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Corp tutorials (karina)
Corporate law (LLH305)
Queensland University of Technology
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TABLE OF CONTENTS
- Topic 1 The context of Australian corporate law Live Tutorial....................................................................
- Question................................................................................................................................................................
- Topic 2 incorporation and corporate personality Live Tutorial...................................................................
- Question 2..........................................................................................................................................................
- Question 2..........................................................................................................................................................
- Topic 3 The corporate constitution Live Tutorial........................................................................................
- Question................................................................................................................................................................
- Topic 4 CORPORATE BUSINESS Live Tutorial..............................................................................................
- Question................................................................................................................................................................
- Topic 5 CORPORATE GOVERNANCE Live Tutorial.......................................................................................
- Question................................................................................................................................................................
- Topic 6 CONFLICTS AND DUTY OF CARE Live Tutorial...............................................................................
- Question..............................................................................................................................................................
- Topic 7 INSOLVENT TRADING Live Tutorial..............................................................................................
- Question..............................................................................................................................................................
- Topic 8 SHARE CAPITAL Live Tutorial.......................................................................................................
- Question..............................................................................................................................................................
- Topic 9 MEMBERS Live Tutorial...............................................................................................................
- Question 1 – STATUTORY DERIVATIVE ACTION.....................................................................................................
- Topic 10 Loan capital Live Tutorial..........................................................................................................
- Question..............................................................................................................................................................
- Topic 11 RECEIVERSHIP Live Tutorial.......................................................................................................
- Question 11......................................................................................................................................................
- Topic 12 VOLUNTARY ADMINISTRATION Live Tutorial..............................................................................
- Question 12......................................................................................................................................................
Topic 1 The context of Australian corporate law Live Tutorial....................................................................
Question................................................................................................................................................................
Georgia and Douglas run a research and development lab working on new forms of energy. Their research has to date been fully funded by grants. For the past 5 years, these funds have allowed them to employ a team of 40 scientists. Their breakthrough research uses gravity to power floor lamps. Prototypes of several lamps have been made and most are working successfully. Some flaws need to be ironed out by further research and experimentation, including the risk of electrocution from the lamps. The research funds are about to run out. They need to attract investors to help them complete their research, as well as to grow and develop their business.
In an effort to find new financial backing, Georgia and Douglas ran a small showcase for family and friends. Feedback from the showcase gives them some confidence that there could be plenty of public interest in investing in their energy project.
Georgia and Douglas are excited by the sustainability prospects of their research and believe that their research could make a lot of money for investors if it were to be commercialised. Georgia and Douglas are keen bring these plans to fruition. They would like to be able to offer their employees an opportunity to share in the potential rewards that might come with commercialisation of the research. There are plans to apply for a patent (or other intellectual property rights) to protect their invention, including in particular the process via which the lamps work, and to secure exclusive rights to commercial exploitation.
Georgia and Douglas are keen to form a company, and seek your advice as to whether this is advisable, and if so, which corporate
form is most suitable for commercialisation of their sustainable energy project.
Overarching advice:
- Should form a proprietary company with limited liability by shares allowing the benefit of incorporation and
flexible fundraising options by having a share capital
- A proprietary company limited by shares will be attractive to investors due to the nature of limited liability
- Name of the company must end with ‘Proprietary limited’ Section 148(2)
- Registering a company will make it a distinct legal person – can do all the things a natural person can do
legally in its own name
- If they enter into a partnership they would be liable as it would not be its own legal person
- If they incorporate - the company can raise capital (s124)
- A company will last up until it is deregistered by ASIC
- Will have to be prepared that creditors may put in place more protective layers (eg; bank might insure itself
against a non-payment of a loan)
- Proprietary companies must have a share capital – will benefit because they can issue shares in itself – the
purchase price will become the capital of the company. G and D could raise from the investors
- There are different classes of shares – G and D could set up what type of shares are available and can target at
different groups (eg: employees)
- Limited liability makes shareholders have certainty with their investment – even if company is struggling and
will not have an obligation to put in more money
- Benefit of being proprietary over public is that there is less reporting and public disclosure
- Small proprietary companies don’t require to report – s45A must satisfy 2 of the criteria
- At this stage should not form public company as they are still starting out and still relying on grant income
Topic 2 incorporation and corporate personality Live Tutorial...................................................................
Question 2..........................................................................................................................................................
How many members held less than a marketable parcel of shares in Fortescue Metals? the report says there were 1,420 unmarketable parcels. Who owned almost 30% of the shares in Fortescue Metals? in 2020 the Minderoo Group held about 29% of the shares. They are a private company and controlled by Andrew Forest. What do you think this means in relation to the shareholding and control of Fortescue Metals? Comparison with the Shareholder Information in the company's FY 2018 Annual Report (page 140) may be useful to you here. the basic arrangement is that there are an enormous number of shareholders in the company. 2020 has about 70,000 people holding shares. Is an ASX top 50 company.
- Aurizon's Annual Report FY 2020
Review the Shareholder Information on pages 110-111.
Who holds the majority of shares in Aurizon? over 90% are held by the top 20 fully paid shareholders. HSBC custodies nominees Australia hold the most shares out of the shareholders. There is not a shareholder who owns over 50% of the shares. This is because Aurizon is a ASX top 500 and is interested in the public investing rather than corporate.
Considering your discussion of minority and majority shareholders in this topic, and your observations of the shareholding of Fortesque Metals, what observations can you make about the shareholdings in these companies? ( Note in answering this question your tutor may refer to the Qantas Shareholder Information 2020 Annual Report PDF ). What we can see is that the largest shareholder is HSBC. The list is dominated by custodian and nominee banks. A lot of ASX top 50 companies have a lot of custodian and nominee banks investing.
Topic 3 The corporate constitution Live Tutorial........................................................................................
Question 2..........................................................................................................................................................
Faraway Industries Pty Ltd has a shareholding divided into 2 classes: ordinary shares and preference shares. Clause 4 of the company’s constitution grants preference shareholders all the rights of ordinary shareholders and:
(a) the right to an annual fixed cumulative preferential cash dividend of $2 per share payable quarterly on the first day of March, June, September and December each year;
(b) the right in any winding up of the company to payment of all capital paid up and secondly to the payment of all arrears of dividend (whether earned or declared or not) in priority to all shares in the company but with no further right to participate in profits or assets.
Clause 6 of the company’s constitution states:
(a) The rights attached to shares of any class of shares may be varied or cancelled only in accordance with the procedure set out in this clause.
(b) The rights attached to shares of any class of shares may be varied or cancelled only by:
I. special resolution of the company in a general meeting and
II. with the written consent of members with at least 75% of the votes in the class.
Daniel and Luke, the directors of Faraway, hold all the ordinary shares in the company. All the preference shares are held by Sam, the company’s founder.
Faraway is struggling to remain profitable. Daniel and Luke feel like they are running the business just to fulfil the company’s obligations in relation to Sam’s annual fixed cumulative preferential cash dividend.
Daniel and Luke resolved at a recent directors' meeting of Faraway to call a meeting of all shareholders to pass a resolution to alter the company’s constitution so as to alter the rights attaching to preference shares. Clause 4(a) will be amended to reduce the amount of $2 to $0 and Clause 4(b) will be amended by altering the words 'payment of all arrears of dividend' to 'payment of 10% of all arrears of dividend'. Sam, who has been offered no explanation or compensation, does not support the amendments.
Advise Daniel and Luke as to the validity of the proposed constitutional amendment.
The company has a constitution here. S 124(1)(a) allows the company to issue and cancel shares in the company, here
clause 4 of the constitution grants this.
254(B)(1) – corporations act regulates the rights and restrictions surrounding shares. If the company wants to issue
preference shares they must be set out in the const or otherwise approved by special resolution of the company
(254A).
Issues:
Can a company’s constitution be amended, and if so, how?
1. Relevant procedures needed to amend const
- Section 136 sets out a general freedom for a companys constitution to be amended by a special resolution
- Special resolution is defined in section 9 – requires 75% of votes from members to be for amending
- On the facts it is likely Sam will not cast a vote in favour of resolution but Dan and Luke will can’t reach
certain conclusion but unless Dan and Luke hold 75% of the votes than won’t be valid.
- Would have to look at the statutory restraints around amending a company const. The issue here is class rights
246B
- These facts are suggestive of minor statutory oppression on s
2. Have procedures been complied with – class rights under 246B
Statutory restraints:
- Two step process – has the provision been triggered (look to see if company has share capital divided into
classes, rights must be attached to a class or membership, amendment will cancel share rights)
- AND
- The next step if the provision has been triggered is which procedure to comply with As Sam is the only
member of the affected class and facts indicate that he is opposed so his consent is not going to be forth-
coming therefore does not comply with the procedure under 246B
- Amendment is invalid because it cannot comply with the procedure in the const
- Will have failed to comply with the statute because of this.
Common law restraints: Gambotto
- If amendment does not involve actual or effective expropriation of shares or the valuable proprietary rights
attaching to shares – amendment will be valid
- If amendment allow for an expropriation by the majority of the shares or of the valuable proprietary rights
attaching to shares of a minority – will only be valid if: exercisable for a proper purpose or will not operate
oppressively
3. What are the consequences if they have not been complied with?
- Would contravene corporations act – breach of statute
- And contravene the common law
Powers of a managing director – the general day to day business of the company and supervising and running the company ( Entwells ).
Reliance?
- Even though haircare approach Meg for the contract bc she is the managing director – they didn’t stop entering into the contract once they found out that she wasn’t actually the managing director
Reasonable reliance? ( Pacific carriers )
There can be no reasonable reliance where the circumstances put a person on inquiry as to whether the agent is the relevant authority
If there is suspicion they should make further inquiries – when Meg said she isn’t the managing director should have been enough for them to think it is not reasonable.
Therefore, Haircare could not rely on an agency to enforce the contract against Blondie. Since Meg is not entering into the contract personally, Haircare cannot enforce the contract against her.
Would have action against Meg for damages for breach of warranty of authority ( Brownett v Newton).
Statutory assumptions?
Sections 128 and 129:
A person is entitled to make the assumptions in s 129 in their dealings with the company. The company is not entitled to assert that the assumptions are incorrect.
Directors names on asic records are duly applied the authority
Person held out by the company as an officer of agent is duly applied with the authority
Person not entitled to rely upon the assumptions if the person knew or suspected that the assumption was incorrect (s 128(4).
Therefore, there would not be a contract between HC and Blondie
Topic 4 CORPORATE BUSINESS Live Tutorial..............................................................................................
Question................................................................................................................................................................
Question................................................................................................................................................................
Bosteel Ltd and Cable Ltd are engaged in a joint venture for the purposes of acquiring Ximenez Ltd. Ximenez Ltd holds a number of valuable assets but runs a barely profitable business. Bosteel Ltd and Cable Ltd intend to mount a takeover of Ximenez Ltd and sell off its valuable assets. This has the full support of the directors of Ximenez Ltd.
Thuan and Rui together own 30% of the issued ordinary shares in Ximenez Ltd. They have announced that they will reject any takeover offer by Bosteel Ltd and Cable Ltd.
The board of directors of Ximenez Ltd has announced that it will issue further ordinary shares in Ximenez Ltd for the stated purpose of raising much-needed capital. These shares are issued only to Bosteel Ltd and Cable Ltd. The share issue has the effect of converting the combined holding of Thuan and Rui into a minority holding but is of considerable commercial benefit to the company.
Thuan and Rui admit that the directors were not motivated by a desire for personal gain or a desire to retain their positions as directors but they allege that the directors' primary purpose was not to satisfy Ximenez Ltd's need of capital but to convert the combined holding of Thuan and Rui into a minority holding. No alternative capital sources were sought.
The board of directors of Ximenez seeks your advice as to their fiduciary duty to act bona fide and in the interests of the company. Specifically, the board seeks your advice as to whether they are in breach of this duty and if so the consequences of contravention. You should include advice on the general law and the Corporations Act 2001 (Cth).
First, the directors may be in breach of the general law duty to act in good faith and in the
interests of the company, if the directors failed to consider the interests of the shareholders as a whole.
The directors appear to have acted for an improper purpose and
- as a result the share issue would be voidable at the instance of the company at general law.
Third, the directors are in contravention of s181(1) which applies in addition to and not in
derogation of the general law: s185(1). o
This is a civil penalty provision. ASIC may institute proceedings against the directors seeking civil penalty orders
.
- This can lead to compensation being paid directly to the company.
- Duty to act in good faith and in the best interests of the company - Re Smith and Fawcett Ltd [1942]
Ch 304, 306.
- Directors have to exercise power with a proper purpose – if they do then not open to review by the courts:
Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil NL.
The duty implicitly involves honesty – if they honestly believe stuff, unlikely to be in breach.
The directors are presumed to have acted bona fide and in the interests of the company. This impacts the on
us of proof.
To rebut the presumption the shareholders will need to show (they bear onus of proof)
both subjective and objective tests:
- Subjective: the directors did not genuinely and honestly believe they were acting in the company’s best int
erests
- Objective: the directors have acted in a way that no reasonable director in their
position would have considered to be in the best interests of the company. Note Santow J in ASIC v
Adler (2002) 41 ACSR 72.
What are the interests of the company as a whole?
- When the law speaks of the "interests of the company as a whole" the directors must generally take into ac
count the interests of the general body of shareholders: Darvall v North Sydney Brick and Tile Ltd.
Interests depend on solvency of the company
- Where the company is solvent and there is no real risk of insolvency, the interests of the company as a who
le will be the interests of the shareholders collectively.
- Where times are tough and concern of meeting debts, focus of company will be about making sur they pay
their creditors
Are the tests satisfied here?
- The interests of the company will be the interests of the creditors in two situations:
- where the company is insolvent: Walker v Wimborne (1976) 137 CLR 1; Ring v Sutton (1980) 5
ACLR 546 or
Precisely what will happen
here – if shares issued, will annihilate voting power of Thuan and Ruhi who hold 30% of the ordinary issues shares
STEP 2: Subjective: The second step is to determine as a matter of fact why was the power exercised? This can in
volve a consideration of good faith: Whitehouse v Carlton Hotel Pty Ltd.
The court will look at the subjective reasons of the directors for their actions. Multiple purposes
Where the question is whether the directors exercised a power for one purpose or another, the courts are entitled to
look at the situation objectively:
Howard Smith Ltd v Ampol Petroleum Ltd.
If there are multiple purposes for the directors’ decision to exercise a power, some purposes could be proper, other
s may be improper. The test is the ‘but for’ test: Whitehouse v Carlton Hotel Pty Ltd (1987) 5 ACLC 421:
As a matter of logic and principle, the preferable view would seem to be that, regardless of whether the
impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the
allotment will be invalidated if the impermissible purpose was causative in the sense that, but for its
presence, “the power would not have been exercised.
Application of tests
The duty has been breached.
Facts that support the view that the directors acted for the improper purpose of destroying an existing majority blo
ck of shares: Bosteel and Cable have the support of the directors of Ximenez;
Alternative capital sources not sought.
- Could have borrowed money, called shares, etc. could have done more than just issuing so many shares
- In thinking about shareholders as a whole, should have thought about impact on the issue of all the
shares on existing shareholders like Ruhi and Thuan
- If this had been a public company listed on the ASX
it would not have been able to engage in this sort of behaviour.
- Note Listing Rule 7-1.
A company listed with the ASX must not, without shareholder approval, issue or agree to issue more
securities in one year than would represent 15% of its issued capital. This protects against dilution of
shareholdings. There are exceptions listed in Rule 7.
Overall, but for this takeover bid, the power would not have been exercised – therefore proper purpose
In conclusion, issue of shares would be voidable at the option of the company – remend that Thuan and Ruhi
can enforce – falls within member’s personal rights in upcoming lectures
Relief from liability – s
The two element s to be established are:
(1) Have the directors acted honestly?
(2) Ought they be fairly excused from liability?
Hall v Poolman [2007] NSWSC 1330, Palmer J
- In my view, when considering whether a person has acted honestly for the purposes of a defence
under CA s 1317S(2)(b)(i) or s 1318, the Court should be concerned only with the question whether
the person has acted honestly in the ordinary meaning of that term,
- ie, whether the person has acted without deceit or conscious impropriety, without intent to gain
improper benefit or advantage for himself, herself or for another, and without carelessness or
imprudence to such a degree as to demonstrate that no genuine attempt at all has been to carry out
the duties and obligations of his or her office imposed by the Corporations Act or the general law.
A failure to consider the interests of the company as a whole, or more particularly the interests of creditors,
may be of such a high degree as to demonstrate failure to act honestly in this sense.
However, if failure to consider the interests of the company as a whole
- including the interests of its creditors, does not rise to such a high degree but is the result of error of
judgment, no finding of failure to act honestly should be made, but the failure must be taken into
account as one of the circumstances of the case to which the Court must have regard under CA s
1317S(2)(b)(ii) and s 1318
The court can relieve from liablity for breach of this duty if the court is satisfied that the person acted
honestly and having regard to all the circumstances of the case.
Keep this second part of the passage in mind when considering the obligation of a director to act in good
faith and in the best interests of the company.
This should be discussed in your answer, but the answer is largely open. You would need to consider the
failure to take into account the interests of all of the shareholders.
The company is solvent, and that would have been the appropriate consideration. This suggests that they
have failed to do what they had to do and given the influence of the takeover, this may not about to acting
honestly.
Remedy at general law
The share issue would be voidable at the option of the company.
Thuan and Rui have a personal right as shareholders to enforce this remedy – this will be explained later in the unit
.
Corporations Act
A director or other officer of a corporation must exercise their powers and discharge their duties in good faith in th
e best interests of the corporation and for a proper purpose: s181(1).
This provision has effect in addition to, and not in derogation of the general law or any other rule of law: s185(1).
Application: s181(1) has been contravened.
S 181(1) is identical to general law; uses same phraseology at general law; no way to come to different
conclusion
Consequences of contravening a civil penalty provision
As a civil penalty provision has been contravened, Part 9 sets out the civil consequences.
Pursuant to s1317J(1) ASIC can make application for the following:
- S1317E
– if the court is satisfied a civil penalty provision has been contravened it must make a declaration of contr
avention
Douglas put this proposal to Georgia and Chelsea advising them that if Online Edits did not pursue the new business plan, he would pursue it on his own. Georgia and Chelsea declined the opportunity to take up the new business plan because the company simply did not have the funds to pursue it. Georgia and Chelsea wished Douglas luck with the new venture.
Douglas’ new business is Complete Editing Services. It offers a premium editing service with complementary secure offsite data storage, printing and binding services. Business for Complete Editing Services has been highly profitable.
The board of directors of Online Edits seeks your advice as to its prospects of success against Douglas in action for breach of the duty to avoid conflicts both at general law and under the Corporations Act 2001 (Cth). Note: You are not required to advise on any other breach of duty either at general law or under the Corporations Act 2001 (Cth).
Alternative Facts Scenario : How would your advice differ if Douglas’ new business Complete Editing Services is operated through a company, Complete Editing Services Pty Ltd, of which Douglas is the sole director and shareholder?
Structure:
1. Always look at what the problem is asking
2. Identify the duty
At general law
Under statute
3. Consequences of the breach
At general law
Under statute
4. Relief from liability
5. Deal with alternative facts
6. Summary of advice
Has Douglas breached his duty to avoid conflicts:
A director is in a fiduciary position to the company and must not put themselves in a position where there is a conflict between their duty to the company and personal interest (Howard v Commissioner of Tax).
Conflict: Is the diversion of a corporate opportunity that properly belonged to the company. (Cook v Deeks)
The fiduciary relationship between director and company is in a category of a fiduciary relationship. Not all aspects of the relationship are attended by fiduciary duties, only those that are within the scope (Grimaldi v Chameleon Mining).
The duty is enlivened when there is a real or substantial possibility of conflict (Hospital Products).
FD: Douglas is in a FD relationship with the company
Scope: No facts suggest that Douglas FD duties are anything other than broad and general. No facts suggesting the duty is narrow. Opportunity had come to Douglas in his capacity as a director and not in a personal capacity.
Real or substantial: There is a real or substantial possibility of conflict. Complete Editing will clearly be in competition with existing business.
Conflict of duty and interest: Conflict will be between his duty to the company and his personal interest. Alternative Facts would be if D became a director of the new company. D has driven this idea away from the company where it properly belonged. He is in breach
Corporate opportunity:
Having diverted a business opportunity away from the company which it properly belonged, will make D liable for any profit personally derived (Cook v Deeks).
Even if D resigned to exploit the opportunity this will rarely spare the fiduciary from breach of duty to avoid conflicts (Natural extracts)
D is in breach of duty to avoid conflicts
Disclosure and consent:
No facts suggesting attenuation by constitution (would not extend to diversion of corp opportunity in any event)
D has made disclosure to G and C
Disclosure has been full and frank
D disclosed to the board not the company
Disclosure to the board is insufficient thus authorisation of the board is insufficient to authorise D breach of duty
If D made full and frank disclosure to the company it could still technically ratify the breach
D liable to the company at general law for breach of FD
Remedy: D would be ordered to an account of profits personally held by him to Online Edits.
Statute - section 182 and 183 of Corp act:
D was a director the company at the relevant time
Was use of the information or his position improper and was there some impropriety raised by his actions (R v Chew)?
Not enough to establish the director ‘intended’ that a result would ensure BUT also that the accused believed that intended result would be an advantage to himself or another person or a detriment to the company.
Not necessary the results be achieved. Not necessary the officer be conscious of any impropriety. Assessed objectively. D does not have to be aware about improper actions. Here is seems clear that this result would follow from establishing his new business and there would be an advantage to himself or to his new company. If D had put his interest ahead of online edits that would mean he was acting improper.
Both civil penalty provisions have been breached
Statutory duties to disclose:
Directors must notify other directors of their personal interest unless and exemption applies (s 191(2).
Exemptions: s 191(2)(b): the company is a proprietary company and the other directors are aware of the nature and extent of the interest and its relation to the affairs of the company.
Douglas has disclosed the nature of the interest and its relation to the affairs of the company. Online edits is a proprietary company therefore D is entitled to vote.
D is in contravention of both s 182 and 183 as he was a director at the relevant time, made improper use of his position and information that came to him in that position to gain advantage for himself (R v Chew).
Relief from liability:
Section 1317S permits a director to make application for relief from liability for contravention of a civil penalty. If it appears to the court that the person has acted honestly and in all the circumstances of the case the person ought to fairly be excused.
(a) Their duty to avoid insolvent trading
(b) The remedies / penalties that might apply
Structure:
Step 1: Are the preconditions that trigger the operation of the section satisfied s588G(1)
Step 2: Has the civil penalty provision in s588G(2) been contravened?
Step 3: Has the criminal offence in s588G(3) been breached?
Step 4: Is the safe habour in s588GA available?
Step 5: Are any defence available? 588H
Step 6: Consequences of contravening civil penalty provision
Step 7: Consequences of the offence – eg: imprisonment
Step 8: Claims for compensation – s588M
Step 9: make application for relief against liability for contravention s1317 1318
Duty to avoid insolvent trading:
Step 1: The 4 preconditions under s588(G)(1) must be met.
A person is a director at the time when the company incurs a debt. Georgia, Michael and Graham are on the
board so would be considered appointed directors. Chelsea would fit in s9(b) of the act as a director. The
debt is the bank loan and was incurred sometime after it was approved on 14 August. It can be assumed that
the debt was incurred in August 2020.
The company is insolvent at the time or becomes insolvent by incurring the debt. Apply the test of
insolvency. Commercial test conducted by weighing up the company’s debts on one hand and with its book
debts and cash resources it can readily realise through conversion of assets (Sandell Porter). Can rely on the
presumptions of insolvency – set out in 588E(e). Raise a presumption of fact and are rebuttable. Is the
company being wound up – yes, the facts affirm. Can be presumed that if both subsections 3(a) and (b) are
satisfied that the company is insolvent.
At the time there are reasonable grounds for suspecting the company is insolvent/ would become insolvent.
Would a director, in a position of this director, in a company like this company, have reasonable grounds to
suspect the company was insolvent. The standard of a director is to keep themselves informed of the
financials of the company. Would a director of this company, have suspected that this company was
insolvent when the debt to blue bank occurred? Company was having cash flow problems, Michael didn’t
read the report and neither did Georgia and Chelsea. A reasonable director would have read the report. None
of them have read the report so any belief they have of the company being solvent would not be relied upon.
That time is at or after the commencement of Corp Act. Commenced on 23 June 1993. Debt occurred in
2020 therefore satisfied.
Step 2:
Element 1: Awareness of the director to suspect insolvency. Subjectively aware of the company’s
circumstances that it can’t pay its debts. Graham has falsified the reports and financial records. The other
directors state of mind would be difficult to prove. Is not satisfied go to element 2.
Element 2: Reasonable person in a like position. Inquiry focuses on a reasonable person in a like situation
and regard must be had to facts that the director ought to have known and facts already known (Asic v
Plymin). Case of Green, says that an unreasonable director would not know the facts because they didn’t
take responsibility to read and understand the accounts before the meeting.
Stronger argument under element 2. Conclusion based on Commonwealth Bank v Freidrich.
Element 3: Failure to prevent the company from incurring debt: (Asic v Elliot) No directors have acted to
prevent the debt. Satisfied.
Therefore, provision contravened.
Step 3:
Whether the director/s have been dishonest. Graham has been dishonest here but no others. Therefore, he has
contravened.
Step 4: Safe Harbours
2 safe Habour:
588GA: not relevant here as not course was taken to seek a better outcome for the company
S588GAAA: temporary relief during coronavirus pandemic. Has the debt been incurred during the ordinary
course of business – no, and G and C are shocked that the company would engage in property development.
Was the debt in the relief period – yes as it was in Aug 2020. Was the debt incurred before the appointment
of that time? Yes, liquidator was appointed Sept 2020.
Step 5: Defences:
4 defences relevant for Chelsea, Michal and Georgia:
- Reasonable grounds to expect company was solvent – wouldn’t apply
- Reliance on information from reliable person – wouldn’t apply
- Director not involved in management for some good reason at the time – wouldn’t apply
- Reasonable steps to prevent company from incurring debt – wouldn’t apply
Step 6: consequences of civil penalty provision
Section 1317 and 1318 would be relevant
Step 7: Consequences of offence:
Court can order G to pay fine of up to 2000 PU or imprisonment for up to 5 years
Step 6: if UNAUTHORISED explain consequences for company and director
Step 7: Signpost provisions – s257J
Step 8: Injunction under s
Problem Answer:
Step 1: Share buy-backs offend the rule against self-purchase at common law (Trevor v Whitworth). There are
exceptions in s259A and s257A which allow buy-backs so long as they conform with appropriate procedures in
ss257A-257J.
S59A: A company must not acquire share in itself unless:
- In buying back shares under s257A
- In acquiring interest (other than legal) in fully-paid shares in the company is no consideration is given for the
acquisition by the company or entity it controls
- Under court order
S257A: company may buy-back shares if:
- The buy-back does not materially prejudice the company’s ability to pay its creditors
- The company follows the procedures laid down in this division s257A-257J.
Step 2: Explain all 5 types of buy-backs and identify the type of buy-back in the problem. All defined in the act in
section 9. And s257B table. Selected buy-backs are those that don’t fall into the other categories use process of
elimination.
Here, the buy-back is not aimed at small unmarketable parcels of shares so not minimum holding buy-back. It is
also not targeting employee shares therefore cannot be employee share scheme buy-back. Not being conducted by
buying shares in the ASX so not market buy-back. The buy-back here is targeting a particular group of shareholders so
it is not an equal access scheme buy-back.
Step 3: Look at column in table under s257B if there is a ‘yes’ in the row and make sure that buy-back complies
with each of the sections signposted in the ‘procedures’ column. 257D – needs shareholder approval. The buy-back
offer is being made to shareholders who purchases before 1 December 2008 therefore F and R cannot vote in a
resolution. Would be difficult to get remaining shareholders to vote because they are wide spread. Almost all
minority shareholders have objected – therefore would unlikely be approved meaning buy-back would be
unauthorized under s257D.
*if it fails to meet one of the statutory requirements will be deemed unauthorized.
Step 4: Prejudice companies’ ability to pay Creditors
On these facts there look to be serious concerns the buy-back will materially prejudice the company’s ability to pay
creditors. This is a concern shared by minority shareholders. Without further facts it is difficult to reach conclusion
however alludes to the possibility
Step 5: Buy-back authorized:
Because the buy-back is funded by issue capital it would not be authorized by s258E(b). Therefore, would be
unauthorized because does not comply with the act.
Step 6: The buy-back would contravene section 257. Consequences for the company is under 259F – the company is
not guilty for an offence. Persons that are involved are the directors and officers that arranged for the buy-back
would contravene 259F(2) a civil penalty provision. And ASIC can institute proceedings against directors. If they have
been dishonest than that person has committed an offence which is 2000 penalty units for imprisonment.
Step 7: s257J signpost provision. Here insolvent trading looks to be a concern, but it has not gone further. If it did
trigger insolvent trading provisions under s588G and directors would have contravened not trading while insolvent
s588G and s1317E (civil penalty provision). 588M would be triggered and proceedings can be brought personally
against directors and make them liable for debts of the company for buy-backs while insolvent.
Step 8: If there is insolvency involved – there are deeming provision for the creditor or minority shareholders to apply
for an injunction under.
Topic 9 MEMBERS Live Tutorial...............................................................................................................
Question 1 – STATUTORY DERIVATIVE ACTION.....................................................................................................
In tutorials for Topic 6 you considered the liability of Douglas and Complete Editing Services Pty Ltd:
Douglas, Georgia and Chelsea are the directors of Online Edits Pty Ltd. The company was formed to operate a new business offering fast online proof-reading to university students. Despite the persistent marketing efforts of the directors, the business has been an almost complete failure having only found one customer in its first 3 months of trading - a customer who has not yet paid for the services rendered. However, the company is solvent.
Douglas sought professional advice on behalf of Online Edits from Nick, a successful entrepreneur and business adviser. Nick suggested that the key to a new business plan for Online Edits might be to offer a higher standard of editing services at premium prices and include complementary additional services such as secure offsite data storage, thesis printing and binding. Nick suggested that Douglas put the plan to the other directors, and that if they didn’t want to pursue it, Douglas should take it on himself.
Douglas put this proposal to Georgia and Chelsea advising them that if Online Edits did not pursue the new business plan, he would pursue it on his own. Georgia and Chelsea declined the opportunity to take up the new business plan because the company simply did not have the funds to pursue it. Georgia and Chelsea wished Douglas luck with the new venture. Douglas’ new business is Complete Editing Services. It offers a premium editing service with complementary secure offsite data storage, printing and binding services. Business for Complete Editing Services has been highly profitable.
The board of directors of Online Edits seeks your advice as to all rights or remedies the company may have against Douglas both at general law and under the Corporations Act 2001 (Cth). How would your advice differ if Douglas’ new business Complete Editing Services is operated through a company, Complete Editing Services Pty Ltd, of which Douglas is the sole director and shareholder?
The Board of Online Edits has now received your legal advice that Online Edits Pty Ltd has a good cause of action against Douglas for contravention of ss182 and 183. However, the Board has determined not to pursue Douglas as they don’t think he has done anything morally wrong and doesn’t deserve to be dragged through the courts.
Corp tutorials (karina)
Course: Corporate law (LLH305)
University: Queensland University of Technology
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