- Information
- AI Chat
2017 Exam Feedback
Corporate law (LLH305)
Queensland University of Technology
Recommended for you
Related Studylists
corporate lawPreview text
Feedback LLH305 Semester 2 2017 Final Exam
Question 1
This question required advice to ASIC. ASIC had standing to bring an action against the directors for contravention of civil penalty provisions. The two contraventions with the best prospects of success were the unauthorised share buy back and the duty to avoid insolvent trading. These two issues were live on the facts; every element of each action was specifically dealt with by the facts of the problem.
Insolvent trading required discussion of the preconditions to the operation of s588G including identification of who the directors were at the relevant time the debts were incurred and identification of the relevant debts. Here this included the rental payment on the lease of premises as well as the share buy back transaction. Better answers carefully considered facts regarding the liquidator’s assessment of the company’s solvency, and the facts stipulating as to awareness of insolvency. Marks were available for a discussion of whether there had been a failure to prevent the company from incurring the debt, defences, consequences of contravention and the relief application. Section 588G(3) also needed to be considered.
The share buyback application required a discussion of s259A. Section 259A requires the share buy back to comply with s257A which provides that a company can buy back its own shares if the buyback does not materially prejudice the company’s ability to pay its creditors and the company follows the procedures laid down in Division 2 (See s257B). This was an unauthorised buyback because it contravenes s259A for two reasons. First the buyback materially prejudices the company’s ability to pay its creditors and secondly because the company has not followed the procedures in Division 2. Material prejudice required close consideration in applying the law to the facts. Entering into this buyback clearly prejudiced creditors. The facts relating to the solvency of the company were all highly relevant. The relevant requirements of division 2 depend upon the type of buy back. This is a selective buy-back because it applied only to preference shares and was not one of the other types of buyback. Several marks were available for an explanation of why this buyback was a selective buyback. Many students did this exceedingly well. Selective buy-backs require compliance with numerous procedures all of which were dealt with the fact scenario including: S257D – special/unanimous resolution neither of which was possible here; S257E – lodge offer documents with ASIC; S257F – 14 days notice; S257G – disclose relevant information when offer made; S257H – cancel shares; S254& - notify ASIC of cancellation. Not all the procedures have been complied with and thus s259A had been contravened.
The consequences of contravention of s259A required attention as this would have been seminal to the advice to ASIC. This required discussion of ss259F(1)(a), 259F(2), s1317E, s79 and s259F(3). There were no facts here to suggest that the buy-back was dishonest. The facts stipulated that Max and Alex ardently believed that restructuring in this way would achieve administrative efficiencies that could solve the solvency crisis. Other relevant considerations were the consequences of contravening a civil penalty provision and the relief application under s1317S. As these had also been relevant to s588G some students dealt with these issues together rather than separately.
To some extent the duty to avoid insolvent trading involves a consideration of the standard of care. This is implicit in the tests involved in the preconditions to the operation of s588G. A few students dealt with this as a standalone contravention of the duty to act with due care and diligence under s180. Students taking this approach typically had very little to say in applying the law to the facts and in attempting to resolve whether there had been a contravention of s180 these students were typically led back to the
duty to avoid insolvent trading by the critical fact that the directors ought to have known that the company was insolvent at the time the buy back was entered into. A few students erred in overlooking this critical fact and instead considered whether the disagreement between the three directors as to the best approach to take in the solvency crisis amounted to a business judgment. Approximately 10% of students raised the duty to act in good faith and to exercise powers for a proper purpose under s181. Of those answers dealing with good faith, most were simply an exceedingly brief statement that a director acting in good faith and exercising their powers for a proper purpose would not engage in insolvent trading. These students typically identified that good faith was a potential issue without supporting it with any analysis or reasoning. However several students did deal with this duty at length exploring the directors’ obligation to act in the best interests of the company, what those interests might be in a solvency/cash flow crisis such as those arising on the facts and considered the objective and subjective purposes of a power to buy back shares. Some of these answers were very impressive and demonstrated considerable depth of thinking and understanding about the law in the context of the problem. A flexible approach was taken to marking papers raising these other issues with up to 10 bonus marks available for a full discussion of the relevance of s180 and/or 181. The marks given depended on the level and quality of discussion and analysis.
Common errors:
90% of students identified both insolvent trading and the share buyback as the critical issues. Papers that did poorly generally did not deal with the issues in sufficient depth, for example, writing only one or two sentences on the issue in total. Among these papers were those that did not genuinely attempt to answer the question. This manifested in one of two ways. Firstly a few students rewrote the question at length without identifying the live issues, the relevant law or applying it to the facts. Secondly, a few students wrote very little at all (frequently less than 1-2 pages), generally avoiding sentences and instead listing a few disjointed key words without explaining the relevance of the words listed. In this approach application to the facts was generally omitted. Interestingly, students taking this approach in question 1 maintained this approach in questions 2 and 3. This approach makes it very difficult for it to obtain all the marks for each issue.
Among papers who did deal with the critical issues in depth, there were some common errors, for example, omitting a discussion of the consequences of contravening a civil penalty provision, or omitting a discussion of the relief application. A number of students failed to discuss the possibility that the share buy-back would materially prejudice the company's capacity to pay creditors. This was a live issue on the facts and required discussion. Common errors with insolvent trading were as follows: A number of students did not identify that two types of debts existed on the facts; the share buy-back and the invoices regarding the lease. A complete answer would have included both these debts. Given the unpaid rent amounted to a debt incurred while insolvent, Chelsea’s liability ought to have been considered. Some students failed to discuss the relevance of Chelsea, focusing their analysis on Max and Alex. Unnecessarily inventing facts.
Question 2
Overall this question was done quite well with the vast majority of students clearly understanding the basic points that there needed to be perfection and attachment and the consequences of this (ie the basic priority rules). This was one of those questions that many students could get at least 5-6/10 by
the subject of the security (agent for mortgagee). However, if the lending documents allows it BA should appoint Rebecca as agent for AA. This approach would be particularly useful and more favourable for BA because BA has security over AA’s assets and business and if BA appoints Rebecca as agent for AA then Rebecca can manage AA on behalf of BA without incurring direct liability back to BA.
The liability falls with AA if this is the case which is less risky for BA. When Rebecca is acting, that is dealing with AA’s assets, she can act in a way that gives preference to the secured creditor BA. A number of marks were available for discussing the effects of receivership. Students drew on the following in explaining these effects on the basis of the facts provided: Rebecca will come in using her expertise to either manage the bus or sell the assets - probably both with a view to ensuring that BA gets repaid; AA is still the legal owner of the secured property but Rebecca has control of it; BA must notify ASIC under s427(1) that they have appointed a receiver; the company name (AA) has to have the words in receivership after it on all public documents - s428(1); a report is required by the directors under s429(2)(b). Many students noted the importance of this report given that Rebecca is an outsider without knowledge of AA’s inner workings.
Most students were across the powers and duties of a receiver, were able to clearly and concisely state the law and apply it in full to the facts. Rebecca’s powers arose from the appointment documents and if not stated in the appointment document, then extensive powers are conferred by statute in s420. Also important in this context are s430, s431, s424, s418A. Rebecca’s primary duty is to BA: Expo International Pty Ltd v Chant [1980] 2 NSWLR 820 – that is, the duty to obtain funds to repay lender. Fiduciary duties are owed to the company as its agent; the receiver is also an officer – s9 definition.
Thus, Rebecca has both general law and statutory duties. The general law include the duty to exercise powers in good faith, act within the terms of appointment, account to the company after the lender’s security has been discharged. Statutory duties include:
o ss180-184 (included in s9 definition of ‘officer’) o s420A – reasonable care in selling secured assets o s429(2)(a) and (c) – notification of appointment and lodging of directors’ report o s427(2) – notification of address o s421 – opening of bank accounts to keep receipts separate o s432 – lodging of accounts with ASIC o s422 – report breaches of duty by company officers to ASIC o s433 – if applicable pay priority debts
Most papers did a very good job on their discussion and application of the powers and duties of the receiver to the facts.
A common error here was to omit much needed detail regarding the statutory effects of receivership. For example not all students referred to ss427-429. Also, the agency relationship was not always addressed or considered in sufficient detail.
Question 3(b) was answered well by most students who referred to s420A and applicable caselaw. Further application to the specific problem at hand was required by some students. A number of students failed to identify the live issues were the duties and powers of a receiver under s420A and instead exclusively considered general director duties rather than s420A.
This part of the question required application to the particular facts arising in the sale of the art. s420A - When selling AA’s assets Rebecca must take all reasonable steps to ensure that they sell for not less than market value or if there is no market value the best price reasonably obtainable. It’s not entirely clear what is meant by market value or “best price”: Jeogla V ANZ [1999] NSWSC 563. However, it seems clear that the nature of the obligations will very much depend on the particular facts faced by the receiver when selling the asset. Here this means that Rebecca should advertise the art in the market where it fits. This places emphasis on the need to get the best price: Florgale Uniforms Pty Ltd v NAB (2004) 22 ACLC 1,580 though not always necessary: Boz One Pty Ltd v McLellan [2014] VSC 208. It is arguable on the facts that if she sells to her father-in-law she is not fulfilling this obligation.
Q3(c) was a straight forward question requiring an outline of members’ voluntary liquidation and how it leads to the winding up process, and how that is achieved. Students needed to identify that this is a members’ voluntary winding up where the company appears solvent.
Students were required to identify how to initiate the process under s491, the requirement for a declaration of solvency under s494 and the relevance of s95A. Students were also required to note that if company resolves by special resolution to wind up the company, the company in general meeting must appoint a liquidator: s495(1).
Better answers noted that if liquidator forms the view that the company is insolvent - s 496(1): the liquidator must either: (a) apply under s 459P for the company to be wound up in insolvency; (b) appoint an administrator under s 436B; or convene a meeting of the company’s creditors, in which case the winding up may become a creditors’ voluntary winding up.
Regarding how to “achieve” the process, better answers demonstrated an understanding of the process that is used to achieve voluntary winding up based on a range of the below points. This part of the question was marked flexibly with students expected to draw on some but not all of the points below in explaining how the process would be achieved.
- generally voluntary winding up commences on the day on which the special resolution for winding up of the company is passed: s 513B.
- s474(1): liquidator required to take into personal custody or control all the property to which the company is, or appears to be entitled.
- powers and duties of liquidator generally, including the duty to sell the company’s assets. Powers under ss477(2)(c) and s477(2)(d) enable the liquidator to sell all the company’s property and execute documents in the company’s name.
- the purpose of a winding up is to distribute the proceeds of sale of the company’s assets to creditors + if not insolvent, surplus to shareholders.
- Liquidator finally has duty to repay the company’s debts – this is a collective procedure so all creditors are entitled to claim.
- Creditors paid first, then surplus if any is distributed among the company’s members.
- Repayment of debts: ▫ from commencement of winding up: follow the pari passu principle – s ▫ i except for certain priority payments, all debts proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately.
2017 Exam Feedback
Course: Corporate law (LLH305)
University: Queensland University of Technology
