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Exam Feedback 2015
Corporate law (LLH305)
Queensland University of Technology
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LWB334 Feedback
QUESTION 1
Part (a) - Overall strengths and common errors
Students generally answered the question well. Part (a) was of a high standard, in particular students were generally very familiar with the relevant duties of the relevant officers. Although it was not a wide-spread error, some students did not discuss some significant effects of the appointment.
Almost all answers could have been dramatically improved by providing a considered and specific application of the facts - e. advice as to which assets the receiver would be able to take control over. Application to the facts where it did occur was generally far too short in comparison to a detailed restatement or description of the relevant law.
Another area where most answers could have been improved was a detailed discussion as to the relevance and specific definition and meaning of receiver and manager
Part (a) - Critical elements of good answers
Almost all students analysed the effects of appointment, and identified that GB’s power to appoint Matt comes from the agreement (the lending documents) between FF and GB. Students should have included a definition of receivership/receiver from Re Manchester & Milford Railway Co (1880) 14 ChD 645, s9 and s90 of the Corporations Act, and a comparison with the definition of receiver and manager. See Part 5 of the Act.
Almost all students identified that when GB appoints Matt, it could be appointing him as “their agent” in order to deal with the property that is the subject of the security (agent for mortgagee). Most students also identified that if the document allows it, GB should appoint Matt as agent for FF. This approach would be particularly useful and more favourable for GB because GB has security over FF’s assets and business and if GB appoints Matt as agent for FF then Matt can manage FF on behalf of GB without incurring direct liability back to GB. Most students raising this point identified that the liability falls with FF if this is the case which is less risky for GB. Almost all students identified that when Matt is acting, that is dealing with FF’s assets, he can act in a way that gives preference to the secured creditor GB. An important consideration here was any property which is subject to a Retention of Title arrangement which is registered will come within the PMSI
super priority so as to not be available to Matt. Most students identified this as a relevant point.
Most students also identified all following points as directly relevant to their answer:
Matt will come in using his expertise to either manage the bus or sell the assets - probably both with a view to ensuring that GB gets repaid. GB’s registered security interest is extensive. Therefore, FF’s directors will not no longer have the ability to trade in the business. The extent to which Matt has power to manage the business will diminish FF’s directors’ powers. FF’s directors will still have to comply with their general obligations and duties under the Corporations Act. Students typically cited Deangrove Pty Ltd v Commonwealth Bank of Australia [2001] FCA 173 in support of this analysis. FF is still the legal owner of the secured property but Matt has control of it. Notification of appointment to ASIC – s427(1) – GB must notify ASIC that they have appointed a receiver. The company name (FF) has to have the words in receivership after it on all public documents. s428(1) Report required by directors - s429(2)(b) – students may note the importance of this given that Matt is an outsider without knowledge of FF’s inner workings.
Almost all students included a detailed analysis of the powers and duties of a receiver. The following critical points were generally included:
Matt’s powers arise from the appointment doc and if not stated in the doc (which obviously it isn’t in the exam question) then extensive powers in s420. Other provisions generally raised here included: ss430, 431, 424, 418A. Matt’s primary duty is to GB: Expo International Pty Ltd v Chant [1980] 2 NSWLR 820 - duty to obtain funds to repay lender. Matt’s duties when selling assets arise from s420A, Jeogla v ANZ, Florgale Uniforms Pty Ltd v NAB (2004) 22 ACLC 1,580, Boz One Pty Ltd v McLellan [2014] VSC 208, ANZ v Bangadilly Pastoral Co Fiduciary duties to the company as its agent, officer – s9 definition Matt has both general law and statutory duties – general law duties include 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
conclusion, better marks were awarded to students who gave a detailed explanation as to why this was the case. This involved articulation and application of s 62.
Part (c) - Overall strengths and common errors
Almost all students recognised that voluntary administration was the most preferable option given the possibility of trading out of financial distress. Almost all students identified that one of the most critical motivating factors in taking steps towards external administration such as voluntary administration would be avoidance of the potential exposure to personal liability for insolvent trading.
Many students noted the object of Part 5 set out in s435A. However, some students did not describe the process by which the administrator takes control and investigates, the moratorium that applies to claims, nor the convening of the two creditor meetings with the second meeting determining the company's future.
Unfortunately a few students did not identify the option of voluntary administration. Rather, these students discussed liquidating the company or whether the receiver could wind up the company. Both options were inappropriate on these facts since there was a clear prospect of trading out of financial distress. That prospect required evaluation and the most appropriate way to conduct such an evaluation is via voluntary administration.
Part (c) - Critical elements of good answers
Most students identified that given the possibility of trading out of the current financial distress the most preferable option is voluntary administration. This was the most viable option and more appropriate than automatically placing FF into liquidation. Most students identified that voluntary administration offered a viable preliminary step, but that if the administrator was of the view that it isn’t possible to trade out then liquidation can follow.
Almost all students identified that the directors’ decision should be influenced by the duty to prevent insolvent trading and that here the administration will be prompted by the directors rather than a secured creditor.
Almost all students explained voluntary administration, including the objects of Pt 5 - s435A... administered in a way that: maximises the chances of the company continuing in existence; or if not possible for the company to continue in existence – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
Most students described the scheme in Pt 5 and empahsised the following points
o An administrator takes control & investigates the company’s affairs.
o During the administration period there is a moratorium on claims
against the company.
o An administrator convenes two meetings of creditors.
o In the second creditors’ meeting a decision is made regarding the
company’s future:(a) execute deed of company arrangement; or (b) end the administration; or (c) resolve to wind up company.
QUESTION 2
Part (a) - Overall strengths and common errors
Part (a) was done surprisingly badly. This question required a discussion of section 127, yet most students seemed to overlook the relevance of the fact that Christophe had asserted two directors had signed. Of those students that did identify s 127 as relevant, very few students demonstrated an understanding of how ss127(1) 128 and 129(5) work together. Most students overlooked s127 and only discussed agency.
Part (a) - Critical elements of good answers
The first issue was whether the company had itself signed the contract. This point was generally missed. Few students explained both s127(1) and (2). Both were potentially relevant given that the problem stipulated signature by two directors, but the facts do not say whether the contract with MAMIL had a common seal affixed. Those students who identified this as an issue tended to lack clarity on how the statutory assumptions in s129 work alongside s127. Section 127 authorises execution of documents, but doesn’t in itself validate a doc signed without authority. To bind Speedy to the contract, MAMIL needs to rely upon the assumptions in s129. In particular the relevant assumptions here were s129(5) and (6). Students discussing s129 tended to make good use of case law supporting their argument such as Brick & Pipe Industries Ltd v Occidental Life Nominees (1992) 2 VR 279 , Bank of New Zealand v Fiberi Pty Ltd (1993) 14 ACSR 736, Northside Developments Pty Ltd v Registrar General (1990) 170 CLR 146.
Of particular relevance here was s128(4). Specially discussion should have focused whether MAMIL (due to Christophe’s discussion with Allan – only 3 months prior) is
party (special resolution), it is a written contract but not signed / no consideration given.
Most students also explained specifically how it can be used by members – a member may take action against the company to force compliance with certain provisions of the constitution (or replaceable rules) where the company refuses to comply. Some students addressed how this might be used by members to protect minority shareholders’ rights.
In part (b)(ii) students were asked to identify and explain two other sections with the Act that can be used by members to force compliance with the company’s constitution. Options were s1322(1), s232 and s246B. Most students discussed only one section.
QUESTION 3
Overall strengths and common errors
Almost all students identified that this question was based on almost the precise fact scenario of ASIC v Vizard. Almost all students did an excellent job of discussing the liability of Phoenix under s183(1). Since this was a 10 mark question, most students got straight to the point of establishing ASIC’s prospects of success in its action under s183. This was the central point of the question and the duty at which most facts were directed. This made up the bulk of almost all answers. The most common error was ignoring the liability of the third party.
Critical elements of good answers
ASIC has focussed its action on section 183. This provision is relevant to taking advantage of a corporate opportunity. It provides that officers or employees of the corporation are not to make improper use of information obtained by virtue of their office to make a gain from themselves or to cause detriment to the company. Most students listed the elements (below) and applied them to the facts. The elements are: the defendant at the relevant time was an officer or employee of the company the defendant acquired the relevant information the defendant acquired that information by virtue of the position as officer or employee of the company the defendant made improper use of the information the defendant made that improper use for the purposes of gaining an advantage or alternatively causing detriment to the corporation; the advantage was either for the officer or some other person.
Most students explained that s183 imposes this duty on former directors, officers and employees. Phoenix is a director. The statutory duties in s180-183 apply in addition to not in derogation of the general law: s185. In fact, s183 is broader than the obligation at general law in that it applies to employees and officers of the company and not just directors.
In establishing that the elements had been made out, many students drew on analogies arising with the facts in ASIC v Vizard (2005) 54 ACSR 394. Vizard had come into possession of confidential information through his position as a director and made improper use of that information to buy and sell shares with a view to obtaining a personal profit. Vizard admitted responsibility. He was fined $390, and disqualified from managing companies for 10 years.
A lot of students cited in full the quote from Finkelstein J that appeared on the lecture slides for this duty, but very few students identified the relevance of the statements within that quote to the facts. For example, the fact that it is not necessary for Phoenix to have actually benefited from the transaction or for the company to have actually suffered a loss.
Not all students applied the elements of s183(1) to the facts, rather these students just reached the automatic conclusion that there was a contravention without explaining why. Relevant points to make here were that Phoenix acquired the information in her capacity as a director; she made improper use of the information because she has used it to gain an advantage for herself or for the third party (the company as trustee of the family trust).
Both ss182 and 183 refer to gaining an advantage or causing a detriment. Most students discussed the meaning of this phrase as considered by the High Court when interpreting a predecessor of s182(1). In Chew v R (1992) 173 CLR 626, the court stated: it is necessary to establish not merely that the director intended that a result should ensue, but also that the accused believed that the intended result would be an advantage to himself or herself or for some other person or a detriment to the corporation.
Almost all students identified that these results are alternatives; it is not necessary that the results actually be achieved. Impropriety does not depend upon the officer’s consciousness of impropriety; it is to be assessed objectively. This ought to have been applied to the facts.
Almost all students identified that s 183 refers to there being an improper use of either position or information. In R v Byrnes (1995) 183 CLR 501, the High Court
jumps to her bidding, she would be the managing director. Almost all students applied these facts in such a way that they rightfully concluded that it would be possible to import Phoenix’s knowledge to the company.
Accordingly most students advised ASIC that Speculative was in contravention of s183(2).
Almost all students addressed the consequences of contravention of a civil penalty provision to an excellent standard. This was exceptionally well done. However very few students addressed the dishonesty of Phoenix. This was directly raised on the facts. Here the misuse appears to have been dishonest – Phoenix looks to have been positioning herself for this opportunity. If that is the case, then there may be an offence under s184. Students that did identify Phoenix’s dishonesty also tended to identify that Schedule 3 sets out the penalty and it includes a substantial pecuniary penalty and/or imprisonment.
Almost all students identified that Phoenix’s application for relief from liability would fail. These students first established the parameters of the application under s1317S. It permits a director to make application for relief from liability for contravention of a civil penalty provision. There is not possibility of relief from liability for an offence (since it requires dishonesty have been established as an element). Relief may be whole or partial. Most students relied upon Hall v Poolman and stated that the focus of the enquiry is whether the person in contravention has acted honestly and ought in all the circumstances be fairly excused.
The difficulty here was recognising the significance of the facts that point to Phoenix as an upstanding citizen. Despite Phoenix’s outstanding reputation, her application under 1317S would fail because there is little in the way of positive acts that Phoenix can point to as being honest.
Most students also advised ASIC that there are a range of other provisions of the Act that might have been contravened here. One is that Phoenix has an obligation to make disclosure under s191. This has not been done. Failure to do so is an offence – s1311. Some students also mentioned the range of general law obligations and other statutory provisions ASIC could have relied upon in bringing its action here, including: Officers must act in good faith and in the best interests of the company and for a proper purpose: s Officers must not make improper use of their position: s Officers must not make improper use of information: s18 3 A director of a company who has a material personal interest in a matter that relates to the affairs of the company must given the other directors notice of the interest: s
Exam Feedback 2015
Course: Corporate law (LLH305)
University: Queensland University of Technology
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