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LLH305 Corporate Law Final Exam Notes
Corporate law (LLH305)
Queensland University of Technology
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Table of Contents
- DUTY OF DUE CARE & DILIGENCE..........................................................................
- GENERAL LAW DUTY..........................................................................................
- STATUTORY LAW DUTY......................................................................................
- CASE LAW – EXPLORING THE STATUTORY DUTY.............................................
- BUSINESS JUDGEMENT RULE..........................................................................
- CONSEQUENCES OF BREACH...........................................................................
- DUTY TO AVOID INSOLVENT TRADING.................................................................
- STATUTORY DUTY............................................................................................
- PRECONDITION 2..............................................................................................
- PRECONDITION 3..............................................................................................
- PRECONDITION 4..............................................................................................
- THE CIVIL PENALTY PROVISION........................................................................
- THE OFFENCE...................................................................................................
- DEFENCES........................................................................................................
- RELIEF FROM LIABILITY.....................................................................................
- SAFE HARBOUR................................................................................................
- CONSEQUENCES OF CONTRAVENTION.............................................................
- SHARE CAPITAL....................................................................................................
- NATURE OF SHARE CAPITAL.............................................................................
- RAISING SHARE CAPITAL..................................................................................
- MAINTENANCE OF SHARE CAPITAL...................................................................
- Share buy-backs – limited liability companies..................................................
- General Law.....................................................................................................
- SHARE CAPITAL REDUCTIONS..........................................................................
- PROTECTION OF MEMBERS..................................................................................
- STATUTORY REMEDIES.....................................................................................
- Oppression....................................................................................................
- Statutory Derivative Action...........................................................................
- Statutory Injunctions.....................................................................................
- Winding Up...................................................................................................
- ABUSE OF MAJORITY POWER............................................................................
- PERSONAL ACTIONS.........................................................................................
- STATUTORY REMEDIES.....................................................................................
- CORPORATE FUNDING & SECURITIES..................................................................
- SHARE CAPITAL V DEBT CAPITAL......................................................................
- PAYMENT OF DIVIDENDS..................................................................................
LOAN CAPITAL – BORROWINGS BY COMPANIES...............................................
PRIORITIES AND THE PPSA............................................................................... 47
RECEIVERSHIP.....................................................................................................
APPOINTMENT OF RECEIVER............................................................................
VOLUNTARY ADMINISTRATION.............................................................................
Insolvency...........................................................................................................
APPOINTMENT OF ADMINISTRATOR..................................................................
ADMINISTRATOR’S POWERS, RIGHTS AND OBLIGATIONS.................................... DEED OF COMPANY ARRANGEMENT (DOCA)................................................
LIQUIDATION........................................................................................................ WHEN THE COMPANY CAN BE WOUND UP - INSOLVENCY............................. Appointment of Liquidators..........................................................................
Companies limited by guarantee – cannot issue shares = no share capital.
CIVIL PENALTY PROVISIONS
Penalty
S1317E – if the court is satisfied the civil penalty provisions discussed above have been contravened it must make a declaration of contravention
S1317G – a court may order the person pay the Commonwealth a pecuniary penalty of up to:
(3) Individual: the greater of: $1,050,000 (5000 penalty units); or if the Court can determine the benefit derived and the detriment avoided because of the contravention – that amount x 3;
(4) Corporation: the greater of: $10,500,000 (50,000 penalty units); or if the Court can determine the benefit derived and the detriment avoided because of the contravention – that amount x 3; or
10% of the annual turnover of the corporation for the 12-month period ending at the end of the month in which the corporation contravened the civil penalty provision but only to a maximum monetary value of 2. million penalty units (which equates to $525m)
Non-executive directors = not bound to give continuous attention to the affairs of the corporation. Their duties are of an intermittent nature to be performed at periodic board meetings, and at meetings of any committee of the board upon which the director happens to be placed. Notwithstanding a small number of professional company directors there is no objective standard of the reasonably competent company director to which they may aspire (AWA v Daniels). Daniels v Anderson
Directors duties – losses from foreign exchange deals – Auditors contributorily negligent.
FACTS: Koval was a manager with AWA. Koval carried out foreign exchange deals at AWA that incurred losses. The foreign exchange deals were not well supervised, internal controls were inadequate or non-existent and few records, if any, were kept. Such was the state of these internal failures that Koval managed to conceal the losses from the board. AWA’s auditors conducted 2 audits. Daniels was the responsible audit partner. But neither the figures given to the board, nor the auditors reports disclosed the real situation. Evidence was that Daniels was aware of the defects in AWA’s internal controls. He mentioned these defects to the CEO and to senior management, but not to the board of directors.
AWA sued the auditors for negligence for failure to bring the defects in the internal control systems to the board’s attention. The Auditors denied liability and claimed that AWA had been contributorily negligent and that both the full time executive director and the non executive directors had all been negligent.
HELD: Auditors had been negligent and AWA was contributorily negligent. Claims of negligence were also made against the chairman and CEO and were successful, but they were not successful in relation to the non executive directors – it was held that non executive directors had not breached their duty of care, skill and diligence to the company (they had made inquiries and requested information about the foreign exchange dealings from senior management and from the auditor but the full details were concealed from them).
Principles in case
Directors owe a duty to take reasonable care in the performance of their office. The duty will vary according to the size of the business of the particular company and the experience or skills that the director held himself or herself out to have in support of the appointment to office. Generally, directors may take reasonable steps to place themselves in a position to guide and monitor the management of
THE OFFENCE...................................................................................................
The law of negligence can accommodate different degrees of duty owed by people with different skills- but that does not mean that a director can safely proceed on the basis that ignorance and failure to enquire are a protection from liability.
directors must familiarise themselves with the companies’ business when they join the board although directors don’t have to have equal knowledge and experience, they are under a continuing obligation to make inquiries and keep themselves informed about the company’s business operations directors must be familiar with the company’s financial position by regularly reviewing its financial statements. They can’t avoid liability for insolvent trading by claiming that they don’t know how to read financial statements directors appointed because they possess special skills or experience in an aspect of the business of the company must pay attention to other aspects of the business which might reasonably be expected to attract inquiry, even if this is outside their area of expertise; directors must be allowed to make business judgments and take commercial risks, but can’t safely proceed on the basis that ignorance and failure to inquire are protection against liability for negligence. directors can’t shut their eyes to corporate misconduct and then claim that they didn’t see the misconduct and didn’t have a duty to look.
Clear minimum standard: at least being able to read and understand the financial statements of a company.
Special Expertise
Where a director has special expertise, the director is obliged to make his or her expertise available for the benefit of the company (Gold Ribbon (Accountants) Pty Ltd v Sheers).
Gold Ribbon (Accountants) Pty Ltd v Sheers
Non-executive director special expertise in commercial lending – oversaw company giving out unsecured loans.
FACTS: Here a company had been giving out unsecured loans to accountants or their service companies at high interest rates. Things went pear shaped for a number of reasons including the high risk nature of the venture, failure to comply with accepted lending practices and the incompetence of the appointed administrator of the scheme. One of the
In June 2000, HIHC paid $10m to Pacific Eagle, a trustee company controlled by Adler. It was the trustee of Australian Equities Unit Trust. The control of that trust was vested in Adler’s company Adler Corp. Units were then issued by Australian Equities to HIHC for $10m. These units entitled HIHC to receive 90% of Australian Equities distributable income. The $10m was applied in 3 separate transactions.
- Pacific Eagle purchased shares in HIH on the stockmarket for $4m. ASIC argued Adler had done this to prop up the share price of HIH. Within 3 months of purchasing the shares, Pacific Eagle sold the $4m shareholding in HIH at a loss of $2m.
HELD: Adler had breached 180(1). It materially prejudiced the interests of 2 HIH companies. There was no implementation of proper safeguards, eg independent appraisal of the investment by way of proper due diligence, approval by the investments committee etc., nor was it considered by the investment committee of HIH.
- $3 million of the $10m paid to Pacific Eagle was used to purchase from Adler Corp shares in unlisted technology and communications companies. The purchase was made without independent valuation at a time when technology and communication stocks were collapsing. The entire investment was lost.
HELD: Adler had breached 180(1). At the time of the purchase the companies were already having cash flow difficulties. There was already a risk the companies would fail.
- The rest of the $10m paid to Pacific Eagle formed three unsecured loans of over $2m, from Pacific Eagle. The borrowers were all companies associated with Adler.
HELD: Adler had breached 180(1).
Adler was disqualified for 20 years, Williams for 10 years. Fodera was not disqualified. Alder, Adler Corp and Williams were order to pay compensation to the company to the tune of almost $8M, plus they were fined. Adler’s fine was $450,000, plus the same again from Alder corp, Williams was fined $250,000 and Fodera $5000. The matter went on appeal, where the decision at first instance was largely upheld. However the court of appeal found that Adler and Adler Corp had not breached s183 – the duty not to make improper use of information, so the court varied the amounts of interest to be paid in the compensation order.
ASIC V RICH
Responsibilities of a chairman above those of a director.
FACTS: Greaves had been the chairman of One for about 4 years and chairman of the finance and audit committee for 8 months before the company’s collapse, and a qualified chartered accountant with substantial experience as the finance director or chief financial officer of large public companies.
The substance of ASIC’s claim against Greaves was that by virtue of his positions within One, his professional experience, particularly the financial experience, in the context of the financial circumstances of One, ASIC alleged greaves had responsibilities above and beyond the other directors, including taking reasonable steps to ensure an adequate flow of information to the board so that the board was fully informed of the company’s financial position. Greaves ought to have ensured that the Board:
was given more information about cash, creditors and debtors was supplied with monthly management accounts of One had access to all other relevant information was convened for substantial meetings at least fortnightly understood the financial position of One and had a properly functioning independent audit committee and internal review of One’s financial position.
HELD: A chair does have higher duties than other directors. The chairman is responsible to a greater extent than any other director for the performance of the board as a whole and each member of it. The chairman has the primary responsibility of selecting matters and documents to be brought to the board’s attention in formulating the policy of the board and in promoting the position of the company.
ASIC V HEALEY
Directors failed to pick up on discrepancies in financial reports – blamed accountants – basic concepts that directors should have read/noticed.
FACTS: The directors of the Centro group of companies signed off on the 2007 financial reports. There were a number of discrepancies in reports – the way liabilities had been classified. The directors argued that they were entitled to rely upon these appropriately qualified people (company accountants including CFO & CEO). Counsel for the directors repeatedly pointed out that these were outstanding directors, highly respected and with years of experience; further the directors were dealing with an avalanche of information and documents being sent to them for each meeting. Significantly the auditor did not pick up on the misclassification.
emphatic about the level of compensation funding to the board. The term ‘fully funded’ was used repeatedly and often.
The Court of Appeal upheld the decision at first instance finding that the CFO and the secretary were in contravention of s180(1), but upheld the appeal of the non-executive directors. It was this aspect of the Court of Appeal’s decision that was reversed in the High Court.
The non-executive directors were in contravention and the High Court remitted to the court of appeal consideration of the applications of the directors for relief from liability.
BUSINESS JUDGEMENT RULE
S 180(2) - A defence for actions for a breach of duty of care where: A business judgment is made in good faith and for a proper purpose; The director or officer does not have a material personal interest in the subject matter of the judgment The director or officer has informed themselves about the subject matter of the judgment to the extent they reasonably believed was appropriate; and The judgment was rationally believed to be in the best interests of the corporation. A director or officer’s belief is a rational one unless the belief is one that no reasonable person in their position would hold.
S 180(3) – Definition of a ‘business judgement’ Any decision to take or not to take action in respect of a matter relevant to the business operations of the company.
The director must have made a decision involving the exercise of judgment. So they must at least have turned their mind to making a decision, and be able to prove that they did that.
The onus is on the director seeking to rely on the rule (ASIC v Adler). In this case; Adler could not rely on the rule because he had a material personal interest.
This rule gives directors with a safe harbour from personal liability when they make an informed rational business decisions in good faith and in the best interests of the company. If the director doesn’t come within the safe harbour, they remain liable for all consequences of contravention.
Only acts as a defence for s 180(1) breach of duty
CONSEQUENCES OF BREACH...........................................................................
GENERAL LAW DUTY..........................................................................................
If the director’s lack of care and skill have caused loss or damage to the company, then the director would be liable to compensate the company for that loss (Lister v Romford Ice and Cold Storage).
Breach of this duty can be closely to tied to breach shareholders rights in relation to oppression. Thus the remedy might be directed at the oppression.
The director would be eligible to make application for relief from liability under s1318 of the Act and would need to establish that in all the circumstances of the case it is appropriate that relief be granted and that the director has acted honestly.
STATUTORY DUTY............................................................................................
See contravention of Civil Penalty Provision (page 2)
It is possible to seek relief from liability for contravention again here under s1317S, and s1318 is available for breach of a general law duty, again showing that in all circumstances they ought to be excused and have acted honestly (see
RELIEF FROM LIABILITY.....................................................................................
- Note a director who has failed to exercise due care and skill is very likely to be removed from office and/or banned from managing companies by ASIC (s206F) or the Court (s206C).
S1324 – statutory injunction may be available to prevent a contravention
DUTY TO AVOID INSOLVENT TRADING
STATUTORY REMEDIES.....................................................................................
- This duty becomes relevant when you are considering comps in financial distress
A company that is/approaching insolvency obtains a loan, property or services on credit + a director or reasonable person in the director’s position would know or
commercial debts, depend on what were the express and/or implied terms of the agreement leading to the debt (Credit Corp Pty Ltd v Atkins).
588G(1A)
PRECONDITION 2..............................................................................................
The person is a director when the company incurs a debt
S 9 ‘Director’ - a person occupying or acting in the position of director - by whatever name called.
In Williams v Bearing Traders Pty Ltd - a person was considered to be a director at the time the company traded while insolvent, despite that the person had resigned as a director before the company became insolvent. This was because the person stayed active in the corporate group of which the company formed a part was found to have been acting as a director at the time when the company traded while insolvent.
PRECONDITION 3..............................................................................................
The company was insolvent at the time when the debt was incurred or became insolvent as a result of the incurring of the debt
Insolvent? Whether or not a company is able to pay all its debts as and when they become due and payable (s 95A)
Commercial test of insolvency - The appropriate calculation is made by weighing up the company's debts on the one hand with its book debts and cash resources it can readily realise through conversion of its assets (Sandell Porter).
- Not balance sheet approach whether assets exceed liabilities.
Presumptions of insolvency are of assistance S 588E(3)-(9) - if company is being wound up - failed to keep financial records (does not apply in only minor or technical)
PRECONDITION 4..............................................................................................
There were reasonable grounds for suspecting that the company was insolvent or would become insolvent as a result of debt being incurred
Reasonable Grounds
Objective standard – judge directors on the basis of the director of ordinary competence (Metropolitan Fire Systems).
Director of reasonable competence and diligence, seeking properly to perform his duties as imposed by law (when viewed as a whole) and capable of reaching a reasonably informed opinion as to a company’s financial capacity. In other words, facts and matters must be shown to exist which would give grounds for a director acting in accordance with that standard to suspect insolvency (Carrier Air Conditioning Pty Ltd v Kurda).
The standard expected of all directors includes the obligation to keep him/herself informed of the financial affairs of the company. A director is expected to be capable of understanding his/her company’s affairs to the extent of actually reaching a reasonably informed opinion of its financial capacity. A director ought usually to know, at the time of the annual general meeting, what the auditor’s report contains (Commonwealth Bank of Australia v Friedrich).
Suspect
Means that the person has a positive feeling of an actual apprehension or mistrust that a situation exists such as the fact that the company is insolvent.
The inquiry focuses on a reasonable person in a like situation. Regard must be had to facts that the director ought to have known and facts actually known to him or her (ASIC v Plymin).
The phrase ‘in a like position’ will enable the court to look both at any special expertise held by individual director and the distribution of functions within the corporation’ (Explanatory Memorandum for the Corporate Law Reform Bill 1992).
A reasonable model director is ‘one who understands, in general terms at least, what the company accounts and the auditor’s report show’ (Commonwealth Bank v Friedrich).
A reasonable director would read the reports before signing a statement that stipulates that the director has read the reports, and on the basis of an understanding of the reports has formed an opinion as to the company’s solvency.
This element of reasonableness is most relevant in cases where the directors did not know of the relevant facts and circumstances because they failed to ascertain them, but a reasonable person in a like position would or ought to have ascertained those facts or circumstances (Green in his capacity as a liquidator of Arimco Mining Pty Ltd (in liq) v CGU Insurance Ltd).
Factors which might be taken into account include the type of company, the size and nature of the enterprise, the provisions of its constitution, the composition of its board and the distribution of work between the board and other officers (Commonwealth Bank v Friedrich).
Is there a finance & audit committee?
Element 3: Director fails to prevent the company from incurring the debt
On the balance of probabilities would these facts give a director of ordinary competence, seeking properly to perform the duties of that office, reasonable grounds to suspect that the company is not able to pay all its debts as and when they become due.
A ‘failure to prevent’ covers inactivity or the failure to attempt to prevent the company from incurring the debt (ASIC v Plymin), You don’t have to establish that the particular director had the actual power to take a step that would have actually been effective to stop the company from incurring the debt (Elliott v ASIC).
THE OFFENCE
S 588G(3) – The various elements are much the same but additional element: (d) the persons failure to prevent the company incurring the debt was dishonest.
The new element here is s588G(3)(d) which provides that the person’s failure to prevent the company from incurring the debt is dishonest. This is obviously a question of fact that will turn on all the circumstances of the case.
DEFENCES
Defences – director may rely on upon these to disprove a claim of contravention of s 588G(2), they are set out in S 588H.
S 588H(2) Reasonable grounds to expect that the company was solvent
Reasonable grounds: this implies an objective consideration of the grounds viewed against all the circumstances.
To expect: This is to be understood according to its usage in ordinary parlance, namely to predict that something will happen or turn out. It implies a measure of confidence in the outcome of what is expected such as the fact that the company is solvent at the time the debt is incurred. It goes beyond a mere hope or possibility. (Carrier Air Conditioning Ply Ltd v Kurda; Tourprint International Pty Ltd v Bott).
The expectation must be that the debts will be paid when due, not that funds will become available at some indefinite time in the future (Hall v Poolman).
S 588H(3) Reliance on information from a reliable person
When the debt was incurred, the director had reasonable grounds to believe, and did believe, that a subordinate person was competent, reliable and responsible for providing adequate information about the company’s solvency and the director expected, on the basis of this information, that the company was solvent and would remain solvent.
Related to the circumstance where directors must rely primarily upon other persons, particularly accountants and actuaries to prepare accounts which will disclose the financial position of a company. The section does not negate a director’s duty to keep himself informed, and to form his own judgment about the affairs of the company, of which he is a director (Lilodw’ Aliphumeleli Pty Ltd v Commissioner of Taxation).
any such course of action ceases to be reasonably likely to lead to a better outcome for the company; the appointment of an administrator, or liquidator, of the company.
Evidentiary Proof
‘Evidentiary Burden’: the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist (s 588GA(7))
S 588GA(2) - Directors may seek to establish that their course of conduct comes within s 588GA(1) (Safe Harbour) by pointing to evidence of matters such as:
(1) they are properly informing themselves of the company’s financial position; or (2) they are taking appropriate steps to prevent any misconduct by officers or employees of the company impacting upon payment of debts; or (3) they are taking appropriate steps to ensure that the company is keeping appropriate financial records • they are obtaining advice from an appropriately qualified entity; or (4) they are developing or implementing a plan for restructuring the company to improve its financial position.
Directors can also lose the ability to rely upon certain books or information when seeking to discharge their evidential burden where they fail to permit inspection of the books or fail to deliver the books of the company as required under the Act or where a warrant is issued by the court where the court is satisfied that the director has concealed destroyed or removed company books (s 588GB(1)(2))
Preclusion from safe harbour
The safe harbor of s588GA does not apply in certain circumstances: s588GA(4) - failing to pay the entitlements of employees or failing to give returns, notices, statements, applications or other documents as required by taxation laws s588GA(5) - failing to complete RATA or assist a liquidator
s588GA(6) - can apply to the court to retain protection despite (4) and (5) above if due to ‘exceptional circumstances’ or otherwise in the interest of justice.
CONSEQUENCES OF CONTRAVENTION.............................................................
If no defence or safe harbour can be raised, then the director is liable to compensate the company: s 588J-U. This applies equally to both a contravention of 588G(2) and a breach of 588G(3).
The director is required to compensate the company and the amount of compensation is determined by reference to the loss to the creditor to whom the debt in question is owed.
This is separate and distinct from the compensation order under s1317H. This provision enables a compensation order to be made following contravention of a civil penalty provision. When making a compensation order under 1317H, the amount that the director is required to compensate the company is determined by the loss or damage occasioned by the company flowing from the contravention.
Sections 588G, 588J and 588K apply irrespective of whether or not the company is being wound up. If the company is being wound up then the liquidator may also seek a compensation order that the director is liable to compensate the company for contravention of the insolvent trading provisions under s588M. Creditors can bring these compensation proceedings with the liquidator’s consent s588R or in certain circumstances without the liquidator’s consent ss 588S&T.
- Where director allows the comp to incur a debt while insolvent ^
- Creditor may recover an amount equal to the amount of that loss or damage from the director as a debt due to the company, whether or not the director had been convicted of an offence or a civil penalty order has been imposed.
- The "loss or damage", for the purposes of s 588M, is the amount of the unpaid debt due to the relevant creditor, rather than the difference between that debt and creditor's likely recovery in the winding up (Tourprint International Pty Ltd (in liq) v Bott).
S 588G(2) Civil Penalty Provision
See page 2
S 588G(3) Offence
In accordance with Schedule 3 of the Act, if a director is found to have committed a criminal offence under s588G(3), the court may order the director to pay a penalty of up to 2,000 penalty units which is currently $420,000; or order the director to be imprisoned for up to five years or both.
LLH305 Corporate Law Final Exam Notes
Course: Corporate law (LLH305)
University: Queensland University of Technology
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