Professional Documents
Culture Documents
LAW 4171
Corporations Law
TOPIC 2 Registration
Registration process
x Process:
1. A person may lodge an application with ASIC (s 117(1) Corporations Act 2001 (Cth));
s 117(2) outlines what the application must state (page Fout! Bladwijzer niet gedefinieerd.).
2. ASIC may then register the company, give the company an ACN, and issue a certificate of registration
(s 118(1)).
x Company names:
o Must be stated on the application, unless the ACN is to be used (s 117(2)(b));
o Requirements for a valid company name:
Name must be available (s 148(1)(a)).
A name is not available where it is identical to a name held or registered on the Business
Names Register (s 147(1)(b)) or it is unacceptable for registration under the regulations 1 (s
147(1)(c)).
Name must contain Limited or Proprietary Limited, as appropriate (s 148(2) or the
abbreviation, s 149).
o A company must set out its name and ACN on all public documents (s 153).
o A person may reserve a company name for 2 months (with 2 months extensions) (s 152).
Effect of registration
x The company has a separate legal personality once it is registered (s 119 and Salomon).
x The shareholders and directors are distinct from the company and can therefore also be secured creditors (eg
Salomon) or employees (eg Lees Air Farming) with respect to the company.
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A name is unacceptable if, in the opinion of ASIC, it is undesirable or likely to be offensive to members of the
public OR it contains a restricted word or phrase.
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Corporate groups
x A corporate group is not a separate legal entity each company within the group has separate legal
personality, but not the group as a whole.
x Consequences:
- Duties are owed by directors to the company on whose board they sit. The question is what is in the
best interests of the individual company and not what is in the best interests of the corporate group
(Walker v Wimborne);
- Profits of each company must be treated separately and a parent company cannot pay a dividend
based on the profits of the group as a whole (Industrial Equity);
- A contractual promise made by a subsidiary does not bind the holding company to the contract
(Pioneer Concrete).
Corporate veil
x The veil of incorporation recognises that a company is a separate legal entity distinct from its shareholders.
The liabilities of the company are not the liabilities of the shareholders. Therefore, a shareholders liability
for the companys debts is limited to paying the full purchase price of shares taken.
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contractual obligation of the landowner as the obligation of the company, because the
company was a sham used to avoid a legal obligation.
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benefited the two companies, because the Bank of NZ funded the entire group and
without that security the funding of every company in the group would be jeopardised.
c. Where the subsidiary commits a tort.
o Different considerations apply in tort actions compared with other cases, because, as
Rogers AJA noted in Briggs v James Hardie, The victim of the negligent act has no
choice as to the corporation which will do him harm [cf. contracting parties].
o A holding company may be liable to an employee of its subsidiary for negligence, on
the basis that the HC itself owed a duty of care to the employee. This DOC can arise
where the HC exercise a high degree of control over the day-to-day activities of its
subsidiary.
o For example, in CSR v Wren, Wren developed mesothelioma after working for AP, a
subsidiary of CSR. The Court held that CSR owed Wren a DOC because CSR had
operational responsibility for the work conditions at AP (as the management staff at AP
were CSR staff). Similarly, in CSR v Young, the degree of control of CSR over the
activities of the subsidiary was so strong that CSR itself effectively conducted those
activities.
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Classification (s 112)
x First classification
Proprietary company
o A proprietary company is a company that is registered as, or converts to, a proprietary company
under this Act (ss 9 and 45A(1));
o Restrictions:
It must not have >50 non-employee shareholders (s 113(1)). Employee means an employee
of the company or of a subsidiary of the company (s 113(2)(b));
It must not engage in public fund raising (s 113(3)).
o Can be either a small or large proprietary company:
Small proprietary company: A proprietary company is a SPC for a financial year if it satisfies
as least 2 of the following: consolidated revenue <$25 million, consolidated gross assets
value <$12.5 million, or <50 employees (s 45A(2)). A small proprietary company has reduced
financial reporting requirements.
Large proprietary company: All other proprietary companies (s 45A(3)).
Public company
o A company other than a proprietary company (s 9).
o It may be listed or unlisted.
x Second classification
Public companies
Limited by shares: The liability of members for the debts of the company is limited to
any amount that is unpaid on the shares that the member holds in
the company (ss 9 and 516 2). Must have Ltd in name (s 148(2)).
Limited by guarantee: The liability of members is limited to the amounts that they have
undertaken to contribute in the event of it being wound up (ss 9 and
517 3). This type of company does not have shareholders. It does
not raise money from its members, nor does it return profits to its
members. Must have Ltd in name (s 148(2)).
Unlimited with share capital: Members have no limit placed on their liability (s 9).
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s 516: If the company is a company limited by shares, a member need not contribute more than the amount (if
any) unpaid on the shares in respect of which the member is liable as a present or past member.
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s 517: If the company is a company limited by guarantee, a member need not contribute more than the amount
the member has undertaken to contribute to the company's property if the company is wound up.
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Proprietary companies
Limited by shares Must have Pty Ltd in name (s 148(2)).
Unlimited with share capital Must have Pty in name (s 148(3)).
Related companies
x Definitions (s 9)
o Holding company means a body corporate of which the first body corporate is a subsidiary;
o Subsidiary means a body corporate that is a subsidiary of the first-mentioned body by virtue of
Division 6.
x Test
Under s 46, a company (AB) is a subsidiary of another company (A) if one of four tests is satisfied:
1. A controls the composition of ABs board (s 46(a)(i));
o Under s 47, A is deemed to have this control if it can appoint or remove all or the majority
of the directors of AB. A is deemed to have the power to appoint if a person cannot be
appointed as director of AB without the exercise by A of such a power, or a persons
appointment as director of AB follows necessarily from them being director or officer of A;
o Control means a legal power to control practical or de facto control, in the absence of
any legally enforceable power, is not sufficient (Mount Edon). For example, it was not
enough in Mount Edon that the two companies thought they were holding and subsidiary
companies and one deferred to the other to determine board composition.
o Where A holds >50% of the capital of AB, this gives A legal control (overlaps with (a)(iii)).
OR look for an enforceable and irrevocable agreement that ABs members will vote
according to As directions.
2. A can cast, or control the casting of, more than one-half of the votes that might be cast at a general
meeting of AB (s 46(a)(ii));
o Control the casting requires an actual power (revocable or not, legally enforceable or not)
to cast >50% of the votes (Bluebird Investments). It is enough if A has an unenforceable
agreement with ABs shareholders to cast their vote (a proxy vote).
3. A holds more than one-half of the issued share capital of AB (s 46(a)(iii)); or
4. AB is a subsidiary of a subsidiary of A (s 46(b)).
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Constitution
Objects clauses
x The constitution may contain an objects clause that restricts the companys powers (see s 125 5).
x If the company breaches its objects clause, the exercise of power is not invalid (s 125). However, there may
be consequences against directors or agents who caused the clause to be breached (eg breach of duty).
x Per s 140(1), the constitution of the company has effect as a contract between:
(a) the company and each member;
(b) the company and each director and company secretary; and
(c) the members.
x Under this contract, each person agrees to observe and perform the constitution so far as it applies to that
person (s 140).
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Special resolution means a resolution of which notice has been given and that has been passed by at least 75%
of the votes cast by members entitled to vote on the resolution (s 9).
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s 125(1): The constitution 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
objects clause.
s 125(2): The constitution 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.
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x Members may also have contracts with the company that bind them as individuals (special contracts)
(Bailey).
Alteration of constitution
x The company may modify or repeal its constitution by special resolution (s 136(2)).
x Effect of alteration
o Members are bound to changes even if they did not vote for them;
o Alteration takes effect on the date on which the resolution is passed (s 137);
o Special contracts
Generally, an alteration to the constitution will not alter a special contract unless the parties
intended to the contrary (Bailey);
Where a special contract refers to the constitution, an alteration of the provision in the
constitution will vary the special contract prospectively (into the future) and not
retrospectively (Bailey);
For example, in Bailey, Dr Bailey was a member of the NSW Medical Defence Union. Its
purpose was to provide its members with insurance against negligence claims. The Union
changed its constitution, giving the directors the discretion to terminate assistance to any
person who has ceased to be a member (eg through death). Dr Bailey died and a claim was
made against him. Was his estate entitled to be indemnified from the Union? The majority
found that the contract of insurance was a special contract and therefore changes to the
constitution could not have a retrospective effect to the contract.
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2. Changes that increase the liability of current members require their written agreement: s 140(2) 6.
3. Majority shareholders cannot use their voting power to unfairly deprive minority shareholders of
their rights (also called oppression, or fraud on the minority).
o Equitable restriction;
o Where the alteration provides for the expropriation or compulsory disposal of a members
shares, a two-fold test must be satisfied (Gambotto and Bundaberg *use Gambotto for
acquisition of shares, and Bundaberg for cancellation/extinction of shares):
The expropriation must be:
1. For a proper purpose; and
2. Fair in all the circumstances.
o 1. Proper purpose
An expropriation will be for a proper purpose if it prevents the company from suffering
significant detriment or harm (eg to remove shareholders who are competing with the
company, as in Sidebottom).
In Gambotto, the majority held that an expropriation to secure taxation and
administration advantages was not a proper purpose (it does not protect the company
from harm; rather it results in a gain to the majority). McHugh J dissented because he
thought that the substantial tax savings were sufficient to make it a proper purpose.
However, in Bundaberg, the court held that an extinction of shares to prevent a loss of
valuable and existing long-term tax benefits was a proper purpose (how to reconcile
with Gambotto? To protect benefits is acceptable, but to gain them is not).
o 2. Fairness
Fairness has two elements: (1) the process must be fair (requires disclosure of all
relevant information to the shareholders, and valuation by an independent expert); and
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(2) Unless a member of a company agrees in writing to be bound, they are not bound by a modification of the
constitution made after the date on which they became a member so far as the modification:
(a) requires the member to take up additional shares; or
(b) increases the member's liability to contribute to the share capital of, or otherwise to pay money to, the
company; or
(c) imposes or increases restrictions on the right to transfer the shares already held by the member.
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(2) the price to be paid for the expropriated shares must be fair (if the price is < market
price, it is prima facie unfair however, other considerations are relevant).
In Bundaberg, the alteration was invalid because it was oppressive, as the directors
would not pay a market price for the shares.
Membership of companies
x There must be a register of members (s 169; see page Fout! Bladwijzer niet gedefinieerd.).
x The proprietary company replaceable rule in s 1072G provides that directors of a proprietary company have
the power to refuse to register a transfer of shares for any reason. The replaceable rule in s 1072F(3) allows
directors to refuse to register a transfer of shares if the shares are not fully paid up or the company has a lien
over the shares.
x General principles:
o Where the companys constitution gives directors a discretion to refuse to register a transfer, they
must exercise this power consistent with their fiduciary obligations that is, in good faith in the best
interests of the company (Re Smith and Fawcett);
o The directors do not have to give reasons, unless the constitution provides otherwise. The transferee
must lead evidence showing bad faith or not in best interests (eg in Re Smith and Fawcett the
applicant failed as he could not prove this);
o The power must be exercised in a reasonable time (16 months is unsatisfactory; Winmardun).
x Note: under s 1072E(6), a Trustee in Bankruptcy automatically becomes the registered owner of the shares
of the bankrupt, without need for registration.
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Share capital
x Flexibility for company: share capital is less flexible as it cannot be readily paid back (for non-listed
companies).
x Rights of investor to have a say in company business: ordinary shareholders have a right to vote, whereas
lenders do not have any say (in most circumstances).
x Tax advantages: loan and interest repayments are tax deductible, whereas dividends paid to shareholders
are not tax deductible. Shareholders get no automatic return on their investment as there is no right to a
dividend.
What is a share?
x Shareholders do not own the companys property, as the company is a separate legal entity.
x Under s 124(1)(a), a company has the power to issue shares in the company. The right to issue shares
belongs to the Board.
x The power to issue shares includes the power to issue: bonus shares (shares for whose issue no
consideration is payable to the company), preference shares, and partly-paid shares (s 254A(1)).
x A company may determine the terms on which its shares are issued, and the rights and restrictions attaching
to the shares (s 254B(1)).
x A company must, within 28 days, lodge a notice of share issue with ASIC (s 254X(1)).
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o Companies may issue shares for a non-cash consideration (eg in Salomon, a sole trader sold his
property to the newly formed company in exchange for shares; Re Wragg, where partnership assets
were transferred to a company in exchange for shares; and s 254X(1)(e), which requires particulars
of the non-cash consideration or the contract to be included in the notice of share issue);
o The value of the consideration must represent moneys worth for the allotment of shares (Re White
Star Line). That is, the consideration must not be merely colourable or illusory.
Classes of shares
x The company can issue shares with different rights (see s 254B(1)).
x Shares can be divided into classes. A class of shares is a category of shares that differs sufficiently in
respect of the rights, benefits or disabilities or other incidents that attach to the shares so as to make that
class distinguishable from any other category of shares in the company (Crumpton). Shares belong to the
same class when there is commonality of interest between shareholders of a particular class. There may be
only one shareholder of a particular class of shares.
Common differences
Ordinary shares Preference shares
No right to vote.
(In many constitutions, preference
Right to vote on general business shareholders get a right to vote when they
have not been paid a dividend that is, the
dividend is in arrears)
Fixed dividend, paid first.
This still depends on whether the company
Right to dividend only if determined is profitable, but the board will ensure that
pref shareholders are paid dividends before
ordinary shareholders.
Priority return of investment.
Right to return of investment after pref If company is wound up, pref shareholders
shareholders are paid get their investment (the purchase price of
shares) paid out first.
Share of surplus assets after company has paid
No share of surplus assets.
all debts and investments
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o The following actions are not variations at common law (except in the above circumstances):
Dilution of voting power (eg the issue of new shares that dilutes the existing shareholders
voting power does not vary a legal right [eg they can still vote], rather it varies the enjoyment
of that right [their vote carries less weight] and this is not sufficient; White v Bristol Airplane);
For example, in Greenhalgh v Arderne Cinemas, the company resolved to subdivide all 10
schilling shares into 2 schilling shares (giving the holders a five-fold increase in voting
power). The only shareholder with 2 schilling shares, G, argued this was a variation to his
class rights. The Court held there was no variation of a legal right. In addition, s 246C would
not apply because Gs shares were not being divided. [Could be oppressive conduct.]
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If a company has a constitution that sets out the procedure for varying or cancelling rights attached to shares in
a class of shares, 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.
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ii. Special resolution of members of the class whose rights are being varied (or the written
consent of at least 75% of the members of the class). Effectively, >90% vote is required, as
members with at least 10% of the votes in the class may apply to the Court to have the
variation set aside (s 246D 8).
Maintenance of capital
General position
x General rule: Limited liability companies must maintain their issued share capital (Trevor v Whitworth).
This is because a reduction in share capital would prejudice the rights of creditors.
x A company may reduce its capital eg by purchasing shares from a shareholder.
x A company might want to reduce share capital for various reasons:
- Business changes (eg sale of part of business, reduced performance);
- Buy out retiring shareholders;
- Buy out retiring directors.
x Part 2J permits some reductions. Under s 256A, the rules governing capital reductions are designed to
protect the interests of shareholders and creditors by:
(a) addressing the risk of these transactions leading to the companys insolvency;
(b) seeking to ensure fairness between the companys shareholders; and
(c) requiring the company to disclose all material information.
x Under s 256B(1), a company may reduce its share capital if the reduction:
(a) is fair and reasonable to the companys shareholders as a whole; AND
o Fair and reasonable is a composite requirement (EM);
o Consider (EM):
The adequacy of the consideration paid to shareholders;
Whether the reduction would have the practical effect of depriving some
shareholders of their rights (eg by stripping the company of funds that would
otherwise be available for distribution to preference shareholders); or
Whether the reduction was being used to effect a takeover and avoid the
takeover provisions.
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The test under s 246D(5) is whether the variation would unfairly prejudice the applicant members.
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o The reduction must be fair and reasonable as a whole that is, the reduction need not
be fair and reasonable for every individual shareholder, but it cannot prejudice
significant groups of shareholders;
o For example, a reduction in capital that gives payment to ordinary shareholders and
nothing to preference shareholders is not fair and reasonable, because the companys
constitution gave the preference shareholders a priority to a return of capital on winding
up (Fowlers Vacola).
(b) does not materially prejudice the companys ability to pay its creditors; AND
o The company must ensure that it will remain solvent after the reduction;
o For example, a reduction of capital that involves cancellation of shares for no
consideration does not alter the companys financial position, so this requirement does
not apply.
(c) is approved by shareholders under section 256C.
o Depends on type of reduction:
Equal reduction: only relates to ordinary shares and applies equally and in
proportion to the # of ordinary shares the shareholder holds (s 256B(2)); or
Selective reduction: all other reductions (s 256B(2)).
o If equal reduction, must be approved by an ordinary resolution 9 (s 256C(1));
o If selective reduction, must be approved by either: unanimous agreement of ordinary
shareholders, or special resolution of all shareholders (no voting by those who stand to
gain from the reduction) (s 256C(2));
o BUT if the reduction involves the cancellation of shares, it must be approved by a
special resolution passed at a meeting of the shareholders whose shares are to be
cancelled: s 256C(2). This requires a class meeting (ie a meeting of just those
shareholders) (Winpar Holdings).
AND s 256C disclosure requirements are satisfied
o Disclosure to shareholders (the company must include with the notice of the meeting a
statement setting out all information known to the company that is material to the
decision on how to vote on the resolution; s 256C(4));
o Disclosure to ASIC (before the above notice, the company must lodge with ASIC a
copy of the notice of the meeting and the information statement; s 256C(5)).
x Breach?
x The company must not make the reduction unless it complies with the above requirements (s 256D(1)).
x If the company does not comply with the requirements, the validity of the reduction is not affected and the
company is not guilty of an offence (s 256D(2)).
x However, any person who is involved 10 in the contravention is liable for a civil penalty (s 256D(3)), or an
offence if their involvement is dishonest (s 256D(4)).
9
Ordinary resolution is a simple majority vote (MORE THAN 50%).
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x Financial assistance is not defined in the Act, but it includes lending money; guaranteeing repayment of a
loan; providing assets as security for a loan; releasing person from a debt or other obligation already owed
to the company; and acquiring assets at an inflated price.
x The financial assistance must assist a person acquire shares in the company providing the assistance, or its
holding company 11 (see s 260A(1)).
x Under s 260A(1), a company may financially assist a person to acquire shares in the company (or a holding
company of the company) only if:
(a) giving the assistance does not materially prejudice:
(i) the interests of the company or its shareholders; or
o One assesses material prejudice by reference to the transaction with its
interlocking elements giving rise to the financial assistance, taking into account
its financial consequences for the interests of the company or its shareholders.
This is in order to determine where the net balance of financial advantage lies
from the giving of the financial assistance. If it lies against the company or its
shareholders, then there is material prejudice (Adler per Santow J);
o For example, in Adler, the financial assistance was in the form of an unsecured
loan without any documentation and it was likely that only a small amount of the
$10 million could be recovered. Therefore, there was material prejudice.
(ii) the company's ability to pay its creditors; OR
o See above.
10
s 79: A person is involved in a contravention if, and only if, the person:
(a) has aided, abetted, counselled or procured the contravention; or
(b) has induced, whether by threats or promises or otherwise, the contravention; or
(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or
party to, the contravention; or
(d) has conspired with others to effect the contravention.
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Example: Independent Steels v Ryan. A company wanted to buy shares in Marlon and Marlons subsidiary,
Independent Steels, paid part of the purchase price. Therefore, Independent Steels provided financial assistance.
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x Breach?
x The contravention does not affect the validity of the financial assistance and the company is not guilty of an
offence (s 260D(1)).
x However, any person who is involved in the contravention is liable for a civil penalty (s 260D(2)), or an
offence if their involvement is dishonest (s 260D(3)).
Dividends
x Dividends are payments to shareholders and represent a return on the shareholders investment.
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TOPIC 6 Directors
Directors
x Directors include:
o Persons appointed to the position of director (s 9(a)(i)); and
o Persons not appointed as directors, but who act in the position of a director (de facto director) or the
other directors are accustomed to act in accordance with that persons instructions or wishes (shadow
director) (s 9(b)).
o See page Fout! Bladwijzer niet gedefinieerd. for the provision.
x Types of directors:
o Executive director (managing director): officer and employee of the company;
o Non-executive director: officer but not employee;
o Nominee director: represents a major creditor or shareholder on the board;
o Alternate director: temporary appointee 12 (eg if another director has taken a holiday).
Appointment
x Requirements of constitution:
o Other requirements can be specified by company constitution;
o For example, RR s 201G: a company may appoint a person as a director by resolution passed in
general meeting.
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Eg RR s 201K: a director may appoint an alternate for a specified period, with the other directors approval.
Any power exercised by the alternate is just as effective as if exercised by the director. The appointing director
can terminate the alternates appointment at any time, in writing.
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Functions
x Functions include:
o To manage the business of the company in the interests of its shareholders;
For example, RR s 198A: the business of a company is to be managed by or under the
direction of the directors.
This includes:
- To set business goals;
- To oversee the implementation of business strategies to achieve those goals;
- To ensure there are systems in place to monitor compliance with business
strategies and legal requirements; and
- To monitor the companys financial position, in particular to be aware of the
companys solvency.
o Appoint a Managing Director/CEO;
o Call and run board and company meetings;
o Determine dividends;
o Issue new shares (to raise capital); and
o Refuse to register a share transfer (Pty Ltd company).
Removal
A. Resignation
x RR s 203A: A director of a company may resign as a director of the company by giving a written notice of
resignation to the company at its registered office.
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B. Removal by members
C. Disqualification
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Remuneration
x Proprietary companies:
o Remuneration is determined by resolution (RR s 202A(1));
o The company may also pay the directors travelling and other expenses that they properly incur in
attending directors meetings, attending general meetings or in connection with company business
(RR s 202A(2));
o Generally, the remuneration of executive directors is set by contract. However, a company must
disclose the remuneration paid to each director if directed to disclose the information by RIWKH
votes of members at a general meeting (s 202B(1)(a)).
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Section 206A(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 business of the corporation; or
(b) they exercise the capacity to affect significantly the corporations financial standing; or
(c) they communicate instructions or wishes to the directors of the corporation:
(i) knowing that the directors are accustomed to act in accordance with their instructions or wishes; or
(ii) intending that the directors will act in accordance with those instructions or wishes.
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x Directors and senior employees are under a duty to exercise a reasonable degree of care and diligence;
x The duty applies to directors (under the common law tort of negligence and the equitable duty of care) and
to senior employees (as an express or implied term of their contract of employment).
Corporations Act
x The substance of the common law and statutory duties is the same (Vines v ASIC). The statutory duty does
not override the common law (s 185).
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x Test: Section 180(1) provides that a director or other officer of a corporation must exercise their powers and
discharge their duties with the degree of care and diligence that a reasonable person would exercise if they
were in the position of that director or officer. 14
x ASK: What would an ordinary person, with the knowledge and experience of the Defendant, be expected to
have done in the circumstances if he or she was acting on their own behalf? (Adler)
o Directors must ensure that the board has available means to audit the management of the company so
that it can satisfy itself that the company is being properly run (Daniels at 500);
o Directors are expected to attend all board meetings unless exceptional circumstances, such as illness
or they are not in the state. They should bring an informed and independent judgment to bear on the
various matters that come to the board for decision (CBA v Friedrich at 117);
o Directors must institute inquiries, and raise issues with the board (Daniels at 504).
o Directors must have a minimum degree of financial literacy (so that they can read and understand
financial statements) (ASIC v Healey per Middleton J at [124]). They must also actually read and
consider the companys financial statements (CBA v Friedrich per Tadgell J at 126). Although the
preparation can be delegated, the obligation to read them cannot (ASIC v Healey at [124]).
14
That is, the reasonable person:
(a) were a director or officer of a corporation in the corporations circumstances; and
(b) occupied the office held by, and had the same responsibilities as, the director or officer.
15
One might correspondingly expect that the standard for company chairmen has also been raised (at [71]).
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o Non-executive directors
Reasonable person is attributed the particular skills and experience of the non-executive
director (Daniels at 502);
But directors are subject to minimum standards, regardless of their background; Daniels.
The courts have rejected attempts by uneducated or inexperienced directors to lower the
standard, even if, when appointed, they were assured that they would not have to do
anything (DCT v Clark);
For example, a non-executive director who comes to the board with extensive lending
experience must give the company the benefit of that experience (in Gold Ribbon, Dunn
failed to ensure that the lending scheme complied with accepted practice, failed to ensure
that the company had appropriate procedures for making due diligence inquiries, and failed
to monitor the administration of the scheme).
In ASIC v Hellicar, the seven non-executive directors of JHILs board failed to take
reasonable care when they approved the ASX announcement that the foundation for
compensation was fully funded. The directors ought to have known that the statement was
misleading and they were well aware of the damage that this false statement would cause.
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Note: Vines comment to the board that Management remained confident of the profit forecast was not a
breach, because it was a statement a reasonable person could have made given it reflected the majority opinion.
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o Section 180(2) provides a defence to s 180(1) and the common law duties;
o 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:
i. (a) Make it in good faith for a proper purpose;
ii. (b) Do not have a material personal interest in the subject matter of the judgment;
iii. (c) Inform themselves about the subject matter of the judgment to the extent they reasonably
believe to be appropriate; and
iv. (d) Rationally believe that the judgment is in the companys best interests. The belief is
rational unless it is one that no reasonable person in their position would hold (s 180(2)).
o Business judgment?
Onus on party evoking the rule to establish (Adler);
Defined in s 180(3) to mean any decision to take or not take action in respect of a matter
relevant to the business operations of the corporation;
Two requirements:
i. Must be a positive, conscious decision to take or not take action (thus failure to do
something is not sufficient; Adler); and
ii. The action must be in respect of a matter relevant to the companys business operations.
This includes planning, budgeting and forecasting (Rich). It does not include monitoring the
affairs of the company, because there is no action in respect of business operations (Rich).
x Under s 189, the directors reliance on the information or advice is prima facie reasonable, provided:
(a) a director relies on information, or professional or expert advice, given or prepared by:
(i) an employee whom the director believes on reasonable grounds to be reliable and competent
in relation to the matters concerned;
(ii) a professional adviser or expert in relation to matters that the director believes on reasonable
grounds to be within the persons professional or expert competence;
(iii) another director or officer in relation to matters within the directors or officers authority; or
(iv) a committee of directors on which the director did not serve in relation to matters within the
committees authority; AND
(b) the reliance was made:
(i) in good faith; and
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(ii) after making an independent assessment of the information or advice, having regard to the
directors knowledge of the corporation and the complexity of the structure and operations of
the corporation.
x This applies to Part 2D.1 17 proceedings and equivalent general law proceedings (s 189(c));
x Person alleging that reliance was unreasonable (eg ASIC) has the burden of proof.
x HOWEVER, despite the statutory provision, the court may still impose a higher standard.
o For example, in Healey, it was held that while directors are entitled to rely on others for preparation
of financial statements, they retain the responsibility to read, understand and question the contents;
o In ASIC v Macdonald, Gzell J found that s 189 did not apply because the non-exec directors were not
entitled to rely on the exec directors because this was a key statement in relation to a highly
significant restructure of the group.
x Under s 198D(1), unless the companys constitution provides otherwise, the directors of a company may
delegate any of their powers to:
(a) a committee of directors;
(b) a director;
(c) an employee of the company; or
(d) any other person.
The delegation must be recorded in the companys minute book.
x The delegate must exercise the powers in accordance with any directions of the director (s 198D(2)).
x The exercise of the power by the delegate is as effective as if the director had exercised it (s 198D(3)).
17
Sections 179-198F.
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- The extent to which the director is, or should have been, put on inquiry;
- The delegated function is such that it may properly be left to such officers; and
- The risk involved in the transaction.
Consequences of breach
x Section 180(1) is a civil penalty provision under s 1317E (but not an offence under s 184);
x The Court may order:
o A pecuniary penalty of up to $200,000 (under s 1317G);
o Compensation to the corporation (under s 1317H); or
o Disqualification (under s 206C, see page 21).
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2: Acting bona fide in the companys interests and for proper purposes
Common law
x Test:
o Director must act honestly for the benefit of the company and not for some ulterior purpose;
o This is subjective; however, the Court will look for objective evidence of the directors assertion
(Bell Group per Owen J). The court is not questioning the commercial justification for the decision
rather, the court is assessing whether the director actually held that assertion; 18
o If no rational director would have considered the actions to be in the best interests of the company,
then the duty is breached (Adler). Otherwise a company could be run by a lunatic (Hutton).
x Directors must act in the best interests of individual shareholders or groups of shareholders in some
circumstances:
18
If a business decision is made in good faith and for proper purposes, it will not be reviewed by the courts
(Harlowes Nominees). That is, the courts do not assess the merits of a decision, just the legality.
19
Thus it is the company that brings proceedings for breach of duty, and damages are payable to the company.
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2. Corporate groups
o See page 3;
o A director will not breach their duty if they act for the benefit of the corporate group, where it
will benefit the company on whose board they sit (Equiticorp);
o It is not necessary for the director to independently consider the interests of the company on
whose board he sits, provided the decision benefits the company as well as the corporate group
(Equiticorp, cf. dissent of Kirby P).
3. Employees
o Directors cannot favour the interests of employees at the expense of the shareholders;
o For example, gratuitous payments cannot be made to ex-employees (in Parke v Daily News, DN
closed down one branch of the company and gave the surplus from the sale to the dismissed
employees. Held: Breach, because it does not serve the interests of the company);
o A payment to current employees may be in the interests of the company, because industrial
relations may be improved.
4. Creditors
o Creditors interests must be taken into account when the comp is insolvent or near insolvency
(Kinsela). At this time, the shareholder value is almost nil and so the focus of the directors must
shift;
o Can shareholders cure a breach? NO since the duty is owed to the creditors, the shareholders
cannot cure a breach by majority vote (eg in Kinsela, the directors caused the company nearing
insolvency to lease its premises to the directors, on less than commercial terms. Held: Breach,
because a reasonable person could not have believed that the lease transaction was for the
benefit of the company, having regard to the interests of creditors lease set aside);
o How close to insolvency? The greater the degree of financial instability, the less risk the
directors can take with the assets (Kinsela);
o *BUT this obligation does not give creditors an independent right to sue for breach (Spies v R).
It is up to the liquidator to ensure fair proportional distribution to creditors.
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Nominee directors
x Nominee director: represents the interests of a major creditor or shareholder on the board.
x Prima facie they must they act bona fide and in the companys interests, and not in the interests of their
nominator. However, the company constitution may provide otherwise.
x See s 187 for a nominee director from the holding company on the board of a subsidiary. 20
x Test:
Directors must use their powers for:
i. The purposes for which the power was given; and
ii. The benefit of the company as a whole.
(Ure case)
Proper purpose
x A director who exercises their powers to secure some private advantage is acting for an improper purpose
because such a purpose is outside the purpose of benefiting the company (Mills v Mills);
x However, directors are not prohibited from acting in any way that benefits their interests as shareholders.
20
A director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith
in the best interests of the subsidiary if:
(a) the constitution of the subsidiary expressly authorises the director 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.
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If not for the improper purpose, would the directors still have acted that way?
If no, then breach of duty.
o For example, in Howard Smith, the Millers board argued that the issue of shares to HS was
primarily motivated by the fact that their company was in urgent need of funds to finance tankers
(and the share issue indirectly blocked a takeover bid). The Court examined how real and pressing
the proper purpose was here, there was no pressing need for the tankers and the need had been
alleviated by the company raising loan capital, therefore primary purpose was to block takeover.
x Directors must exercise an independent judgment when making decisions and not promise to act in
accordance with the wishes of others. It is a breach if the director binds himself in advance to vote in
particular ways;
x The relevant time to judge the exercise of discretion is when the agreement is entered into, rather than when
the terms of the agreement are to be performed (eg in Thorby v Goldberg, the directors entered into a
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contract whereby they agreed to vote in favour of a particular course of action in the future. The directors
then sought to have the contract declared void, because it purported to fetter their discretion. Held: No
breach, because at the time the contract was entered into the directors exercised their discretion).
(1) A director or other officer 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.
x Section 181(1) is a civil penalty provision under s 1317E (and is an offence under s 184, if the director is
reckless or intentionally dishonest higher BOP).
x Additional examples:
o In Adler, Mr Adler breached s 181 by using the loan from HIHC (where Mr A was a director) to
purchase bad investments from his own company;
o In PBS v Wheeler, the MD was not in breach because he excused himself from the transaction
because of the conflict of interest.
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3: Fiduciary duties
Conflicts rule
x Multiple directorships
o Prima facie, holding more than one directorship is not a breach;
o Provided:
i. No confidential information is divulged; and
ii. If a transaction involves both companies, the director:
Discloses the conflict (R v Byrnes);
Refrains from negotiating the contract and voting (Fitzsimmons v R); and
May need to take positive steps to protect the company (for example, where the
director has power and influence over the board and should use it to prevent a risky
transaction going ahead, Adler; or where the director has special knowledge about
the transaction, Wheeler).
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scope of the benefit and potential profit that the director will receive (Camelot per Santow J).
Mere suggestions are insufficient (Camelot);
It must be given by the director (Camelot), and as soon as practicable after the director
becomes aware of their interest in the matter (s 191(3)(b));
The details must be recorded in the minutes of the meeting (s 191(3) and Camelot).
o Standing notice can be given
Notice is not required under s 191(1) if standing notice has been given (s 191(2)(d));
Under s 192(1), a director of a company who has an interest in a matter may give the other
directors standing notice of the nature and extent of the interest in the matter. The notice may
be given at any time and whether or not the matter relates to the affairs of the company at the
time the notice is given;
Does not need to be a material personal interest;
The notice must be given to all directors at a meeting, or to all directors individually (s
192(2)). It must be recorded in the minutes of the meeting (s 192(4));
Further notice must be given if a new director is appointed (s 192(5)) or the interest materially
changes (s 192(6)).
o Consequences of notice
Can the conflicted director vote on, and retain benefits from, the transaction if the directors go
ahead with it?
Pty Ltd company = depends on the constitution. BUT s 194 (RR) says that the director may
vote and retain any personal benefits;
Public company = the director must not vote or be present while the matter is being
considered (s 195(1)), unless the other directors pass a resolution to the contrary (2) 21, ASIC
makes a declaration or order (3), or there are not enough directors to form a quorum (4).
o Consequences of breach
Civil penalty offence;
Breach of s 191(1) = 10 penalty units or imprisonment for 3 months, or both (Sch 3);
Breach of s 195(1) = 5 penalty units (Sch 3);
Contravention does not affect the validity of any act, transaction, agreement, instrument,
resolution or other thing (ss 191(4), 192(7)).
21
s 195(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.
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Profits rule
x Prohibited activities
o A director may not misappropriate business opportunities or confidential information belonging to
the company. For example, diversion of a contract from the company to the director is a breach
(Cook v Deeks);
o A director may not profit personally from transacting the companys business. For example,
receiving a personal incentive payment by the buyer for selling a part of the business (Furs v
Tomkies).
x It is irrelevant that the directors act in good faith and in the interests of the company (Regal (Hastings)). In
this case, the directors bought shares in a subsidiary so it could fund the lease of cinemas. These shares were
later sold at a profit. This was a breach, because the directors acted on knowledge that they acquired as
directors of the company and they made profit without the consent of the company.
x Fiduciary duties survive resignation of the fiduciary (Canadian Aero Service). That is, a director or senior
employee cannot resign and then exploit a corporate opportunity if the resignation was for the purpose of
taking up that opportunity.
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x Under Chapter 2E and s 208(1), for a public company (or an entity that the public company controls) to give
a financial benefit to a related party of the public company, the company must obtain the majority vote of
fully informed, disinterested shareholders (by ordinary resolution).
x Financial benefit:
o Is interpreted broadly (s 229(1)(a));
o Includes any financial advantage, whether or not it involves payment of money;
o Examples in s 229(3)(a)-(f) include:
- Giving or providing finance or property;
- Buying or selling an asset;
- Leasing an asset;
- Supplying or receiving services;
- Issuing securities or granting an option; and
- Taking up or releasing an obligation.
x Related party:
o The following are related parties of the public company:
- A controlling 22 entity 23 (s 228(1));
- Directors, directors of the controlling entity, and spouses (inc de facto partners, s 9) (s 228(2));
- Parents and children of above (s 228(3));
- An entity controlled by someone above (s 228(4));
- Anyone who satisfied above within the previous 6 months (s 228(5)) or will satisfy above in
the future (if the person above believes or has reasonable grounds to believe this is likely, s
228(6)); and
- An entity who acts in concert with a related party of the public company on the understanding
that the related party will receive a financial benefit if the public company gives the entity a
financial benefit (ie PCERP; s 228(7)).
x Exceptions
o Shareholder approval is not required if:
- The financial benefit is on terms that would be reasonable if the parties were dealing at arms
length, or the terms are less favourable to the related party than arms length terms (s 210);
- Reasonable remuneration, or reimbursement of expenses, to an officer or employee (s 211);
- Amounts of money given to a director or spouse of less than $5,000 (s 213);
- Financial benefits to or by a closely held subsidiary (s 214);
22
Control is the capacity of a person or entity to determine the outcome of decisions about a second entitys
financial and operating policies (s 50AA).
23
Entity is a body corporate, partnership, unincorporated body, individual, trust, or trustee/s of the trust (s 9).
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- Financial benefits given to members of the company, without unfairly discriminating between
members (s 215).
o If an exception applies, the directors control whether or not to give the financial benefit
otherwise, a majority vote is required.
x Consequences for breach
o A contravention of s 208 does not affect the validity of any contract or transaction (s 209(1));
o However, a person who is involved in a contravention of s 208 is liable for a civil penalty (s 209(2)
see footnote 10 for definition of involved in). See page 29 for remedies. A person commits an
offence if the involvement is dishonest (s 209(3)).
Corporations Act
x Under s 182(1), a director, secretary, other officer or employee must not improperly use their position to:
(a) Gain an advantage for themselves or someone else; OR
(b) Cause detriment to the corporation.
A person who is involved in a contravention is liable for a civil penalty (s 182(2)). Also, might be an
offence under s 184 if dishonest.
x Under s 183(1), a person who obtains information because they are, or have been, a director or other officer
or employee must not improperly use the information to:
(a) Gain an advantage for themselves or someone else; OR
(b) Cause detriment to the corporation.
*This duty continues after the person stops being an officer or employee (Note 1 of s 183(1)).
A person who is involved in a contravention is liable for a civil penalty (s 183(2)). Also, might be an
offence under s 184 if dishonest.
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The duty
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(b) The company is insolvent at that time, or becomes insolvent by incurring that debt; and
o A company is insolvent if it is unable to pay all its debts, as and when they become due and
payable (s 95A);
o The conclusion of insolvency must be derived from a proper consideration of the companys
financial position, in its entirety, based on commercial reality. A company is not insolvent
simply because it is suffering a temporary lack of liquidity. Insolvency is the inability of the
company to meet debts, utilising the resources available to the company (Powell v Fryer per
Olsson J);
o Common indicators of insolvency include (ASIC v Plymin per Mandie J):
- Continuing losses;
- More liabilities than assets;
- Overdue taxes;
- Inability to borrow further funds from present bank;
- No access to alternative finance;
- Inability to raise further equity capital;
- Suppliers requiring COD, or otherwise demanding special payments before supply;
- Creditors unpaid outside trading terms;
- Issuing of post-dated cheques;
- Dishonoured cheques;
- Special arrangements with selected creditors;
- Impending court action for debts; and
- Inability to produce timely and accurate financial information.
(c) At that time, there are reasonable grounds for suspecting that the company is insolvent, or would
so become insolvent.
o Suspect means more than mere speculation, but less than actual belief or expectation it is a
positive feeling of apprehension or mistrust (Queensland Bacon);
o Satisfied where a reasonably competent and diligent director would have grounds to suspect
insolvency, in all the circumstances of that company (ASIC v Plymin per Mandie J).
AND the director failed to prevent the company from incurring the debt (s 588G(2)).
o Covers inactivity (ASIC v Plymin).
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Defences
x General points:
o Director has burden of proof on BOP;
o Director can rely on more than one defence;
o The defences are designed to assist directors who have otherwise acted diligently.
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o Some other good reason does not include a total failure to participate in management, for
example, where one director defers to another (in DCT v Clark, it was not sufficient that the wife
simply deferred to her husband to make decisions).
Consequences of breach
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Flowchart
Q2: AGENCY
Formalities
x The contract may be signed by the 3rd party and the agent signs as follows:
Signed for and on behalf of ClayCo Pty Ltd
Angela Ashworth
Angela Ashworth, Managing Director, ClayCo Pty Ltd
A. Actual authority
x An agent with the companys actual authority (express or implied) may make, vary, ratify or discharge a
contract on behalf of the company (s 126(1));
x Actual authority is where the company is communicating to the individual that they have authority.
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x Two types:
1. Implied from the position in the company held by the agent; or
o Agent is presumed to have the usual authority that attaches to that position in that type of co;
o For example, the following usually have the authority to enter contracts: Managing director,
CEO, CFO, purchasing officer, and human resources manager;
o BUT, the following do not usually have the authority: Individual non-executive directors,
non-executive chairmen, or the company secretary (Northside Developments).
x The company is holding out the agent has having authority to contract it creates an agency by estoppel.
x Two requirements:
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1. Representation; and
o The company must make a representation to the 3rd party that the agent has authority;
o Who must make the representation?
The representation must be made by someone with the companys actual authority to
make the representation (eg the Board, or a person who has actual authority to manage
that part of the business to which the contract relates);
For example, in Crabtree-Vickers, Bruce McWilliam Junior could not hold out Peter
McWilliam (the agent) as having authority to enter into the transaction, because he
himself did not have actual authority to enter into the transaction (he was MD, but
needed his fathers approval to enter contracts). But see Paribas.
o How is the representation made?
Where the company permits the agent to occupy a particular position, then the company
represents that the agent has the customary authority of a person in such position (eg in
Freeman & Lockyer, although there was no express communication by the Board to
amount to implied actual authority, the Board knew that Mr Kapoor was acting as MD
and they did nothing to prevent him);
Where the company arms an officer with a document and permits them to enter into the
contract without taking proper safeguards against misrepresentation (in Paribas, the
bank gave a junior employee all of the documents for the 3rd party to sign and therefore
held out that she had authority).
2. Reliance.
o The 3rd party must rely on the representation when entering into the contract.
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Formalities
x The Indoor Management Rule allows a 3rd party to assume that internal matters have been satisfied, even
if this is not true (Turquands case). For example, if a shareholder meeting is required to authorise a
transaction, the 3rd party is not required to investigate whether this meeting occurred and therefore the
contract is binding even if the meeting was not held. 24
x EXCEPTION
o The 3rd party cannot rely on this assumption if a reasonable person would be put on inquiry that the
assumption was wrong (Northside);
o Note: a 3rd party is not required to read the Constn or other ASIC documents (s 130);
o Example:
Northside: The bank was put on inquiry by the nature of the transaction that is, it was a
mortgage over a valuable asset, and none of the funds lent by the bank went to the company
itself.
24
There are differing judicial views on the IMR. Mason CJ in Northside said that the IMR is a special rule of
company law, which enables 3rd parties to assume that transactions evidenced by an executed document are
authorised by the company if the companys signature is on the document, unless they are put on inquiry
(preferred approach, see eg Kirby J in Bank of NZ v Fiberi). Dawson J said that where a 3rd party contracts with
the company and has no reasonable grounds to suspect that the transaction is not properly authorised, an
equitable estoppel arises. Thus grounded in agency and estoppel.
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Statutory assumptions
x General principles:
o Under s 128(1), a person is entitled to make the assumptions in s 129 in relation to dealings with a
company 25. The company is estopped from asserting that the assumptions are incorrect;
o The assumptions apply even if an officer or agent acts fraudulently or forges a document (s 128(3)).
The forged document is not a nullity and can still bind the company (Story);
o EXCEPTION:
A person is not entitled to make an assumption if at the time of the dealings they knew or
suspected that the assumption was incorrect (s 128(4));
See meaning of suspect on page 41;
This is a subjective test (Soyfer v Earlmaze).
o (2) 3rd party can assume that officers whose details appear in ASIC records are duly appointed and
have the usual authority;
There is no obligation to check ASIC documents (s 130);
Usual authority remember, non-executive directors and secretaries have narrow authority.
o (3) 3rd party can assume that a person held out as an officer or agent has been duly appointed and
has the usual authority of someone in that position;
Principle of apparent or ostensible authority;
Note: the sale of the whole business is something that only the whole Board can do, and so is
not within the usual authority of a MD, CEO or director;
For example, in Brick and Pipe Industries, Mr Furst signed a guarantee as secretary, but he
was never appointed as secretary and the 3rd party had searched the company records and
knew that he had not been appointed. However, the company had held Mr Furst out as
secretary it was stated in the presence of Mr Goldberg, who was effectively the MD, that Mr
25
Dealings with a company extends to purported dealings (Story v Advance Bank that is, it includes
dealings with people who did not have actual authority from the company).
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Furst was secretary and Mr Goldberg remained silent. Therefore, company is bound by the
guarantee.
o (4) 3rd parties can assume compliance with fiduciary or statutory duties;
That is, company cannot argue that the officer breached their duties to avoid the contract (Pico
Holdings).
o (5)/(6) 3rd parties can assume company documents are properly executed;
Use (5) for documents executed without seal, and (6) for documents executed with seal;
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 s 127;
What if the description of the signee is wrong?
In Story, the executed document described Mr Storys wife as secretary, when she was
actually a director. Mr Story forged her signature. The Court held that a misdescription of a
signatory does not prevent the assumption from being relied upon. See also Brick and Pipe
Industries, because Mr Furst was a director but signed as secretary.
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Types of meetings
Convening meetings
2. Members.
o Members may requisition a meeting;
Under s 249D(1), the directors must hold a meeting on the request of members with at least
5% of the votes or at least 100 voting members. The request must be in writing, state any
resolution to be proposed, be signed by the members, and be given to company (s 249D(2)).
AND
Members with >50% of the votes may call a meeting if the directors do not do so within 21
days after the request is given (s 249E(1)). The company must pay the expenses of the
members (s 249E(4)).
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x A meeting must be for a proper purpose (s 249Q). Eg the meeting is not for a proper purpose if it is to
decide a matter that is not within the powers of members to decide such as directing the directors how to
exercise their exclusive powers (NRMA v Parker).
Meeting requirements
Basic requirements
x Notice: At least 21 days notice must be given (s 249H(1)). Shorter notice may be allowed in some
circumstances (see extract). For listed companies, at least 28 days notice must be given (s 249HA(1)).
x Quorum: A quorum is the minimum number of shareholders whose presence is necessary for a meeting to
be able to validly transact business. The quorum for a meeting is 2 members and the quorum must be
present at all times during the meeting (s 249T(1) RR).
x Electing a chair: The directors must elect a chair to be present at every meeting (s 249U(1)-(3) RR). The
chair must adjourn a meeting if the members present with a majority of votes agree (s 249U(4) RR).
x Technology: A meeting may be held at 2 or more venues using any technology that gives the members as a
whole the reasonable opportunity to participate (s 249S).
Member participation
2. Members statements: Members with at least 5% of the votes, or at least 100 voting members, may
issue or make statements to be circulated to all members (s 249P). See extract of section below.
3. Reasonable opportunity to ask questions at AGM: 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 (s 250S(1)). Failure to do so is a strict liability offence (s 250S(2)).
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Duty to inform
x For example, in Fraser, the members were to vote on whether or not the company should undergo
demutualisation (co limited by guarantee co limited by shares). The company sent out a prospectus that
stated that the members would receive free shares in the new company. However, the prospectus did not
detail the benefits that the members were foregoing. Therefore, breach of the duty to inform, because the
prospectus failed to identify the disadvantages of demutualisation to members this left members with the
dominant impression that they were better off, when this was not necessarily true.
26
Financial product is a facility through which, or through the acquisition of which, a person does one or more
of the following: makes a financial investment, manages financial risk, or makes non-cash payments (ss
763A(1), 761A, 9).
Financial service is provided if the person: provides financial product advice, deals in a financial product,
makes a market for a financial product (ss 766A(1), 761A, 9).
Conduct in relation to a financial product includes: (a) dealing in a financial product, (b)(i) issuing a financial
product, (b)(ii) publishing a notice in relation to a financial product, (b)(iii) making, or making an evaluation of,
an offer under a takeover bid or a recommendation relating to such an offer s 1041H(2).
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Decisions at a meeting
x Proxy votes
o Proxy voting allows member to vote without attending the meeting;
o Summary of provisions:
Member can appoint a proxy (s 249X(1));
Member can specify the # of votes that proxy may exercise (s 249X(2));
Proxy has same rights as member, including to speak, vote and demand poll (s 249Y(1));
Proxy cannot exercise rights if member present, unless Constn says otherwise (s 249Y(3));
To appoint a proxy, the document must be signed by the member and contain the members
name and address, companys name, proxys name, and the meetings at which the
appointment may be used [may be a standing appointment] (s 250A(1)), unless the Constn
provides otherwise (s 250A(2)). Appointment must be received at least 48 hours before the
meeting (s 250B(1)), unless the Constn reduces this period (s 250B(5)).
o Directed proxy where shareholder has directed the proxy how to vote. The proxy must vote
according to their instructions (eg s 250BB(1), the proxy need not vote on a show of hands or the
poll (unless chair, where they must vote on a poll), but if they do vote they must follow instructions
allows for cherry picking, because the proxy can decide if and when to vote);
o Undirected (open) proxy where shareholder appointed proxy without specific voting instructions.
x Two ways:
1. Circulating resolution (Pty companies)
o A Pty company may pass a resolution without a general meeting if all the members entitled to
vote on the resolution sign a document containing a statement that they are in favour of the
resolution set out in the document (s 249A(2));
o The resolution is passed when the last member signs (s 249A(4)).
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x Procedural irregularity
Not exhaustively defined but defined to include the absence of a quorum, or a defect, irregularity or
deficiency of notice or time (s 1322(1)(b)(i)-(ii)). The procedure for a nomination of a person for election as
a director at a general meeting is not a proceeding.
x Substantial injustice
o The court must balance the real prejudice suffered by a member, against the prejudice to the
company and other members in invalidating the resolution. The injustice to the member must be
real and not theoretical or insubstantial ie you need the injustice to affect the outcome of the
resolution (Re Compaction Systems);
o Bell Resources: the notice papers failed to state that the resolution was to reduce the number of
directors. The votes of members who did not attend would have affected the outcome. Thus,
substantial injustice (this was an important and fundamental resolution);
o Chew Investment: the refusal to hold a poll when the Constn required it was held to be a
substantial injustice, because it deprived the members of the full exercise of their voting rights and
the outcome would have been different if a poll was held.
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proceeding is essentially of a procedural nature, that the person/s concerned in the contravention acted
honestly, that it is just and equitable that the order be made [s 1322(6)(a)(i)-(iii)], and that no substantial
injustice has been or is likely to be caused to any person [s 1322(6)(c)].
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27
Defined very broadly in s 53, and includes: (a) formation, membership, control and transactions of the body;
(c) internal management and proceedings; (e) ownership of shares in the body; (f) power to exercise the rights to
vote attached to shares and to dispose of such shares; (h) circumstances under which a person acquired or
disposed of shares.
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9 A refusal to pay dividends, where excessive benefits to directors (eg in Sanford, the
majority shareholders diverted business away from the company to another company they
controlled and paid themselves high salaries and other benefits. Their refusal to pay
dividends was oppressive, because it excluded the minority shareholder from a share of
the profits of the company. Remedy: Co to buy minoritys shares).
9 Breach of directors duties (can amount to oppressive conduct; Jenkins).
x It allows a member to take legal action in the name of the company for a wrong done to the company (cf s
232, it is not a personal action). The purpose is to enable an individual member to take action on behalf of
the company, where the majority is unwilling (eg breach of directors duties).
x Q1: What does the member want to sue on behalf of the company for?
o Eg breach of directors duties.
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28
Under s 237(3), a rebuttable presumption that leave is not in the best interests of the company arises if the
proceedings are against a 3rd party (not related to the company; s 237(4)), AND the company has decided not to
bring the proceedings, AND all directors who participated in that decision acted in good faith for a proper
purpose, without a material personal interest, were reasonably informed, and rationally believed it was in the
best interests of the company (ie a business judgment rule).
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Leave can be granted even if the company has ratified the breach (s 239(1)). BUT the
Court may take this into account in deciding what order or judgment to make the
Court must have regard to whether the members were fully informed and acting for
proper purposes (s 239(2)).
o Proceedings are brought in the companys name (s 236(2)).
x The Court has a discretion to grant an injunction restraining a person from engaging in conduct that
contravenes the Act.
ii. Where a person has refused or failed, is refusing or failing, or is proposing to refuse or fail, to
do an act or thing that the person is required by this Act to do (s 1324(2)).
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x Four types:
1. Special fiduciary relationship (see page 30);
2. Fraud on the minority, by ratifying breaches by the majority (see page 37);
3. Unfair alteration of the constitution to expropriate shares (see page 9); and
4. Improper allotment of shares that dilute voting power:
o Also see page 33 an improper purpose of the power to issue shares is to dilute the voting
power of a member;
o A shareholder may have a personal right to bring an action where it is alleged that an issue of
shares was made for an improper purpose (uncertain, but this position is favoured by Residues
Treatment and Ngurli). The shareholder can seek an injunction to prevent the share issue.
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1. Receivership
x What is a receiver?
o A receiver is appointed by a secured creditor of a company, to take possession of the property
secured by the creditors loan, sell it and repay the secured debt owed by the company out of the sale
proceeds;
o Where the security is over the whole undertaking, the receiver may also have the power to manage.
x Receivers powers
o Contained in the loan agreement;
o AND s 420(1): a receiver has the power to do all things necessary or convenient to be done to
achieve the objective for which the receiver was appointed (eg, per s 420(2), enter into possession
and take control of property, and sell property);
o Receivership terminates when the receiver achieves the object of the appointment.
x Receivers duties
o A receiver must take all reasonable care to sell property for not less than market value, or the best
price that is reasonably obtainable having regard to the circumstances existing when the property was
sold (s 420A(1));
o A receiver is an officer (s 9(c)) hence subject to the duties in ss 180-183.
2. Voluntary administration
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x Administrators duties
o An administrator is an officer (s 9(d)) hence subject to the duties in ss 180-183.
o The administrator must convene a meeting of the companys creditors (s 439A(1)). The
administrator must give written notice to as many of the creditors as reasonably practicable and
publish such a notice, and the administrator must fully inform the creditors. At the meeting, the
creditors may resolve (s 439C):
1. That the company executes a deed of company arrangement 29 (eg the creditors agree to accept
payment of a lesser amount in final settlement of their debts this may be beneficial if it
results in the company continuing as a customer of the creditor);
29
The deed of company arrangement binds all unsecured creditors (whether they voted in favour or not);
secured creditors who voted in favour (those who did not are free to enforce their securities); and secured
creditors under court order.
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2. That the administration should end (eg where they believe that the company can trade out of
its difficulties); or
3. That the company be wound up (if the creditors cannot reach a compromise).
o This resolution ends the administration (s 435C(2)).
3. Liquidation
x What is liquidation?
o The purpose of liquidation is to wind the company up and deregister it.
x Appointment of a liquidator
o The liquidator takes complete control of the company (ss 477, 506). Directors lose their power to
manage the companys affairs (s 471A);
o A liquidator is an officer (s 9(f)) hence subject to the duties in ss 180-183;
o The liquidator sells the unsecured assets of the company, maximises the pool of funds available for
distribution (by enforcing any debts owed by others to the company, challenging transactions that
occurred when the company was insolvent, and pursuing directors who have breached the Act) and
distributes the funds according to the rules.
Under s 444A(4), the instrument must specify the administrator of the deed, the property of the company that is
available to pay creditors, the nature and duration of any moratorium period, to what extent the company is to be
released from its debts, the conditions if any for the deed to come into operation and continue, the circumstances
in which it terminates, the priority order for distributing proceeds, and the day on or before which claims must
have arisen if they are to be admissible under the deed.
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x Within 3 months, the liquidator must apply to ASIC to deregister the company.
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