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Corporate Law Summary Notes for Exam
Corporate Law (MLL221)
Deakin University
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The Company as a Separate Legal Entity and Personal Liability of Shareholders
If the company enters into a lease, shareholders will not be liable because the company is a
separate legal entity and shareholders have limited liability ( Soloman ).
If the company has debt it will be the company’s debt unless an exception applies that
would allow a piercing of a corporate veil.
If the company enters into a loan contract that is between bank and company, then because
the company is a separate legal entity, the bank needs to reclaim their loan from the company, not the shareholders. This is except if a contracts of guarantee has been signed by a director/officer in their personal capacity which means they weren’t acting for company. The bank can then reclaim the funds from the director/officer personally.
Proprietary and Public Companies
Separate legal entity protects directors of public and private companies from liability for the company’s debt as long as there is no insolvency issues or fraud that would pierce the corporate veil. A private company can become a public company if they wish to grow their investment. There are more reporting obligations and responsibility. Issues of control will arise when a proprietary company issues shares to other people as shareholders then have rights over the directors, they can vote on who will be the directors. This can be managed by issuing different types of shares, the company may issue preference shares to shareholders which means they will be first in line for dividends but have no voting rights. There may also be tax benefits for a company - get them to crunch tax numbers with their accountant, company has tax rate of 30 percent on profit. Company has lots of profit in bank account, if a director wants to use it personally they can’t, it has to be used for salary or dividends. If taking money out of the company tax has to be paid on it (PAYG). Can take it out as directors fees, can run directors loan account.
Proprietary Limited company gives the benefit of less disclosure, paperwork, reporting, less management and accounting fees, which makes the running of it cheaper and easier.
If starting out a company, the director can issues shares and vote for themselves as director so they will be the sole director. Whereas in has public company they will be one of three directors, so will have less control of the business decisions. Proprietary company can have only 50 shareholders ( s 113 CA ), will need to be a public company if there are more shareholders.
Replaceable Rules and Internal Governance
Steps:
- Find rule ( s 141 for all of the replaceable rules)
- Can we change it, is it replaceable
- Replace it by writing our own clause in the Constitution.
Changing the voting power of ordinary shares:
s 250E , need to ask client if they want all ordinary shareholders (both existing and others that might take up shares in future) to have the same voting power. Or do they want to call existing class 1 and give them more votes and in future if the client wants to issue ordinary shares with one vote they can issue class 2 ordinary shares and the default rule will apply and they would have one vote per share.
Nominating a Chair and Casting Votes at Meetings If someone other than director wants to have the power to nominate the chair and have a casting vote at a directors meeting ( s 240E ) they will need to replace s 240E , as this section says directors may elect a chair. They may enter a clause in their constitution which will say the chair at a board meeting will be appointed by .[xxx]. If the company wants the chair to have a vote as a director and a casting vote, look at s 248G.
Appointing Managing Director Appointing managing director is s 201J , which is replaceable rule which says the director may appoint one or more person to be MD. If company wants to change this, they will need to put a Clause in the Constitution which will say the MD is person who is appointed by [xxx] and cannot be removed unless [xx] agree.
Issuing/Transferring Shares Can issue preference shares only if rights attached to shares are set out in the Constitution or company has shareholder vote that is a special resolution (resolution in a shareholder meeting ( s 9 for special res)). If company already has a Contituion, could add in to the company Constitution, alternatively could have a shareholder vote. Restriction on transferring shares, generally if own shares can give them/sell them to others, however company can say they do not want shares sold to strangers and restrict who shares can be transferred to. Rules on selling shares back to company - taking capital out of company if sold back to the company. Section 1072G directors of proprietary company can refuse to register or transfer shares in the company for any reason (not public). If a company wants to be clear and implement what they want, could add a clause that shareholders can only transfer their shares to existing shareholders. Pre-emption rights are about maintaining proportionate voting power, only relate to issue of new shares eg- company with shareholders both have 50 percent, director wants to manipulate the voting power and wants more shareholders to have vote, director issues new shares but before give shares to herself or friends needs to offer shares to other party and her in proportion to existing shareholding (if trying to issue 100, need to offer 50 to other party and 50 to herself) ( 254D )
Freeman Lockyer Buckhurst Park - court said holding out by company means you have to find the holding out, but have to find out who did the holding out by company and then look to whether that person had actual authority to represent that the person had authority. Does [xxx] role give them actual authority to represent [another xxx] as company sec? if Yes, bank will be entitled to rely on this.
S 129(6) document executed by seal. Bank can assume document has been duly executed if it appears the company seal has been stamped on the document and appears to have been witnessed in accordance with s 129(7) (2 directors and company sec).
Disclosure Requirements when Issuing Shares
Does a company have to disclose:
have to be a public company under Ch 6D ( s 706 ) you must disclose unless can fit within exception within s 708 (table on p 194 of textbook). Do not need to disclose if offering additional shares to existing shareholders 708(13)(a) unless dividend plan or bonus share plan s 708(12) then need to disclose. Offering 50 million no need for disclosure providing check they are experienced investor.
What must be in the disclosure document:
General test is whether the info is reasonably required by investors to make an informed assessment of the investment ( s 710 ). Also s 711 and s 710 what interest directors have in property the company has acquired Profit and dividend forecasts: don’t have to provide future projection, if they do have to be careful because will have liability under s 128 if wrong. ( 728 )
Varying and Cancelling Class Rights
Step one: Is there a constitution to follow? If yes, follow what is said in constitution.
Step two: if there is no evidence of constitution, s 246B(2) applies. Rights can be varied only by special resolution of company and special resolution at a meeting of members of the class whose rights have deemed to be varied ( s 246B(2)(c) ). So, varied member should be given a vote, likely they will vote against the issuing of the shares which result in a loss of voting power. If the member has over 25 percent of the vote, they will be able to block the special resolution of the company which requires 75 percent of votes. The second meeting will require 75 percent of the votes as well.
Dilution
if other shares get issued and the percentage of shares the shareholder has is lessened, the member will have less voting power and won’t be able to block any special resolution. Not a legal variation under common law and not a deemed variation under s 246C , so member won’t get a vote.
If no new shares are issued but varying the rights attached to some shares are varied, this is deemed a variation of class rights. Eg- Sam and Mary both in the same class of shareholders. If change Sam’s one vote to two votes and Mary stays at one vote, this is a dilution. CA says Sam is varied at common law as did have one vote and now has two. Whereas, Mary’s legal right to vote has remained the same, will deem Mary’s shares to be varied and Mary gets a right to vote s 246C. CA says doing that is deemed a variation, so both Sam and Mary both vote.
Dividends
Paying dividend all depends on s 254T. A company must not pay a dividend unless assets
exceed liabilities, whatever dividend is fair and reasonable to shareholders as a whole group and the dividend does not materially prejudice the company’s ability to pay creditors.
Creditors right to prevent a dividend being paid:
S 254T(1)(c) - paying of a dividend must not materially prejudice the company’s ability to pay creditors. Creditor may argue that the excess is not sufficient to protect the creditors so paying out the dividend would prejudice the company’s ability to pay creditors. Not a replaceable rule. Contravention of section of act might give creditor the ability to apply to the court to grant an injunction of the company from paying the dividend under s 1324 , if their interest would be affected if paying of dividend went ahead.
Shareholders right to force a dividend be paid:
Directors have discretionary power to control how/when to pay dividends s 254U. This is a
replaceable rule, need to check whether constitution says otherwise. If nothing in constitution, the shareholders cannot take legal action to force the directors to pay a dividend. Shareholders may argue the not paying of the dividend is oppressive or unfair under s 232 but if the company have a fair business reason for not paying the dividend it will not be oppressive.
Director’s/Officer’s Duties – Statutory
Structure - talk about the issues and for each issue apply to each director or talk about each director and each issue that is relevant
Preliminary Points:
Directors have to manage business in an informed way, have to understand financial position, read reports and ask questions ( Daniels ). Bit hard for them to say they had no knowledge.
Director of officer ( King case) Someone who can substantially effect the corporation. CFO will be judged by a CFO in that position with the same expertise ( Vines ).
Section 180
Section 180(1) director or officer must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
a. were a director or officer of a corporation in the corporation's circumstances; and
Look at circumstances of company – are they having financial difficulties, what is the nature of the transaction, is it especially risky in any way? b. occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
(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
(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.
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 directors are under a duty not to make undisclosed personal profits arising from their position. This is narrower than stat duty as stat duty includes officers and employees too.
Name the officer: CFO, MD, Director, non-exec director etc
Section 182(1)(a): have they used their position to gain an advantage for themselves or someone else. Note : if director has prejudiced the interests of the company’s creditors by giving away company assets or otherwise disposing of them for less than market value. This may amount to an uncommercial transaction or an unreasonable director-related transaction as well. Section 182(1)(b): have they caused detriment to company – look at whether they are paying more than reasonable for a transaction, whether company will go insolvent, increasing debt etc.
S 183 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.
Section 183(1)(a): have they obtained information to gain an advantage for themselves or someone else. Note : if director has prejudiced the interests of the company’s creditors by giving away company assets or otherwise disposing of them for less than market value, this may amount to an uncommercial transaction or an unreasonable director-related transaction as well. Section 183(1)(b): have they caused detriment to company – look at whether they are paying more than reasonable for a transaction, whether company will go insolvent, increasing debt etc.
Related party transactions s 208
Related parties defined in s 9 includes relative of director S 208: if have public company is to give financial benefit to a related party have to get member approval. If they don’t get member approval this will be a breach. S 209: if you breach s 208 , the contract or deal is still valid and the public company is not guilty of an offence but any person involved in the contravention is in breach, so they are liable for a civil penalty. S 228: the spouses of the directors are classified as related parties under s 228(2)(d) , as s 228(4) says An entity controlled by a related party referred to in subsection (1), (2) or (3) is a related party of the public company unless the entity is also controlled by the public company. S 229: in determining whether financial benefit is given, have to take a broad view and the economic and commercial substance of conduct prevails over its legal form and disregard consideration that may be given for the benefit of consideration. Includes giving benefit indirectly. S 229(3)(b) - buying an asset from a related party. Need to give members a vote.
Section 588FE(4) provides that related party transactions will be voidable if entered into, during or after the 4 years ending on the relation-back day. In this case it was entered into within this period so is voidable. Section 588FF allows the liquidators to recover property.
S 191: Material personal interest-- director's duty to disclose. Director must disclose when conflict arises.
Director must make a disclosure to other directors if they have a material personal interest in making a transaction. Grand Enterprises Pty Ltd v Aurium Resources Ltd [2009] FCA 513 , it was held that the word “material” conveyed the idea that the interest must be of some substance or value, rather than merely a slight interest. S 195(1): if public company cannot be present at the meeting where matter is being discussed or voted on, unless all other directors are willing to pass board resolution allowing Henri to be present ( s 195(2) ).
Directors Duty to Prevent Insolvent Trading
A director is under a duty to prevent the company incurring debts if there are reasonable grounds for suspecting that it is insolvent: s 588G Elements: 1) Person was a director when the company incurs a debt (look at table in s 588G(1A) ); 2) The company must be insolvent at the time the debt was incurred or become insolvent by incurring the debt (definition of insolvency s 95A(1)-(2) ); 3) There were reasonable grounds for suspecting the company was insolvent ASIC v Plymin ; and 4) The director failed to prevent the incurring of the debt (if they were aware there were grounds for suspecting or a reasonable person in position and circumstances have been aware then they have failed s 588G(2)(a)-(b) ). Subject to four alternative defences set out in s 588H , contravening directors are liable to pay compensation to the company of an amount equal to the loss or damage suffered by unsecured creditors in relation to the debts so incurred because of the company’s insolvency: ss 588J, 588K and 588M
Defences Section 588H sets out four alternative defences available to directors who otherwise contravene s 588G : 1) it is a defence if the director proves that, at the time when the debt was incurred, the director had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time ( s 588H(2) ); 2) it is a defence if a director has delegated the monitoring of the company’s financial position to others upon whom the director relies. The director must prove that at the time when the debt was incurred, the director had reasonable grounds to believe, and did believe, that a competent and reliable person was responsible for providing the director with adequate information about whether the company was solvent and that the other person was fulfilling that responsibility ( s 588H(3)) ; 3) it is a defence if a director is absent from management because of illness or for some other good reason at the time when the company incurs the debt in question ( s 588H(4) ); and
Directors Duties – Common Law
Gaining a financial advantage
Any profit has to be reported to the company and profit has to be handed over to company because he cannot keep a personal profit that has not been approved by members ( Regal v Hastings ).
Duty to act in good faith and in the best interests of the company Subjective and objective test. Subjective: directors comply with this duty if they genuinely believe that they are acting in the best interests of the company. They breach their duty where they engage deliberately in conduct, knowing that it is not in the interests of the company: ASIC v Maxwell [2006] NSWSC 1052. Objective: directors will breach their duty “if, on consideration of the surrounding circumstances (objectively viewed), the assertion of directors that their conduct was bona fide in the best interests of the company and for proper purposes should be doubted, discounted or not accepted” Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239.
Best interests of the company The courts take the view that the duty to act in good faith in the best interests of the company means that the directors must act in the best interests of the shareholders as a collective group: Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 (when company is solvent). Directors may act in what they consider to be the best interests of the company as a commercial entity even though this may not be in the short-term interests of shareholders: Darvall v North Sydney Brick & Tile Co Ltd (1987) 6 ACLC 154. The duty to act in the best interests of the company does not mean that directors owe duties to particular shareholders: Percival v Wright [1902] 2 Ch 421. In special circumstances, a fiduciary relationship may arise between a director and an individual shareholder, and the director may then owe fiduciary duties to the shareholder: Coleman v Myers [1977] 2 NZLR 225.
Interests of creditors Directors’ duty not to prejudice creditors’ interests arises if the company is insolvent or in financial difficulties. Directors have a duty to exercise their powers in a way that does not prejudice the company’s ability to pay its creditors: Walker v Wimborne (1976) 137 CLR 1. Directors prejudice creditors’ interests if they cause their company to enter into arrangements that reduce the pool of company assets that would otherwise be available to be shared among creditors when the company is wound up.
Duty to exercise powers for proper purposes Certain powers are conferred on the board of directors by the replaceable rules and constitution (if any). These generally include broad powers of management. Examples of specific powers conferred on directors include the power to issue shares and to refuse to register transfers of shares. In cases where it is alleged that the directors have exercised their powers for improper purposes, the courts consider two matters: the objective purpose for which the power was granted and the purpose which actually motivated the exercise of the power. The onus of establishing that the directors acted improperly rests with those alleging the breach of duty: Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199.
The courts are generally reluctant to interfere in the internal management of a company unless improper purposes are clearly demonstrated. Directors breach their fiduciary and statutory duties to exercise their powers for a proper purpose if they issue shares to: maintain control of the company’s management or majority shareholding ( Ngurli Ltd v McCann (1953) 90 CLR 425 ); or create or destroy the voting power of majority shareholders: Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821. Shareholders may ratify an improper share issue. If directors suspect that a share issue may result in them breaching their fiduciary duty they should obtain shareholder approval at a general meeting. In Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 , the High Court explained that where there was more than one purpose for a share issue, the “but for” test should be applied to work out whether the directors breached their duty and issued the shares for an improper purpose.
Conflicts of interest and disclosure
The obligation to avoid conflicts of interest aims to prevent directors improperly making a profit from their office. However, it goes further than this to prevent directors putting themselves in a position where it appears that they may act in their own interests. In such a case, directors cannot avoid liability by claiming they did not make a profit, their company did not suffer any loss or that the contract was a fair one. Examples: self-interested transactions with the company; : Transvaal Lands Co v New Belgium personal profits arising from acting as a director; Regal (Hastings) Ltd v Gulliver [1967] bribes and other undisclosed benefits; also amount to a s 181, 182 breach. misuse of company funds; Totex-Adon Pty Ltd v Marco (1982) taking up a corporate opportunity; Queensland Mines Ltd v Hudson misuse of confidential information; Faccenda Chicken improper use of position ( s 182 ); and improper use of information: s 183.
Directors owe a duty to exercise a reasonable degree of care and diligence Directors and other officers are under a duty to exercise a reasonable degree of care and diligence. These duties are imposed by s 180(1) as well as the common law tort of negligence and the equitable duty of care. The substance of the fiduciary and statutory duties is the same: Vines v ASIC [2007] NSWCA 75.
A liquidator is an agent of the company. This agency relationship imposes upon the liquidator fiduciary duties and duties of care. A liquidator owes fiduciary and statutory duties to the company. These duties are similar to the duties imposed on directors of the company, discussed in Chapters 13–20. Section 9 includes a liquidator within the definition of “officer” (see [13]) for purposes of the duties and liabilities imposed by ss 180–. While liquidators owe similar duties to other officers, because of the nature of the position, they also have specific obligations related to their role. In Re Partridge [1961] SR (NSW) 622 , the court described the main duties of a liquidator: Speaking generally, the liquidator’s principal duties are to take possession of and protect the assets, to make lists of contributories, to have disputed cases adjudicated upon, to realise the assets and to apply the proceeds in due course of administration amongst the creditors and contributories.
S 181 :
have to do their duties in two tests: a. best interests of company: Best interests of company is best interests of shareholders - except shifts to best interests of creditors when insolvent. The point at which they could not pay their debts when they were due was when they were insolvent. Under s 95A(1) , a person is solvent if the person is able to pay all their debts as and when they become due and payable. A person who cannot do this is insolvent: s 95A(2). At this point, creditors must be put first. Look at whether they have done this. b. proper purpose. Was the transaction in the best interests of the company or for personal interest of liquidator?. Kinsela v Russell a company’s financial instability raised the directors’ duties to act in the interests of the creditors. Best interests is subject test but if saying deal is best interests and look at deal and think no rational person would believe, then director cannot satisfy that test Name is a valuable asset, liquidator could have sold the name
As an officer, will also be liable under s 180, 182, 183
Voluntary Administration
The aim of the voluntary administration provisions of the Corporations Act is to maximise the chances of the company or its businesses remaining in existence and, if this is not possible, to achieve a better return to creditors than would result from an immediate winding-up: s 435A An administrator’s task is to investigate the affairs of the company and to report on whether a compromise or arrangement can be negotiated that would be acceptable to the company and its creditors. As admin process moves through Admin will put in report which will go to vote of creditors then bank will get their vote on the deed of company arrangement provided administrator makes that recommendation. If no deed of arrangement, company will go onto wind up. This will be end of moratorium, liquidator will be selling off assets. Unsecured creditors go into pool with other unsecured creditors. Ultimately, however, the fate of the company is determined by its creditors, who have the final say as to what should happen to the company after voluntary administration ends. Stay will be lifted after second creditors meeting. Under s 439C , creditors can choose whether: the company enters into a deed of company arrangement; the company is wound up; or the administration is terminated.
Who has initiated the VA?
Directors may appoint an administrator if they believe that the company is insolvent or is likely to become insolvent at some future time: s 436A(1). If directors decide to appoint an administrator, they lose their rights to run the company unless they have the administrator’s written approval: s 437C. A company may also be put into voluntary administration by its liquidator or a creditor who has an enforceable security interest over the whole, or substantially the whole, of a company’s property: ss 436B and 436C
Has the director avoided liability?
Section 440J prevents creditors from enforcing guarantees of company debts provided by a director’s spouse or other relatives. Directors’ personal liability to pay compensation for breaching s 588G (duty to prevent insolvent trading) arises only if their company goes into liquidation: s 588M. It is a defence if directors took all reasonable steps to prevent company incurring debts, which includes consideration as to whether an admin was appointed ( s 588H(6) ).
Has the creditor lost their rights to enforce the loan/security? With some exceptions, while a company is under voluntary administration, there is a moratorium ( s 440D ) or stay of all claims or legal proceedings against the company and guarantors of its debts: ss 440A–440J During voluntary administration, secured creditors cannot enforce their security interests over the company’s property except with the administrator’s or court’s consent: s440B. Secured creditors’ rights to enforce their security interests resume after voluntary administration ends unless they have agreed to a deed of company arrangement. A secured creditor with a security interest over the substantially the whole of the property of a company has the ability to enforce the security interest within the “decision period” ( s 441A ) and personally take possession of the company’s property or appoint a receiver. The “decision period” is defined in s 9 as being within 13 business days of the day administration begins or within 13 business days of the secured creditor being given notice of the administrator’s appointment.
Creditor cannot commence proceedings to sue for the debt while the company is in liquidation: ss 417B (compulsory liquidation) or 500(2) (voluntary winding up). Creditor must prove for its debt in the liquidation and the parri passu rule applies. Unsecured debts are paid only if there is money left over after preferential debts have been paid. The liquidator may apply to the court ( s 588FF ) and seek to recapture voidable transactions if they are an unfair preference ( s588FA ) insolvent transaction ( s588FC) or a voidable transaction ( s588FE ). Directors can be sued to enforce guarantees. Lessor may retake possession for non-payment of rent. In relation to unpaid rent, lessor must prove for its debt in the liquidation and the parri passu rule applies. Unsecured debts (includes unpaid rent) are paid only if there is money left over after preferential debts have been paid. Employees must prove for their debt in the liquidation. However, amounts owed to them are preferential debts under s 556(1) and are paid ahead of other unsecured debts. Employee entitlements rank in the following order: unpaid wages, then accrued holiday pay or long service leave, then payments for retrenchment.
Recovery of Assets
Unfair preferences
Section 588FA(1) : transaction (entered into within 6 months of winding up i. the relation back day) is an unfair preference given by a company to a creditor if:
a) Company and creditor are parties to the transaction b) Transaction results in creditor receiving more from the company than creditor would have received if creditor had to prove for the debt in a winding up NB: If the transaction that is an ‘unfair preference’ was entered into when company was insolvent or caused/contributed to company’s insolvency, the transaction is an ‘insolvent transaction’ and is voidable. STEPS:
Was the transaction entered into within 6 months before winding up (the relation back day)
Did the transaction give a creditor an unfair preference? Did the creditor get more than they should have?
Was the company insolvent when it entered into the unfair preference transaction (or did it cause or contribute to the company becoming insolvent)? If yes, liquidator can apply to the court for an order to ‘take back’ the amount of money that was given in the unfair preference transaction and distribute it to other creditors.
Uncommercial transactions
Section 588FB : transaction (entered into within 2 years of winding up, i. the relation back day) is an uncommercial transaction if a reasonable person in company’s circumstances would not have entered into it having regard to:
a) – b) Benefits (if any) and detriment to company from entering into transaction
c) Benefits other parties gain from the transaction, and
d) Any other relevant matter
NB: uncommercial transactions can only be voidable under s. 588FE if they are insolvent transactions within the meaning of s 588FC and entered into within two years of the relation back day. The court has a discretion in making orders, including an order to require a person to pay some or all of the benefits that the person has received because of the transaction s 588 FF(1)(c).
STEPS:
Was the transaction entered into within 2 years before winding up (the relation back day)?
Was the transaction an uncommercial transaction?
- Would a reasonable person enter into it?
Was the company insolvent when it entered into the uncommercial transaction (or did it cause or contribute to the company becoming insolvent)?
If yes, liquidator can apply to the court for an order to ‘take back’ the amount of money that was given in the unfair preference transaction and distribute it to other creditors
Unfair loans
Section 588FD : loan to company is unfair if the interest or charges on the loan is extortionate (i. excessively high), or if because of variation they have become extortionate : s 588FD(1)
An unfair loan is voidable in winding up regardless of the date on which it was made ( s 588FE(6) ).
If a company has entered into an unfair loan this will constitute a voidable transaction and the liquidator can apply to the court for an order to take back the money and then distribute it to other creditors.
Unreasonable director-related transactions
Secured creditors
Expenses of the winding up (including liquidator’s remuneration)
Unpaid wages, unpaid superannuation and employee entitlements
Unsecured creditors
Members (but only if there is a surplus after all creditors have been paid)
All unsecured creditors with provable debts participate equally in the distribution of the company’s assets on a winding-up. If there are insufficient funds available to meet them all in full, they are paid proportionately s 555.
Receivership
A company enters receivership when a receiver or a receiver and manager is appointed in respect of some or all of its property. Receivership is a form of administration of a company’s property that involves the appointment of an independent, experienced insolvency practitioner as a receiver. The role of a receiver appointed by a secured creditor is to take possession of secured property, sell it and, out of the proceeds, repay the secured debt owed by the company. Appointing a receiver is an effective means whereby a secured creditor can enforce rights in relation to a secured debt without recourse to the courts. Where the secured property includes the business of a debtor company, the terms of a debenture or other secured loan agreement often give a receiver wide powers to manage the business of the company. This is done in order to maximise the return to the secured creditor. Such a receiver is known as a “receiver and manager”. The court may also appoint a receiver. Such appointments, while rare, are usually made where the secured assets are in jeopardy. A court-appointed receiver is usually appointed for specific purposes and for a limited duration. Receivers are given wide powers in carrying out their roles. An important power is to sell the company’s secured property for the purpose of discharging the secured debt. Receivers are under a statutory duty to take reasonable care in selling secured property. Receivers also owe a common law duty to the debtor company to exercise the power of sale in good faith. Receivers are included in the definition of “officer” and are therefore subject to the duties imposed on officers such as directors. Receivers are liable for certain debts incurred by them in the course of the receivership. This encourages persons to continue dealing with a company in receivership and enables the receiver to carry on the company’s business. As an agent of the company, a receiver is entitled to be reimbursed by the company. A receiver will also generally obtain an indemnity from the appointing creditor so as to be further protected from personal liability.
Deregistration
The final outcome of a liquidation is that the company is deregistered from the register of companies. ASIC may deregister a company on the application of its liquidator or directors if it is not carrying on business and has few assets and no liabilities. ASIC may also initiate the deregistration of a company if it has not lodged documents and does not appear to be carrying on business.
Corporate Law Summary Notes for Exam
Course: Corporate Law (MLL221)
University: Deakin University
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