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W10 Workbook 10 2019 Tri 1
Company Law (2106AFE)
Griffith University
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2106AFE Company Law Workbook No. Workshop Objective Key Law Key Reading Know it? N) 1 Explain and apply the rules on remedies including: penalty and which requires dishonesty recklessness 1317E, 1317F, 1317G, 1317H, 1317J, 184 2 Explain and apply the elements of conduct: when can a person apply? what is the relevant conduct? Is the conduct oppressive or unfair? What are the remedies? 53, 232, 233, 234, Wayde v Thomas v HW Thomas Fexuto v Bosnjak Sanford v Sanford Courier Service Hogg v John J Starr (Real Estate) v Robert R Andrew Pty 3 Explain and apply the elements of a statutory derivative action: who can apply? when will the Court grant leave? 236, 237, Swansson v RA Pratt Properties Pty 4 Explain the law with respect to injunctions 1324 5 Explain and apply the following elements of winding up (company is solvent): Can the person apply? Is there a ground for winding up? Will the Court exercise its discretion? 461, 462, 467(4), Clarke v ASIC v Storm Financial Ebrahimi v Westbourne Galleries Note: Cases denoted are provided in the textbook. Otherwise they are summarised in this workbook. 1 Contents Duties: Remedies........................................................................................ Declaration of Contravention................................................................................... Pecuniary Penalty.................................................................................................... Compensation.......................................................................................................... Disqualification......................................................................................................... Criminal Penalties.................................................................................................... Remedies.................................................................................................... Video: Oppressive or Unfair Conduct.......................................................................... Video Diagrams: Oppressive or unfair conduct....................................................... How do you answer an oppressive or unfair conduct question?............................. Video: Statutory Derivative Action............................................................................. Video diagrams: Statutory derivative action........................................................... Can the person apply?........................................................................................... Will the Court grant leave?..................................................................................... Who pays for the statutory derivative action?........................................................ Statutory Injunctions.................................................................................................. Video: Winding Up the Court................................................................................ Video diagrams: Winding up the Court............................................................. Can the person apply?........................................................................................... What are the grounds for winding up a company?................................................ Will the Court exercise its discretion?.................................................................... Workshop exercises: to be completed in class......................................................... Question 1 (Workshop Objective 2)....................................................................... Question 2 (Workshop Objective 3)....................................................................... Workshop exercise: for you to do before class......................................................... Workshop Revision Question.................................................................................... Workshop Revision Answer................................................................................... Member remedies: What to put in your Law and Application.................................... What makes a great answer on oppressive or unfair conduct?............................. What makes a great answer on statutory derivative action?................................. 2 Compensation Section 1317H(1): A Court may order a person to compensate a corporation for damage suffered the corporation if: the person has contravened a civil penalty provision in relation to the and the damage resulted from the contravention (i. causation) What counts as damage? In determining the damage suffered the corporation for the purposes of making a compensation order, you can include profits made any person resulting from the contravention (s1317H(2)). For example, if Company A director makes an undisclosed profit from a conflict of interest situation involving a contract between Company A and Company B. Company A may have suffered no financial loss, but as damage includes profit caused a breach of the CA, Company A can obtain the undisclosed profit. Who can apply for compensation? There are two parties that can apply for compensation orders: Section 1317J(1): and Section 1317J(2): the company Disqualification Refer to discussion on disqualification in previous weeks. Criminal Penalties In addition to the civil penalty provisions, there may also be criminal penalties imposed where the nature of the breach is reckless or intentionally dishonest. Good Purpose Section 184(1): A director or other officer of a corporation commits an offence if they are reckless or are intentionally dishonest and fail to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose. 4 Use of position Section 184(2): A director, other officer or employee of a corporation commits an offence if they use their position (a) dishonestly with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the or (b) recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation. Use of information Section 184(3): A person who obtains information because they are, or have been, a director or other officer or employee of a corporation commits an offence if they use the information: (a) dishonestly with the intention of directly or indirectly gaining an advantage for themselves, or someone else, or causing detriment to the or (b) recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation. What are the penalties? Schedule 3 of the CA sets out the criminal penalties: The maximum penalty is penalty units x per penalty point) or 5 years imprisonment, or both for sections 184 and 588G(3) The maximum penalty for breach of rules on disclosure of, and voting on matters involving, material personal interests (ss are: fine for a breach of section 195 fine and up to three months prison or both for a breach of section 191 NEW CORPORATIONS ACT PENALTIES As well as increasing the penalties for certain civil and criminal offences in the Corporations Act the Treasury Laws Amendment (Strengthening Corporate And Financial Sector Penalties) Act 2018 which applies from 13th March 2019 also amends the Corporations Act to: 5 this penalty based on turnover is capped at a maximum amount of 2 million penalty units million). Remedies Video: Oppressive or Unfair Conduct The remedy for oppressive or unfair conduct is typically used a shareholder in a small proprietary company effectively to the company because no ready market for their shares exists. The remedy is not common with public companies, which are more likely than proprietary companies to have a market for the shares and aggrieved members will sell their shares rather than incur costs in taking legal action. Furthermore, publicly listed companies must comply with ASX Listing Rules which require these companies to gain shareholder approval when they propose structural changes. Under section 232, the applicant must prove that: 1. the conduct of a OR 2. an actual or proposed act or omission or on behalf of a OR 3. a resolution, or a proposed resolution, of members or a class of members of a company IS 4. contrary to the interests of the members as a OR 5. oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. The video below provides a summary of the law, with reference to the diagrams on the pages which follow. Video: Oppressive or unfair conduct Video Diagrams: Oppressive or unfair conduct 7 Oppressive unfair conduct Issue: Can the person apply? Law: Section 234. For example: Member (a) Former member (c) Person who receives shares will (d) ASIC provides permission for person to take action (e) Issue: What is the relevant conduct? Issue: Is the relevant conduct Law: s 53, s Law: s 232(d), (e) Conduct of a affairs behalf of the company resolution at general or class meeting Contrary to interests of members as a whole or Commercially unfair (objective test) (e) See case examples of conduct in Workbook and Textbook Issue: What are the remedies? Law: s 233(1) Winding up (a) Repeal or modify constitution (b) Regulate the future affairs of the co (c) Share purchase co (e) or member(d) Co or member on behalf of the company institute, prosecute, defend or discontinue legal action (f), (g) Appointment of a receiver or receiver and manager over property (h) 8 Given the wide definition, any matter that comes before a general meeting or meeting would be within the scope of the affairs. Section 232(b): Actual proposed act or omission or on behalf of a company Act: For example, a single resolution of the board of directors (Wayde v NSW Rug League Ltd) Omission: For example, the company refuses to pay dividends when sufficient profits exist that are diverted the directors (Sanford v Sanford Courier Service Pty Ltd) Section 232(c): Actual or proposed resolution at a general or class meeting Note that the actual or proposed resolution is not directors, but members at a general meeting or class meeting. Is the relevant conduct contrary to member interests, oppressive or unfair? The relevant conduct must be: Section 232(d): contrary to the interests of the members as a OR Section 232(e): oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. A case example of section 232(d) is Re Overton Holdings Pty Ltd. Faye, managing director and majority shareholder, arranged for the company to lend money to 2 other companies controlled Faye that were in financial difficulty. The loans were unsecured and made without the knowledge of other director and minority shareholder. In relation to section 232(e), the three underlined elements above are now considered as a This means that the key issue is whether the conduct is commercially unfair on a member or members. There is no definition for or in the CA, so the best way to determine whether the conduct falls under section 232(e) is looking at the case law. What we do know from the case law is that: The result, not the motive must be unfair. This means that conduct may amount to oppression even though directors and majority shareholders are 10 acting in what they think are the best interests of the company. The issue is this: is the effect of the conduct commercially unfair? Typical case scenarios where section 232(e) is raised include: o Disagreements between minority and majority shareholders o Diversion of corporate opportunity profits o Exclusion from management o Failure a person to dispose of their shares o Failure to pay a dividend Unfair is determined objectively. For example, a conduct is oppressive or unfair if no reasonable director would have acted in that way (Wayde v NSWRL Ltd) Shareholder disagreements In determining whether or not conduct is oppressive or unfair the court must balance the conflicting interests of majority and minority shareholders. The court will examine the background of the company and the reasonable expectations of its shareholders. For example, the fact that minority shareholders are unhappy with a decision is not itself a ground for oppressive or unfair conduct given that on purchasing shares as minority holders, they should realise that control of the company lies with persons with substantial interests in the company. For example: In McWilliam v LJR McWilliam Estates Pty Ltd, the Court held that it was not necessarily oppressive or unfair just because the Board was pursuing company policies with which the minority shareholders disagreed. The company amended its dividend policy because of tax laws and not to act unfairly towards the minority (albeit that the amendment had the effect of disadvantaging the minority). In Re H W Thomas Ltd, a minority shareholder could not show that conduct was oppressive, unfairly prejudicial, or unfairly discriminatory. At a general meeting of the company, the minority shareholder moved that the assets held the company be sold and the proceeds reinvested in higher income earning investments (i. a riskier proposition). The resolution was not passed. The company was a family company in which it was common ground 11 Exclusion from management Many family companies are run as with family members having a to participate in the management of the company. An act of blocking this participation may be considered unfair. Case examples include Hogg v Dymock and Fexuto v Bosnjak Holdings Pty Ltd. Failure to dispose of shares The mere fact that a member of a company cannot dispose of shares is not enough to establish oppression. For example, the other shareholders may be unwilling to purchase the shares: McWilliam v L J R McWilliam Estates Pty Ltd. Failure to pay a dividend Failure to pay a dividend the company is not itself oppressive or unfair. However there may be surrounding circumstances which, combined with the failure to pay a dividend, makes the of a dividend unfair. A case example is Sanford v Sanford Courier Service Pty Ltd. What are the remedies? Section 233 CA: The Court has a wide discretion with respect to remedies it can any order it considers appropriate in relation to the Section 233 provides a list of orders that the Court can make, including: Winding up Repeal or modification of the constitution Regulation of the future affairs of the company Purchase of any shares any member or the company itself Company or a member acting on behalf of the company to institute, prosecute, defend or discontinue specified proceedings Injunction (both and injunction) Appointment of a receiver or receiver and manager over company property Video: Statutory Derivative Action A statutory derivative action enables persons, with prior leave of the Court, to take action on behalf of the company. This differs from oppressive or unfair conduct, 13 where the applicant (e. a member) takes action personally. However, in particular circumstances, both remedies may apply to the same factual scenario. There are two issues in a statutory derivative action: 1. Can the person apply? 2. Will the Court grant leave? The video below provides a summary of the law that you need to cover for a statutory derivative action, with reference to the diagram on the next page. It is interactive, requiring you to in the Video: statutory derivative action Video diagrams: Statutory derivative action 14 Can the person apply? Section 236 provides that a former or current member or officer of the company can apply to the Court for leave to bring a statutory derivative action. Will the Court grant leave? Section 237(2): The court must grant an application for leave if all the following matters are established: a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in and The issue is this: what is the probability, based on the circumstances at the time of the court hearing, that the company take action? Where the proposed defendant to the contemplated action is an officer of the company, inaction is easy to identify. b) the applicant is acting in good and Two questions here: Does the applicant honestly believe there is a good cause of action with a reasonable prospect of success? Is the applicant bringing the action for a collateral (i. alternative) purpose not connected to the proceedings? For example, an application which puts pressure on the company directors to resign, have the company buy out the shares or to pay dividends to a particular class of shareholders. The Court will scrutinise the reasons why a former member or officer is applying for leave c) it is in the best interests of the company that the applicant be granted and As with section 181, the best interests of the depends on its solvency. For example in the case of Charlton v Baber, the Court was satisfied that the legal proceedings against the director for breach of fiduciary duty would enhance returns to and there promote creditor interests, which were the interests during the liquidation. If the applicant (on behalf of the company) intends on taking or defending proceedings involving a third party (i. not a related party of the company), there are particular grounds set out in section 237(3) which create a rebuttable presumption that granting leave is not in the best interests. The 16 grounds are pretty much the same as the business judgment defence to a due diligence action under section 180(2). d) there is a serious question to be and This criterion is designed to prevent frivolous claims, but it is not necessary that the applicant be required to prove the legal issue when applying for leave. A person only needs to show that there is a probability of success e) either: a. at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for or b. it is appropriate to grant leave despite the above. Who pays for the statutory derivative action? The applicant who is the party involved in the action on behalf of the company. However, section 242 states that a court can make any order it considers appropriate concerning the legal costs, which includes indemnification the company. Statutory Injunctions Rule: Under s1324(1), the court has a discretion to grant an injunction restraining a person from engaging in conduct that has contravened or would contravene the Corporations Act. Injunction: the court may make any order restraining the conduct or requiring the person to act. Who may apply? Only ASIC or a person whose interests have been affected conduct which relates to a contravention of the Corporations Act can apply to the court for an s1324 injunction (s1324(2)). have been Persons who apply need not show that they suffered any special injury arising from the contravention of the Corporations Act. However, applicants must establish that their interests go beyond the mere interests of members of the public (Broken Hill Pty Co Ltd v Bell Resources). A line of court authority suggests that shareholders have standing to apply for an s1324 injunction because they have greater interests 17 Winding Up Issue: Can the person apply? Issue: Is there a ground for winding up the company? 461(1)(e) 461(1)(f) 461(1)(g) 461(1)(k): just and equitable. What are the 4 common scenarios? Relevant cases? Issue: Will the Court exercise its discretion to wind up the company? No if (two matters): 19 Can the person apply? Section 462(2) provides that the following persons may apply for an order to wind up the the a creditor (including a contingent or prospective creditor) of the a contributory (see section 9 definition includes a fully paid holder of shares in a company with a share the liquidator of the APRA. What are the grounds for winding up a company? The Court may order the winding up of a company under a number of grounds in section 461(1) CA (e. the company has no members, the ASIC or APRA determines that it is in the public, member or creditor interests or the company passes a special resolution to have the Court wind up the company). In this course, we will focus specifically on section 461(1)(k) which provides: the Court is of opinion that it is just and equitable that the company be wound up. Your thoughts: what does sections 461(1)(e), (f) and (g) remind you of? What are the differences between oppressive or unfair conduct and winding up in terms of who can apply and the available remedies? What is just and equitable? The and ground is known as a provision in statute law. If an act or omission does not fall under any of the grounds in section 461(1)(a) (j), the Court can still find that it was and that the company be wound up. This is a question of fact. 20
W10 Workbook 10 2019 Tri 1
Course: Company Law (2106AFE)
University: Griffith University
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