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Exam Feedback 2017
Corporate law (LLH305)
Queensland University of Technology
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Feedback LLH305 Semester 2 2017 Final Exam
Quesion 1
This quesion required advice to ASIC. ASIC had standing to bring an acion against the directors for contravenion of civil penalty provisions. The two contravenions 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 acion was speciically dealt with by the facts of the problem.
Insolvent trading required discussion of the precondiions to the operaion of s588G including ideniicaion of who the directors were at the relevant ime the debts were incurred and ideniicaion of the relevant debts. Here this included the rental payment on the lease of premises as well as the share buy back transacion. Beter answers carefully considered facts regarding the liquidator’s assessment of the company’s solvency, and the facts sipulaing 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 contravenion and the relief applicaion. Secion 588G(3) also needed to be considered.
The share buyback applicaion required a discussion of s259A. Secion 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 consideraion in applying the law to the facts. Entering into this buyback clearly prejudiced creditors. The facts relaing 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 selecive 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 explanaion of why this buyback was a selecive buyback. Many students did this exceedingly well. Selecive buy-backs require compliance with numerous procedures all of which were dealt with the fact scenario including: S257D – special/unanimous resoluion neither of which was possible here; S257E – lodge ofer documents with ASIC; S257F – 14 days noice; S257G – disclose relevant informaion when ofer made; S257H – cancel shares; S254& - noify ASIC of cancellaion. Not all the procedures have been complied with and thus s259A had been contravened.
The consequences of contravenion of s259A required atenion 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 sipulated that Max and Alex ardently believed that restructuring in this way would achieve administraive eiciencies that could solve the solvency crisis. Other relevant consideraions were the consequences of contravening a civil penalty provision and the relief applicaion 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 consideraion of the standard of care. This is implicit in the tests involved in the precondiions to the operaion of s588G. A few students dealt with this as a standalone contravenion of the duty to act with due care and diligence under s180. Students taking this approach typically had very litle to say in applying the law to the facts and in atemping to resolve whether there had been a contravenion of s180 these students were typically led back to the
duty to avoid insolvent trading by the criical fact that the directors ought to have known that the company was insolvent at the ime the buy back was entered into. A few students erred in overlooking this criical 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 acing in good faith and exercising their powers for a proper purpose would not engage in insolvent trading. These students typically ideniied that good faith was a potenial issue without supporing it with any analysis or reasoning. However several students did deal with this duty at length exploring the directors’ obligaion to act in the best interests of the company, what those interests might be in a solvency/cash low crisis such as those arising on the facts and considered the objecive and subjecive 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 lexible 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 ideniied both insolvent trading and the share buyback as the criical issues. Papers that did poorly generally did not deal with the issues in suicient depth, for example, wriing only one or two sentences on the issue in total. Among these papers were those that did not genuinely atempt to answer the quesion. This manifested in one of two ways. Firstly a few students rewrote the quesion at length without idenifying the live issues, the relevant law or applying it to the facts. Secondly, a few students wrote very litle at all (frequently less than 1-2 pages), generally avoiding sentences and instead lising a few disjointed key words without explaining the relevance of the words listed. In this approach applicaion to the facts was generally omited. Interesingly, students taking this approach in quesion 1 maintained this approach in quesions 2 and 3. This approach makes it very diicult for it to obtain all the marks for each issue.
Among papers who did deal with the criical issues in depth, there were some common errors, for example, omiing a discussion of the consequences of contravening a civil penalty provision, or omiing a discussion of the relief applicaion. 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 idenify 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 invening facts.
Quesion 2
Overall this quesion was done quite well with the vast majority of students clearly understanding the basic points that there needed to be perfecion and atachment and the consequences of this (ie the basic priority rules). This was one of those quesions 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 paricularly 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 acing, 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 efects of receivership. Students drew on the following in explaining these efects on the basis of the facts provided: Rebecca will come in using her experise to either manage the bus or sell the assets - probably both with a view to ensuring that BA gets repaid; AA is sill the legal owner of the secured property but Rebecca has control of it; BA must noify ASIC under s427(1) that they have appointed a receiver; the company name (AA) has to have the words in receivership ater 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 duies 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 Internaional Pty Ltd v Chant [1980] 2 NSWLR 820 – that is, the duty to obtain funds to repay lender. Fiduciary duies are owed to the company as its agent; the receiver is also an oicer – s9 deiniion.
Thus, Rebecca has both general law and statutory duies. The general law include the duty to exercise powers in good faith, act within the terms of appointment, account to the company ater the lender’s security has been discharged. Statutory duies include:
o ss180-184 (included in s9 deiniion of ‘oicer’) o s420A – reasonable care in selling secured assets o s429(2)(a) and (c) – noiicaion of appointment and lodging of directors’ report o s427(2) – noiicaion 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 oicers to ASIC o s433 – if applicable pay priority debts
Most papers did a very good job on their discussion and applicaion of the powers and duies of the receiver to the facts.
A common error here was to omit much needed detail regarding the statutory efects of receivership. For example not all students referred to ss427-429. Also, the agency relaionship was not always addressed or considered in suicient detail.
Quesion 3(b) was answered well by most students who referred to s420A and applicable caselaw. Further applicaion to the speciic problem at hand was required by some students. A number of students failed to idenify the live issues were the duies and powers of a receiver under s420A and instead exclusively considered general director duies rather than s420A.
This part of the quesion required applicaion to the paricular 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 enirely 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 obligaions will very much depend on the paricular facts faced by the receiver when selling the asset. Here this means that Rebecca should adverise the art in the market where it its. 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 fulilling this obligaion.
Q3(c) was a straight forward quesion requiring an outline of members’ voluntary liquidaion and how it leads to the winding up process, and how that is achieved. Students needed to idenify that this is a members’ voluntary winding up where the company appears solvent.
Students were required to idenify how to iniiate the process under s491, the requirement for a declaraion of solvency under s494 and the relevance of s95A. Students were also required to note that if company resolves by special resoluion to wind up the company, the company in general meeing must appoint a liquidator: s495(1).
Beter 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 meeing of the company’s creditors, in which case the winding up may become a creditors’ voluntary winding up.
Regarding how to “achieve” the process, beter 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 quesion was marked lexibly 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 resoluion 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 enitled.
- powers and duies 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 inally has duty to repay the company’s debts – this is a collecive procedure so all creditors are enitled to claim.
- Creditors paid irst, 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 insuicient to meet them in full, they must be paid proporionately.
Exam Feedback 2017
Course: Corporate law (LLH305)
University: Queensland University of Technology
