.80], [10.85] members proposing resolutions, [10.85], [10.240] questions by, [10.90] notice, [10.85], [10.190] contents of, [10.80], [10.85], [10.210] method of giving, [10.200] overview, [10.70] proxy voting corporations legislation reforms, [1.100] remuneration report, [10.80], [10.90] reforms, [10.85] who must hold, [3.160], [10.70] Annual review notifying ASIC of changes, [15.290] overview, [1.120], [3.150], [15.310]
Index
INDEX ..................................................................................................................................
820
CORPORATIONS LAW: IN PRINCIPLE
Annual Statement, [1.120], [3.150], [3.160], [15.310] APRA — see Australian Prudential Regulation Authority ARBN (Australian Registered Body Number), [3.110], [3.170] Articles of association constitution of pre-1998 company, [5.140] internal rules prior to 1 July 1998, [5.130] ASCOT database, [1.170], [3.170] ASIC — see Australian Securities and Investments Commission Association incorporated — see Incorporated association not-for-profit — see Not-for-profit association unincorporated — see Unincorporated not-for-profit association ASX — see Australian Securities Exchange ASX Listing Rules compliance with, [2.630], [5.70], [15.10], [22.320] on-market share buy-backs, [18.390] promoters, [8.70] continuous disclosure, [15.330], [15.340], [22.280] enforcement of, [22.300], [22.310] false markets, [22.280] membership restrictions, [9.30] overview, [22.270] Rule 3.1, [15.340], [22.280], [22.300], [22.310] transfer of shares, [9.130], [9.150] ASX Trade nature and purpose, [9.160] Audit Aboriginal and Torres Strait Islander corporations, [15.20] auditor — see Auditor Corporations Act, [15.20] financial reports, [15.130] incorporated associations, [2.470] obligations, [15.80] reforms, [15.20], [15.380] regulation overview, [15.60] purpose of, [15.10], [15.380] terminology of, [15.30]
types of entity, [15.40] Auditor annual general meeting appointment at, [10.80] duty to answer questions at, [10.90], [15.450] report considered at, [10.80] appointment AGM, at, [10.80] general meeting, by, [6.30] proprietary and public companies, [15.390] small companies limited by guarantee, [15.390] tenure of, [15.420] ASIC, reporting to, [15.470] CLERP 9 reforms, [1.140], [6.90], [15.380], [15.400] conflict of interest, [6.100] dividends, liability for wrongful payment, [19.150] duties company, to, [15.500] general law, [15.490] outsiders, to, [15.510], [15.520] reporting — see Auditor’s report statutory, [15.450] using reasonable care and skill, [15.500] false or misleading statements, [15.480] independence, [1.140], [6.90], [6.100], [15.410] liability, criminal, [15.480] misleading or deceptive conduct, [15.530] negligent misstatement, [15.510] proprietary and public companies, [15.390] qualifications, [15.400] removal by general meeting, [6.30] remuneration AGM, fixing at, [10.80], [10.85] disclosure in directors’ report, [15.230] report — see Auditor’s report rotation, mandatory, [15.430] corporations legislation reforms, [1.100] small companies limited by guarantee, [15.390] small proprietary companies, [15.390] tenure, [15.420] tort liability, [15.500] Auditor’s report AGM, consideration at, [10.80] ASIC, to, [15.300], [15.470] false or misleading statements, [15.480] members, to, [15.250], [15.280], [15.460] Australian Business Number (ABN) allotment on registration, [3.110] company, [3.110]
Australian Business Number (ABN) — cont compliance with rules for use, [3.150] overview, [3.110] partnership, [2.70] sole trader, [2.30] use of, [3.110]
Australian Competition and Consumer Commission (ACCC) ASIC, relationship with, [1.230] Australian Financial Markets Licence (AFML), [22.230] Australian Financial Services Licence (AFSL), [22.90]
Australian Registered Body Number (ARBN), [3.110], [3.170] Australian Securities and Investments Commission (ASIC) ACCC, Co-operation Agreement with, [1.230] accountability, [1.200] administration of corporations legislation, [1.60], [1.170] aims, [1.170] Annual Statements, [3.150], [3.160], [15.310] APRA and, [1.240] ASCOT database, [1.170], [3.170] ASX and, [1.210] auditor reporting to, [15.470] background, [1.150], [1.160] body corporate, [1.160] capability review, [1.180] changes to company, notifying, [3.150], [15.290] company searches, [3.170] Director of Public Prosecutions (Cth) and, [1.250] disclosure documents, powers relating to, [21.210] disqualification of directors, [6.300] document imaging system, [3.170] enforcement of corporations legislation, [1.60], [1.170] establishment, [1.150] Financial Reporting Council and, [1.260]
821
financial services regulation, [22.10], [22.240], [22.300], [22.310] functions, [1.170], [3.160] legislation administered by, [1.190] market supervision transfers corporations legislation reforms, [1.100] members, [1.160] Memoranda of Understanding APRA, [1.240], [22.240] ASX, [1.210], [22.240], [22.300], [22.310] corporate regulators in other countries, [1.270] Reserve Bank, [22.240] Takeovers Panel, [1.220] offices, [1.160] reporting to, [15.290], [15.330] share issues, notification of, [3.150], [15.290], [16.100] strategic review, [1.180] takeovers, powers relating to, [23.300] Takeovers Panel and, [1.220], [1.300] true ownership of shares, obtaining information about, [9.110]
Australian Company Number (ACN) compliance with rules for use, [3.150] overview, [3.110] use on documents, [3.110]
Australian Prudential Regulation Authority (APRA) ASIC, relationship with, [1.240] role, [22.250]
INDEX
Australian Securities Exchange (ASX) application for listing on, [22.270] ASIC supervisory role, [1.210] Corporate Governance Principles and Recommendations, [6.80] derivatives market, [22.220] Disciplinary Tribunal, [22.260] financial markets regulation, [22.10], [22.220], [22.260] listing on, [22.270] Listing Rules — see ASX Listing Rules Memorandum of Understanding with ASIC, [1.210], [22.240] merger with Sydney Futures Exchange, [1.210], [22.220] Operating Rules, [22.260] overview, [22.220] public companies listed on — see Listed public company reporting to, [15.340] role of, [1.210], [22.220], [22.260] securities market, [22.210] share issues, notification of, [16.100]
B
Bankruptcy directors, [6.290] member, ceasing to be, [9.50], [9.60] Board division of powers board vs general meeting, [6.50] execution of contracts, [7.40] meetings — see Directors’ meeting
Index
B
822
CORPORATIONS LAW: IN PRINCIPLE
Board — cont organ of company, [6.20] Breach of directors’ duties account of profits, [11.170] burden of proof, [11.200] care, skill and diligence, [11.330] civil penalties, [11.200], [11.215], [11.330], [13.150] Rich v ASIC, [13.155] sentencing, [13.166] class action, [14.570] common law remedies, [13.140] compensation, [11.180], [11.210] conflict of interest, [13.30], [13.100] civil penalties, [13.150], [13.155], [13.166] common law remedies, [13.140] criminal liability, [13.160], [13.166] ratification by general meeting, [13.290] consequences, [13.350] Corporations law, under, [11.130] court examination of director, [11.180] court orders, [11.180] court relief, [13.330] criminal penalties, [11.220], [11.230], [13.160] objective test, [13.163] damages common law, [11.170] statutory, [11.180] declaration of trust, [11.170] disclosure of interests, [13.230] dishonesty or recklessness, [11.220], [11.230], [13.160] disqualification, [6.280] equitable remedies, [11.160], [11.170] evidence, [11.130] exoneration from civil liability, [13.280] court, by, [13.330] internal rules, by, [13.320] ratification by general meeting, [13.290], [13.310] fiduciary duties, summary of issues arising, [13.340] general law, [11.130] remedies, [11.160], [11.170] good faith to act in interest of company, [12.70], [12.80], [12.255], [13.160] indemnity, [13.320] information, misuse of, [13.90], [13.130] case law, [13.135] injunction, [11.180] insolvent trading, [11.570] insurance against personal liability, [13.320] internal rules excusing, [13.320] issues arising upon breach, summary, [13.350] legal consequences, [11.120], [11.230] management banning order, [11.150], [11.210]
member remedies — see Members’ rights and remedies misleading or deceptive conduct — see Misleading or deceptive conduct misuse of position — see Directors’ misuse of position oppression remedies, [11.180] penalties, [11.190] case law example, [11.215] civil, [11.200], [11.210] criminal, [11.220], [11.230] position, misuse of — see Directors’ misuse of position proper purpose criminal penalty, [12.255], [13.160] determining, [12.200] objective test, [12.250] proper use information, of, [13.130], [13.160] position, of, [13.110], [13.120], [13.135] ratification by general meeting, [6.50], [13.290], [13.310] remedies, [11.160], [11.180], [13.140], [13.160] rescission, [11.170] sanctions, [11.150] sentencing, [6.290] statutory remedies, [11.160], [11.180] termination of employment, [11.170] who may sue, [11.140] winding up, [11.180] Business judgment rule ASIC v Mariner Corporation Ltd, [11.505] defence to breach of duty, [11.480] limitations, [11.500] overview, [11.490] protection from personal liability, [11.490] reform proposals, [11.40], [11.510] Business name — see Name of company Business structure comparison, [2.350] corporate forms, [2.360], [2.410] incorporated associations, [2.420] joint venture, [2.330], [2.350] limited liability partnership, [2.135], [2.350] non-corporate forms, [2.20], [2.350] not-for-profit association, [2.270], [2.350] overview, [2.10] sole trader, [2.30], [2.350] trust, [2.220], [2.350]
C
CALDB — see Companies Auditors and Liquidators Disciplinary Board (CALDB) CAMAC — see Corporations and Markets Advisory Committee (CAMAC) Capital loan — see Loan capital maintenance doctrine — see Capital maintenance doctrine raising — see Fundraising reduction — see Capital reduction share — see Share capital — see Shares Capital maintenance doctrine overview, [18.20] reforms, [18.30] Trevor v Whitworth rule, [18.25] Capital reduction ability to pay creditors not materially prejudiced, [18.80], [18.130] Re CSR Ltd, [18.135] breach of Ch 2J, [18.500], [18.510] cancellation of shares, [18.200] date of effect, [18.170], [18.180] definition, [18.50] equal reductions, [18.150], [18.180] exchanging equity for debt, [18.60] exempted reductions, [18.200] fair and reasonable, [18.80], [18.100], [18.120] case law, [18.115] definition, [18.110] “shareholders as a whole”, [18.120] internal rule, [18.70] legislation, [18.190] lost, [18.200] minimum requirements for, [18.80] exemptions, [18.200] minority member, eliminating, [18.60] protection of shareholders and creditors, [18.90] reasons for, [18.60] regulation of, [18.70] return of capital, [18.60] selective reductions, [18.160], [18.180] matters to consider, [18.170] Winpar Holdings v Goldfields Kalgoorlie, [18.165] share buy-back — see Share buy-back shareholder approval, [18.80], [18.140] equal reductions, [18.150], [18.180] information to shareholders, [18.170] notice of meeting, [18.170], [18.180] selective reductions, [18.160], [18.165], [18.180]
INDEX
823
special resolution, [10.230], [18.160], [18.170] summary of procedures, [18.180] takeover context, [18.200] unlimited companies, [18.200] variation of class rights, whether, [17.230] what constitutes, [18.50] Care, skill and diligence acting collectively to manage company, [11.380] Australian authorities, [11.310], [11.316] ASIC v Hellicar, [11.316] AWA Ltd v Daniels, [11.312] Vines v ASIC, [11.314] business judgment rule, [11.490], [11.510] care — see standard of care below chief financial officers, [11.430] civil penalties, [13.150] sentencing, [13.166] common law duty, [11.260], [11.290] common law remedies, [13.140] contract of employment, [11.250] criminal liability, [13.160] objective test, [13.163] delegation, [11.440], [11.460] determining compliance, [11.300] differing board functions, [11.380] diligence, [11.350] case law, [11.355] entrepreneurial risk-taking, [11.480] equitable duty, [11.260], [11.290] executive directors, [11.250], [11.390], [11.420] general law duties, [11.260], [11.280], [11.290] insolvent trading, preventing — see Insolvent trading issues affecting duty, [11.370], [11.480] legislative reform, [11.620] non-executive chair of listed company, [11.420] non-executive directors, [11.250], [11.390], [11.420] reasonable person test, [11.320] reliance on information or advice of others, [11.470] scope of duty, [11.300], [11.360] skill, [11.340], [11.348] ASIC v Healey, [11.344], [11.346] Re City Equitable Fire Insurance, [11.342] source of duty, [11.240] standard of care, [11.300], [11.320], [11.330] breach of duty v contravention of civil penalty, [11.330] executive and non-executive directors, [11.390], [11.420] Shafron v ASIC, [11.325] statutory duty, [11.270], [11.280], [11.290] summary of duties, [11.600]
Index
C
824
CORPORATIONS LAW: IN PRINCIPLE
Certificate of registration, [3.70], [3.80], [3.150] Charges — see Personal property securities CHESS (Clearing House Electronic Subregister System) nature and purpose, [9.170], [22.260] Chief financial officers directors’ declaration, [15.170] role and responsibilities, [11.430] Civil penalty provisions breach case law, [11.200], [11.215], [11.348] duty of care, of, [11.330] penalties, [11.200], [11.215] proceedings by ASIC, [11.200], [11.215] overview, [11.200] share capital transactions, [18.500] Class action ASIC, by, [14.570] definition, [14.40] CLERP — see Corporate Law Economic Reform Program (CLERP) Common seal ACN, ARBN or ABN on, [3.110] execution of contract, [7.60], [7.70] statutory assumption, [7.100], [7.110] secretary witnessing affixing of, [6.200], [7.70] Commonwealth Treasury, [1.330] Companies Auditors and Liquidators Disciplinary Board (CALDB) role, [1.310] Company articles of association, [5.130] artificial legal entity, [1.10], [6.10] change of status, [2.700] classification of, [2.560], [2.690] liability of members, [2.560], [2.620] public status, [2.630], [2.650] size, [2.660], [2.690] coming into existence, [3.70], [4.10] contracts by — see Contract criminal liability — see Criminal liability division of powers, [6.10], [6.60] board of directors, [6.20] board vs general meeting, [6.50] general meeting, [6.30] residual powers, [6.40]
single director/shareholder companies, [6.60] formation, [2.350], [8.10] liability of, [7.10] Aboriginal and Torres Strait Islander corporations, [7.10] civil penalties, [7.350] contract — see Contract criminal — see Criminal liability tort, [7.270], [7.290] limited by guarantee — see Company limited by guarantee by shares — see Company limited by shares memorandum of association, [5.120] name — see Name of company no liability, [2.580], [2.610] other entities, compared, [2.350] proprietary — see Proprietary company public — see Public company registration — see Registration self-incrimination, [7.360] separate legal entity, as, [4.10], [4.30] types of, [2.360] unlimited, [2.620] Company limited by guarantee ceasing to be member, [9.60] change of status, [2.700] constitution, requirement to have, [5.70] “Limited”, exclusion of, [3.130] overview, [2.580], [2.600] Company limited by shares ceasing to be member, [9.50] change of status, [2.700] company limited by guarantee compared, [2.600] name, [2.590], [2.630] number registered, [2.695] overview, [2.580], [2.590] Small Business Guide, [2.640] Company name — see Name of company Company searches, [1.170], [3.170] Company secretary appointment, [6.200] defective, [6.210] authority to enter contracts, [7.210] change of, notification to ASIC, [3.150], [15.290] execution of contracts, [7.40] failure to comply with statute or company constitution, [6.210] obligation to ensure requirement met, [3.150] powers and duties, [6.200]
Company secretary — cont proprietary company, [6.180], [6.200] public company, [6.180], [6.200] replaceable rules, [5.50] usual (implied actual) authority, [7.210] validity of acts, [6.210] Confidential information conflict of interest, [13.90] purpose, [13.130] meaning, [13.90] misuse, [13.90], [13.130] case law, [13.135] Conflict of interest breach of duty — see Breach of directors’ duties bribes, [13.60] civil penalties, [13.150], [13.166] common law remedies, [13.140] competing with company, [13.100], [13.120] confidential information — see Confidential information contract with company, making, [13.40] corporate opportunity, Taking, [13.80], [13.86] Cook v Deeks, [13.83] corporations legislation reforms, [1.100] criminal liability, [13.160] objective test, [13.163] definition, [13.10] disclosure obligations, [13.20] examples, [13.30], [13.100] misuse of company funds, [13.70] personal profit, making, [13.50], [13.56] Regal (Hastings) v Gulliver, [13.53] source general law duty, [13.20] statutory duty, [13.20] undisclosed benefits, [13.60] voting at general meeting, [13.180] Constitution — see also Internal rules adoption of, [10.230] alteration to displacing replaceable rules, [5.180] effective date, [5.170] general law limits, [5.200] general meeting, power of, [6.30] limits, [5.190] modifying replaceable rules, [5.180] removal of directors, [6.270] special resolution, [5.20], [5.30], [5.160], [10.230] statutory limits, [5.190] binding on parties, [5.150] breach, [5.250] personal rights of members, [14.210] companies that must have, [5.70] compliance with Corporations Act, evidence of, [5.35] contractual effect, [5.150], [5.250], [14.210]
INDEX
825
director’s breach of duty, excusing, [13.320] dividends directors’ power to pay, [19.50] entitlement, [19.60] payment procedure, [19.10] enforcement, [5.250] injunction against breach, [5.260] internal rules of company, [5.20] limitation on powers clause, [5.210] breach, [5.250], [5.260] companies with, [5.240] companies without, [5.230] listed public company, [5.70] members’ rights conferred by, [14.210] memorandum and articles of pre-1998 company, [5.140] modification, [5.20], [5.30], [5.160], [14.120] case law, [14.125] conflicts between members, giving rise to, [14.140] effective date, [5.170] expropriation of shares, [14.130] fraud on the minority, [14.60], [14.210] relevant law, [14.120] replaceable rules, using, [5.180] right to challenge, [14.50] special resolution, [5.20], [5.30], [5.160], [10.230] objects clause, [5.220] acts outside (ultra vires), [5.220] breach, [5.260] companies with, [5.240] companies without, [5.230] overview, [5.90] personalised rules, [5.10], [5.90] pre-1998 company, [5.140] related party transactions — see Related party transactions share issue restrictions, [16.200] single director/shareholder company, [5.100] special resolutions making up, [5.70] specialised provisions, [5.90] statutory provisions, [5.30] Continuous disclosure ASX Listing Rule 3.1, [15.340], [22.280], [22.300], [22.310] CLERP 9, [1.140] directors’ obligations, [13.20] disclosing entities, [3.150], [15.50] definition, [15.40] ED securities, [15.50], [15.330] global financial crisis, and, [6.110] obligations, [15.330] price sensitive information, [15.340], [22.280] statutory obligation, [15.330], [22.290], [22.310] case law, [22.300], [22.310]
Index
C
826
CORPORATIONS LAW: IN PRINCIPLE
Contract agency, principles of, [7.50], [7.60] authority to enter actual, [7.40] apparent (ostensible), [7.40] company secretary, [7.210] express, [7.40] implied, [7.40] individual directors, [7.180] lack of, [7.20], [7.80], [7.230] managing directors, [7.200] sole director companies, [7.190] usual (implied actual), [7.170], [7.210] common seal, [6.200], [7.60], [7.70] constructive notice doctrine, [7.250] contrary to Corporations Act, [7.30] directors’ conflict of interest, [13.40] execution by company, [7.40], [7.60], [7.70] deed, as, [7.75] execution clause on proxy form, [7.75] seal, with, [7.60], [7.110] seal, without, [7.60], [7.110] statutory assumption, [7.100], [7.110] indoor management rule, [7.50], [7.230], [7.250] constructive notice, [7.250] relevance, [7.240] statutory assumptions replacing, [7.50], [7.230] liability of companies, [7.20], [7.260] authority, [7.20], [7.40], [7.170], [7.210] balancing of rights, [7.20] defence of lack of authority, [7.20] general requirements, [7.30] statutory assumptions, [7.80], [7.160] summary, [7.260] overview, [7.20] partners — see Partner pre-registration — see Pre-registration contract public policy, contrary to, [7.30] requirements for enforceability, [7.30] statutory assumptions authority to exercise powers, [7.100] authority to warrant that document genuine, [7.100] case law, [7.150], [7.160] close dealings with individuals, where, [7.120] constitution, compliance with, [7.100] dealings with company, meaning, [7.90] director/secretary duly appointed, [7.100] document duly executed, [7.100], [7.110] entitlement to make, [7.80], [7.90] exceptions, [7.120], [7.160] officers/agents, validity of, [7.100] post-1 July 1998, [7.140] pre-1 July 1998, [7.130] proper performance of duties, [7.100]
replaceable rules, compliance with, [7.100] usual (implied actual) authority company officers, [7.170] company secretaries, [7.210] individual directors, [7.180] managing directors, [7.200] sole director companies, [7.190] voidable, [7.30], [7.230] Controller — see Receivership Corporate collapse, [11.40], [11.215], [14.570], [15.380], [16.30], [22.60] global financial crisis, [6.110] Corporate governance ASX Principles and Recommendations, [6.80] auditor independence — see Auditor CAMAC discussion paper, [6.80] CLERP 9, [1.140], [1.260], [6.80] Combined Code (UK), [6.80] compliance systems, [6.80] continuous disclosure — see Continuous disclosure debate over, [6.80] definition, [6.70] disclosure requirements, [6.90] margin lending, [6.120] Financial Services and Credit Reform Green Paper, [6.120] global financial crisis, and, [6.110] issues, [6.80] recent, [6.110] margin loans, disclosure of, [6.120], [22.60] overview, [6.70] public companies, [6.130] reforms, [6.80], [6.100] auditor independence, [6.90] global financial crisis, following, [6.110] margin lending, and, [6.120] public companies, [6.130] 2007 recommendations, [6.100] statutory regulation vs self-regulation, [6.80] Corporate group CASAC Report, [4.160] consolidated financial statements, [4.110] “control” test, [4.100], [4.160] corporate veil issues, [4.110] cross-directorships, [4.100] cross-shareholdings, [4.100] directors’ duty of good faith, [12.130] individual companies as separate entities, [4.100] exceptions, [4.110] insolvent trading, [4.110] Patrick Stevedores case, [4.120], [4.150]
Corporate group — cont pooling arrangements, [4.100], [4.160] relationship between companies, [4.110] restructuring, [4.130], [4.140] separate legal entity doctrine, [4.100], [4.160] Corporate Law Economic Reform Program (CLERP) CLERP 7, [1.120] CLERP 8, [1.130] CLERP 9, [1.140], [1.260], [1.310], [6.80], [6.90], [6.150], [6.220], [11.40], [11.150], [11.380], [15.380], [15.400], [16.70] overview, [1.110], [1.120] Corporate liability civil penalties, [7.350] contract — see Contract crime — see Criminal liability self-incrimination, [7.360] tort, [7.270] organic theory, [7.280] vicarious liability, [7.290] war crimes, [7.370] Corporate veil corporate groups, [4.110] lifting, [4.60], [4.90] cases, [4.90] general law, [4.80] statute, [4.70] overview, [4.40], [4.50] phoenix companies, [4.50] Corporation company as type of, [2.360] corporation sole, [2.380] registration, formed by, [2.400] Royal Charter, formed by, [2.370] statutory, [2.390] types, [2.360], [2.410] Corporation sole, [2.380] Corporations Agreement 2002, [1.80] Corporations and Markets Advisory Committee (CAMAC) cessation of operation, [1.290] Corporate Groups report, [4.160] directors’ duties, recommendations, [6.80], [11.100] establishment, [1.290] functions, [1.290]
INDEX
difficulties, [1.30] co-operative scheme 19791990, [1.40] Corporate Affairs Commissions (States), [1.40] Corporations Act 2001, [1.80] Corporations Law scheme 19912001, [1.50], [1.70] evolution, [1.50] flowchart, [1.20] pre-1991, [1.30] referral of powers to Commonwealth, [1.80] reform programs, [1.90], [1.100] legislation, [1.100] Simplification Task Force, [1.110] Corporations law administrative bodies, [1.280], [1.340] Creditor definition, [24.10] directors’ duty of good faith to, [12.50], [12.120] liquidators’ duty to, [24.230] meetings, [24.50] schemes of arrangement, [24.420] secured, definition, [24.10] voluntary winding up, [24.140] Criminal liability auditors, [15.480] companies, [7.300], [7.370] case law, [7.313], [7.316] corporate culture, [7.340] Criminal Code Act, [7.340] criminal penalties, [7.350] directing mind and will of company, [7.310] mens rea, [7.300] negligence element, [7.340] offences punishable by imprisonment, [7.340] organic theory, [7.310] overview, [7.300] physical element of offence, [7.340] self-incrimination, [7.360] statutory attribution, [7.320] vicarious liability, [7.330] director’s breach of duty — see Breach of directors’ duties Meridian Global Funds Management Asia Ltd v Securities Commission, [7.316], [7.320] Tesco Supermarkets Ltd v Nattrass, [7.313] Cross-border insolvency, [1.130]
Corporations law Alice Springs Agreement, [1.50], [1.80] constitutional challenges, [1.70]
827
Crowd-sourced funding offers disclosure regime, proposed, [21.30], [21.330]
Index
C
828
CORPORATIONS LAW: IN PRINCIPLE
D
Damages claims for corporations legislation reforms, [1.100] Debenture borrowers’ duties, [20.110] chose in action, [20.50] conversion to shares, [20.90] definition, [20.50], [20.70] disclosure documents exemption, [21.110] distinctions, [20.70], [20.80] guarantors’ duties, [20.110] mortgage, [20.70], [20.80] public offerings, [20.60] register of debenture holders, [3.150], [20.60] secured loan, [20.70] stock, [20.60] subordinating debt, [20.230] trust deed, [20.100] duties of borrowers and guarantors, [20.110] unsecured note, [20.70], [20.80] Debt debt/equity distinction, [20.30], [20.40] debt to equity ratio, [16.10] definition, [16.10] dividend becoming, [19.140] gearing, [16.10] loan capital — see Loan capital subordinating, [20.230] Deed of company arrangement (DOCA) nature and purpose, [24.100] Delegation by director authority to delegate, [11.460] internal rules, permitted by, [11.450] reasons for, [11.440] responsibility for actions of delegate, [11.460] statute, permitted by, [11.460], [12.290] Deregistration ceasing to be member, [9.50], [9.60] Derivative action application for leave, [14.270] “best interests of the company”, [14.275] case law, [14.270] liquidation, effect of, [14.285] rebuttable presumption, [14.280] company’s name, brought in, [14.240] costs, [14.295]
definition, [14.40] directors or officers, [14.260] leave of court, [14.270] “best interests of the company”, [14.275] case law, [14.270] liquidation, effect of, [14.285] rebuttable presumption, [14.280] members’ statutory remedy, [14.10], [14.40], [14.230], [14.240] personal action, definition, [14.40] ratification, effect, [14.290] reasons for bringing, [14.300] Charlton v Baber, [14.305] third parties, [14.260] who can bring, [14.260] winding up, company in process of, [14.260] wrong done to company, [14.240] Derivatives ASX Derivatives, [22.220] definition, [22.50] financial products, [22.20], [22.50] high-yield equity notes (HYENAs), [22.50] over-the-counter (OTC) derivatives, [22.50] Director access to information, [6.310] alternate, [6.160], [6.180] meetings, attending, [10.20] appointment, [6.170] AGM, at, [10.80] alternate director, [6.180], [10.20] casual vacancy, filling, [6.180] consent, [6.190] constitution, restrictions in, [6.190] defective, [6.210], [7.220] existing directors, by, [6.180] general meeting, by, [6.30], [6.180] initial members, [6.180] minimum number, [6.170] one-person company, [6.60] overview, [6.170] restrictions, [6.190] who can appoint, [6.180] authority to enter contracts — see Contract bankrupt, [6.290] board of directors — see Board care, skill and diligence — see Care, skill and diligence changes, notification to ASIC, [3.150], [15.290] confidentiality — see Confidential information conflict of interest — see Conflict of interest convictions for offences, [6.290] prior, appointment and, [6.190] de facto, [6.150] definition, [6.140]
Director — cont delegation of functions — see Delegation by director directing mind and will of company, [7.280] disclosure of interests — see Disclosure of interests disqualification from office, [6.280] ASIC, by, [6.300] bankruptcy, [6.290] breach of duties, for, [6.290] conviction of offence, [6.290] court, by, [6.290] offence to participate in management after, [6.280] overview, [6.280] dividends, payment of — see Dividend duties — see Directors’ duties breach of — see Breach of directors’ duties execution of contracts, [7.40] effectiveness of acts, [6.210] executive, [6.160], [11.390] remuneration, [6.220] standard of care, [11.390], [11.420] fiduciary relationship with company, [6.220], [11.50] fraud, [11.20] insolvent, [6.190] liability for corporate fault, [6.320] management banning order, [11.150], [11.210] managing, [6.160] appointment, [6.180] authority to enter contracts, [7.200] meetings — see Directors’ meeting minimum number, [6.180] mismanagement, [11.20] nominee, [6.160] duty of good faith, [12.140] non-executive, [6.160], [11.390] remuneration, [6.220] rival companies, of, [13.100] standard of care, [11.390], [11.420] obligation to ensure requirement met, [3.150] personal liability for corporate fault, [6.320] powers, [6.20] single director/shareholder company, [6.60] proprietary company minimum number, [6.170] public company corporate governance reforms, [6.130] minimum number, [6.170] removal, [6.260] remuneration disclosure, [6.230] related party transactions — see Related party transactions removal of, [6.170] alteration of constitution, [6.270] general meeting, by, [6.30], [6.250] proprietary company, [6.250]
INDEX
829
public company, [6.260] remuneration, [6.220], [6.230] AGM, consideration at, [10.80], [10.85] disclosure requirements, [6.240] global financial crisis, reforms, [6.230] recent developments, [6.230], [10.85] replaceable rules, and, [5.50], [6.170] report — see Directors’ report resignation, [6.170] resolutions, [10.30], [10.40] restrictions on appointments, [6.190] shadow, [6.150] single director/shareholder — see Single director/shareholder company validity of acts by, [6.210] Director of Public Prosecutions (Cth) ASIC and, [1.250] Directors’ duties Aboriginal and Torres Strait Islander corporations, [11.10], [12.10], [13.10] case law, [11.10], [12.10], [13.10] application to other officers, [11.90] breach of — see Breach of directors’ duties business judgment rule, [11.490], [11.510] CAMAC recommendations, [6.80], [11.100] care, skill and diligence — see Care, skill and diligence categories, [11.10] civil penalty provisions, [11.200], [11.215], [13.150] Rich v ASIC, [13.155] sentencing, [13.166] common law remedies, [13.140] company as a whole, owed to, [11.110] company secretary, [6.200] confidential information — see Confidential information conflict of interests — see Conflict of interest corporate collapses, effect, [11.40] criminal liability, [13.160] objective test, [13.163] sentencing, [13.166] debate, [11.40] delegation, [11.440], [11.460] disclosure of interests — see Disclosure of interests extension to other persons, [6.80], [11.100] fiduciary, [6.220], [11.50] fraud, protection against, [11.20], [11.30] good faith in the interests of company — see Good faith information, use of, [13.90], [13.130] case law, [13.135] insolvent trading, preventing — see Insolvent trading
Index
D
830
CORPORATIONS LAW: IN PRINCIPLE
Directors’ duties — cont loyalty and good faith — see Loyalty and good faith mismanagement, protection against, [11.20], [11.30] officers, application to, [11.90] outline of duties, [11.60], [11.70], [12.30] overview, [11.20], [11.70] proper purpose, using powers for — see Proper purpose proper use information, of, [13.130], [13.135] position, of, [13.110], [13.120], [13.135] protection of shareholders, [11.20] reason for, [11.20], [11.50] related party transactions, [13.250], [13.270] retaining discretions — see Retaining discretions shares, allotment of, [12.240] best interests of company, acting in, [12.248] Howard Smith v Ampol Petroleum, [12.242] invalid, [12.244] Kokotovich Constructions v Wallington, [11.246] source, [11.80] statutory regulation vs self-regulation, [11.40] who must perform, [11.90] Directors’ meeting alternate directors, [10.20] board meetings, [10.20] calling, [10.30] chair, electing, [10.30] concurrence in action taken, [10.20] informal, [10.20] minute book of resolutions, [3.150], [3.160] notice, [10.20], [10.30] overview, [10.10], [10.50] quorum, [10.30] replaceable rules, [5.50], [10.30] report on, [10.20], [15.220] requirements, [10.20] resolutions, [10.30] single director companies, [10.40] without meeting, [10.30] technology, use of, [10.20] Directors’ misuse of position breach of duty, [13.110] case examples, [13.120], [13.135] civil penalties, [13.150], [13.166] common law remedies, [13.140] criminal liability, [13.160] objective test, [13.163] “gaining of an advantage”, [13.120], [13.135]
Directors’ report AGM, consideration at, [10.80] annual, [15.100], [15.180], [15.230] ASIC, lodgment with, [15.300] board meetings, details of, [10.20], [15.220] contents, [15.180] details of directors and officers, [15.200] general information, [15.190] half-year, [15.110], [15.240] indemnities and insurance, details of, [15.200] listed companies, [3.160], [15.230] members, notification of, [15.250], [15.280] options over shares, details of, [15.200] public companies, [3.160], [10.20], [15.220], [15.280] requirements, [3.160], [15.100] share issues, information relating to, [15.200] specific information, [15.200], [15.230] unused shares, information relating to, [15.200] Disclosing entities, [3.150], [15.50] continuous disclosure, [2.350], [6.90], [15.330] CLERP 9, [1.140], [6.90] obligations, [15.330] definition, [15.40] enhanced disclosure (ED) securities, [15.50], [15.330] financial report, [15.50], [15.100] lodgment with ASIC, [15.300] reporting deadline, [15.280] fundraising, [16.70], [21.10] listed, [15.330] ongoing requirements, [3.160], [15.330] unlisted, [15.330] Disclosure — see also Disclosure documents — see also Disclosure of interests — see also Reporting conflict of interests — see Conflict of interest continuous — see Continuous disclosure disclosing entities — see Disclosing entities documents — see Disclosure documents incorporated associations, [2.350] interests — see Disclosure of interests margin loans, [6.120], [22.60] ongoing requirements, [3.150], [3.160], [15.290] partnership requirements, [2.350] personal interests — see Disclosure of interests price-sensitive information, [15.340], [22.280]
Disclosure — cont share issues, [16.70] short-selling, [6.130] trusts, [2.350] unincorporated associations, [2.350] Disclosure documents — see also Prospectus application form attached, [16.80], [21.120] ASIC’s powers, [21.210] Pluton Resources investigation, [21.210] crowd-sourced funding offers, [21.30], [21.330] exemptions, [21.100], [21.110] financial services guide (FSG), [22.100], [22.130] form, [21.120] fundraising disclosure, [16.70], [21.10] liability where defective, [21.220] civil liability, [21.240] criminal liability, [21.230] defences, [21.250], [21.280] listed securities, offer of, [21.130] lodgment, [21.170] misleading or deceptive statement civil liability, [21.240] criminal liability, [21.220] defences, [21.250], [21.280] forecasts, [21.240] materially adverse, [21.220] misrepresentation, [21.290] fraudulent, damages for, [21.310] negligent, damages for, [21.320] remedies under general law, [21.290], [21.320] rescission, [21.300] modification of provisions by ASIC, [21.210] offer information statement, [21.60], [21.90], [21.140] content, [21.140] lack of knowledge defence, [21.270] securities quoted on ASX, not acceptable for, [21.140] offer of securities for sale, [21.100] offers requiring disclosure, [21.100] omissions, [21.240] product disclosure statement — see Product Disclosure Statement (PDS) profile statement, [21.70], [21.150] approval for use, [21.70], [21.150] content, [21.150] lack of knowledge defence, [21.270] unlisted registered schemes, [21.70], [21.150] prospectus — see Prospectus public companies, [21.20] purpose, [16.70], [21.30] replacement, [21.180] securities covered, [21.100]
INDEX
831
statement of advice (SoA), [22.100], [22.140] supplementary, [21.180] types of, [21.40], [21.70] when required, [21.100] Disclosure of interests board meeting, at, [13.210] breach of duty, [13.230] company proprietary, [13.200], [13.210] public, [13.210], [13.240] single director, [13.210] directors’ remuneration, [6.240] extent of, [13.220] general law duty, [13.180] internal rules modifying duty, [13.200] manner of, [13.210] material personal interest, [13.190] standing notice, [13.210] statutory duty, [13.190] summary of regime, [13.210] Dividend Aboriginal and Torres Strait Islander corporations, [19.10] bonus shares, [19.30] calculation of, [19.40] class rights, [19.80] company, [19.80] debt, becoming, [19.140] decision to pay, [19.50] definition, [19.10] differing rights, [19.80] directors’ liability for wrongful payment, [19.150] power/recommendation to pay, [19.50] entitlement to, [19.60] failure to pay, [19.70] final, [19.20] directors’ recommendation, [19.50] financial assistance to purchase shares, [18.430], [18.450] fixed amount, [19.40] franked, [19.160] half-yearly payment, [19.20] imputation system, [19.160] interim, [19.20] directors’ power to pay, [19.50] internal rules directors’ power under, [19.50] entitlement stated in, [19.60] procedure in, [19.10] liability for wrongful payment, [19.150] oppression failure to pay, [14.390], [19.70] failure to renew policy, [14.390] payment of, [19.20], [19.90] balance sheet test, [19.100] previous rules, [19.130] shareholder protection, [19.110]
Index
D
832
CORPORATIONS LAW: IN PRINCIPLE
Dividend — cont solvency, [19.120] three-limb test, [19.90] percentage of issue price, [19.40] profits, [19.100] existing at time dividend paid, [19.90] payment out of, [19.90] reinvestment plans, [19.30] right to receive, [16.20] wrongful payment, [19.150] yield, [19.40]
debt to equity ratio, [16.10] definition, [16.10] Executive remuneration corporations legislation reforms, [1.100]
Duomatic principle, [10.310]
External administration Aboriginal and Torres Strait Islander corporations, [24.10] creditor, definition, [24.10] inter-relationship between forms, [24.290], [24.300] overview, [24.10] receivership — see Receivership schemes of arrangement, [24.420], [24.430] secured creditor, definition, [24.10] types of, [24.10] voluntary administration — see Voluntary administration winding up — see Winding up
E
F
ED securities, [15.50], [15.330]
False or misleading statements ASX, made to, [11.145] disclosure documents, [21.240] civil liability, [21.240] criminal liability, [21.220] defences, [21.250], [21.280] materially adverse, [21.220] financial products, [22.160], [22.210] replacement or supplementary PDS, [21.180] takeovers, [23.230] liability for, [23.280]
Documents document imaging system (DOCIMAGE), [1.170], [3.170] electronic company registration system (ECR), [1.170] electronic lodgment system (EDGE), [1.170]
Eggleston principles, [23.140] Electronic Company Registration (ECR) service, [3.70] Employee directors’ duty of good faith to, [12.50], [12.150], [12.155] case law, [11.155] share scheme buy-backs, [18.350] winding up effect on, [24.210] entitlements on, [24.135] notice of dismissal, [24.210] Employee entitlements General Employee Entitlements and Redundancy Scheme (GEERS), [4.140] lifting corporate veil, [4.70] Patrick Stevedores case, [4.120], [4.150], [24.135] voluntary administration, [4.120], [4.150] winding up, [24.135] Enhanced disclosure securities — see ED securities Environmental protection lifting corporate veil, [4.70] vicarious liability, [7.330] Equity capital, [20.30], [20.40] debt/equity distinction, [20.30], [20.40]
Financial assistance to purchase assisting company’s shares breach of Ch 2J, [18.500], [18.510] definition, [18.450] dividend, [18.430], [18.450] exemptions, [18.480] financial assistance, meaning, [18.450] general restriction, [18.430] lifting corporate veil, [4.70] material prejudice, [18.460] protection of creditors and shareholders, [18.440] shareholder approval, [18.470] Financial markets aims of legislation, [22.10] APRA, role of, [22.250] ASIC, role of, [22.10], [22.240], [22.300], [22.310] ASX — see Australian Securities Exchange (ASX) Australian Financial Markets Licence (AFML), [22.230] compensation scheme, [22.330]
Financial markets — cont definition, [22.220] false, [22.280] licensing, [22.220], [22.230] National Guarantee Fund, [22.330] primary market, [22.220] prohibited conduct, liability for, [22.210] false trading, [22.160] insider trading, [22.170], [22.200], [22.210] market manipulation, [22.160] market rigging, [22.160] misleading or deceptive conduct, [22.160] penalties, [22.210] short-selling, [22.160] regulation of, [22.10], [22.220] role of, [22.220] secondary, [22.220] Financial products aims of legislation, [22.10] definition, [22.20] derivatives, [22.50] dishonest conduct relating to, [22.160], [22.210] exclusions, [22.20] false or misleading statements relating to, [22.160], [22.210] financial investment, [22.20] risk, managing, [22.20] high-yield equity notes (HYENAs), [22.50] managed investment schemes, interests in, [22.40] margin lending facility, [22.60] non-cash payment facilities, [22.20] product disclosure statement — see Product Disclosure Statement (PDS) regulation of, [22.10] securities, [22.30] Financial records Aboriginal and Torres Strait Islander corporations, [15.20] accounting standards — see Accounting standards AGM, consideration at, [10.80], [10.85] ASIC, lodgment with, [15.290], [15.300] audit — see Audit — see Auditor basic obligations, [15.80] breach of requirements, [15.360] compliance reasonable steps to ensure, [15.360] relief from, [15.370] contents, [15.140] corporate groups, consolidated statements, [4.110] Corporations Act, [15.20] definition, [15.90] directors’ declaration, [15.170] directors’ report — see Directors’ report
INDEX
833
disclosing entities definition, [15.40] ED securities, [15.50], [15.330] lodgment with ASIC, [15.300] obligations, [3.160], [15.50], [15.100] reporting deadline, [15.280] entity types, [15.40] false or misleading information, [15.360] financial statements corporate groups, consolidated statements, [4.110] notes, [15.140] financial year, [15.100] form, [15.90] half-year, [15.110] incorporated associations, [2.470] large proprietary companies, [3.160], [15.100] definition, [15.40] lodgment with ASIC, [15.300] reporting deadline, [15.280] members, notification of basic obligation, [15.250] concise report, [15.250], [15.260] deadlines, [15.270], [15.280] requests, [15.260] ongoing requirements, [3.150], [3.160], [15.290] public companies, [3.160], [15.100] definition, [15.40] reporting deadline, [15.280] reasonable steps to ensure compliance, [15.360] reforms, [15.20] registered schemes, [15.100] definition, [15.40] reporting deadline, [15.280] regulation overview, [15.60], [15.70] purpose, [15.10] regulatory terminology, [15.30] relief from compliance, [15.370] requirements, [3.160], [15.100] requirement to keep, [3.160], [15.80], [15.90] retention period, [15.90] Financial Reporting Council, [1.260] Financial reports small proprietary companies, [3.160], [15.120] audit requirement, [15.130] definition, [15.40] lodgment with ASIC, [15.300] reporting deadline, [15.280] true and fair view, [15.160] Financial services advice general, [22.70] “know your client” rule, [22.120] personal, [22.70], [22.120] reasonable basis for, [22.120] remuneration, [22.120]
Index
F
834
CORPORATIONS LAW: IN PRINCIPLE
Financial services — cont statement of advice (SoA), [22.100], [22.140] APRA, role of, [22.250] ASIC, role of, [22.10], [22.240], [22.300], [22.310] Australian Financial Services Licence (AFSL), [22.90] corporations legislation reforms, [1.100] dealing in financial product, [22.70] definition, [22.70] disclosure obligations, [22.100] hybrid financial instruments, [22.100] personal advice to retail clients, [22.120] retail/wholesale client distinction, [22.100], [22.110] dishonest conduct relating to, [22.160], [22.210] financial services guide (FSG), [22.100], [22.130] licences, [22.90] margin lending facility, [22.60] margin loans, disclosure of, [6.120], [22.60] market for financial product, making, [22.70] product disclosure statement — see Product Disclosure Statement (PDS) regulation of, [22.10], [22.70] providers, [22.80] remuneration, [22.120] representatives, [22.80] retail/wholesale client distinction, [22.100], [22.110] statement of advice (SoA), [22.100], [22.140] Wallis Report, [22.10], [22.80] Financial Services and Credit Reform Green Paper, [6.120] Financial Services Guide (FSG), [22.100], [22.130] Financial System Inquiry (Murray Inquiry) recommendations, [1.180] Formation of company incorporation, [3.50] pre-registration contracts — see Pre-registration contract promoters — see Promoter registration — see Registration shelf company, [3.60], [8.90], [8.100] Foss v Harbottle rule in, [14.220] Fraud class action, [14.570] directors, by, [11.20]
on the minority — see Fraud on the minority winding up, [14.640] Fraud on the minority definition, [14.60] doctrine of, [14.60] examples, [14.80] expropriation of company’s property, [14.100] members’ property, [14.110] shares, [14.110], [14.130] majority members not fiduciaries, [14.70] modification of internal rules conflicts between members, giving rise to, [14.140] expropriation of shares, [14.130] relevant law, [14.120] right to challenge, [14.50] ratification of directors’ breach of duty, [13.300] improper, [14.90] right to challenge, [14.50] Fundraising Aboriginal and Torres Strait Islander corporations, [21.10] advertisements, [21.190] ASIC’s powers, [21.210] disclosure documents — see Disclosure documents private methods, [21.10] prospectus — see Prospectus public offers, [21.10] securities hawking, [21.200]
G
General meeting — see also Annual general meeting (AGM) — see also Members’ meeting calling, [10.120] case law, [10.155] court, [10.150], [10.155] directors at request of members, [10.130] directors’ failure to call, [10.130] members, [10.140] contracts execution, [7.40] directors calling, [10.130] election/removal of, [6.30] voting at, [13.180] express powers, [6.30] extraordinary, [10.100] matters considered at, [10.110] members’ control, [10.140], [14.10] notice, [10.190] contents, [10.210] method of giving, [10.200] objection to decision of board, [6.50]
General meeting — cont organ of company, [6.30] proper purpose, [10.120] ratifying breach of duty by directors, [6.50], [13.290], [13.310] reasonable time and place, [10.120] case law, [10.125] replaceable rules, [5.50] residual powers, [6.40], [6.50] takeover approved by, [23.90], [23.110] voting rights, [10.270], [14.10], [14.50] preference shares, [17.100], [17.140] proxies and body corporates, [10.280] who can call, [10.120] Global financial crisis (GFC) corporate reforms, and, [6.110] directors’ remuneration reforms, and, [6.230], [10.85] Productivity Commission report, [10.85] Good faith civil penalties, [13.150], [13.166] classes of shares, [12.110] common law remedies, [13.140] contravention of duty, [12.300] consequences, [12.320] Gerard Cassegrain & Co Pty Ltd (in liq) v Cassegrain, [12.310] corporate groups, [12.130] creditors’ interests, [12.50], [12.120] criminal liability, [13.160] objective test, [13.163] description of duty, [12.60], [12.240] employees’ interests, [12.50], [12.150] case law, [11.155] fiduciary relationship, [11.50], [12.30] general law, under, [12.70] improper purpose objective test, [12.250] internal rules, impact of, [12.160] members’ interests, [12.50], [12.100] nominee directors, [12.140] objective test, [12.250] persons to whom duty owed, [12.40], [12.50] proper purpose, and, [12.255] contravention of duty, [12.300], [12.320] objective test, [12.250] public interest, [12.150] scope, [12.90], [12.160] classes of shares, [12.110] corporate groups, [12.120] creditors, [12.120] employees, [12.150], [12.155] members, [12.100] nominee directors, [12.140] public interest, [12.150] wholly owned subsidiaries, directors, [12.130] shares, allotment of, [12.240] best interests of company, acting in, [12.248]
INDEX
835
Howard Smith v Ampol Petroleum, [12.242] invalid, [12.244] Kokotovich Constructions v Wallington, [11.246] statutory duty, [12.70], [12.255] wholly owned subsidiaries, [12.130] Group company — see Corporate group
H
HIH Royal Commission report, [6.90], [11.40], [11.380], [15.380]
I
Incorporated association audit, [2.470], [2.477] cancellation of incorporation, [2.540] distribution of surplus assets, [2.550] reasons for, [2.530] certificate of incorporation, [2.440] committee members, [2.450] common seal, [2.450] consequences of incorporation, [2.440] constitution, [2.450] limiting powers, [5.210] continuing regulatory requirements, [2.470] eligibility, [2.435] ending, [2.520], [2.550] financial records and returns, [2.470] incorporation procedure, [2.430] internal rules, [2.450] lawful, not-for-profit purpose, [2.435] members dwindling membership, where, [2.520] liability of, [2.420], [2.450] minimum number of, [2.435] rights of, [2.510] name, [2.440] not-for-profit associations, [2.250], [2.420] procedure for incorporation, [2.440] public officer, [2.460] registration, [2.250], [2.430], [2.440] registrable Australian bodies, [3.30] reporting obligations, [2.477] restructure, [2.480] Royal Charter, incorporation by, [2.250] separate legal entity, [2.450] statement of purposes, [2.450] tiered system (Victoria), [2.475] audit, and, [2.477] reporting obligations, [2.477] transfer of incorporation, [2.490] direct transfer, [2.500] winding up, [2.540]
Index
I
836
CORPORATIONS LAW: IN PRINCIPLE
Incorporated association — cont distribution of surplus assets, [2.550] reasons for, [2.530] Indoor management rule, [7.50], [7.90] constructive notice, and, [7.250] overview, [7.230] relevance, [7.240] Insider trading ASX Guidance Note, [22.200] Chinese Wall defence, [22.180], [22.185] ASIC v Citigroup, [22.185] compensation orders, [22.210] corporations legislation reforms, [1.100] definition, [22.170] exclusions, [22.170] inside information, meaning, [22.170] liability, [22.210] penalties, [22.210] presumptions about solvency, [24.280] price-sensitive information, [22.170] prohibition, [22.170] tipping, [22.170] Insolvency meaning, [11.520], [24.10] ratification not available, [13.300] reasonable grounds for suspecting, [11.540] winding up — see Winding up Insolvent trading breach of duty to prevent, [11.570] defences, [11.580], [11.610] civil penalties, [11.570] civil remedies, [11.570] compensation orders, [24.280] corporate groups, [4.110] criminal penalties, [11.220], [11.570] defences, [11.580], [11.610] Metropolitan Fire Systems v Miller, [11.590] directors’ duty to prevent, [11.70], [11.520] Agricultural Land Management Ltd v Jackson, [11.565] breach, [11.570] business judgment rule, and [11.500] disqualification of directors, [6.290] general duty of care, and, [11.560], [11.565] directors’ state of mind, [11.550] dishonesty element, [11.220], [11.570] disqualification of directors, [6.290] expectation of solvency, [11.580], [11.590] holding company liability, [4.110] lifting corporate veil, [4.70] liquidator claim by, [24.270] litigation insurance, [24.280] reasonable grounds for suspecting, [11.540]
requirements, [11.530] what constitutes, [11.530] Insolvent transactions — see Voidable transactions Inspection of company books former directors, [6.310] members’ right, [14.170], [14.180] Smartec Capital Pty Ltd v Centro Properties Ltd, [14.185] minute books, [3.150] registers, [3.150] replaceable rules, [5.50] Internal management rule Foss v Harbottle, [14.220] Internal rules articles of association, [5.130] companies registered pre-1 July 1998, [5.20] constitution — see Constitution director’s breach of duty, excusing, [13.320] memorandum of association, [5.120] modification bona fide, in interests of whole company, [14.150] conflicts between members giving rise to, [14.140] expropriation of shares, [14.110] fraud on the minority, [14.60], [14.210] onus of proving compliance, [14.130] proper purpose, [14.130] relevant law, [14.120], [14.125] requirements for validity, [14.130], [14.150] right to challenge, [14.50] nature of, [5.10] personalised, [5.10] pre-1 July 1998, [5.110], [5.140] replaceable rules — see Replaceable rules share issue restrictions, [16.200] sources, [5.20], [5.30] statutory provisions, [5.30]
J Joint venture company, constitution limiting powers, [5.210] partnership, [2.330] unincorporated, [2.330], [2.350]
L Liability administrators, [24.80]
Liability — cont avoiding pre-registration contract, [8.150] contract law, [7.20], [7.260] authority, [7.20], [7.40], [7.170], [7.210] balancing of rights, [7.20] defence of lack of authority, [7.20] general requirements, [7.30] statutory assumptions, [7.80], [7.160] summary, [7.260] criminal — see Criminal liability false or misleading statements takeover bids, [23.280] personal liability for corporate fault, [6.320] Aboriginal and Torres Strait Islander corporations, [7.10] indemnity, [13.320] legislative reform, [11.620] North Australian Aboriginal Family Violence Legal Services Aboriginal Corporation (NAAFVLS), [7.10] vicarious, [7.330] criminal law, [7.300] tort, [7.290] Licences Australian Financial Markets Licence (AFML), [22.230] Australian Financial Services Licence (AFSL), [22.90] corporations legislation reforms, [1.100] Limited liability partnership, [2.135] Liquidation — see Winding up Listed public company AGM, [10.70], [10.90] application for listing, [22.270] ASX Listing Rules — see ASX Listing Rules constitution, requirement to have, [5.70] continuous disclosure, [22.280] Corporate Governance Principles and Recommendations, [6.80] definition, [15.40] directors’ report, [15.220], [15.230] disclosure of interests in, [9.110] margin loans, [6.120], [22.60] members, [9.30] reporting to ASX, [15.340], [15.350] shareholders — see Shareholder transfer of shares, [9.180] true ownership of shares, obtaining information about, [9.110] Loan capital Aboriginal and Torres Strait Islander corporations, [20.10]
INDEX
837
authority to borrow money, [20.20] debentures — see Debenture debt/equity distinction, [20.30], [20.40] equity capital distinguished, [20.30], [20.40] overview, [20.10] personal property securities — see Personal property securities regulation of, [20.10] subordinate debt, [20.230] Loyalty and good faith — see also Good faith civil penalties, [13.150], [13.166] common law remedies, [13.140] criminal liability, [13.160] objective test, [13.163] fiduciary relationship, [11.50], [12.50] outline, [11.60], [12.30] overview, [11.50], [11.60], [12.10], [12.30] persons to whom duties owed, [12.40], [12.50]
M
Managed investment scheme definition, [22.40] financial reports — see Financial reports interests in, as financial products, [22.20], [22.40] listed true ownership of interests, obtaining information about, [9.110] registered scheme definition, [15.40] unlisted registered scheme profile statement, [21.150] Management banning order sanction for breach of duties, [11.150], [11.210] Margin loans, [22.60] corporations legislation reforms, [1.100] margin lending facility, [22.60] reforms, [6.120] Market manipulation product disclosure, and, [22.150], [22.200] Meetings Aboriginal and Torres Strait Islander corporations, [10.10] AGM — see Annual general meeting (AGM) company, [10.10], [10.60] directors — see Directors’ meeting
Index
M
838
CORPORATIONS LAW: IN PRINCIPLE
Meetings — cont members — see Members’ meeting unanimous consent, doctrine of, [10.310] Member — see also Shareholder Aboriginal and Torres Strait Islander corporations, [9.10] gender composition, [9.10] allotment of shares, [9.20] assertion of membership, [9.90] becoming a, [9.20] ceasing to be company limited by guarantee, [9.60] company limited by shares, [9.50] company as member of another company, [9.10] denial of membership, [9.90] directors’ duty of good faith to, [12.40], [12.90] disclosure of interests, [9.110] Duomatic principle, [10.310] maximum number, [9.10] meetings — see Members’ meeting minimum number, [9.10] minority fraud on — see Fraud on the minority protection of — see Members’ rights and remedies minors, [9.10] proprietary company, [9.10], [9.30] public company, [9.10], [9.30] register of — see Register of members remedies — see Members’ rights and remedies reporting to auditor, [15.460] basic obligation, [15.250] concise report, [15.250], [15.260] deadlines, [15.270], [15.280] requests regarding, [15.260] restrictions on membership, [9.30] schemes of arrangement, [23.435] shareholders as, [9.10] transfer of shares — see Transfer of shares true ownership of interests, [9.110] trustees holding shares for others, [9.110] unanimous consent, doctrine of, [10.310] who are, [9.10] Members’ meeting — see also Annual general meeting (AGM) — see also General meeting body corporate representatives, [10.280] class meetings, [10.160] conduct of, [10.260] counting votes, [10.270] extraordinary — see General meeting irregularities, [10.300], [10.310] case law, [10.305] minute book, [3.150], [3.160], [10.260] notice, [10.190]
contents, [10.210] directors’ duty to provide information, [10.210] listed public company, [10.190] method of giving, [10.200] poll, demanding, [10.270] procedural irregularities, [10.300] case law, [10.305] proxies, [10.280], [10.290] quorum, [10.250] replaceable rules, [5.50], [10.250], [10.290] resolutions member-initiated, [10.240] minute book of, [3.150], [3.160], [10.260] ordinary, [10.220] special, [10.230] right to receive notice and attend, [16.20] single members companies, [10.40], [10.170] technology, use of, [10.260] types, [10.180] voting rights, [10.270], [16.20] preference shares, [17.100], [17.140] Members’ rights and remedies Aboriginal and Torres Strait Islander corporations, [14.10] alternative capacity, claim in, [14.660], [14.670] Sons of Gwalia v Margaretic, [14.663], [14.666] class actions, [14.40], [14.570] contract, rights conferred by, [14.210] correction of register, [14.170], [14.190] derivative action — see Derivative action diverging interests, [14.10], [14.240], [14.680] enforcement of personal rights, [14.220] Foss v Harbottle, rule in, [14.220] fraud on the minority — see Fraud on the minority general law, [14.10], [14.50] injunction, [14.170], [14.230], [14.520], [14.550] conduct caught by s 1324, [14.530] timing of application, [14.550] who may apply, [14.540] insolvent company, claim against, [14.660] inspection of books, [14.170], [14.180] Smartec Capital Pty Ltd v Centro Properties Ltd, [14.185] internal management rule, [14.220] internal rules challenging modification of, [14.50], [14.120], [14.130] rights conferred by, [14.10] legal proceedings, [14.20] minority members fraud on — see Fraud on the minority
Members’ rights and remedies — cont protection of, [14.680] oppression — see Oppression overview, [14.10], [14.20] personal actions, [14.40] personal rights under general law, [14.50] personal rights under statute, [14.160], [14.170] contract, conferred by, [14.210] correction of register, [14.190] enforcement of, [14.220] inspection of books, [14.180], [14.185] variation, [14.200] poll, demanding, [10.270] procedural irregularities, [14.230], [14.560] Weinstock v Beck, [14.565] representative actions, [14.40] restitution rights, [14.660], [14.670] case law, [14.663], [14.666] statutory remedies, [14.40], [14.170] derivative action — see Derivative action injunction, [14.230], [14.520], [14.540] irregularities, [14.560], [14.565] suing directors for breach of duties, [14.50] terminology, [14.30], [14.40] voting at general meetings, [14.10] protection of voting rights, [14.50] Memorandum of association constitution of pre-1998 company, [5.140] internal rules prior to 1 July 1998, [5.130] Minute books, [3.150], [3.160], [10.260] Misleading or deceptive conduct auditors, [15.500], [15.530] prohibited market conduct, [22.160], [22.210] statements made to ASX, [11.145] Misleading statements — see False or misleading statements Mismanagement directors, by, [11.20] Misrepresentation disclosure documents, [21.290] fraudulent, damages for, [21.310] negligent, damages for, [21.320] remedies for, [21.290], [21.320] rescission, [21.300] promoters, [8.50]
INDEX
839
Misuse of position — see Directors’ misuse of position
N Name of company ASIC Identical Names Check, [3.140] “Limited”, use of, [3.120], [3.130] passing off, [3.140] restrictions, [3.140] unacceptable, [3.140] National Companies and Securities Commission (NCSC), [1.40], [1.150] National Guarantee Fund claims against, [9.170], [22.260] nature and purpose, [22.330] Negligence auditors, [15.500] wrongful payment of dividends, [19.150] class action, [14.570] lifting corporate veil case law, [4.90] No liability company change of status, [2.700] constitution, [5.70] limiting powers, [5.210] name, [2.630] overview, [2.580], [2.610] Non-corporate forms of association comparison, [2.350] joint venture, [2.330], [2.350] limited liability partnership, [2.135], [2.350] not-for-profit association, [2.270], [2.350] partnership — see Partnership sole trader, [2.30], [2.350] trust, [2.220], [2.350] Not-for-profit association AGM fixing membership fees, [10.85] constitution limiting powers, [5.210] definition, [2.230] incorporated — see Incorporated association overview, [2.270] partnership, compared, [2.240] profit, incidental, [2.240] purpose of, [2.240] unincorporated — see Unincorporated not-for-profit association
O Occupational health and safety lifting corporate veil, [4.70]
Index
O
840
CORPORATIONS LAW: IN PRINCIPLE
Occupational health and safety — cont vicarious liability, [7.330]
remedies, [14.230], [14.310], [14.515] right to seek, [14.170], [14.320] winding up, [14.230], [14.580], [14.650] resolution by company or class of members, [14.330] uncommercial loans, [14.400] variation of class rights, [17.320] voting rights, restricting, [14.380]
Offer information statement — see also Disclosure documents content of, [21.140] lack of knowledge defence, [21.270] overview, [21.60], [21.90] Office of the Registrar of Indigenous Corporations (ORIC) Larrakia Nation, and, [1.350] Registrar, appointment of, [1.350] role, [1.350] Officer of corporation definition, [6.150], [11.90] director — see Director directors’ duties applicable to, [11.90]
Options, [16.240] Organic theory criminal liability, [7.310] case law, [7.313], [7.316] directing mind and will of company, [7.280], [7.310] tort liability, [7.280]
P One-person company director, appointment of, [6.180] Salomon case, [4.30], [4.37] separate legal entity, [4.30] Oppression abuse of process, [14.430] act or omission by company or class of members, [14.330] affairs of company, conduct of, [14.330] breach constitution, of, [5.250] directors’ duties, of, [11.180] cases successful, [14.340], [14.430] unsuccessful, [14.440], [14.500] conduct covered by s 232, [14.290] controlling member gains, [14.360] court order, [14.310], [14.515] who may apply, [14.320] discrimination, [14.450] dismissal of managing director, [14.500] dividends failure to pay, [14.390], [19.70] policy, failure to renew, [14.390] exclusion from management, [14.410], [14.490] gains by directors, [14.370], [14.515] good faith, effect, [14.450] inaction by directors and company, [14.350] information, failure to provide, [14.420] low profitability, [14.470] managing director, dismissal, [14.500] members’ right to relief, [14.10], [14.515] no departure from contractual position, [14.510] ratification, and, [13.300] refusal to inspect accounts, [14.480] to purchase shares, [14.460] register of members, and, [9.100]
Parliamentary Joint Committee on Corporations and Financial Services, [1.100], [1.200], [1.320], [2.690] Partner — see also Partnership authority to bind firm, [2.110] case law, [2.115] contract, liability in, [2.50], [2.120] holding out person as, [2.140] case law, [2.150] liability of, [2.50], [2.120], [2.350] contract, [2.120] incoming and outgoing partners, [2.190] joint and several, [2.130] limited, [2.135] tort, [2.130] members of firm, apparent, [2.190] relationship between, [2.160] rights and duties, [2.50], [2.160] tort liability, [2.130] Partnership — see also Partner ABN, [2.70] agreement, [2.50], [2.160] assignment of share in, [2.160] business name, [2.70] carrying on business in common, [2.90], [2.240] case law, [2.100] contract, based on, [2.50] definition, [2.50], [2.90] disclosure requirements, [2.350] dissolution, [2.200] consequences, [2.210] finance, [2.350] firm, [2.70] formation, [2.70] legal basis and nature, [2.50], [2.80]
Partnership — cont limited liability partnership, [2.135] maximum size, [2.80], [2.350] net profits, share in, [2.90] not separate legal entity, [2.80] other entities, compared, [2.240], [2.350] property, [2.170] case law, [2.180] statutory regulation, [2.60] taxation, [2.350] termination, [2.200] consequences, [2.210] transferability of interest, [2.160], [2.350] view to profit, [2.90] what constitutes, [2.90] Passing off, [3.140] Perpetual succession company registration and, [4.10] Personal property securities charges (former), [20.130], [20.140] circulating assets, [20.140], [20.150] corporations legislation reforms, [1.100] harmonised legislative regime, [20.120] Corporations Act amendments, [20.130] purpose, [20.120] priority, obtaining, [20.200], [20.205] Re Maiden Civil (P&E) Pty Ltd, [20.205] priority rules, [20.195] registration of, [20.180] effective/defective, [20.190], [20.192] PPS Register, [20.180], [20.190], [20.210] retention of title (Romalpa) clauses under, [20.160] security agreement, [20.150] security interests (formerly “charges”), [20.130] circulating asset, over (floating charge), [20.130], [20.140] definition, [20.170] determining existence of, [20.150] non-circulating asset, over (fixed charge), [20.130], [20.140] transitional arrangements, [20.220] Whittaker Report, [20.240] Phoenix company separate legal entity doctrine, and, [4.50] Preference shares converting, [17.180] definition, [17.40] dividends cumulative, [17.60], [17.70], [17.130] entitlement to, [17.80], [17.130] example, [17.70] issue of, [17.50] participating, [17.90], [17.130]
INDEX
841
priority rights, [17.80] redeemable, [17.110], [17.170], [17.178] proceeds of new share issue, [18.200] Weinstock v Beck, [17.175] Whitby Land Co Pty Ltd v Li, [17.178] repayment of capital, [17.110] rights interpretation of, [17.120], [17.150] shareholders, [17.60], [17.150] voting, [17.100], [17.140] winding up — see Winding up Pre-registration contract company never registered, [8.120], [8.140], [8.160] decrease in number of, [8.90] definition, [8.90] examples, [8.100], [8.110] liability, avoiding, [8.150] principles, [8.10] ratification, [8.120], [8.160] effect, [8.130] failure to ratify, [8.120], [8.140], [8.160] implied, [8.145] statutory provisions, summary, [8.160] Product Disclosure Statement (PDS) information to be disclosed, [22.150] replacement, [21.180] retail/wholesale client distinction, [22.100], [22.110] short-form, [22.150] supplementary, [21.180] when required, [22.150] Profile statement — see also Disclosure documents approval for use, [21.70], [21.150] content, [21.150] unlisted registered schemes, [21.70], [21.150] Promoter breach of duties compensation, [8.70] non-disclosure, [8.70] remedies, [8.50], [8.70] rescission of contract, [8.50] statutory derivative action, [8.60] untrue statements, [8.70] wrong against company, [8.60] company as, [8.20] definition, [8.20] disclosure of interests, [8.10], [8.40], [8.70] duties directors’ duties, and, [8.60] remedies for breach of, [8.50], [8.70] timeline, [8.80] fiduciary relationship with company, [8.30] listed companies, [8.70]
Index
P
842
CORPORATIONS LAW: IN PRINCIPLE
Promoter — cont officer of company, acting as, [8.60] participation in formation of company, [8.20] principles, [8.10] secret profits, duty not to make, [8.30] Proper purpose civil penalties, [13.150], [13.166] common law remedies, [13.140] context, [12.170] criminal penalty, [12.255], [13.160] objective test, [13.163] description of duty, [12.180], [12.255] fiduciary duty, [12.50], [12.190] general law duty, [12.190] good faith and, [12.255] objective test, [12.250] onus of establishing breach, [12.200] persons to whom duty owed, [12.40], [12.50] purpose actual, [12.200], [12.220] legal, [12.200], [12.210] multiple purposes, [12.230] replaceable rules, [12.170] scope of duty, [12.210], [12.248] statutory duty, [12.190], [12.255] Proprietary company AGM, [3.160], [10.70], [10.80] audit requirement relief, [2.680] change of status, [2.700] classification according to size, [2.660], [2.690] company secretary, appointment, [6.180], [6.200] definition, [2.630] directors — see Director disclosure of interests in, [9.110] financial reports — see Financial reports large audit requirement relief, [2.680] definition, [2.660], [15.40] financial reports — see Financial reports ongoing requirements, [3.160] reporting obligations, [2.670], [3.160] limited by guarantee, [2.580], [2.600] by shares, [2.580], [2.590] members number of, [9.10] restrictions, [9.30] name, [2.630] number registered, [2.695] public company, compared, [2.630] replaceable rules, [5.50], [5.80] small definition, [2.660], [15.40] financial reports — see Financial reports
ongoing requirements, [3.160] Small Business Guide, [2.640] unlimited, [2.620] Prospectus — see also Disclosure documents advertisements, [21.190] application form, [16.80], [21.120] ASIC’s powers, [21.210] 2015 report, [21.210] content, [21.120] electronic format, [21.120] exclusions, [21.100], [21.110] form, [21.120] general disclosure test, [21.120] liability where defective, [21.220] civil, [21.240] criminal, [21.230] defences, [21.250], [21.280] listed securities, offer of, [21.130] misrepresentation fraudulent, damages for, [21.310] negligent, damages for, [21.320] remedies under general law, [21.290], [21.320] rescission, [21.300] modification of provisions by ASIC, [21.210] object of legislation, [21.30] reforms, [21.30] offers requiring disclosure, [21.100] public companies, [21.20] purpose, [16.70], [21.30] replacement, [21.180] securities covered, [21.100] short form, [21.50], [21.90], [21.120] supplementary, [21.180] transaction-specific, [21.50], [21.130] when required, [21.100] Public company AGM, [3.160], [10.70], [10.80] ASX listed — see Listed public company change of status, [2.700] company secretary, appointment, [6.180], [6.200] corporate governance standards, [6.130] definition, [2.630], [15.40] directors — see Director financial reports — see Financial reports listed — see Listed public company members number of, [9.10] restrictions, [9.30] no liability company, [2.610], [2.630] number registered, [2.695] ongoing requirements, [3.160] proprietary company, compared, [2.630] replaceable rules, [5.50], [5.80]
R
Ramsay Report, [1.140], [6.90], [15.380] Receiver — see Receivership Receivership appointment of administrator, [24.30] controller, appointment of charge holder, by, [24.370] compliance with terms of security interest, [24.370] court, by, [24.330], [24.380] distinctions between types, [24.320] effect, [24.390] managing, [24.360] person in possession of property, [24.350] powers and duties, [24.400] privately appointed, [24.400] receiver, [24.330] receiver and manager, [24.340] voluntary administration, during, [24.290] overview, [24.310] property, control of, [24.350] receiver, [24.310], [24.330] liability, [24.410] receiver and manager, [24.340] liability, [24.410] reporting requirements, [24.360] winding up application during, [24.300] Reduction of capital — see Capital reduction Register Aboriginal and Torres Strait Islander corporations, [2.10] change in location, notifying ASIC, [3.150] debenture holders, [3.150], [20.60] inspection, [3.150] members — see Register of members members’ right to correct, [14.170], [14.190] PPS Register, [20.180], [20.190], [20.210] Register of members assertion of membership, [9.90] changes, notification to ASIC, [3.150] correction, [9.80] case law, [9.85] members’ right, [14.170], [14.190] court’s power to create, [9.72] denial of membership, [9.90] improper purpose test, [9.78] inspection, [9.70] application for, [9.78] Corporations Act amendments, [9.78] fee, [9.74]
INDEX
843
rights, [9.78] location, [9.70] changes, notification to ASIC, [3.150] oppression cases, role in, [9.100] predatory behaviour, protection from, [9.76] requirement to keep, [3.150], [9.70] share capital, specification of, [16.50] significance, [9.90] use without approval, [9.70] Corporations Act amendments, [9.78] predatory behaviour, [9.76] Registered office, [2.460], [3.70], [3.100], [3.150], [3.170], [9.70], [15.290] Registration ABN, [3.110] ACN, [3.110] annual review, [3.150] application form, [3.70] ARBN, [3.110] certificate, [3.80] changes or events, notifying ASIC, [3.150], [3.160], [15.290] company coming into existence on, [3.70], [4.10] electronic company registration system (ECR), [1.170] foreign, [3.40] name, [3.120], [3.140] pre-existing, [3.20] proprietary limited, [3.70] shelf, [3.60], [8.90], [8.100] contracts entered before — see Pre-registration contract Corporations Act, under, [2.560], [3.10] effect of, [4.10], [4.20] Electronic Company Registration (ECR) service, [1.170], [3.70] incorporation on, [3.50] not-for-profit associations, [2.250], [2.430], [2.440] ongoing requirements, [3.150], [3.160], [15.290] personal property securities effective/defective, [20.190], [20.192] PPS Register, [20.180], [20.190], [20.210] procedure, [3.70], [3.90] registered office, [3.100] registrable Australian bodies, [3.30] requirement for, [3.10] security interests in personal property, [20.120], [20.150] Related party transactions ASIC v Adler, [13.260] civil penalty provision, [13.250] directors’ duties, [13.250], [13.270] exceptions to prohibition, [13.250] financial benefit, giving, [13.250]
Index
R
844
CORPORATIONS LAW: IN PRINCIPLE
Related party transactions — cont protection of members’ interests, [13.250] regulation of, [13.250], [13.270] related parties, definition, [13.250] Replaceable rules application, [5.60] best practice, reflecting, [5.40] binding on parties, [5.150] breach of, [5.30], [5.250] companies to which applicable, [5.30] pre-1998, [5.60], [5.140] proprietary, [5.50], [5.80] public, [5.50], [5.80] single director/shareholder, not applicable to, [5.30], [5.100] constitution displacing or modifying, [5.180] contractual effect, [5.150] enforcement, [5.250] failure to comply, [5.30] internal rules, [5.20] list of, [5.50] proxies, and, [10.290] quorum for meeting, on, [10.250] statutory provisions, [5.30]
criminal liability, [13.160] objective test, [13.163] description of duty, [12.270] limitations, [12.290] scope of duty, [12.280] Retention of title clause PPS Act, under, [20.160] Rights issues, [16.250], [21.110] Romalpa clause nature of, [20.160] Royal Charter, [2.250], [2.370], [2.420]
S
Schemes of arrangement, [13.160], [21.110] class meetings, [10.160] creditors’, [24.420] members’, [24.430] Secretary — see Company secretary
Reporting ASIC, to, [15.290] annual statement, [15.310] auditor, [15.470] continuous disclosure, [15.330] extract of particulars, [15.310] lodgment of reports, [15.300] solvency resolution, [3.150], [15.320] ASX, to, [15.340], [15.350] auditors — see Auditor’s report continuous disclosure — see Continuous disclosure corporations legislation reforms, [1.100] directors — see Directors’ report disclosing entities — see Disclosing entities financial reports — see Financial reports members, reporting to, [15.250] auditor, [15.460] basic obligation, [15.250] concise report, [15.250], [15.260] deadlines, [15.270], [15.280] requests, [15.260] Restitution rights of members, [14.660] Sons of Gwalia v Margaretic, [14.663], [14.666] Corporations Amendment response, [14.670] Retaining discretions civil penalties, [13.150], [13.166] common law remedies, [13.140] context, [12.260]
Securities definition, [22.30] disclosure documents — see Disclosure documents financial products, [22.20], [22.30] hawking, [21.200] offer of — see Fundraising personal property — see Personal property securities Security interest circulating asset, over (floating charge), [20.130], [20.140] definition, [20.170] determining existence of, [20.150] non-circulating asset, over (fixed charge), [20.130], [20.140] Senior manager definition, [6.150] Separate legal entity doctrine Aboriginal and Torres Strait Islander corporations, [4.10] corporate groups, [4.100], [4.160] corporate veil, [4.40], [4.90] case law, [4.90] one-person company, [4.30], [4.37] overview, [4.10], [4.30] Salomon case, [4.30], [4.37] Share buy-back ability to pay creditors, and, [18.300] bonus shares, [19.30]
Share buy-back — cont breach of Ch 2J, [18.500] remedies, [18.510] cancellation of shares, [18.390] capital reduction and, [18.200], [18.280] compliance with procedures, [18.290] definition, [18.260] disclosure requirements, [18.390], [18.400] employee share scheme buy-backs, [18.350], [18.390] equal access buy-backs, [18.330], [18.400] exempted capital reduction, [18.200] fairness, [18.300] legislation, [18.420] maximum size limit, [18.380] minimum holding buy-backs, [18.360], [18.390] notice of meeting, [18.390], [18.400] on-market buy-backs, [18.340], [18.390] ordinary resolution, [18.390], [18.400] procedures, [18.380], [18.390] protection of creditors and shareholders, [18.300] reasons for, [18.310] regulation, [18.270] requirements, [18.290] selective buy-backs, [18.170], [18.370], [18.390], [18.410] shareholder approval, [18.280] special/unanimous resolution, [18.390], [18.410] 10/12 limit, [18.380] types of permitted, [18.320] Share capital — see also Shares Aboriginal and Torres Strait Islander corporations, [16.10], [18.10] authorised capital, [16.130] capital maintenance doctrine, [18.20], [18.30] debt, [16.10] debt to equity ratio, [16.10] equity, [16.10] gearing, [16.10] increasing, [16.230], [16.260] issue of shares — see Shares nominal capital, [16.130] par value, [16.140] reduction — see Capital reduction specification on registration, [16.50] transactions affecting, [18.10] breach of Ch 2J, [18.500], [18.510] buy-backs — see Share buy-back capital maintenance doctrine, [18.20], [18.30] financial assistance to purchase own shares, [18.430], [18.480] protection of creditors and shareholders, [18.40], [18.90] reduction — see Capital reduction reforms, [18.30] remedies for breach of Ch 2J, [18.510]
INDEX
845
self-acquisition, [18.210], [18.250] summary, [18.490] valuation, [16.150] issue price, [16.160] Share issue application form, [16.80] cancelling existing rights, [16.210] consideration other than cash, [16.180] disclosure document, [16.70], [16.100] requirements, [16.70] improper, [16.120] Celtic Capital Pty Ltd v Cityview Corporation Ltd, [16.125] internal rules, restrictions in, [16.200] minimum subscription condition, [16.100] notification to ASIC, [3.150], [15.290], [16.100] notification to ASX, [16.100] pre-emption, right of, [16.220], [17.250] preference shares, [17.50] price, [16.160] private, [16.60] prospectus, [16.70], [16.80] protection of existing shareholders, [17.250] public, [16.60] publicly listed companies, [16.100] requirements prior to, [16.100] restrictions, [16.190], [16.220] timeline, [16.110] varying existing rights, [16.210], [17.230], [17.240] Shareholder — see also Member disclosure of interests, [9.110] fraud on — see Fraud on the minority listed company, [16.90] meetings — see General meeting — see Members’ meeting members of company, [9.10] minority compulsory acquisitions, [23.260] rights and remedies — see Members’ rights and remedies substantial holdings, [9.120] disclosure, [23.270] takeover regulation, [23.40] Shares — see also Share capital allotment, [9.20], [16.90] duty to use power for proper purpose, [12.240], [12.242] evidence of, [16.90] improper motive, [12.248] invalid, [12.244], [12.246] buy-backs — see Share buy-back call options, [16.240] calls on, [16.170] cancellation ceasing to be member, [9.50]
Index
S
846
CORPORATIONS LAW: IN PRINCIPLE
Shares — cont notification to ASIC, [3.150], [15.290] takeover context, [18.200] cancellation of share rights non-legitimate purpose, for, [17.190] rights requiring protection, [17.200] share issue cancelling existing rights, [16.210] classes of, [17.10] Aboriginal and Torres Strait Islander corporations, [17.10] reasons for, [17.30] source of rights and benefits attaching to, [17.20] company acquiring own breach of Ch 2J, [18.500], [18.510] exceptions to prohibition, [18.230] indirectly, [18.240], [18.250] prohibition, [18.210] reasons for prohibition, [18.220] contract for sale of, [9.140] corporations legislation reforms, [1.100] debentures converted to, [20.90] dividend reinvestment plans, [16.260] financial assistance to purchase company’s own breach of Ch 2J, [18.500], [18.510] dividend, [18.430], [18.450] exemptions, [18.480] financial assistance, meaning, [18.450] general restriction, [18.430] lifting corporate veil, [4.70] material prejudice, [18.460] protection of creditors and shareholders, [18.440] shareholder approval, [18.470] holder identification number (HIN), [9.170] holding statement, [16.90] invitation to purchase, [16.80] issue — see Share issue nature of, [9.40], [16.20] options, [16.240] ordinary, [16.40], [17.40] par value, [16.140] partly paid, [16.170] personal property, as, [9.40], [16.20] pre-emption, right of, [16.220] preference shares — see Preference shares property rights, [16.20], [16.30] Beconwood Securities v ANZ Banking Group, [16.35] put options, [16.240] replaceable rules, [5.50], [16.220] rights attaching to, [16.20] cancellation, [17.190] internal rules, set out in, [17.20] variation — see Variation of class rights rights issues, [16.250] securities lending, [16.30] Beconwood Securities v ANZ Banking Group, [16.35]
security holder reference number (SRN), [9.170], [16.90] substantial holdings, [9.120] disclosure, [23.270] transfer — see Transfer of shares true ownership, obtaining information about, [9.110] trustee holding on behalf of another, [9.110] obligations, [20.100] types of, [16.40] valuation, [16.150] issue price, [16.160] variation of class rights — see Variation of class rights voting rights, [16.20] Shelf company, [3.60] Short-selling prohibited conduct, [22.160] regulation and disclosure, [6.130] Single director/shareholder company appointment of another director, [6.60] authority to enter contracts, [7.190] constitution, [5.100] death or incapacity of director, [6.180] powers of director, [6.60] replaceable rules not applicable, [5.30], [5.100] resolutions, [10.40] without meeting, [10.170] Small Business Guide, [2.640], [3.150], [3.160] Sole trader ABN, [2.30] disclosure requirements, [2.350] finance, [2.350] GST, registration for, [2.30] liability, [2.30], [2.350] nature of, [2.30] taxation, [2.350] Solvency resolution, [3.150], [15.320] Statement of Advice nature and purpose, [22.140] Statutory assumptions in dealings with companies case law, [7.150], [7.160] close dealings with individuals, where, [7.120] constitution, compliance with, [7.100] dealings with company, meaning, [7.90] director/secretary duly appointed, [7.100] document duly executed, [7.100], [7.110] entitlement to make, [7.80], [7.90]
Statutory assumptions in dealings with companies — cont exceptions, [7.120], [7.160] officer/agent authority to confirm validity of document, [7.100] duly appointed, [7.100] holding out to be, [7.100] post-1 July 1998, [7.140] pre-1 July 1998, [7.130] proper performance of duties, [7.100] replaceable rules, compliance with, [7.100] Statutory debt lifting corporate veil case law, [4.90] Statutory derivative action — see Derivative action Subsidiary — see Corporate group
T
Takeover Aboriginal and Torres Strait Islander corporations, [23.10] approved by general meeting, [23.90], [23.110] ASIC powers, [23.300] Regulatory Guide, [23.230] associate, [23.80] bid — see Takeover bid bidder — see Takeover bidder capital reduction, [18.200] compulsory acquisitions, [23.260] control, types of, [23.20] court powers, [23.340] creeping, [23.90], [23.100] defensive conduct, [23.290] definition, [23.10] disclosure documents exemption, [21.110] downstream acquisition, [23.90], [23.120] effective control, [23.20] Eggleston principles, [23.140] equal treatment of target shareholders, [23.250] exceptions to general prohibition, [23.90], [23.100] failure to provide clear and unambiguous information, [23.240] false or misleading statements, [23.230], [23.280] FIRB approval, [23.160] friendly, [23.10] frustrating action, [23.290] general prohibition, [23.50]
INDEX
847
exceptions, [23.90] Glencore cases, [23.140] hostile, [23.10] inadvertent acquisitions, [23.90] inducements to target shareholders, [23.250] overview, [23.10] protection of small shareholders, [23.40] regulation, [23.40] relevant interest, [23.50], [23.60] restrictions, [23.50] substantial holding disclosure, [23.270] substantial interest/holding, [23.140] Takeovers Panel — see Takeovers Panel target — see Takeover target total control, [23.20] transaction, acquisition through, [23.50] unacceptable circumstances, [23.330] remedies, [23.240] voting control, [23.20] power, [23.70], [23.80] withdrawal of offer, [23.250] Takeover bid acceptance of offer under, [23.90], [23.130] alternative, [23.290] false or misleading statements, [23.230], [23.280] market, [23.130], [23.210] bidder’s statement, [23.210] cash consideration, [23.210], [23.220] full bid, [23.210] listed target, [23.220] off-market bid, compared, [23.220] requirements, [23.210] target’s statement, [23.210] unconditional, [23.210] off-market, [23.130], [23.140] bidder’s statement, [23.190] class of securities, [23.150] conditions, [23.160] consideration, [23.170], [23.220] Eggleston principles, [23.140] full bid, [23.150] information for shareholders, [23.180] listed or unlisted target, [23.220] market bid, compared, [23.220] offer period, [23.150] partial bid, [23.150], [23.220] requirements, [23.140], [23.150] substantial interest, [23.140] target’s statement, [23.200] proposal, time limit for bid after, [23.250] reasons for making, [23.30] statements, [23.190], [23.200] withdrawal of offer, [23.250] Takeover bidder definition, [23.10] foreign, conditional bid, [23.160] rival, [23.290] statement, [23.190]
Index
T
848
CORPORATIONS LAW: IN PRINCIPLE
Takeover bidder — cont market bid, [23.230] off-market bid, [23.190] white knight, [23.290] Takeover target bidder not to sell shares in, [23.250] defensive conduct, [23.290] definition, [23.10] no more than 50 members, [23.90] shareholders, [23.250] statement market bid, [23.230] off-market bid, [23.200] Takeovers Panel establishment, [1.300] jurisdiction, [1.70], [1.300] Memorandum of Understanding with ASIC, [1.220] non-judicial powers and functions, [23.320] powers, [1.300], [23.310] takeover documents guidance notes, [23.250] unacceptable circumstances declarations, [1.300], [23.320], [23.330] constitutionality of exercising judicial powers, [1.70], [23.320] substantial interest/holding, [23.140] Taxation company, [2.350] lifting corporate veil, [4.70], [4.80] partnership, [2.350] sole trader, [2.350] trust, [2.350] Torts auditors, [15.500] corporate liability, [7.270] organic theory, [7.280] vicarious liability, [7.290] lifting corporate veil, [4.80] partners, liability in, [2.130] Transfer of shares ASX Trade, [9.160] brokers, [9.150] cessation of company membership, [9.50] CHESS (Clearing House Electronic Subregister System), [9.170], [22.260] constitution, under, [9.130] contract, [9.140] listed, [9.150] membership of company, [9.20] registration, [9.140] refusal to register, [9.180], [9.186] replaceable rules, and, [5.50], [9.130] restrictions, [9.30] refusal to register, [9.180], [9.186]
winding up company, [9.190] share certificate, [9.140] stamp duty, [9.140] unlisted shares, [9.140] Trust company, distinguished, [2.220] directors’ duty of good faith to beneficiaries, [12.50] disclosure requirements, [2.350] finance, [2.350] formation, [2.220], [2.350] personal liability of trustee, [2.220], [2.350] separate entity, not recognised as, [2.220] taxation of, [2.350] transferability of interest, [2.350] unit, [2.220] Trustee company transfer of estate assets and liabilities corporations legislation reforms, [1.100] Two-part simple corporate bonds offers for issue or sale, [21.80], [21.90] approval for use, [21.80], [21.160] content, [21.160] lodgment, [21.170]
U
Ultra vires doctrine abolition, [5.220], [5.230] Unfair dismissal lifting corporate veil case law, [4.90] Unfair loans voidable transactions, [24.240] Unfair preference voidable transactions, [24.240] Unincorporated joint venture, [2.330] Unincorporated not-for-profit association advantages, [2.250] disadvantages, [2.280], [2.320] dissolution of, [2.310] formation of, [2.250], [2.350] lawsuits, [2.290] legal status, [2.280] liability of committee members, [2.290] limitations, [2.280] members’ rights, [2.300] other entities compared, [2.350]
Unincorporated not-for-profit association — cont overview, [2.270] taxation, [2.350] Unlimited company, [2.620], [2.700] articles of association, [5.130] share capital, [16.50]
V
Variation of class rights ASIC, notification to, [17.350] challenging validity of, [17.310], [17.320] consent, [17.290], [17.300] Biodiesel Producers v Stewart, [17.295] constitution not providing for, [17.290], [17.295] providing for, [17.270], [17.285] contravention of Corporations Act, [17.320] deemed variations, [17.220] excluded transactions, [17.230] key issues, [17.240] legal effect, [17.330], [17.340] procedure, [17.260] notice requirements, [17.350] oppressive, [17.320] pre-emptive right provision, [17.250] rights requiring protection, [17.200] Cody v Live Board Holdings Ltd, [17.205] share issue varying existing rights, [16.210], [17.250] special resolution, [17.290] summary, [17.360] unfair prejudice, [17.310] what constitutes, [17.210] HNA Irish Nominee Limited v Kinghorn, [17.215] when takes effect, [17.330], [17.340] Vicarious liability, [7.330] criminal law, [7.300] tort, [7.290] Voidable transactions compensation orders, [24.280] defences, [24.250] identifying, [24.260] insolvent transactions, [24.240] liquidator, claim by, [24.240] litigation insurance, [24.280] overview, [24.240], [24.260] presumption as to insolvency, [24.280] relation back day, [24.260] running account, [24.250] uncommercial transaction, [24.240] unfair loan, [24.240]
INDEX
849
preference, [24.240] Voluntary administration administrator — see Administrator conduct of, [24.40] court’s power to make orders, [24.110] deed of company arrangement, [24.100] employee entitlements, [4.120], [4.150] meeting of creditors, [24.50], [24.100] moratorium on court actions, [24.70], [24.100] object, [24.20] protection from creditors, [24.70] receiver, appointment during, [24.290] secured creditors appointment of administrator, [24.60] definition, [24.10] right to bring proceedings, [24.70] substantial chargees, rights of, [24.60], [24.70] time limits, [24.50] transition to winding up, [24.120]
W
War crimes Argor-Heraeus case, [7.370] corporate liability, [7.370] Winding up appointment of liquidator, [24.130] members, by, [24.140] receivership, during, [24.290] breach of constitution, [5.260] directors’ duties, [11.180] breakdown in mutual trust and confidence, [14.620] compulsory (court-ordered), [24.135], [24.150] insolvency, in, [24.160] contracts, effect on, [24.220] creditors effect on, [24.180] liquidators’ duty to, [24.230] voluntary winding up, [24.140] deadlock, [14.630] directors acting in own interests, [14.580], [14.590] effect of winding up on company, [24.190] creditors, [24.180] customers, [24.220] employees, [24.210] members, [24.200] employees effect on, [24.210] entitlements, [24.135] failure of substratum, [14.650] fraud or misconduct, [14.640] grounds for, [14.230], [14.580], [14.650], [24.170]
Index
W
850
CORPORATIONS LAW: IN PRINCIPLE
Winding up — cont breakdown of mutual trust and confidence, [14.620] deadlock, [14.630] Ebrahimi v Westbourne Galleries, [14.613] failure of substratum, [14.650] fraud, [14.640] “just and equitable”, [14.610] misconduct, [14.640] reluctance of court to grant, [14.600] incorporated association, [2.540], [2.550] insolvency, in, [24.160] lifting corporate veil case law, [4.90] liquidator’s powers and duties, [24.230] members effect on, [24.200] remedy, [14.230], [14.580], [14.650] right to apply for order, [14.170] voluntary winding up by, [24.140]
oppression remedy — see Oppression overview, [24.135] preference shares priority of repayment of capital, [17.80], [17.150] surplus assets, participation in, [17.90], [17.150] unpaid dividends, [17.160] relevant provisions, [24.135] special resolution for, [24.140], [24.170] statutory demand, [24.160] transfer of shares, [9.190] transition from administration to, [24.120] voidable transactions — see Voidable transactions voluntary creditors, by, [24.140] members, by, [24.140] special resolution, [10.230]