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LLH305 Sem 2 2018 Final Exam General Feedback
Corporate law (LLH305)
Queensland University of Technology
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General Feedback Final Exam LLH305 Corporate Law Semester 2, 2018 Question 1 Overall this question was done well. The live issues were the validity of the constitutional amendment and the statutory limitations on the right to vary or cancel class rights and any applicable statutory remedies. Most students ably followed these instructions and confined their analysis to the live issues - the statutory exception to the general rule in s 136(2) that company constitution can be varied by a special resolution. The statutory exception here arises because the amendment to the constitution will vary share class rights. Sections 246B-G place restrictions on majority shareholders using their voting power to alter the constitution to vary or cancel class rights attached to shares. These sections tell us that class rights can only be cancelled or varied by special resolution at a meeting of the class of members holding shares in that class OR the written consent of at least 75% the holders of those affected classes of shares. The facts state that Artic Ice Pty Ltd’s constitution is silent as to a procedure for varying or cancelling class rights so students need to look to and apply 246B(2) and the definition of special resolution in section 9. Most students took a two step approach to determine if s246 was triggered. In the first step students considered three critical issues: Firstly does Artic Ice Pty Ltd have a share capital divided into classes of shares? s246B(1)(a) Clements Marshall Consolidated Ltd v ENT Ltd. The answer is yes. Secondly, do special rights attach to a class of shares or membership. (Class rights s246B(1)(a). See Buckland v Johnstone. The answer is yes. Finally, does the proposed amendment actually vary or cancel class rights s246B. The answer is yes. Because all three preconditions are satisfied, the statutory restriction on altering the company’s constitution in s246B applies. Then the second step is to apply the statutory restriction to the factual scenario. Since the company’s constitution is silent on a procedure for varying or cancelling class rights, then class rights can only be varied by special resolution passed at a meeting for a company with a share capital of the class of members holding shares in the class OR with the written consent of 75% of the shareholders affected: s246B(2). Since neither of the above has happened on our facts, the court would declare that the resolution and alteration is invalid. An injunction under s1324 would be available to prevent the amendment of the constitution. Remedies may also be available under s232 - where majority votes in favour of resolution altering constitution (or replaceable rules) that is contrary to interests of the company as a whole, oppressive, unfairly prejudicial or unfairly discriminatory. Excellent papers approached the issue in a coherent way, going into detail on the live issues, with a complete statement of the law supported by authority and a comprehensive application of the law to the facts.
Common errors: The most common error was to not follow the instructions in the question. The question asked: “Advise Nathaniel and Noel as to the validity of the constitutional amendment. Only consider the relevant statutory limitations on the right to vary or cancel class rights and any applicable statutory remedies. Do not consider corresponding common law limitations or remedies.” It was surprising how many students ignored/missed this instruction. The common errors flowing from this manifested in a few different ways: Some students discussed issues that were specifically excluded by the question, namely the corresponding common law limitations and remedies. Some students discussed only the special resolution and not the relevant statutory limitation. Some students discussed neither the resolution nor the relevant statutory limitations on the right to vary or cancel share class rights, and instead discussed matters not raised on the facts – such as share buy-backs. Students who identified the live issues and had a good go at stating the law and applying it to the facts tended to easily pass this question. Students who failed this question tended to either have provided no answer at all, missed the live issues or got off to a basic start identifying some but not all of the main points of law, but did not apply it to the facts. Question 2 Part A Advise Randy fully in respect of the above matters (10 marks) For the security priority aspect of the question where students did engage with the question of priority, they did very well. Some students did not consider the issue of priority and this was a missed opportunity to gain significant marks for this part of the question. Here we had a potential issue over priority and students needed to demonstrate an understanding that to enforce a security interest against a 3rd party generally the interest has to be perfected, and that perfection will normally occur by registration of the security interest: s 21 PPSA. Perfection had occurred here as the two interests had been registered under s21. Students also needed to demonstrate an understanding that generally priority will depend on the timing of the perfection – note s55(4). Students then needed to explain that M’s security interest is a PPSA lease. The lease is for personal property and the period is longer than 2 years. Not all students adequately explained the definition of a PPSA lease. A frequent error here was incorrect explanation of a PPSA lease. This was one aspect of this question that was generally done poorly. Note that the lease was entered into after the amendment to the definition of a PPS lease from 20th May 2017 which increases the lease period from more than 1 year to more than 2 years s PPSA). The lease will be subject to the PPSA as it meets the new definition of a PPSA lease as it is for a period of 3 years: see s 13 PPSA. A PPSA lease is a special category of security interest known as Purchase Money Security Interests (PMSI): s 14 PPSA. This means that M’s interest takes priority over CP’s interest to the extent of any inconsistency. CP has a security interest over all of the assets of SP. Therefore SP’s default means that CP is entitled to
However an administrator has a strong statutory right to an indemnity. Students needed to explain to Sally that she is entitled to be indemnified out of the company’s (SP’s) property for debts incurred by her in exercising her powers during administration along with money borrowed, costs interest etc: s443D and any other debts liabilities, damage or losses in good faith and without negligence. Overall feedback on question 2 Overwhelmingly, students performed well on the issue of the administrator’s liabilities and indemnities. Most answers logically approached the problem, incorporated references to relevant sections from the CA, outlined the law fully, and linked how this law might impact on Sally’s performance in her role as administrator. Answers about the appointment of an administrator were also good, although more inconsistent. Although nearly all students referred to the power of the board to appoint an administrator (in some cases, going on unnecessarily to discuss what the administrator would need to do once appointed), a portion of students omitted to refer to the power of the secured creditor to also make the appointment. There was also uneven performance on the answer to the appointment and powers of the receiver. Most noted the power of the receiver to inspect books – but not all commented on the power to order reports (to help locate the missing fleet of cars). Most observed that the receiver could be validly appointed by the secured creditor under the security document – but not all identified that the receiver could also seek a court order declaring the validity of his appointment, which was relevant given the rumours questioning his appointment. The most technical aspect of the question – the priority of the security interests – was well- handled. The main point of distinction in the answers was how logically, clearly and comprehensively students compared what the secured interests were, how they were perfected, and which would enjoy priority. Question 3 The question asked you to advise the liquidator on the prospects of success for an action against Spencer, Charlotte and Maddie for insolvent trading, including any remedies. The standard of answers was overall very good. Students receiving highest marks had answered all parts of the question. Most students did well on the statements of law/application of facts for s588(2) and most included a discussion of the additional requirement of dishonesty in s 588G(3). In terms of the preconditions: The loan by the bank is a debt: Commonwealth Bank v Friedrich. It is possible that other debts were also incurred, but this is the earliest one incurred on the facts.
The debt is incurred in/after August 2018. This is after the commencement of Part 5 on 23 June 1993 and after the commencement of the new safe harbor provisions on 17 September 2017. S9 defines director. Charlotte, Spencer and Maddie all fall within the definition and are directors at the time Sproc incurs the debt to EasyMoney Bank. The issue that arises is whether the company is insolvent at the time the debt is incurred or becomes insolvent by incurring the debt or by incurring debts including the debt: 588G(1) (b). The definitions of insolvency are in ss 9 and 95A; the commercial test for insolvency is explained in Sandell v Porter. Here the presumptions of insolvency in s588E(3) assist in helping you to determine that the company was insolvent at the time the debt was incurred. A liquidator has been appointed. The liquidator has determined that the company is insolvent. If the company is being wound up then it is deemed to be insolvent for 12 months prior to the relation back day. This concept of the relation back day appears in the dictionary in s9. The relation back day is likely to be determined by reference to the date the liquidator is appointed which here is October 2018, which means that the company would be presumed to be insolvent for 12 months before the relation back day. The debt was incurred in August 2018 and therefore the company was presumed to be insolvent at the time the debt was incurred. Precondition 3 is met. The fourth precondition is that at the time the debt was incurred there were reasonable grounds for suspecting the company was or would become insolvent: s588G (1)(c). Application of this precondition required consideration of the objective standard: Metropolitan Fire Systems Pty Ltd v Miller; Carrier Air Conditioning Pty Ltd v Kurda; ASIC v Plymin (No1). Most students dealing with this issue applied Commonwealth Bank v Friedrich: The standard expected of all directors includes the obligation to keep themselves 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. Students relied upon Queensland Bacon Pty Ltd v Rees to explain the meaning of ‘suspect’ and observed what is required is suspicion of actual insolvency as defined in s95A without the benefit of the presumptions of insolvency. Some students missed opportunities for marks by leaving out some or all of the preconditions for the application of the provision and/or made no or little attempt to apply the law to the facts. 588G(2) requires that the director is aware at the time that there were grounds for suspecting that the company was insolvent at the time the debt was incurred OR that a reasonable person in a like position in a company in the company’s circumstances would be so aware. If in those circumstances the person fails to prevent the company from incurring the debt, then the director is in contravention of s588G(2). In applying these tests on the facts, much of this analysis turns upon the directors being aware that sales were down, cash flow was down and notwithstanding these problems the
honestly and not acting dishonestly. Even if Spencer and Charlotte are able to argue that they have acted honestly, the second consideration is whether they ought fairly be excused from liability in all the circumstances of the case. Here they have unreasonably relied on the restructuring advice of Jan, who seems somewhat unqualified and inexperienced to give this sort of advice, and it was given briefly over a coffee. This makes the relief application somewhat tenuous. It is unlikely to be granted. Relief can be wholly or partly granted and is at the discretion of the court. Most students ably advised the liquidator that the consequence for Maddy of breaching the offence provision involved a pecuniary penalty and/or imprisonment (Schedule 2), and that for all three directors, the consequences of contravening the civil penalty provision in s588G(2) were: the usual consequences of contravening a civil penalty provision s1317J: declaration of contravention (s1317E), pecuniary penalty (s1317G), a compensation order payable to the company (s1317H), a disqualification order under s 206C (This power of disqualification is quite frequently exercised, and all directors here are likely to face some period of disqualification if they are not relieved of liability); That the liquidator/creditor may seek a compensation order (piercing the corporate veil) holding the directors liable to compensate the company for contravention of the insolvent trading provisions under S588J-U. Section 588M allows the recovery of compensation from a director by the liquidator. Creditors can bring these compensation proceedings with the liquidator’s consent s588R or in certain circumstances without the liquidator’s consent ss588S &T. In certain circumstances, the creditor is prevented from suing: s588U. The amount of compensation would be determined by reference to the loss the creditor to whom a debt in question was owed. Read the question carefully You were asked to advise as follows: “The liquidator is keen to institute proceedings against Spencer, Charlotte and Maddie for insolvent trading. Advise the liquidator fully on the prospects of success of such an action and the remedies potentially available.” Given that the question asked was narrowly focused on insolvent trading, discussion of other duties was not called for.
LLH305 Sem 2 2018 Final Exam General Feedback
Course: Corporate law (LLH305)
University: Queensland University of Technology
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