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The Constitution

Generally, a company can amend its constitution via s136(2) but this is subject to restraints. They identified that a company can generally amend its constitution via s136(2) but this is subject to restraints. The question only asked you to discuss statutory restraints and here the most relevant were s246B, s232- 3 and s140. Is section 246B triggered? If and only if all three preconditions are satisfied, then the statutory restriction in s246B applies.  must have a share capital divided into classes of shares or if the company does not have a share capital, members must be divided into classes (s 246B(1)(a)) (CMC v ENT).  Special rights must attach to a class of shares or membership 246B(1)(b)). (Buckland v Johnstone).  The amendment will vary or cancel class rights (s 246B(1)) IF NOT:  If the constitution is silent, or if the company does not have a constitution, then s 246B(2) applies. Class rights can only be varied with the written consent of 75% of the shareholders in that class.  Note: if the alteration would unfairly prejudice a dissenting minority of shareholders with at least 10% of the voting rights of the class of shares affected, the court can set aside the alteration (s 246D). Section 246B applies where the company has a share capital divided into classes of shares, special rights attached to a class of shares and the amendment will vary or cancel class rights. They correctly concluded that s 246B is triggered here as the company has a constitution that divides the company’s share capital into categories, the classes have different rights and the 2 amendments proposed will both vary or cancel share class rights. A and B class shares have identical rights and these may not be a class of shares, but C class shares do have different rights to A and B class shares and this is sufficient to meet the requirement in s246B that the share capital is divided into classes and those classes have different rights. In reaching this conclusion they applied leading authorities including Buckland v Johnstone and Clements Marshall Consolidated Ltd v ENT Ltd. In Beck v Weinstock, Chief Justice French explained that typically, class

rights differ based on their entitlement to a dividend, voting rights, rights to priority of repayment of capital on winding up and the right to participate in a distribution of surplus assets on winding up. Here the class rights differ in respect to voting rights at general meetings of shareholders. Further the principles from Beck v Weinstock are relevant in that it is still possible for the shares to be divided into classes even if there are no ordinary shares issued in the company. Some students identified that the facts resembled Buckland v Johnstone. These students tended also to identify that the key concern is whether the capital is divided into classes and that s246B applies even if the shares of the entire class are held by one person. They correctly distinguished the two amendments proposed to the constitution as relating to the variation and cancellation of share class rights. Here, the amendment will create a further hurdle before “C” category shares have an entitlement to vote at general meetings, and therefore this is an alteration of share class rights. They were able to explain how s246B could be complied with and how it applied to the cancellation of shares as well as to the variation of share class rights. Most students identified that the most appropriate remedy here was injunctive relief under s1324 and that there was no doubt as to the shareholder’s standing to seek the remedy in circumstances where the provision being contravened was not a civil penalty provision. Alice had standing to seek the statutory injunction as a person whose rights would be affected by the contravention of the statute. The injunction would seek to prevent Frank from putting the amendments to the meeting. They identified that to proceed with the variation of class rights in these circumstances is an attempt to breach the statutory contract: s140. They correctly identified the next statutory restraint was under ss232 and 233. They explained the concept of statutory oppression, including analysis of the specific phrases used in the legislation and applying them to the key facts here (ie ‘affairs of the company’ (s53; Re Norvabron Pty Ltd), ‘Contrary to the interests of the members as a whole’ (Wayde v NSW Rugby League Ltd), ‘oppressive, unfairly prejudicial, unfairly discriminatory, or contrary to the interests of members’. They applied key authorities such as: Shears v Phosphate Co-operative of Australia Limited; Re HR Harmer Ltd; Scottish Cooperative Wholesale Soc Ltd v Meyer; Jenkins v Enterprise Gold Mines NL; Catalano v Managing Australia Desinations Pty Ltd. Fairness is not decided in a vacuum and will turn upon the context in which the context occurs; a decision made in a competitive business environment may be fair; the same decision may not be fair when made in the context of members of a family-owned company. Principles from these cases that were drawn out were that oppression requires something more than the company pursuing management or dividend policies that the shareholder disagrees with, and the particular relevance of the company being a family company. The test was succinctly explained in Catalano and ought to have been explained and applied here. Were the actions unfair according to ordinary standards of reasonableness and fair dealing; did the directors fail to act in the

STEP 1 - Are the preconditions that trigger the operation

of the section satisfied: S588G(1).

S 588G applies if: (a) A person is a director of a company at the time when the company incurs a debt; and i. Person/director [name/s] is a director as defined in ss 9 and 9AC. [name/s] is a director because he/she/they fit within paragraph: 9AC(1)(i) of the definition of director because they were appointed to the position of a director. 9AC(1)(ii) of the definition of director because they were appointed as an [alternate director or acting director] ii. At the time when the company incurs the debt APPLY THE FACTS iii. Debt What debt have they incurred? Entry into a loan arrangement to borrow funds, purchasing goods, paying a dividend, reducing share capital, entering into a share buy-back arrangement, financially assisting the acquisition of shares in the company and entry into an uncommercial transaction. Identify and discuss each debt incurred by the company that may constitute insolvent trading:  Share buybacks s588G(1A) s588G(3) for loans.  Loan by the bank is a debt: CBA v Friedrich (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and Insolvency In line with s 9 and 95A, a company is solvent only if they are able to pay all their debts, when they become due and payable. Two approaches Test for 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 v Porter).

It comes down to a question of fact, in which the key concept is ability to pay the company’s debts as and when they become due and payable’ (Lewis v Doran). APPLY THE FACTS – PICK ONE OF THESE Presumption of Insolvency: The company is presumed to be insolvent if: S 588E(3)(a) & (b) – the company is being wound up AND it is proved OR S 588E(4) has failed to keep financial records as required by subsection 286(1); or has failed to retain financial records in relation to a period for the 7 years required by subsection 286(2); The company is presumed to have been insolvent throughout the period. When is the debt incurred? Was the company insolvent at the time the debt was incurred? Did the company become insolvent by incurring that debt? APPLY THE FACTS (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and “reasonable grounds” Reasonable grounds should be judged according to a director of ordinary competence who is capable of understanding the company’s financial status (Credit Corporation Australia Pty Ltd v Atkins). The awareness of a 'reasonably competent and diligent non-executive director' must be considered (ASIC v Plymin). This requires proof of a subjective awareness by the directors of grounds, whether or not the director has a “subjective suspicion” of insolvency (ASIC v Plymin). It is not material whether or not the directors knew the relevant facts or matter, because it is reasonable person in a like position would or ought to have ascertained such information (Green – Arimco Mining Pty Ltd (in liq) v CGU Insurance).  Evaluate whether there were reasonable grounds for suspecting insolvency, referencing indicators of insolvency and directors' responsibilities as outlined in case law (e., ASIC v Plymin (No1) [2003] VSC 123).  Discuss the subjective awareness of financial issues and objective standards of directorial conduct.

It does not matter that the director was unaware of the grounds for suspecting insolvency, if a reasonable person (in a like position to the particular director in a company in the company’s circumstances) would be aware of the grounds: ASIC v Plymin (No1) (2003) 46 ACSR 126. 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 them: ASIC v Plymin.  A reasonable 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.  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 – for example, is there a finance and audit committee: Tadgell J, Commonwealth Bank v Friedrich (1991) 5 ACSR 115, 125. APPLY THE FACTS Conclusion On the facts, [NAME HAS/HAS NOT] contravened the civil penalty provision in s588G(2).

STEP 3 - Has the criminal offence in s588G(3) been

breached?

Element of dishonesty: 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. Dishonesty is defined in the dictionary in s9 to mean dishonest according to the standards of ordinary people. This is obviously a question of fact that will turn on all the circumstances of the case. APPLY THE FACTS HERE

STEP 4 - Is the safe harbour in s588GA available?

Brief overview: Civil liability is excluded by s588GA(1) when the director starts developing a course of action (turnaround) that is reasonably likely to lead to a “better outcome for the company”. The debt is incurred directly or indirectly with the turnaround AND the debt is incurred within the period beginning when the director starts to develop the turnaround.

APPLY THE FACTS

Temporary relief bc coronavirus? (a) debt incurred in the ordinary course of the company’s business? ‘‘... the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.’’ (Downs Distributing v. Associated Blue Star Stores) (b) debt incurred during the relevant period? ([24 March 2020] and ending on [31 December 2020) (c) was the debt incurred before the appointment during that period of an administrator or liquidator of the company APPLY THE FACTS

STEP 5 – ARE ANY DEFENCES AVAILABLE?

Defence There are four defences under the Corporations Act that may be relied upon by a director to disprove a claim of a contravention of s 588G(2) or (3). 1. Reasonable grounds to expect that the company was solvent: s588H(2). 2. Reliance on information from a reliable person: s 588H(3) 3. Director ill or not involved in management for some other good reason at the time the relevant debt was incurred: s 588H(4) 4. Reasonable steps to prevent the company from incurring the debt: s 588H (5). See the important corresponding provision: Section 588H(6). APPLY THE FACTS Page 59 of Corporate Law Tutorials

STEP 6 – CONSEQUENCES OF CONTRAVENEING CIVIL

PENALTY PROVISION

ASIC can make application for a declaration of contravention. The court must make the declaration of contravention under Section 1317E, if the court is satisfied that a civil penalty provision has been contravened.
If the court makes a declaration of contravention, it can in addition order the person in contravention to pay a pecuniary penalty under s 1317G
ASIC has standing to seek a compensation order from the court under s 1317H.
If the court has made a declaration of contravention, the court can, in addition, make a relinquishment order under s 1317 GAB. This order can be made upon application by ASIC or by the court on its own initiative.

STEP 9 – RELIEF FROM LIABILITY

There has been some debate as to whether directors prosecuted for insolvent trading should make applications for relief under s 1317S or 1318. However, the debate is perhaps futile since s1317S clearly does apply to insolvent trading and the court must take into account almost precisely the same considerations in determining whether or not to exercise its discretion to relieve from liability. The court must consider whether the director has acted honestly and ought fairly be excused from liability in all the circumstances of the case A court may provide relief where a director may have acted honestly and, having regard to all the circumstances of a particular case, the director ought fairly be excused for their conduct. APPLY THE FACTS Highly unlikely that relief will be considered here as the company was insolvent and the director/as acted dishonestly? Penalty/liability/consequnces: Section 588G(2) is a civil penalty provision. It is an important stepping stone to veil piercing. S588G(2) itself doesn’t pierce, but contravention of 588G(2) opens the door for creditors or the liquidator to hold the directors personally liable for debts incurred by the directors when the company was insolvent. These provisions are elsewhere in 588G. DEBT: (e) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and APPLY THE FACTS (f) The definitions of insolvency are in ss 9 and 95A; the commercial test for insolvency is explained in Sandell v Porter. A director has a duty to prevent a company from trading when it is insolvent under s 588G. A company is taken to be insolvent if the company proposes a restructuring plan to creditors (see subsection 455A(2)).

Identification of Relevant Debts:  Identify and discuss each debt incurred by the company that may constitute insolvent trading:  Share buybacks s588G(1A) s588G(3) for loans.  Loan by the bank is a debt: CBA v Friedrich   Cite Commonwealth Bank of Australia v Friedrich (1991) 7 ACSR 629 for guidance on the treatment of debts in relation to insolvent trading. Directorship Status:  Identify individuals who held directorship positions at the time the debts were incurred, citing s9 of the Corporations Act 2001 for the definition of a director. Insolvency Assessment:  Discuss whether the company was insolvent at the time each debt was incurred, applying the commercial test of insolvency as per s95A of the Corporations Act 2001.  Consider any presumptions of insolvency, noting the concept of the relation back day as defined in s9.  Reference Williams v Scholz (2017) 317 ALR 88 for considerations on insolvency assessment. Reasonable Grounds for Suspecting Insolvency:  Evaluate whether there were reasonable grounds for suspecting insolvency, referencing indicators of insolvency and directors' responsibilities as outlined in case law (e., ASIC v Plymin (No1) [2003] VSC 123).  Discuss the subjective awareness of financial issues and objective standards of directorial conduct. Discussion of Defenses:  Analyze potential defenses available to the directors, such as the safe harbor provisions under s588GA (if applicable).  Assess the viability of each defense in light of the facts presented, citing relevant legal provisions and precedents.  Reference CBA v Friedrich (1991) 7 ACSR 629 for insights into potential defenses. Assessment of Dishonesty:  Examine whether the directors acted dishonestly in incurring or allowing the debts to be incurred, referencing legal definitions of dishonesty and relevant case law (e., R v Young [1999] NSWCCA 133, CBA v Friedrich (1991) 7 ACSR 629).  Consider personal interests and motivations of directors in relation to company debt transactions. Relief Application Consideration:  Evaluate the possibility of relief under s1317S or 1318 for directors who acted honestly, considering the fairness of granting relief based on the circumstances of the case.  Discuss any mitigating factors or grounds for denying relief, citing relevant case law such as Hall v Poolman (2007) NSWCA 150. Conclusion:  Summarize the findings regarding each director's potential liability for insolvent trading, highlighting any civil penalty provisions contravened and potential consequences.  Provide a clear and concise conclusion based on the analysis presented, referencing the sections of the Corporations Act 2001 and relevant case law discussed throughout the analysis.

(a) the buy-back does not materially prejudice the company’s ability to pay its creditors and (b) it follows the procedures set out in the Act. 259A(a) has been breached since the buy-back has put the company in a position where it cannot pay its debts. It is unnecessary to reach a conclusion on s257A(b) given that s257A(a) is clearly breached. If the company is in contravention of s257A, it is therefore in contravention of s259A and of s259F. From here it was necessary to identify that the company does not commit an offence under s259F – but rather those who are involved contravene a civil penalty provision. Both directors were involved within the s 79 definition. A company must not take security over shares (or unites of shares) in itself or in a company that controls it (s 259B(1)), unless... 259(b) PROCEDURE: (3) (a) Resolution must be passed at a general meeting of the company; and/if applicable (b)If the company is a subsidiary of a listed domestic corporation— a resolution passed at a general meeting of the listed domestic corporation; and/if applicable (c) A resolution passed at a general meeting of the holding company. If the company’s ordinary business includes providing finance and the security is taken in the ordinary course of that business and on ordinary commercial terms (s 295B(3)), then 10/12 limit rule stipulates that a company cannot buy back more than 10% of its voting shares within the span of any twelve (12) month period.

MEMBERS’ REMEDIES

Directors must not engage in conduct which would be ‘oppressive or unfairly prejudicial to or unfairly discriminatory’ against a shareholder: s232. Affairs of the company is defined in s53 widely: Re Norvabron. Holding company can be held liable - The holding company knew what the subsidiary company was doing because they had common directors (Re Norvabron). Acts: Can include just one act (Wayde v NSWRL) A single resolution of the board of directors could be oppressive or unfair. In that case it was also found that the conduct can even consiste of a proposed act or a resolution or proposed resolution (Wayde v NSWRL) Omission: E. includes an omission to pay dividends (Sanford v Sanford Courier Service)

Estate). Here that would mean both an end to the oppression and it would put an end to the personal relationship between the parties: Hogg v Dymock. Damages would not be an appropriate remedy since it would not neutralise the oppression. Similarly, winding up under s233 would not be a suitable remedy as another remedy is possible (ie buyout). Some students argued that if the directors did not comply with the buyout order, then and only then would winding up would be the most appropriate remedy. Winding up under s233 takes effect as if the winding up order were made under s461. Remedy is granted under s 233. The court has a broad discretion – any relief it thinks appropriate in the circumstances. Guiding principle: The minimum relief that is appropriate to neutralise the oppression (Fedorovitch v St Aubins) Most likely: Buy out at fair value (Fexuto Pty Ltd v Bosnjak Holdings) Examples of remedies granted:  Existing directors must cease to hold office; new board appointed to investigate transactions; constitution amended (Re Spargos Mining)  Appointment of a receiver to investigate breaches of duty; institute proceedings if necessary (Jenkins v Enterprise Gold Mines)  To cease interfering with decisions of the board; step down as a director and become a consultant instead (Re HR Harmer Ltd)  Alteration of company’s constitution (Hannes v MJH)  An order that the majority purchase the minority’s shares at fair value (John J Starr v Robert R Andrew)

VOLUNTARY ADMINISTRATION

required discussion of the holder of a security interest over the whole, or substantially the whole, of the company’s property in voluntary administration. See ss 440B, 441A. Underground Finance would need to enforce its interest within the ‘decision period’, being 13 business days after administration begins.  During administration, a person cannot enforce a security interest over the property of the company except (a) with the administrator’s written consent or (b) with leave of the Court (s 440B).

 Where a person has a security interest over the whole, or substantially the whole, of the property of a company under administration – that person may enforce the security interest within the decision period (s 441A) – i. 13 business days from notice of appointment (ss 441A, 9)  The administrator can be appointed by the company (s 436A) or the liquidator (s 436B) or the chargee (s 436C). How voluntary administration can commence: The priority of the security interests: Possession is a means of perfection. Section 55(3) of the PPS Act provides that, as a general rule, a perfected security interest has priority over an unperfected security interest.

LIQUIDATION/ STATUTORY DEMAND /

WOUND UP

Presumption of insolvency – concerning a statutory demand.

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Course: Corporate law (LLH305)

255 Documents

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University: Queensland University of Technology

Multiple Choice

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The Constitution

Generally, a company can amend its constitution via s136(2) but this is

subject to restraints.

They identified that a company can generally amend its constitution via

s136(2) but this is subject to restraints. The question only asked you to

discuss statutory restraints and here the most relevant were s246B, s232-

3 and s140.

Is section 246B triggered?

If and only if all three preconditions are satisfied, then the statutory

restriction in s246B applies.

must have a share capital divided into classes of shares or if the

company does not have a share capital, members must be divided

into classes (s 246B(1)(a)) (CMC v ENT).

Special rights must attach to a class of shares or membership

246B(1)(b)).

(Buckland v Johnstone).

The amendment will vary or cancel class rights (s 246B(1))

IF NOT:

If the constitution is silent, or if the company does not have a

constitution, then s 246B(2) applies. Class rights can only be varied

with the written consent of 75% of the shareholders in that class.

Note: if the alteration would unfairly prejudice a dissenting minority

of shareholders with at least 10% of the voting rights of the class of

shares affected, the court can set aside the alteration (s 246D).

Section 246B applies where the company has a share capital divided into

classes of shares, special rights attached to a class of shares and the

amendment will vary or cancel class rights.

They correctly concluded that s 246B is triggered here as the company

has a constitution that divides the company’s share capital into

categories, the classes have different rights and the 2 amendments

proposed will both vary or cancel share class rights. A and B class shares

have identical rights and these may not be a class of shares, but C class

shares do have different rights to A and B class shares and this is

sufficient to meet the requirement in s246B that the share capital is

divided into classes and those classes have different rights.

In reaching this conclusion they applied leading authorities including

Buckland v Johnstone and Clements Marshall Consolidated Ltd v ENT Ltd.

In Beck v Weinstock, Chief Justice French explained that typically, class