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Posted on Sep 22, 2023 in Other subjects

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Lecture topic 1: Company fundamentals

Lecture topic 1: Overview

o Icebreaker
o Disruptive example
o What is a company?
o Company regulation in Australia
o Classes of companies
o Separate legal entity
o Corporate groups
o The corporate veil
o Limited liability
o Key terms – check the CLIA Chapters

Lecture 1: Icebreaker Activity

LO 1.6 LO 2.1 LO 2.2 LO 2.4 LO 2.5 LO 2.6 LO 2.7

Why are you studying corporations law this semester?

a) It is a core unit for my degree or major
b) The accounting professional bodies consider it is important
c) I would need more information to answer the question.
d) I am interested in how companies as a legal structure operate and are regulated
e) I am interested in how the law and regulation of companies links to my other studies in
business
f) Other?

…………………………………………………………………………………………………………………………………………………………..

What is in it for you?
❑ Learn to analyse complex fact situations and apply relevant legal rules. ❑ Develop skills in logic, argument & presentation.
❑ Develop strong “self-learning” techniques .
❑ Flexible “learning” tools.

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

❑ Understand what your rights and liabilities are as a company participant: ➢ Director

➢ Shareholder/member
➢ Lender
➢ Professional adviser, auditor, stockbroker etc.
➢ Company participants can be fined or jailed if you get it wrong

Activity Think about it – a “rogues’ gallery” of “corporate criminals” …………………………………………………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………………………………………………..

What is a company?

LO 1.6 Discuss the characteristics, regulatory processes, advantages

and disadvantages of a company structure

Nature of the company

A separate legal entity created by registration with the Australian Securities and Investments Commission.
Has most of the powers of a natural person.
The owners often have limited liability, but this depends on the type of company.
Extensively regulated by the Corporations Act 2001 (Cth)
Internal management is regulated by the Corporations Act and the company’s constitution. Key elements of a company

Members/owners
Operators/managers
Third parties who deal with companies
Advantages/disadvantages Table 1.7
Similarities and differences

 Activity

Similarities

Differences

 Activity Think about it – if a corporation was an animal, what would it be? Watch ch 1 of the movie The Corporation (QUT Readings)

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AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Revision Questions LO 1.6 (see CANVAS modules for solutions)

List and define three key elements that make up a company.
List the key advantages and disadvantages of the company structure.
How are companies regulated in Australia?

Company regulation in Australia

LO 2.1 Define a company and outline the mechanisms by which

companies are regulated in Australia

Key elements of regulation

Limited by s51(xx) commonwealth constitution
Uniform national laws
Corporations Act 2001
ASIC is the regulator
The role of case law Corporations power s51(xx)

Commonwealth parliament only has power s51(xx) commonwealth constitution.
High Court has consistently held that s51(xx) does not empower commonwealth to
regulate all aspects of companies:

o Huddart Parker & Co Pty Ltd v Moorehead (1909) o NSW v Commonwealth (1989)

• s51(xxxvii)–referral of power from the states to allow power to Commonwealth.

Pathway to Uniform national laws

Through 20th C, companies were regulated by both Commonwealth and state laws.
1980s, national code created when each state separately enacted the same law.
1990s, Corporations Law passed by Commonwealth and all states enacted the same law.
2000s, states agreed to give power to Commonwealth parliament.
Corporations Act 2001

Large and complex statute use the Federal Register of Legislation as the most up to date source.
General term used to describe the legal rules governing:

o formation and termination of companies
o characteristics of companies
o relationships between participants in companies (such as members and officers) o aspects of companies’ dealings with outsiders

• Other sources of law –Corporations Regulations, ASIC Act, ASIC exemptions, modifications and guidelines, accounting standards, ASX Listing Rules (for listed companies)

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

• Case law is very important; not every section has relevant case law!
ASIC
‣ National regulator ASIC is Australia’s corporate, markets and financial services regulator. ‣ Role:

Revision Questions LO 2.1

What is a ‘company’?
What is a ‘corporation’? What is the difference between a ‘company’ and a ‘corporation’?
How are companies regulated in Australia?

Classes of companies

LO 2.2 Describe the various class of companies that can be

registered
Classes of companies
• The Corporations Act classifies companies in a variety of ways, including:

o proprietary or public,
o liability of members ,
o size (of proprietary companies), o listing status.

Classes of companies Figure 2.1

Proprietary company s113 (changed 2018)

Limited by shares or unlimited with a share capital
Maximum of 50 members (excluding employee shareholders & crowd-sourced funding shareholders)
No fund raising that would require a Ch 6D disclosure

o Crowd-sourced funding allowed
o Less regulation than public companies
o Can be a single director/shareholder company

Proprietary company s45A (changed 2019)
• A proprietary company is a small proprietary company if at least two of the following apply:

o Revenue < $50 million o Assets < $25 million
o Employees < 100

Otherwise the proprietary company is a large proprietary company and will have additional reporting and auditing obligations.
Applies after 1 July 2019 https://asic.gov.au/regulatory-resources/financial-reporting-and- audit/preparers-of-financial-reports/are-you-a-large-or-small-proprietary-company/
Public companies s9

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

• A company that is not a proprietary company is a public company. o Generally has > 50 non-employee shareholders, and
o engages in public fund raising.

Public companies face more regulation than proprietary companies.
Limited by shares, limited by guarantee, unlimited or no liability.
May be listed on a public securities exchange.

o Listing status
• Public companies may be listed or unlisted.

o NOT ALL PUBLIC COMPANIES ARE listed!

– 2,000 to 2,500 companies are listed/ 2,600,000 companies exist Listing status

Companies that list on the ASX must comply with the ASX Listing Rules as a condition of their listing.
See www.asx.com.au
Listed companies have more disclosure obligations. Comparing company types Table 2.1
Liability of members

• There are 4 main types of company, s112. o Company limited by shares.

o Company limited by guarantee. o Unlimited company.
o No liability company.

• See s 9 for definitions. Change of status S162-164

Companies can change their type from when they first registered – if members in general meeting agree
Members must pass a special resolution.
Meet regulatory conditions.
Provide information to ASIC.
 Activity Disruptive example: Trustees the Roman Catholic Church for the Archdiocese of Sydney v Ellis [2007] NSWCA 117
WARNING – DISTURBING CONTENT
ABC 4 Corners episode August 2014 (QUT Readings) Think about it – why does legal entity matter so much?
………………………………………………………………………………………………………………………………………………………….. …………………………………………………………………………………………………………………………………………………………..

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Revision Questions LO 2.2

List each class of company that can be registered.
Explain the differences between a proprietary company and a public company.
Describe the liability of members in each type of company (more detail on this next
week).

Separate legal entity

LO 2.4 Explain the key principles of a company being a separate legal entity

Separate legal entity

Fundamental and enduring concepts in company law
The company is a legal person separate from its participants
Applies regardless of the type of company
This means that:

o its obligations and property are its own and not those of its participants.
o company can sue and be sued in its own name.
o its existence continues unchanged even if the identity of the participants changes. o company can contract with its participants.

o Statute and SLE

s119 Company comes into existence on registration.
s1274 Certificate issued by ASIC is conclusive.
s124 Company has the legal capacity and powers of an individual.

o In essence, a company can do almost anything a natural person can do.
o People who trade with a company are trading with the company itself, not with the

owners of the company.
o A company does, however, require people to act on its behalf.

• s127 Company can sign documents directly. Revision Questions LO 2.4

1.Explain the concept of ‘separate legal entity’.
2. Why does a company need people to act on its behalf?
3. How can the powers of directors’ meetings and members’ meetings be limited?

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Corporate groups

LO 2.5 Describe the main features of a corporate group as relates to

the concept of separate legal entity Key points

• Formal definition in s50
o Related companies

No legal definition of group
Group is not a separate legal entity. Related companies

Holding companies, subsidiaries s46-47
Related bodies corporate: holding and subsidiaries are related s50 Figure 2.5
Section 46: Only one of the tests need be satisfied:

o The holding company controls the composition of the board of directors.
o The holding company controls more than 50% of the votes in the subsidiary

company.

o The holding company holds more than 50% of the issued shares of the subsidiary company.

o The company is a subsidiary of a subsidiary of the holding company. Legal recognition

Limited recognition of corporate groups – law treats each company in the group as a separate entity.
But some recognition of groups in the law covering insolvent trading, related party transactions, financial statements.

o ss588V-588X: holding co may be liable for debts incurred by insolvent subsidiaries.

o Consolidated accounts may be prepared.

o A director of a wholly owned subsidiary may act in the interests of the holding company.

 Activity Think about it – which companies are related?

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

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https://www.lexology.com/library/detail.aspx?g=90cc6c72-de1a-4ba7-91d0-7cd7a798c5ed

1. 2.

Revision Question LO 2.5

What is meant by the term “corporate group”?
Describe the tests to determine whether a company is a subsidiary of another company.
List the circumstances in which the law recognises a corporate group?

Corporate veil

LO 2.6 Explain what is meant by the corporate veil.

What is the corporate veil?

The corporate veil refers to the effect of the legal rules that separate a company and its participants in the eyes of the law.
The effect of the corporate veil is – in most circumstances – to prevent the law looking beyond the veil of incorporation to say that the company’s obligations, liabilities, rights or property are those of the participants and vice versa.
Salomon v Salomon Ltd (1897)

• FACTS Salomon v Salomon & Co Ltd:
o Salomon owned a boot manufacturing business.
o He formed a company.
o The shares in the company were owned by Salomon, his wife and his children. o Salomon was a director and the chairperson.
o The company experienced financial difficulty and was wound up.

Companies are separate from their controllers

Lee v Lee’s Air Farming Ltd: issue – could Mr Lee be both the controller of a company and its employee?
Macaura v Northern Assurance: issue – was Mr Macaura the “owner” of property that belonged to a company controlled by him?
Exceptions – piercing the corporate veil

• At general law (rare)
o Corporate form used to avoid an existing legal duty – Gilford Motor Co v Horne.
o Subsidiary company is the agent of the parent/controller – Smith, Stone & Knight. o Principles underlying a particular law require the veil to be pierced – Re Darby.

Lifting the corporate veil via statute

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

• Corporations Act and other statutes eg taxation legislation o Insolvent trading s588G

o Directors’ security interests s588FP
o Insolvent and uncommercial transactions in insolvency s588FE
o Directors attempts to defeat employees’ rights to entitlements s596AC

Lifting the veil of corporate groups

• • • •

High risk liability can be quarantined to a holding company’s subsidiary. Creditors can only enforce rights against their particular debtor company. The others in the same group of companies are separate legal entities.

Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116: 6 conditions what are the 6 conditions?

o ……………………………………………………………………………………………………….. o …………………………………………………………………………………………………………. o ……………………………………………………………………………………………………….. o …………………………………………………………………………………………………………. o ……………………………………………………………………………………………………….. o ………………………………………………………………………………………………………….

Courts say we should not confuse commercial reality with legal identity Briggs v James Hardie

ASIC v MacDonald 2009 : http://www.abc.net.au/7.30/content/2012/s3495057.htm … Should we sustain the corporate veil in such circumstances?

The directors did not escape – penalties ranged between $30K-350K, bans from 5-15 years (for breaches of directors’ duty). BUT they appealed the decision

Then ASIC appealed to High Court ASIC v Hellicar 2012 Revision Questions LO 2.6

What is the corporate veil?
What does the phrase ‘lift the corporate veil’ mean? In what circumstances have
courts been willing to lift the corporate veil under the Corporations Act?
In what circumstances have courts been willing to lift the corporate veil under the
common law?

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◦ ◦

Limited liability

LO 2.7 Describe how the principle of limited liability applies to the members of a company

Limited liability

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

In a company limited by shares, a member’s liability is limited to the amount (if any) remaining unpaid on their shares
Allows investors to quarantine the risk of a particular venture from their other assets.
In practice, creditors may negotiate personal guarantees etc from controllers
Economic benefits:
reduces the need for investors to monitor their investment, allows efficient
diversification and reduces agency costs.
promotes ease of transferability of shares.
At whose cost?

– Unsecured creditors

– Victims of negligence  Activity

Who do you think should win in a case like James Hardie, where there is a very pro-social reason to lift the corporate veil

• What would you call your doctrine? Revision Questions LO 2.7

1. What is meant by limited liability?
2. Explain a members’ liability in relation to the ownership of partly paid shares. 3. Explain how a director and shareholder can relinquish their limited liability.

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Tutorial 1 Workbook: Company fundamentals

Reading: CLIA Ch 1 & 2; ASX.com.au

By the way…did you know…students sometimes ask me – why does the Tutorial workbook have blanks. This simple technique of fill the blanks is called “flash cards” – a well-established technique for self-directed learning for facts: https://www.youtube.com/watch?v=p3-o0pxDrL0.

You can also make your own revision flash cards by using the flashcard tool in the e-text.

Question 1

You will note that the textbook introducing a case study involving a small business Retrofit. Start by LOCATING THE CASE STUDY at the beginning of ch 1 & ch 2 of the textbook and consider the first 2 issues:

What type of company should Retrofit be?
What are the consequences for Julian and Retrofit arising from the choice of company type?
Q1 Solve by ILAC…
If you cannot find the case study in the textbook, it is reproduced in Topic 1 Module in Canvas.
Issue: What types of companies are there in Australia?
Law: Start by setting out the conceptual framework of the classes of companies, including the sections.
Application: Read the facts of the case study and make a recommendation.
Conclusion: Based on your recommendation, state what you think are some of the consequences.
Question 2 LO 2.2
What are the ASX Listing Rules? Do they apply to Retrofit? Give an example of a company they apply to.
Q2 Solution
I suggest that you look at ASX.com.au
Issue: What are ASX Listing Rules? …………………………………………………………………………………………………………………………………………………………..
Law/source: ………………………………………………………………………………………………………………………………………………………….. Application: Give an example …………………………………………………………………………………………………………………………………………………………..

Question 3
LO 2.6

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

At a meeting of the world’s leading fishing nations in Kyoto, Japan, concerns were expressed over the global reduction in blue fin tuna stocks caused by overfishing. In total, 67 countries agreed to enter into an international treaty pledging to introduce domestic legislation aimed at limiting the number of blue fin tuna that may be caught by each commercial fisherman.

In Australia, the Fisheries Act (Cth) was introduced to give effect to the protocols set out in the Treaty document. The Commonwealth Government set a quota of 1,000 blue fin tuna per commercial licence per season. The penalty for exceeding this quota is a fine not exceeding $500,000 and/or three years’ imprisonment.

Horatio Hook, the skipper of ‘Nautilus, consults his solicitor over how to overcome this fishing restriction placed on him by the legislation. Horatio’s solicitor suggests he create a proprietary company, with Horatio as sole director and shareholder, to obtain its own commercial fishing licence. This way, Horatio could double his quota of tuna if he also was awarded a licence in his own name.

Question: Can a company be formed such as to allow H to ‘get around’ or subvert some legal regulation imposed on him personally? That is, can the corporate veil be effectively used here?

Q3 Solution

Issues:

What is the corporate veil?
When can the corporate veil be pierced? Law:

Under the principle established in ______________v_____________, a company is a _________________________________ entity from its directors and shareholders.
This is sometimes called the ‘corporate ___________’.
However, the _______________________v____________ case sets out an exception when
the court may lift the corporate veil for avoiding an existing _____________________________________.
Application:
Consider the main facts: Horatio is subject to the new quota imposed by the Fisheries Act of 1000 blue fin tuna per licence per season (This can be seen as an important event as it leads to the decision to seek advice as to what to do with a company). H has been advised to incorporate a company (transaction or event). It is proposed that he is the sole shareholder and director in the company (relationship).
Conclusion:
Question 4 LO 2.1
Is company law in Australia Commonwealth Law or State Law? Why does it matter?
Q4 Solution
I suggest that you start by considering the Commonwealth constitution as the source of power.

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Issue: What is the source of Company law? …………………………………………………………………………………………………………………………………………………………..

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Law/source: ………………………………………………………………………………………………………………………………………………………….. ………………………………………………………………………………………………………………………………………………………….. Application: state why it matters. …………………………………………………………………………………………………………………………………………………………..

Tutorial tips & tricks

• Corporate law problems can be complex. Start by understanding the nature of the relationships and the transactions or events that you see unfolding. Not every ‘fact’ provided will be relevant; and you will not always see every fact you need.

• When answering legal problems in this unit, you must use the ILAC approach. This is a tried- and-true model for ensuring you bring your knowledge to the examiner’s attention and applying your knowledge in a way that is appropriate to arrive at a conclusion or solution to the problem.

Topic 1 Practice Problem: LO2.6

Bonnie and Clyde decided to form Acme Ltd. Bonnie and Clyde were the only directors and shareholders. Acme bought the exclusive Australian licence to manufacture clothing under the

McBRAT trademark. Acme then formed a company called Beta, which issued a prospectus to the public, stating that Beta would purchase the lucrative exclusive licence from Acme. Since the

McBRATmark had enjoyed significant press coverage and media discussion, and it was anticipated that the clothing sales were going to be very strong, the public eagerly subscribed to Beta. It was ultimately floated and issued 100,000 $1 shares.

Bata bought the McBRAT licence from Acme for $100,000, which was a severely over-inflated price. After Acme received the funds, Bonnie and Clyde divided up the $100,000, taking $50,000 each.
Beta failed to manufacture under its licence, and it ultimately failed and went into liquidation. Acme has no assets.

Can the liquidator pursue Bonnie and Clyde?
Facts: The facts show that Bonnie and Clyde were directors and shareholders of Company A. Is the liquidator would be confined to pursuing Company A only, or whether the ‘corporate veil’ could be lifted to allow the liquidator to pursue Bonnie and Clyde personally?

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Issues: So the tip is to articulate the issue more broadly so you can solve this type of problem in the future.
When are the directors and shareholders of a company be liable for the company’s debts?
Law: The general rule – the Salomon v Salomon & Co Ltd case held that the directors and shareholders of a company have separate legal identities to the company itself.

Exceptions – However, there are some exceptions where the courts will lift the corp veil and hold the company’s participants (directors and shareholders) liable for the company’s debts. Re Darby case shows that a court may lift the corporate veil in circumstances of fraud.
Application & Conclusion:

According to the Salomon v Salomon & Company case, Bonnie and Clyde would be considered separate legal identities (‘natural persons’) to Company A (a ‘legal’ person recognised by the law). In ordinary cases, a court would not look behind this corporate ‘veil’, and the liquidator could not pursue Bonnie and Clyde for any profits made by Company A.
However in Re Darby, as here, the directors and shareholders of Company A formed a ‘dummy’ company so that this company could, in turn, float Company B and raise money from investors in Company B. The arrangement was simply a fraudulent means of obtaining money from innocent shareholders and Company B failed. The liquidator pursued Darby for Company A’s profits, but Darby argued Company A was a separate legal entity from himself and that the profits were the company’s and not his. The court held that since Darby incorporated Company A as a ‘dummy company’ to engage in fraud, he had to ‘disgorge’ his profits.
Since the relevant facts surrounding incorporation here are almost identical with those in Re Darby, it is strongly arguable the liquidator will be able to pursue Bonnie and Clyde personally rather than Company A, which has no assets. A court would lift the corporate veil to allow the liquidator to do so, and ultimately it is quite likely that the court would require Bonnie and Clyde to disgorge their profits.

•

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Lecture topic 2: Overview o Disruptiveexample

Lecture topic 2: Registration, Pre-registration, Company Constitution

o Classesofcompanies
o Registeringcompanies
o Companyrulesandconstitution o Objectclauseandultravires
o Constitutionascontract
o Changingtheconstitution
o Companypromoters
o Pre-registrationcontracts

Disruptive example

Have you heard of a B corp?

LO2.2 LO2.3 LO3.1-3.3 LO3.4 LO3.5 LO3.6 LO4.1-4.3 LO4.4

• https://www.australianethical.com.au/about/b-corporation/ • Purpose driven companies in Australia

What type of company is a B corp?

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Classes of companies

LO 2.2 Describe the various class of companies that can be

registered Member liability

There are 4 main types of company, s112.
Company limited by shares.

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Company limited by guarantee.
Unlimited company.
No liability company.
See s 9 for definitions. Company limited by shares.

Company limited by shares – the liability of members is limited to any unpaid amount on the shares they hold.
Most common type of company in Australia.
May be public or proprietary.
Company limited by guarantee

Company limited by guarantee – the liability of members is limited to an amount they have undertaken to contribute in the event of a winding up.
Often used by clubs and charities, where the members’ liability is limited to their membership fee.
Unlimited company

The members’ liability for the debts of the company is not limited.
May be a proprietary or public company.
Often used by professional practices who are prohibited from using a limited liability structure
(e.g. lawyers and accountants).
While not offering limited liability, unlimited companies do provide access to the other
advantages of the company structure.
No liability company

No liability company – members are not obliged to pay any unpaid amount owing on shares. Instead they will forfeit the shares.
Must have share capital.
Must have stated that its objectives are mining.
Must not have any contractual rights to recover money owed on partly paid shares.
Revision Questions LO 2.2

1. Explain the differences between a company limited by shares and (a) a company limited by guarantee, (b) an unlimited liability company; and (c) a no liability company.

Registering companies

LO 2.3 Outline the steps involved in starting a company

See ASIC website for the steps, based on ASIC IS 61 -> note 2021 requirement for Director Identification Numbers
Companies created through registration by ASIC s117
ASIC Form 201

1. 2. 3.

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Revision Questions LO 2.3

List the steps involved in registering a company with ASIC. Explain what ASIC will do upon registration of a company. What is a shelf company?

Company rules & constitution

LO 3.1 Explain why companies need a set of rules and procedures to govern their operations

Most companies are required to have a set of rules and procedures.
o Allcompaniesshouldhaveasetofrulesandprocedures.
Collectively called the constitution.
o Whereisitfound?
o Whatdoesitsay?
o Whodoesitapplyto? o Whatisitseffect
The rules agreed by the members to govern the internal workings of the company
Companies established prior to July 1998

Companies established prior to July 1998 were formed with: o MemorandumofAssociation:
§ the objectives of the company
§ member details
§ share capital details
§ any limitations on the powers of the company.
Companies established prior to July 1998 were formed with: o ArticlesofAssociation:
§ the rules that govern the company’s internal affairs § relationship between shareholders and directors
§ rights and obligations of members.
Companies established after July 1998

Companies established after July 1998 are required to have a set of rules.
The rules may be:
o thereplaceablerulesprovisionsoftheCorporationsAct(s141) o acompanyconstitutionoftailor-maderules
o acombinationofthetwo.
o s134

•

Some of the replaceable rules have exceptions for or special application to: o proprietarycompanies
o singledirector/shareholdercompanies
o publiccompanies.

It is often more appropriate for a company to write a company constitution – a set of rules tailored to the company’s size, goals and activities.

Revision Questions LO 3.2

1. 2. 3.

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Revision Questions LO 3.1

Why does a company need a set of rules to govern its operations? What are the ‘replaceable rules’?
What is a company constitution?

LO 3.2 Describe the application of the replaceable rules contained in the Act

The replaceable rules S141
Most types of company can choose to use the replaceable rules as a set of default rules to
govern the internal matters of the company in relation to: o officersandemployees
o inspectionoffinancialrecordsbymembers
o directors’meetings
o members’meetings o shares.
The replaceable rules

1.
replaceable rules.
2. In what way(s) are single director/shareholder proprietary companies treated differently in the replaceable rules?
3. Why is it often more appropriate for a company to adopt a company constitution rather than rely on the replaceable rules?

LO 3.3 Describe the purpose of a company constitution.

The company constitution

Companies often choose to create a constitution rather than use the replaceable rules.
Some companies are required to have a constitution, e.g.:
o Noliabilitycompanies o ASX-listedcompanies.

List the five main areas of the operations of a company that are covered by the

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

§ are required to include rules pertaining to appointment of a proxy. § are forbidden to include pre-emption clauses.

The company constitution

A company constitution can better match the particular nature and circumstances of the company and cover a wider range of matters.
A company adopts its company constitution when: o itisregistered,
o whenamembers’meetingpassesaspecialresolutiontoadoptit,or o whenacourtordersit.
! Class activity
Look at the Qantas constitution
How difficult is it to locate?
Would you read it before deciding to invest?

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• •

Objects clause & ultra vires

LO 3.4 Explain the purpose of an objects clause in a company

constitution

Object clause – optional
o Whatacompanycando?
o Whatisitspurposeorreasonforexistence?

Corporate capacity
o Section124–Companieshavethecapacitytodomostthingsthatanaturalpersoncan

do, and some additional things, including issuing shares.
What is the effect of internal limitations on powers, such as in the constitution?

Section 125 – constitution may limit power or objects, but acts outside those limitations not invalid as against third parties.

1. 2. 3.

Revision Questions LO 3.3

Which companies must adopt a company constitution?
When is a company considered to have adopted its constitution? What is a pre-emption clause?

AYB230 CORPORATIONS LAW
UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Objects clause

The objects clause of a constitution:
o setsouttheobjectivesforwhichthecompanyexists.
o helpsgivepotentialshareholdersconfidencethatthecompanywillactasexpected. o helpsgivepotentialcreditorsconfidencethatthecompanywillactasexpected.
Historically, companies had narrow objects clauses because they were formed for: o asinglepurposeorproject
o toundertakeanarrowrangeofactivities. The doctrine of ultra vires

• ultra vires means to act beyond authority.
o atransactionthatisoutsideacompany’sobjectsclauseisultravires.
o historically,anultravirestransactionorcontractwasconsideredtobevoidand

unenforceable.
• The constructive notice rule:

o apersondealingwiththecompanywasconsideredtobeawareoftheobjectsofthat company.

Objects clause

Recognising the broad scope of commercial activities today, the Corporations Act changed the operation of ultra vires and the constructive notice rule:
o acompanyhasnoinherentlimitsonitspowers
o anactionisnotinvalidmerelybecauseitisoutsidethecompany’sobjects o thedoctrineofconstructivenoticeisabolished.
! Class activity
Copies of constitution
Watch the UK series on Good board meetings – first 3.5 mins (QUT Readings)
Articles = constitution
If you had to find a copy the articles/constitution of a company,
How would you go about it? …………………………………………………………………………………………………………………………………………………………..
…………………………………………………………………………………………………………………………………………………………..
Revision Question LO 3.4
1. What is an objects clause?
2. Explain how an objects clause can help (a) potential shareholders, and (b) potential creditors.

3. What is meant by ‘ultra vires’?

Constitution as contract

LO 3.5 Explain who is bound by a company constitution

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• Section 140 – A company’s Constitution and the replaceable rules that apply to it have effect as a contract between:

o thecompanyandeachmember
o thecompanyandeachdirectorandsecretary o amemberandeachothermember

Who is bound by the company’s rules?

• The contract between the company and each member:
o Thecompanycansuethemembertocomplywiththecompanyconstitution.
o Themembercansuethecompanytocomplywiththecompanyconstitution.
o Thecontractappliesonlytothemember’srightsasamember,nottootherrights. o HickmanVKentorRomneyMarshSheepBreeders1915
o EleyvPositiveGovernmentSecurityLifeAssuranceCo(1875)

Who is bound by the company’s rules?

The contract between the company and each director and company secretary:

The director or company secretary can sue the company to comply with the company
constitution.
The contract applies only to the rules relating to the directors/company secretary.
o CarrierAustralasiaLtdvHunt(1915)
Who is bound by the company’s rules?
The contract between a member and each other member:

A member can sue to enforce another member to comply with the company constitution.
Usually, an enforceable contract between members will arise when there is a pre-emption
clause and a group of shareholders wants to take over others.
o ReCarrattiHoldings(1975) ! Class activity
“Shareholders agreements”
o Referredtoalotinpractice
o IsNOTtheconstitution
o Sowhatisit,whydoyouneeditandwhatdoesitdo? ……………………………………………………………………………………………………………………………………………………..
……………………………………………………………………………………………………………………………………………………..
Revision Question LO 3.5

1. List the three statutory contracts created by the replaceable rules/company constitution.

For each statutory contract, explain how each party can seek to enforce their rights.
For each statutory contract, explain the remedies each party can seek for a breach of their

rights.

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Changing the Constitution

LO 3.6 Explain how a company’s rules can be changed LO 3.6 Changing the rules s136

A company using the replaceable rules can adopt a constitution to exclude the replaceable rules.
A company with a constitution can repeal its constitution to adopt the replaceable rules.
A company can make changes to its constitution by passing a special resolution. – 75% of
votes
Changes to a company constitution must be lodged with ASIC within 14 days.
Changing the rules

• Limits on changing the constitution:
o s140(2)prohibitiononimposingfurtherliabilityonmembers
o s232protectionofminoritymembersfromoppressionbythemajority o FairnessGambottovWCP(1995)

• https://prezi.com/oufqxtikahtl/amending-the-corporate-constitution/#
• Changes that affect the rights of a particular class of shares generally requires the approval of

the affected shareholders

Gambotto rules
• If a change to a company constitution involves taking minority shares, the change must be: – for a proper purpose:

to the benefit of the company, or
to prevent harm to the company

– fair in all circumstances:
• the value exchanged for the shares must be fair the change must not be oppressive to the shareholder

Revision Questions LO 3.6

1.
2.
members?
3. What two conditions must be met if a company wishes to change its constitution in a way that involves the compulsory acquisition of minority shares?

How can a company constitution be changed?
In what circumstances will changes to a company constitution not be binding on all

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Company promoters

LO 4.1 Identify who would be classified as a promoter

• Promoters are the individuals responsible for the formation of a company.
o strictrulesoverthepowersanddutiesofpromoters,includingtheobligationtomake

appropriate disclosures. o Activepromoters:

• Anyone actively involved in the formation of a company
o Except:professionalsactingunderinstructionintheirprofessionalcapacity(e.g.

solicitors, accountants). • Passive promoters:

o Thosenotactivelyinvolvedintheformationofacompany,butwhostandtogainsome advantage from its formation.

Promoters: Case law

Twycross v Grant (1877)
Emma Silver Mining Co V Lewis & Son (1879)
Aequitas Ltd v Sparad No 100 Ltd (2001)
Tracy v Mandalay Pty Ltd (1953)
Gluckstein v Barnes [1900] AC 240
Revision Questions LO 4.1
1. Who is a promoter?
2. Distinguish between active and passive promoters.
3. Why does the law regulate the activities of promoters?
LO 4.2 Outline the duties and potential liabilities of promoters
Duties and liabilities of promoters

Established in common law that promoters owe fiduciary duties to the company: o actingoodfaith
o inthebestinterestsofthecompany
o avoidconflictsofinterests.
Conflict of interest most often arises when a promoter wants to sell an asset to the company
they are forming.
Duties and liabilities of promoters

Avoiding liability
To avoid liability, promoters can:
o Makefullandfrankdisclosure:
o informthecompanyoftheirinterest
o informthecompanyoftheprofittheystandtomake
o obtainthecompany’sconsent(fromanindependentboardofdirectorsorshareholders’

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resolution).

Revision Questions LO 4.2

Describe the fiduciary duty owed by promoters.
Describe the two key ways promoters can avoid liability.
What are the three steps a promoter will need to take if they want to enter into a

contract with the company they are forming?

LO 4.3 Understand the potential remedies available against promoters who are in breach of their duties.

Remedies

If a promoter has breached their duties, a variety of remedies may be available.
recovery of secret profit
rescission of contract
damages
constructive trust.
Revision Questions LO 4.3
1. List the steps involved in determining whether a promoter has breached their fiduciary duty.
1. What is meant by rescission of contract?
2. Under what circumstance may a court order damages for breach of promoter’s
fiduciary duty?
Pre-registration contracts
LO 4.4 Identify a pre-registration contract, when it is enforceable against a
company and the potential liabilities of parties who enter into such contracts The problem?
o Atcommonlaw,apre-registrationcontractisvoid.
o BlackvSmallwood(1966)117CLR52

• The solution? S131-133 Explained at Figure 4.4

Pre-registration contract:

entered into by the promoter with the intention that the company to be incorporated will be liable for the contract under common law, pre-registration contracts were not binding

Section 131(1) – ratification

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A pre-registration contract is binding if:
a person enters into a contract on behalf of a company before it is registered
the company is later registered
the company ratifies the contract within an agreed or reasonable period of time.
Section 131(2) — promoter liability

The promoter is liable to pay damages to the other party if:
the company is never formed, or
the company fails to ratify the contract.
The damages equal the amount the company would have been liable for had it failed to perform under the contract.
Section 131(3) — recovering against the company

If the company is formed, but fails to ratify a pre-registration contract:
a proceeding can be brought against the promoter
the court has broad powers
Court can order the company to pay for the damages for which the promoter is liable
Section 131(4) — promoter pays damages for which the company is liable

If the company ratifies the contract, but fails to perform
the court can order the promoter to pay some or all of the damages for which the company is liable.
Revision Questions LO 4.4
1. What is a pre-registration contract?
2. Describe the three criteria that must be satisfied if a pre-registration contract is to be binding by and against the company?.

3. Under what circumstance may a promoter be liable in relation to a pre-registration contract?

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UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Tutorial 2 Workbook: Company rules and constitution

Reading: CLIA Ch 2, 3 & 4

Start by revising the law you need: Law:

•

Proprietary companies are not permitted to see s113:

1…………………………………………………………………………………………………………………………………….. ……………………………………………………………………………………………………………………………………. 2……………………………………………………………………………………………………………………………………. Public company means ………………………………………………………………………………………………………………………………… See: s…………………………………………………………………………………………………………………………………..

A company is a separate legal entity. A company comes into existence as a body corporate when …………………………………………………………………………………………………………………….. :see s119 A company has the powers of a ………………………………………………………………………………………………………... see: s124

A company’s constitution will govern its internal proceedings. The definition of constitution is: ………………………………………………………………………………………………………... see: s___________________.

A company’s constitution may be enforced contractually via section __________________;

1.Under the old doctrine of ………………………………………………………………………………………………………..., if a company acted contrary to its objects clause in its constitution then the act was ……………………………………………

………………………………………………………..v………………………………………………………………………………

•

• s125 provides that: 12

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A company may place a restriction on its powers in its constitution; BUT
Acts/conduct in breach will ………………………………………………………………………………………………………...

Question 1 (revision of LO 2.5)

Back in 2014, StreamCo entered the SVOD market, with what we now know as “Stan”:

“Nine Entertainment Co. and Fairfax Media have formed a joint venture to launch a subscription video on demand service that will take on Foxtel and American giant Netflix.

As revealed by Fairfax Media, StreamCo will be owned 50:50 by Nine and Fairfax which have agreed to commit up to $50 million each to the venture over a multi-year period, including expenditure on marketing and advertising.”

http://www.smh.com.au/business/media-and-marketing/nine-fairfax-launch-streamco-to-take-on- foxtel-netflix-20140827-108x7c.html.

Question: Are these companies related?

Q1 Solution

Issue: When are companies related?
What are the tests for holding/subsidiary companies? Law: set out the relevant definitions:

S50:

…………………………………………………………………………………………………………………………………………………….

The test for a subsidiary company is s46:

1…………………………………………………………………………………………………………………………………….

………………………………………………………………………………………………………………………………………

2……………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………..

3……………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………… 4……………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………

Application: Read the facts of the case study and make a recommendation. Conclusion: Based on your recommendation, state what you think the likely answer.

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UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Question 2 LO 3.1-3.4

Note that the constitution of Retrofit Pty Ltd is in the Appendix to the textbook. It currently states:

Imagine that it stated that its object “selling vintage objects” but later wants to run a catering business? What is the legal effect of that limitation?

Q2 Solution

Issues:
1. What legal power and capacity does a company have?
2. What is the effect of a company’s constitution on its legal powers? 3. What does ultra vires mean?

Question 3

LO 3.5

Julian sees Retrofit as his enterprise and would like the company to adopt a constitution that includes a provision guaranteeing his position as CEO of Retrofit Pty Ltd.

Would Julian be able to enforce such a provision against the company?

Q3 Solution

Issue: Whocanenforcetheconstitution?
Law: Read s140 carefully – consider the interpretation of case law. Application: Set out Julian’s relationship to the company Conclusion: make a recommendation.

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UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Tutorial tips & tricks

Topic 2 problem question: LO 2.7, 4.1-4.4

Baumfield Ltd was registered with Richard, Ellie and Tori as its directors. Baumfield Ltd has issued 5 shares with the following persons owing one each: Richard, Torie, Robert, Birgette and Alex. Baumfield Ltd operated a business that designed and sold websites.

Would the company be bound by these contracts? Would the shareholders and/or directors be personally liable on these contracts? Explain.

Baumfield Ltd borrowed $100,000 from Big Bank on an unsecured basis. Richard personally guaranteed the repayment of the loan.
Baumfield Ltd purchased a block of land from Birgette for $500,000 to build a new warehouse, signing a mortgage over the property to secure to the $500,000 purchase price.
Baumfield Ltd purchased several computers from Acme Computers Pty Ltd. However, Richard and Tori were so keen to get the business up and running, they purchased the equipment in the company’s name – which had not yet been issued with a certificate of registration from ASIC. One third of the purchase price was paid on delivery and the balance payable in equal monthly instalments.

Facts: Identify in each case, there is a contract; whether or not this gives rise to liability to the company or its participants will depend on identifying who the parties to the contracts are. Issues: When are the directors and shareholders of a company liable for the company’s contracts?

Law: The general rule, (we learned last topic) Salomon v Salomon & Co Ltd case held that the directors and shareholders of a company have separate legal identities to the company itself. The company comes into existence when ASIC issues the certificate of registration: s119. The company has the legal capacity to enter into contracts of an individual: s124.

Exceptions – However, (we learned last topic) there are some exceptions where the courts will lift the corp veil and hold the company’s participants (directors and shareholders) liable for the company’s debts. In this topic, we learn that there are some other exceptions to take into account, in determining whether a company has legal capacity and liability for its debts.

Look at the 3 scenarios:

a. There are 2 contracts here: the Bank loan and Richard’s guarantee. (If you do not know the legal and economic effect of a transaction referred to as a guarantee – then research it).
Law: The concept of limited liability means that members’ liability to contribute to the company’s debts is limited, depending on the type of company.

S 9: defines a company limited by shares as a company formed on the basis that the liability of the members is limited to the amount of any unpaid amount on the shares held by them.

However, the ability of creditors to secure corporate debts through personal guarantees provided by the company’s directors or members is often overlooked in discussions about limited liability. Effectively, the company’s directors and members voluntarily give up the benefits of limited liability. This is not regulated in the Act.

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UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Application: as Richard has signed a personal guarantee for the company’s debt to the bank, this will be binding on Richard as it is not regulated by the Act.

b. It is crucial to note that the contract is with a participant (member). Although we learned last topic that a company can make contracts with its participants (Salomon v Salomon & Co Ltd; Lee v Lee’s Air Farming Ltd), this topic we learn that there is a special category of participant referred to as “promoter”.

Law: promoter: actively and passively associated with the company’s formation: Tracy v Mandalay Ltd.
Promoters owe fiduciary duties to the company and require the promoter to act in good faith and avoid situations in which their personal interests and duties to the company do conflict or may conflict.

To disclose their interests in any pre-incorporation contract to an independent board of directors (Erlanger v New Sombrero Phosphate Co); and
To disclose all profits made because of their position as promoter to an independent board of directors (Gluckstein v Barnes).

Application: Is Birgette a promoter? We know that she is a first shareholder, and Tracy v Mandaly refers to anyone who knows about the plan to register a company and gains from it. If she is a promoter, then as per Gluckstein v Barnes, she had a duty to disclose to the company the gain from selling her personal property to the company. Potentially, such a contract can be rescinded.

c. Note the contract was made by a company who does not exist yet. A company cannot have contractual capacity of it doesn’t exist?

Law: Under s 131(1), a pre-registration contract is binding if the company is registered and the contract is ratified within the time agreed to by the contracting parties or if no time is agreed, then a reasonable time after the contract is entered into. (Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd ; Keswick Developments Pty Ltd v Kevroy Pty Ltd).

“S131(2) The person is liable to pay damages to each other party to the pre-registration contract if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it:
(a) within the time agreed to by the parties to the contract; or

(b)if there is no agreed time—within a reasonable time after the contract is entered into.
The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the party if the company had ratified the contract and then did not perform it at all.”

Application: Under s 131(2) if the company is not bound, then the promoter (Richard and Tori) become personally liable to Acme. Note that s131(2) refers to “the person” as the person who entered into the contract, on behalf of, or for the benefit of, a company before it is registered. The facts are vague as to Ellie’s role in the promotion of the company, so at this stage we can’t conclude that she is a person who entered into the contract.

Lecture topic 3: Overview o Disruptive example

o Members as owners o Company meetings o Dividends

LO 6.1 LO 6.2 LO 6.3

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! Disruptive example-shareholder activism
Woolworths Ltd v Get Up Ltd (2012)
• http://www.abc.net.au/news/2012-07-06/getup-loses-woolworths-pokies-case/4115514

o MinorityshareholderssoughttoforceanEGMsoaresolutioncouldbeputto shareholders limiting the maximum bet on pokies to $1

o Woolworthsisnowthelargestsingleownerofpokermachines: o cost$550,000toholdtheEGM
o Ultimatelyonly2.47%votedinfavour.

Whitehaven Coal

https://www.abc.net.au/news/2020-08-13/shareholder-fossil-fuel-resolution-whitehaven- coal/12546830

o Thinkaboutit,isit“fair”foroneshareholdertoimposetheirviewonthecompany’s operations?

Members as owners

LO 6.1 Outline the rules, procedures and rights relating to company

membership

The members of a company are its owners or custodians => EQUITY.
In a company limited by shares, members are shareholders.
A share is personal property “chose in action”: s1070A
A set of legal rights Figure 6.1
More limited than conventional ownership rights
Members are not entitled to interfere in management decisions.
Becoming a member: Any individual or entity can become a member:

• Registration: s 120

Lecture topic 3: Membership & meetings

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Applying for & being allotted new shares (module 10)
Transfer from another member: s 1071A, B
Exercising options or warrants over shares
Transmission upon the death, bankruptcy of incapacity of an existing member: s 1072A, B
Register of members figure 6.2

Significance:
The register is proof of matters shown on the register: s 176
A company must make its register available for inspection by anyone (but pay a fee): s 173(1)
There are limitation on what the register can be used for: s 177
IMF Ltd v Sons of Gwalia (2005)
Correction of the register
Remedy to correct register (s 175):
o amountunpaidonshares
o amountofsharesowned
o whethershareshavebeentransferred o CarewReidvThePublicTrustee(1996)
See figure 6.2
o Dateonwhicheveryallotmentofsharestakesplace o Thenumberofsharesineachallotment;
o Thesharesheldbyeachmember;
o Theclassofshares;
o Thesharenumbersorcertificatenumbers(ifany); o Theamountpaidontheshares;
o Whetherthesharesarefullypaidornot;and
o Anyamountsunpaidontheshares.
Share certificate

A share certificate is prima facie evidence of title to a share s1070C
Shows:
o thenameofthecompany
o theclassofshares
o theamountunpaidontheshares.
A company is liable at common law for any loss arising from an error in a share certificate.
Transferring shares

Shares are relatively easily transferred from a shareholder to another person.
The company constitution of an unlisted company may place restrictions on share transfers.
Shares in ASX-listed companies are free from restrictions on share transfers.
Figure 6.5 outlines the 7 steps in transferring shares in an unlisted company.
! Class activity – listed company share registers
If a company is listed is it mandatory to sell your shares on the public market?
See ASIC Information sheet 191
https://www.moneysmart.gov.au/investing/shares/how-to-buy-and-sell-shares
Revision Questions LO 6.1

1. What is a chose in action?

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UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

List the ways in which a person can become a member of a company.
Describe the role of the register of members.

Meetings

LO 6.1 Outline the rules and procedures relating to company meetings Meetings

Members participate & vote in General meetings figure 6.7
Annual General Meeting (AGM)
General Meeting (GM)
Class Meetings
Adjourned Meetings
Directors participate & vote in board meetings
also resolutions without meetings
New: virtual meetings
Corporations Amendment (Meetings and Documents) Act 2022
Members and directors

The Corporations Act gives directors broad powers to manage the company.
Members have very limited ability to interfere with the management of the company.
Members make decision through general Meetings
o appointmentorremovalofdirectors o purchasingofassets
o approvingsharebuybacks
o approvingdirectors’remuneration.
Members make decisions by passing resolutions.
Annual general meeting

What companies have an AGM?
Public companies must hold an AGM within 18 month of registration and then annually: s 250N
What is the business of an AGM? (s 250R)
o Considertheannualreport,directors’reportandauditor’sreport o Electdirectors
o Appointanauditor
o Fixtheauditor’sremuneration
Overall why do we have AGM?

What is the aim of an AGM?
Shareholders must be given the chance to ask questions
o theBoard&auditor(s250S,T),
o listedcompany-auditor(s250PA),
o listedcompany-remunerationreports300A(s250SA)
Board spill s250R, U, V, W, X
o ‘2-strikes and re-election resolution’
o (25%+voteof‘no’toreportfor2consecutiveyears)
Example: Westfarmers AGM Notice General meetings

• Other members’ meetings are called general meetings 3

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To deal with unexpected business
to appoint directors to fill unexpected vacancies
to deal with an issue that — in the company constitution — requires a shareholders’ resolution
Resolutions without meetings

• Members can pass a resolution without a meeting:
o Ptyltd:circulatingtheresolutionandeachmembersigningastatementinfavourofit

(s249A(1)).
o Ifcompanyhasonly1member,byrecordingtheresolutionandsigningit(s249B(1).

Class meetings

Class meeting s246B:
convened by a class of shareholders
to exercise rights that are tied to a particular class of shares
to amend the constitution in regards to the rights of a particular class of shares
Special resolution (75%) of the class shareholders
Meeting procedure Part 2G.2

Who can call meetings? (s249C-G) Figure 6.10
How to call meetings (s249H-Q) Figure 6.11
Meetings procedure – at the meeting (s249N-W) Figure 6.13
Proxies and corporate representatives (s249X-250D)
Meetings procedure – Voting (s250E-M)
Minutes (s251A-B)
Irregularities (s1322(2))
Calling a members’ meeting

Members meetings may be called by:
Director (ss 249C (RR), 249CA)
Members (ss 249D, 249E, 249F)
Court (s 249G)
Totex-Adon Pty Ltd and the Companies Act [1980]
See figure 6.10
Calling a members’ meeting

A members’ meeting must only be held for a proper purpose
s249Q
o Automaticself-CleansingCovCuninghame[1906]
o NRMAvParker(1986)
Notice; how members, directors and the company’s auditor are to be given notice of an
upcoming meeting s249J, K
All notices can be sent as a document or electronically s110D
Meetings have an agenda
Meeting agenda

Who calls the meeting – also controls the agenda
But members always have the rights to be heard
s249N members with 5% or 100 members can give notice of a resolution
Can put a statement with it – but not too long or defamatory: s249P
s250PA a member of a listed company can submit questions to board or auditor prior to the

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meeting

At the meeting

Quorum: s 249T(1): Need 2 shareholders
Chair: s 249U; s 250X
Proxies
RR 249X(1): mandatory for public coy
Corporate representatives: s 250D(1) May appoint representative
s249R meeting can be held at:
(a) at one or more physical venues; or
(b) at one or more physical venues and using virtual meeting technology; (hybrid)
(c) using virtual meeting technology only, if this is permitted by the company’s constitution
Virtual and hybrid meetings NEW

• Section 249S where technology is used to hold a meeting,

Members must have a reasonable opportunity to participate without being physically
present
Reasonable opportunity to exercise a right to speak,
Right to ask questions verbally, orally rather than only in writing
Opportunity to vote in real time (by poll s250J)
Section 249L notice to specify how to join the meeting by technology
Members’ resolutions

Ordinary resolution:
passed by the majority of members present and voting
Special resolution s9:
o passedbyatleast75%ofthevotescastbymembersentitledtovote
Other resolutions:
The constitution can specify rules for particular types of decisions Voting at members’ meetings

Also check the constitution
Voting by show of hands:
Each shareholder has one vote (s 250E, s250J)
Voting by poll:
o Eachshareholderhasonevotepershareheld(s250E)
o Apollmaybedemandedbyatleast5shareholdersentitledtovote,shareholderswith
at least 5% of the votes or the chair.
o New,mustbevotingbypollforvirtualmeetings Proxies

A proxy is the right given by a member to a third party to represent that member at a general meeting.
Commonly, in listed companies, shareholders will appoint the chair of the meeting as proxy.
enable members to provide proxy documents by electronic means: s 250B, BA(1). Minutes

S 251A(1): A record of proceedings and resolutions of meetings of shareholders and
directors(=‘Minutes’)
o mustbekept
o Mustberecordedwithin1monthofmeeting
S 253S minutes may now be kept electronically and signed by the chair electronically.
Minutes are very important!

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UNIT CO ORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

• Eg ASIC v Macdonald (2009) (James Hardie case) Irregularities

s 1322(2): proceedings are not invalidated due to irregularities unless a Court concludes the
irregularity causes ‘substantial injustice’
Re Compaction Systems [1976].
Revision Questions LO 6.2
1. How do company members exercise their decision-making powers?
2. Who calls a members’ meeting and in what circumstances?
3. What is the difference between a show of hands and a poll at a members meeting?
Dividends
LO 6.3 Outline the rules and procedures relating to dividends.
Dividends

As we have now seen, 3 main types of members’ rights: o Distributionrights
o Participationrights
o Informationrights
A dividend relates to distribution rights:
a portion of a company’s assets that is returned to shareholders
s 124(1)(d) gives a company the power to distribute its property to shareholders
represents a return on the shareholder’s investment in the company
Dividends: solvency tests

• Dividends can only be paid if the company passes the balance sheet solvency test in s 254T of the Corporations Act:

! What are the 3 tests …………………………………………………………………………………………………………………………………………………….

……………………………………………………………………………………………………………………………………………………. ……………………………………………………………………………………………………………………………………………………. …………………………………………………………………………………………………………………………………………………….

Distribution rights?

Members have no right to demand to be paid a dividend. It is at the directors’ discretion.
Consider s 254T The 3 tests; http://www.allens.com.au/pubs/cg/focgjun10.htm;
s 254U; s 254V; s 254W Dividends

Dividends paid in contravention of s 254T can expose directors to personal liability and penalties.
“Improper” payment consequences
6

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Illegitimate return of capital s256D
Insolvent trading s588G
Oppression by directors s232
o SanfordCouriercase
Breach of directors duties
Main types of dividends

• Cash – shareholders get to share in the ‘profitability’ of the business though a cash distribution o Contentiousifshareholdershaveexpectations(Ch11):
o Sanford Courier case
o BoydvFeeney

Stock (bonus) – the distribution is in the form of shares in the company o Contentiousifitdilutesotherclasses(Ch5)
o MillsvMills
Property – eg shares the company owns in other companies: contentious, but permissible
o ContentiousifcompanybreachesSLEprinciple(Ch1&2)
o BlackburnvIndustrialEquityLtddirectorswronglypaiddividendstoholdingcompany shareholders from the subsidiaries profit
Activity
What is the difference between the ‘old’ dividend rule and the current rule?
Revision Questions LO 6.3
1. What is a dividend?
2. What principles determine directors’ decision to pay dividends?
3. What entitlement do members have to dividends?
Recap…

Once registered, what do you get?
Statutory rights
wind up the company (s 461)
enforce compliance with Corporations Act (s 1324)
call members’ meeting (s 249D)
notice of meetings (s249L) attend and participate at meetings (s253Q) and vote (s250J)
copy of company’s annual financial report (s 314)
inspect the company’s registers free of charge (s 173(2))

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approve executive remuneration (s 200B) or related party benefits (Ch 2E)
remove directors of public companies (s 203D)
oppression action (s 232)
statutory derivative action (ss 236, 237)
Tutorial 3 Workbook: Membership
Reading: CLIA Ch 6
The usual issues in these types of problems regarding meetings are going to revolve around:

What decisions do members in general meetings make?
Who calls a general meeting?
What are the requirements for notice at a general meeting?
What are the procedures at a general meeting?
What is a virtual meeting?
Who controls a general meeting?
Who votes at a general meeting?
What happens if there is irregularity in meeting procedure?
What rights to dividends do members have?
Start by revising the law you need.
Question 1

(LO 6.1)

Julian has made Bev a shareholder in Retrofit Pty Ltd. He has been talking to his friend Mary and she has suggested he should have included a provision in the company constitution that prevents shareholders from selling their shares to a competitor.

Julian is not too worried because the other shareholder is his mother, but he seeks your advice.

Explain to Julian whether such a provision is advisable.
Regardless of whether you think such a provision is a good idea, explain to Julian how the
company would need to go about amending the constitution to include such a provision. (Hint: Review the content in Ch 3 on changing a company’s constitution.)
Q1 Solution
Issue:

How are shares transferred?
How is a company constitution amended?

Law:
S1070A: A share:

(a) …………………………………………………………………………………………………………………….. ……. and

(b) …………………………………………………………………………………………………………………….

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S136 a constitution can be modified by………………………………………………………………………………………………………….

Application: explain to Julian the wording of the new clause and the procedure for inserting it in the constitution.

Conclusion: You are required to make a recommendation – do you think the amendment is advisable.

Question 2 (LO 6.2)

Bill and Melinda (along with Ravi, based in the US) are the directors of a listed company called TechTalk Australia Ltd, which runs a number of schools teaching students programmer skills. Advise on the following:

(a) TechTalk Australia Ltd has not called an AGM this year. Does TechTalk Australia Ltd need to hold regular meetings?
(b) BillandMelindahavedecidedtoholdashareholders’meetingforTechTalkAustraliaLtd. They want all shareholders to attend and be enthused about the company’s operations. However, they are concerned as to the practicalities, since the shareholders are located all over Australia. The obvious solution is to hold the meeting using Zoom but they are concerned whether the definition of “meeting” means face-to-face with the shareholders. Advise.
(c) Draft a notice of the meeting.
(d) Ellie,ashareholder,wantstoattendthemeetingbutunfortunately,shewillbesittingan
exam on the day of the meeting. Ellie’s friend, Pelma, is also a shareholder of TechTalk Australia Ltd and said she would be happy to vote on Ellie’s behalf at the meeting. Is this feasible? Advise.

Question 3 (LO 6.2, 6.3)

Shakoor, Ashesha and Rebecca are the directors of Erudite Pty Ltd. The shareholders of Erudite Pty Ltd are Shakoor (200 shares), Rebecca (100 shares) and Ashesha (100 shares); and a family member of each holds 100 shares each. Ashesha is concerned as to the lack of a dividend:

If the Board cannot agree on dividends, can Ashesha call a shareholders’ meeting to  pass a resolution forcing the company to pay dividends?

Q3 Solution

Issue: What rights to dividends do members have? Law:

• Definition of dividend: …………………………………………………………………………………………………………………………………………………….

• General rule as to dividends: s254T ……………………………………………………………………………………………………..

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……………………………………………………………………………………………………………………………………………….

• s254U the ……………………………………………………………………………………………………may determine dividends.

Tutorial tips & tricks

Topic 3 problem question: LO 6.2 & 3.6

Dom was a shareholder in Tokyo Drift Pty Ltd, a company that imported racing car parts from Japan. Dom also carried on a similar business in his own right. He was persuaded to invest in the company by another shareholder, his good friend Letty, because of his expertise. Letty thought having Dom as an investor would send a good signal to the market about the quality of the company and its business.

After Dom joined, there was a proposal put at a general meeting to insert a new clause providing that any member who carries on business in competition with the company must sell their shares at a fair price to persons nominated by the directors.

Dom objects on the basis that the new rule will unfairly discriminate against him. He feels that to impose the rule now is unfair and he points out that his business expertise in the area has contributed to the company’s success.

Advise Dom as to the legitimacy of the resolution.

Facts: The problem looks at the general meeting exercising its power. D is a member, who is complaining about the actions of the majority if they pass a resolution in general meeting, so we are looking at the rights and powers of members to make decisions.
Issues:
Issue 1: What power does the general meeting exercise?
Issue 2: What are the limits on the general meeting’s power?

Law:

Under the separation of powers, need to find a specific power in the constitution or law for general meeting otherwise the general grant of management powers is reserved to the board and the general meeting cannot intervene: NRMA v Parker.

Section 136(2) deals with the repealing or modification of a company’s constitution and provides that this may only be done by special resolution. A special resolution is defined in s 9 to mean that:

at least 75% of votes cast are for the motion; and
a notice was sent to members in accordance with s 249L(c) stating the special resolution proposed.
Notify ASIC of change: s137
Application: advise Dom that under s 136(2), a special resolution is required.
Law: We learned that there are several limits in what the general meeting can do is exercising its power:
- s140(2) altering liabilities of members
- oppression of the minority under s232

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• fairness rule in Gambotto.

In WCP Ltd v Gambotto 99.7% of the shares in WCP were held by subsidiaries of IEL. The company convened a general meeting for the purpose of altering the articles to allow majority s/h (90% or more of the shares) to compulsorily acquire the remaining shares at $1.80 per share [market value $1.36].

The High Court held that the amendment was invalid and formulated the following 2 limb test concerning the expropriation [taking away] of minority shares. For the action to be valid the majority shareholder, and not the minority shareholder, must prove:

it was for a proper purpose; and
it is fair: both process & price.

Application: In Gambotto the Court held that the first limb of proper purpose would be satisfied if a member was competing with the company – as appears to be the case here with Dom. We are told in the first paragraph that Dom carries on a similar business.

The constitution alteration provides that Dom would receive a ‘fair price’. This would appear to satisfy the requirement for fairness.

Conclusion: suggest you revisit this problem in the light of s232 remedies.

• •

•

! Disruptive example: where board ceases to exist?
How does corporate governance deal with this traumatic headline?
“A Congolese airline plane crash in west Africa killed the entire board of the Perth-based mining company Sundance Resources”
Warning – potentially disturbing content http://www.abc.net.au/news/2010-07-03/sundance-vows-to-move-on-after-jungle- crash/890242

o o o o o o

Disruptive example
Meaning of corporate governance Definition of officers Decision-making
Appointing officers
Directors and officers duties

LO 7.1 LO 7.2 LO 7.3 LO 7.4 LO 8.1

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Lecture topic 4: Corporate governance

Lecture topic 4: Overview

Meaning of corporate governance

LO 7.1 Outline the theories of corporate governance and list the key

principles of good corporate governance ASX Corporate Governance Principles

See www.asx.com.au
8 core principles
o Laysolidfoundationsformanagementandoversight. o Structuretheboardtoaddvalue.
o Actethicallyandresponsibly.
o Safeguardintegrityincorporatereporting.
o Maketimelyandbalanceddisclosure. o Respecttherightsofsecurityholders. o Recogniseandmanagerisk.
o Remuneratefairlyandresponsibly.

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Separation of powers

• Doctrine of separation of powers:
o Themembersandthemanagershavedistinctdecision-makingpowerandneithercan

override the decision-making power of the other.
o Membersmakedecisionsabouttheappointmentandremovalofdirectors,andchanges

to the company’s constitution.
o Directorsmanagethecompany’sbusinessaffairs.

Agency theory

Agency theory recognises that members’ interests and managers’ interests do not perfectly align.
Agency costs:

o Membersmusttakestepstoalignmembers’interestswiththeirown(e.g.profit-based

bonuses).
o Directorsmustdemonstratetheyareactingintheinterestsofthemembers(e.g.act

transparently).

Revision Questions LO 7.1

1. What are the key differences between agency theory and stakeholder theory?

What is the doctrine of separation of powers?
Why do agency costs arise?

Directors and officers

LO 7.2 Explain who is considered an officer of the company S9 definition of officer – 6 limbs

o Apersonwhomakesorparticipatesindecisionsthatcanhaveasubstantialeffectonthe business:

o directors
o companysecretary
o otherseniormanagers
o incertaincircumstances—areceiver,administratororliquidator,restructuringpractitioner. o ASICvAdler(2003)

S9 definition of director – 4 limbs

o Formallyappointeddirector
o Alternatedirector
o formallyappointedtostandinforanotherdirector
o s201K(1)(RR):directorscanappointalternates.
o Defactodirector
o notvalidlyappointedbutactsinthepositionanyway
o Shadowdirector
o notappointed,buthasinfluenceoverthedirectors—theydonotactwithouttheconsent

and instruction of the shadow director o DFCTvAustin(1998);ASICvKing(2020) o StandardCharteredBankvAntico

Directors

• person elected or appointed to the board of directors to carry on the company’s business in the interests of the company as a whole.

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Proprietary company must have at least one director — s 201A(1). o Changed2018forCSFptyltd:musthave2directors.
Public company must have at least three directors — s 201A(2). Chair of directors

s248E (RR): Directors may appoint a Chair
Role of Chair is very important in corporate governance
o Selectsthematters,documentstobebroughttoBoardattention o FormulatesBoardpolicy
o Promotesthepositionofthecompany
S251A(2): Minutes must be signed by Chair at next meeting
S248G(2): Chair has a casting vote
ASIC v Rich (2011)
Managing directors (MD)(/CEO)

S201J: Directors may appoint a MD (RR)
S198C: MD may be conferred any of the usual powers of directorship.
Company Secretary

• Company secretary:
o Responsibleforaspectsofthenormalday-to-dayaffairsandadministrationofthe

company
§ Panorama Developments (Guiford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] § ASIC v Shafron (2012) (James Hardie litigation)

o Publiccompanymusthaveatleastonecompanysecretary:s204A
o Proprietarycompanydoesnotneedacompanysecretary,butusuallyoneofthe

directors will act in the role
o GovernanceInstituteAustraliaistheprofessionalbodywhorepresentscompany

secretaries
§ http://www.governanceinstitute.com.au/

Types of directors See figure 7.9

Senior managers

Senior managers:
An officer who is not a director or company secretary, but makes or participates in decisions that
can have a substantial effect on the business.
Other Types of Directors

Alternate directors
s201K(1): directors can appoint alternates. (RR)
Nominee directors
Revision Questions LO 7.2
1. Briefly describe each of the four types of director.
2. What is the role of the company secretary?
3. What is a senior manager?

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Decision-making- roles of directors and members

LO 7.3 Describe the relative roles and powers of the company’s

directors and members

Roles of Directors and Members

Members (owners) cannot interfere in the decisions made by directors.
Sources of conflict between members and directors:
o theagencyproblem—members’anddirectors’interestsarenotperfectlyaligned. o differencesofopinionastowhatactionsareinthebestinterestsofthecompany.
Decision-making and company management

How does the law allocate that decision-making power and regulate its exercise?
“Organic principle”
Power to make decisions is divided between:
the members in general meeting
the board of directors
Division depends on the constitution and general principles of company law
“organic” theory

Organic principle – Board has primary decision making power s 198A (RR): A company’s business is to be managed by/under the direction of, directors
Separation of powers
Board meetings

To be a formal board meeting:
o Reasonablenoticemustbegiven:s248C(RR).
o thenoticemustincludeanagenda.
o mustbedeclaredtobeaformalboardmeeting.
o musthaveaquorumpresent:s248F(RR)
o quorumis2directorsunlessthedirectorsdetermineotherwise.
o Meetingscanuseanytechnologyconsentedtobydirectors:s248D
A resolution requires more than 50 per cent of the vote in order to be passed: s 248G (RR).
Circulating resolutions: directors can pass a resolution without a meeting if circulate a resolution
and all directors sign: s 248A.
Minutes of Board Meetings

s 251A(1)(b): Proceedings, resolutions of directors’ meetings must be recorded in co’s minute book (1 mth)
Minute book also records circulating, other resolutions without a meeting
Chair must sign the minutes within “reasonable time” (s251A(6))
ASIC v Macdonald: evidentiary value? (15/2->7/4)
Directors’ access to information

Statutory and common law rights to receive information
Right to access “financial records” (s290(1))
Common law right to “information” is broader
Right to inspect company’s books, in relation to legal proceedings (s198F)

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! Class activity: constraints on boards?

We see that under the organic principle, boards have wide powers over the companies
operations
In what circumstances would you prefer to see a board not act – that is – there must be some
“natural” constraint we would want to impose?
Video – the squeaky-clean principle
………………………………………………………………………………………………………….
Members’ powers

Members cannot instruct the board of directors.
Members can, in accordance with the law & company’s constitution:
Appoint, remove and replace directors. Appoint, remove and replace the auditor. Vote to change the rules/constitution.
limit the directors’ powers:
vest specific powers in the members at a general meeting change name, company type etc
Apply to wind up the company due to oppression.
Vote to wind up the company voluntarily.
Approve certain transactions as required by law eg issue preference shares/share buy-backs Sell their shares and exit the company.
Activity
What options are available to members who disagree with their directors’ management decisions? Summarising above:

Members always have the power to vote to remove directors, and replace them with new
directors.
vote in changes to the rules.
Cease membership e.g. sell shares
If management actions amount to breach of duties or oppressive conduct, then members can
approach the court for a remedy
Members can vote to wind up the company
Revision Questions LO 7.3
1. What role do directors fulfil in a company?
2. How do directors exercise their powers?
3. What options are available to members who disagree with their directors’ management
  decisions?
Appointing officers
LO 7.4 Outline how directors are appointed, remunerated and
removed
Appointment of directors

• Members in general meeting: s201G 5

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o replaceablerulesorconstitution

“Casual” vacancy s201H: directors
o proprietarycompany,confirmedbymembersin2mths.
o publiccompanyconfirmedbymembersatnextAGM.
s205B(1): co must notify ASIC of any new directors’ and secretaries’ details in 28 days. Directors – recap
Director identification number s1272A

New 2021 -> The Treasury Laws Amendment (Combatting Illegal Phoenixing) Act (2020)
From 5 April 2022, intending new directors must apply before being appointed
Criminal offence if fail to apply, or to supply false ID
What is the problem being addressed by this law?
…………………………………………………………………………………………………………. Appointment of directors
Who can be appointed?

Who can’t be appointed?
s201B(1): Persons under age 18
s201B(1): Companies
s206A(1): disqualified persons
o s201B(2):ifthepersonisdisqualified,canonlybeappointedasdirectorwithleave granted by ASIC or court.
Automatic disqualification
- s206B(1): criminal offences regarding decisions affecting corporations: o s206B(2):periodofdisqualification?
  o Jailtime?
- s206B(3): bankrupt person
  ASIC may apply to court to disqualify
- s206C(1): civil penalty breach under s1317E
  o Courtdeterminesdisqualificationperiod
- s206D(1): officer of 2+ failed companies in last 7 years and management was (partly) responsible for the failure.
  o Courtdeterminesperiod,upto20years
- s206E(1): officer in 2+ breaches of the Act
  o Courtdeterminesdisqualificationperiod
- s206F(1): ASIC itself may disqualify for up to 5 years if in last 7 years:
  o Thepersonwasanofficerof2ormorecos;and
  o Whiletheywereanofficer,orw/in12monthsafter,
  § the cos were wound up and
  § a liquidator lodged a s533(1) report (co cannot pay its unsecured creditors more than 50c in the dollar)

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ASIC v Vizard (2005) 145 FCR 57

Businessman and celebrity on board of Telstra
Found out information in role as director of Telstra about investment in 3 software companies
Used information to own benefit by buying shares through an arrangement with his accountant and payment through a family trust
Breach of duty as a director
! Class activity
ASIC v Vizard (2005) 145 FCR 57

• Admitted his breaches
o civilpenaltyfineof$390,000

o Disqualifiedfrombeingadirector for 10 years

<Watch Library media clip in QUT Readings>
Did he receive ‘punishment’ beyond what directors usually receive?
………………………………………………………………………………………………………….
Remuneration of directors Vacation of office
- A director may vacate their position:
- Voluntarily: notice of their resignation
- Condition in constitution
  o viatherotationpolicyofpubliccompanies,wheredirectorsstanddownandoffer themselves for reappointment every few years.
  Removal of directors

• The power of members to remove directors is one of the main ways members can influence the overall management direction of the company.

o Publiccoy–s203D
Revision Questions LO 7.4

1. When is a director automatically disqualified from office?

List the different types of remuneration a director may receive.
How can a directors be removed from office?

Directors’ & officers duties – an introduction

LO 8.1 Outline the duties and obligations of directors and officers

o Framework for D&Os duties
o Who owes D&Os duties?
o Who are D&Os duties owed to? o Overview of fiduciary duties

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o Comparison with statutory duties

o Remedies/consequences Who owes duties?

• At common law, directors and managers are in a fiduciary relationship with the company: o HospitalProductsvUSSurgicalCorp(1984)
o GreenvBestobellIndustriesLtd(1982)

• Statute
o ss180-184:Directors&‘officers’s9 o s182&s183D&O&employees’

Directors’ & Officers’ duties see Figure 8.2

Consequences of breach of duty

ASIC will take action against an officer in breach of their statutory duties if it is deemed of sufficient public interest.
The company, members or other officers can use the common law to take legal action in response to a breach. The action will usually seek damages.
The company can take legal action against an officer if they breach their contract.
Corporations Act

Civil penalty
s1317E: can apply for a declaration of contravention.
Once this is done, THEN can ask for:
o s1317G:pecuniarypenaltyorders(over$1.11Mperbreachforindividuals) o s206C:ASICmayapplyfordisqualification.
o s1317H:canapplyforcompensationforthecompany.
o s1311:makesmostbreachesoftheCorpsActacriminaloffence.
Revision Questions LO 8.1

1. What are the two broad directors’ and officers’ duties under common law and

equity?

List the nine directors’ and officers’ duties that apply under the Corporations Act.
What are the penalty and remedies that apply for breach of directors’ and officers’ duties?

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Tutorial 4 Workbook: Corporate governance

Reading: CLIA Ch 7 & 8

Tutorial tips & tricks

The usual issues in these types of problems are going to revolve around: • Which organ of the company has the power to make a decision? • Who calls a board meeting?
• Who can be appointed a director?

• How are directors removed?
• How are directors disqualified?
• Who is a director of the company?
• Who is an officer of the company?
• Who owes the duties?
• What is the source of directors’ duties?
• What are the consequences of a breach of directors’ duties? • Who enforces a breach of directors’ duties?

Question 1

LO7.2 & 7.4

We know that Julian, the director of Retrofit, is considering future director appointments, as follows:

Bev is planning to take 6 months off for a cruise around the world
Julian considers Tom, who has been managing the office and day to day matters for the
company for several years, to be a key member of the business
Andy, who runs the warehouse, is also a key member, and feels he should be a company
director. However, Bev discovered that Andy was a director of a company that was insolvent four years ago and Andy was fined $12,000 for breaching the Act. Eight years ago he ran a company that became insolvent and he was declared bankrupt. He is no longer a bankrupt.
Julian and Samantha’s daughter Pauline thinks it would be a good idea for her to be a director one day
Julian, as ever, wants to make sure he always has the final say on all management matters. Can Julian appoint any of these people to the board of Retrofit? Should he appoint one of them as
company secretary? How does he go about this?
Issues:

Which organ of the company has the power to make this decision?
Who can be appointed a director? Law:

• S201G:[RR] ________________________________ may appoint _________________ 9

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s201H:[RR] ________________________________ may appoint _________________
s201E: To confirm ________________________________________ by one resolution, the meeting must first resolve to allow voting on the appointments together, and no votes may be cast against this resolution.
s201B: (1) Directors must be at least___________________________ years old
(2) A person disqualified under Pt 2D.6 can only be appointed with _________ consent or
_____________________________________________________.
s201D: the person must ____________________to the appointment.
S204A: a ____________________must have one secretary.
S1272A every officer must apply for a unique
Application Consider the law as to who can be a company director/secretary – apply this to each person to conclude.
Question 2 LO 7.2
Bill and Melinda (along with Ravi, based in the US) are the directors of a company called TechTalk Australia Ltd, which runs a number of schools teaching students programmer skills. Bill and Melinda have not had a board meeting for several months. They received a letter from TechTalk’s overseas holding company MightySoft Inc directing them that all licensed software for the business could only be acquired from one supplier, Macrosoft. The parent company had never issued such a directive before, but Bill and Melinda nevertheless implemented this decision on behalf of TechTalk Australia Ltd. (Ravi did not vote on this resolution).
In these circumstances, could Australian law consider the holding company MightySoft Inc itself to be a “director” of TechTalk Australia Ltd?
Issues: Who is a director?
Law There are 3 limbs to the definition of director:

S9: Director means
(a)____________________________________________

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(b)____________________________________________ (c)____________________________________________________________________
_______________________ v _____________________________________: a ‘shadow director’ does not need to give instructions regarding all board matters, just that the board is accustomed to following their instructions.
Application: Go through each of the requirements of the 3 limbs and apply to the facts, cite case law as appropriate.
Question 3 LO 7.3 & 6.2
Celeste and Perry Wright would like more of a say in the affairs of a family company, Otter Bay Coffee Pty Ltd (OBC). They only hold A class shares, which gives them no right to vote on directors’ and auditor’s appointments. They would like to call a meeting of all shareholders in OBC to vote on a resolution to amend the constitution to give A Class shareholders the right to vote on the appointment of directors.
They have asked Renata (a director) to convene a members’ meeting to consider the resolution but she has refused, saying that it would be a waste of time because for a start, as a major shareholder, she is against it. Further, she knows that the other family members, Madeline and Ed McKenzie, would agree with her. Never-the-less, Celeste and Perry feel they have been peremptorily dismissed and would like your advice on whether the meeting can be held.
The current shareholders’ register of OBC looks like this:
Issues: Can shareholders request a meeting to put forward a resolution to amend the constitution (to vary class rights?)
How do members request a meeting (revise topic 3)?
Law:

1. s246B states that if a company’s constitution does not set out the procedure for varying class rights it requires both a:

____________; AND
________________________________________________ OR

Renata Klein	30 ordinary
Gordon Klein	25 ordinary
Ed McKenzie	25 ordinary
Madeline McKenzie	20 ordinary
Celeste Wright	10 ordinary and 5 A class
Perry Wright	10 ordinary and 5 A class

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written consent of ______% of holders of the ____________________.
• Section ______ states: If shares are divided into further classes, and after division the rights

attached to all of those

shares are _______________________, it will be taken to vary the rights of all shares in the class.

Topic 4 practice problem: LO 7.3

Perry Wright is a member of a family company Otter Bay Coffee Pty Ltd (OBC) who would like more of a say in the affairs of a family company. Perry holds a minority interest with10 x ordinary shares and 5 x A class shares, the latter have restricted voting rights. He knows that the company went to a lot of expense to procure an expert’s report on sustainability initiatives, as a small business, the company could implement. One of the proposals related to acquiring new plant and equipment that used a lot less water and reticulated used water so that it was recycled where appropriate. The other proposal related to acquiring only “fair trade” certified coffee. Despite the professional advice, the board deferred the proposals based on cost.

Perry feels very strongly on about sustainability issues. He thinks the board has made a mistake in making these decisions. What steps, if any, can he take to force the board to reconsider?

Facts: Perry is a shareholder, we are told “minority interest”. We can conclude that he is not a director. The board has made operational decisions that relate to the day-to-day business of the company. Perry happens to disagree.
Issues:

Which organ of the company has the power to make a decision?

Law: Decision-making in solvent companies is divided between the directors and the members. The basis on which decision-making is divided depends on the law and the company’s internal governance rules. Each organ of the company has power to make particular decisions, so that neither organ has to follow the instructions of the other, nor interfere with the operations of the other: Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame.

The board’s power is defined in s 198A (or see the company’s constitution). The broad effect of this rule is that the board of directors, has the power to make decisions on all matters other than those that are expressly reserved to the general meeting (see the Act or the company’s constitution)

Application

You need to look at the type of decision – here, the decision to acquire business assets and inventory – is a business decision that is within the power of the board of directors. Is there anything to suggest shareholders have a specific power to make these decisions?

Conclusion As shareholder, Perry does not have the right to interfere with the board’s decision. If members disagree with a decision made by the board on a matter that the board has power to

decide, what options are available to them? This is discussed in LO7.3.2

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Lecture topic 6: Overview

o Disruptive example
o Duty of care and diligence
o The standard of care & diligence
o Defences
o Insolvent trading
! Disruptive example: what is expected of company directors?

Lecture topic 6: Directors’ duties – duty of care

•

– what is expected of company directors as a board?
o Aretherecircumstanceswhereyouarenot“qualified”toact/decide:

§ What would you do about it, as company director?
§ https://aicd.companydirectors.com.au/membership/company-director-

magazine/2018-back-editions/march/meet-the-millennials

o Aretherecircumstanceswhereyouaddvaluetotheboard? ………………………………………………………………………………………………………….

Duty of care & diligence

LO 8.2
LO 8.3 – 8.4 LO 8.5
LO 8.6

LO 8.2

Duty of care and diligence arises from:

a contract between the director and the company — s 140(1)(b)
the common law
the care and diligence s 180.
Duty of care and diligence is owed to:

o thecompany(i.e.themembersasawhole)
o rarelyincertaincircumstances,alsotoparticularmembers. o BrunninghausenvGlavanics

Reasonable person test

• To determine a breach of the duty of care and diligence, the court will apply the reasonable 1

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person test:
o Thecourtcomparesthecareanddiligenceareasonablepersonwouldhaveexercisedin

the officer’s position with the actual amount of care and diligence exhibited by the

officer.

Penalties

For a breach of the duty of care and diligence:

the company can seek damages
ASIC can ask the court to:
o disqualifytheperson
o imposeasubstantialmonetarypenalty
o ordercompensationtobepaidtothecompany
There are no criminal penalties under the Corporations Act for a breach of this duty. Revision Questions LO 8.2

1. What are the differences between the duty of care and diligence under the Corporations Act and under common law?

To whom is the duty of care and diligence owed?
What is ‘the reasonable person test’.

Standard of care & diligence

LO 8.3-8.4 Modern common law

• A director is expected to act to the standard of a reasonable company director
o StartedinAustwithAWAlitigationinmid1990s
o Sincethen,majorcorporationshavebeeninvolvedindutyofcarecases:

§ Centro Properties § HIH insurance
§ AMP & GIO
§ James Hardie

§ One.tel

Standard of care

A minimum standard of care expected of different types of officers has been established in case law.
The standard of care required is that of a reasonable director.
Directors are expected to: AWA case

o acquireabasicunderstandingofthebusinessandbefamiliarwiththefundamentalsof the business

o stayinformedabouttheactivitiesofthecompany
o delegateonlytocapable,experienced,qualified,reliablepersons

Standard of care

• Directors are expected to:
o befamiliarwiththefinancialstatusofthecompanybyreviewingfinancialstatements o makesufficientenquiriestoinformbusinessdecisions
o nottoignoreanymisconductofthecompany
o payattentiontoallareasofthecompany.

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Daniels v Anderson (1995)

Also called AWA case
Held: à exec directors breached their duty, the NED had not breached their duty.
Established contributory negligence shared between auditors and board
Held:àthe auditors beached their duty the test was objective
o Thecourtsetoutanumberofprinciples
o Figure8.3
Only recently ‘caught’!
Whiz-turned-rogue sentenced in belated sequel to scandal https://www.smh.com.au/business/whiz-turned-rogue-sentenced-in-belated-sequel-to-scandal- 20120826-24ugc.html
Expectations of Exec vs NED

Executive directors
o involvedintheday-to-dayrunningofthecompany o areexpectedtohaveahigherlevelofskill.
Non-executive directors
o Maybeappointedforsomeparticularexpertise,egfinancial,technical

o but are not immersed in the day-to-day running of the company.

Expectations of chair and MD

The chair and the managing director/chief executive officer are subject to relatively high standards of care.
The chairperson’s role is not merely ceremonial

o the chairperson must keep informed: ASIC v Rich

• CEO (or “MD”) has greatest responsibility
o should be in a position to monitor, control key decisions and information flow: ASIC v

Adler

ASIC v Adler

Example of breach of duty of care
Payment by HIHC to PEE
Position of Adler, Fedora and Williams
Overlapping duties – same conduct leads to multiple breaches
Failure to put in place proper safeguards and follow procedures
Chief Financial Officer

• ASIC v Macdonald (part of James Hardie litigation)
o Morley(CFO)wasresponsibleforverifyingthefinancialinformationusedasbasisfor

saying the medical research fund was “fully funded”
§ Morley consulted actuaries, accountants and economists

o Morleybreacheddutyofcareanddiligence(statutory):
o Hedidn’tcommunicatethelimitationstotheBoard;and
o AreasonableCFOwouldknowthelimitationsmeantthepressreleasecouldnotsay

with certainty it was “fully funded”.

Secretary

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• ASIC v Shafron (part of James Hardie litigation)
o Cannotsplitrolesofcompanysecandgeneralcounsel o Duty of care in s 180 clear
o Peter Shafron fell short of the standard expected:

§ FailedtoadviseBoardoncash-flowmodelgivenbyexternalconsultantsfor asbestos claims

§ Failed to advice CEO and Board so consider information about the Deed of Covenant and Indemnity to be disclosed to ASX (continuous disclosure rules LR3.1)

Lessons from ASIC v Hellicar [2012] HCA 17

• • • •

Case does not change general law of directors Significant event needs board & management focus

Silence cannot be interpreted by Chair as assent & boilerplate resolutions can be dangerous Clear procedures for delegation of decisions

o MediaReleasestoASXetc
o Approval of board minutes and evidence o Role of external expert advisors

Case study: Centro litigation

ASIC v Healey
The directors and officers of this company did not discover that the financial reports they signed
off on were seriously incorrect.
‘The directors failed to take all reasonable steps required of them, and acted in the performance
of their duties as directors without exercising the degree of care and diligence the law requires of them.’
Centro litigation – ASIC v Healey

..there is a core, irreducible requirement of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor. There is a responsibility to read, understand and focus upon the contents of those reports which the law imposes a responsibility upon each director to approve or adopt. All directors must carefully read and understand financial statements
=FINANCIAL LITERACY
COULD NOT DELEGATE THIS REQUIREMENT
ASIC v Cassimatis (No 8) (2016)

Exercising their powers in way which
- caused or ‘permitted’ inappropriate advice to be given to relevant investors by Storm
  Financial
- Caused company to breach its financial services licence
Applied the “Storm Model” as the business model to all clients
A reasonable director would have known that the ‘Storm model’ was being applied
inappropriately
Operational –> management
Strategic/culture -> board
Remedies

• Common law – As a remedy for a breach, a company can seek: o compensation

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o damages.
• For example, the AWA case was based on common law

Statutory Penalties

For a breach of the duty of care and diligence: o thecompanycanseekdamagess1317G o ASICcanaskthecourttos1317E:
§ disqualify the person § impose a civil penalty
- The greater of $1.11M
- or three times the benefit gained/loss avoided
There are no criminal penalties under the Corporations Act for a breach of this duty.
! Class activity – standard breached? Y/N

a group of companies, where funds are being shifted around within the group to maintain the financial stability of all the companies: Octaviar case ASIC v Managed Investments Ltd [2016]
CEO delaying bad news to Board: AWB case ASIC v Lindberg [2015]
Signing off accounts as a true and fair view when director does not understand English (but
others do): ASIC v Sino Australia Oil and Gas Ltd (2016)
Approving a company announcement that was misleading: ASIC v Padbury [2016]
Controlled by a dominating, manipulative CEO: Bernie Maddoff case in US
………………………………………………………………………………………………………….
Diligence

The duty of diligence requires officers to:
o understandtheaffairsofthebusiness
o takeproactivestepstobeinformed
o seekprofessionaladviceasnecessary
o poseissuesandquestionsonmattersbeforetheboard.
In delegating responsibilities, an officer must have reasonable grounds to believe the delegate will exercise the delegated powers properly.
Revision Questions LO 8.3-8.4
1. List the minimum standards of care required of directors and officers, as established in Daniels v Anderson (1995) 13 ACLC 614.
2. Explain the standard of care required of officers in relation to the company’s financial statements.
3. Why is an executive director expected to exhibit a higher standard of care than a non-executive director?
4. In what ways can an officer of a company demonstrate diligence in going about their duties?

•

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Under what circumstances will a director not be considered responsible for the action of a delegate?
Under what circumstances can an officer rely on the information and advice provided by others?

Defences

LO 8.5

The statutory duty of care is unlike the other statutory duties: o Nocriminalpenalties
o Defencesapply

§ Directors can delegate
§ Directors can rely on advice
§ Directors can claim the benefit of the business judgment rule

Defences against a breach of care and diligence

Business judgement rule:
A defence in common law and statute that relies on the principle that the court will not review
the merits (good or bad) of a business decision.
The rule recognises that managers operate in an environment of uncertainty.
The court will look at:
why the officers took a particular action
whether the action was intended to benefit the company or intended to benefit the directors
the level of experience and knowledge of the officer making the decision.
Business judgment rule – 4 elements

• Director is taken to meet the statutory and general law duties of care in connection with a business judgment if:

o goodfaithandforaproperpurpose
o nomaterialpersonalinterestinsubjectmatterofjudgment
o informthemselves
o rationallybelievethejudgmentisinthebestinterestsofthecompany

ASIC v Rich 2009

Considered the scope of BJR (first case)
o CoreofASIC’scaseisthatthedirectorswhowereproceededagainst,misleadtheboard
as to the company’s true financial position, over 5 critical months before downfall § ASIC was trying to challenge all management decisions over the period,
evidentially impossible
Directors had also been negotiating a bailout plan with PBL and News Ltd to take up a rights
issue – but that fell through
o maybe it was the sudden lack of finance that caused the downfall, not the sequence of
decisions?
ASIC v Mariner Corp 2015

• ASIC claimed that the directors of Mariner breached their duty of care, after a failed attempt to acquire another company Austock.

o ThedirectorsbelievedAustockwasagoodacquisition–theyjustdidn’thavethe finance in place to fund the deal before going ahead

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• After all, one expects management including the directors to take calculated risks. The very nature of commercial activity necessarily involves uncertainty and risk taking. The pursuit of an activity that might entail a foreseeable risk of harm does not of itself establish a contravention of s 180. Moreover, a failed activity pursued by the directors which causes loss to the company does not of itself establish a contravention of s 180.

Delegation s190

Directors may delegate any of their powers to any person: s198D
If delegate is negligent, directors will be liable
unless
o Reasonablegrounds
o Goodfaith
o Makingproperinquiries
delegate was reliable and competent Reliance s189

•

• •

1. 2. 3.

Reliance on information provided by employees, professional advisers, other directors or officers, and board committees is reasonable?
good faith and independent assessment
An argument by non-executive directors that they could rely on others was rejected in ASIC v Healey

Revision Questions LO 8.5

What is the ‘business judgment rule’?
Why is the business judgment rule a legitimate defence?

What criteria would be considered in determining whether the business judgment rule defence applies to a particular situation involving a potential breach of the duty of care?

Insolvent trading

LO 8.6

Duty to prevent insolvent trading

• Section 588G imposes a duty on directors to prevent insolvent trading.
o Thedutyisdesignedtoprotectunsecuredcreditors.
o Ifdirectorsallowacompanytotradewhilstinsolventandthecompanyenters

liquidation, the directors may be held personally liable for the company’s debts.

Duty to prevent insolvent trading

• Section 588V imposes a duty on holding companies to prevent insolvent trading by subsidiaries. o Thedutyisdesignedtoprotectunsecuredcreditors.
o Ifdirectorsallowacompanytotradewhilstinsolventandthesubsidiaryenters

liquidation, the holding company and its directors may be held personally liable for the

subsidiary’s debts.

o LIFTINGTHECORPORATEVEIL 7

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Duty to prevent insolvent trading

Test: reasonable grounds for the director to suspect insolvency. o Directorsonly(notofficers,employees)
o Testofinsolvencys95A
o Liquidatorenforcess588M
§ Only applies in winding up
§ Statutory duty only (no common law)
Duty does not allow directors to be passive in management-> financial literacy
§ Commonwealth Bank v Friedrich
NEW S588GAB Officer’s duty to prevent creditor-defeating disposition (ANTI-PHOENIX)
(2) An officer of a company must not engage in conduct that results in the company making a
disposition of property of the company, if:

the company is insolvent; OR
less than 12 months after the disposition, the start of an external administration (Topic 11) of
the company occurs as a direct or indirect result of the disposition;
AND
the officer knows, or a reasonable person in the position of the officer would know, that the disposition is a creditor-defeating disposition.
A creditor-defeating disposition is a disposal of company property that prevents, hinders or significantly delays that property from becoming available for the benefit of creditors in the winding up of the company. (For the complete definition, see s 588FDB(1)).
Step 1 – When s588G applies

Person was a director when a company incurred a debt
Company was “insolvent” at that time or became insolvent by incurring that debt
At the time the debt was incurred, there were reasonable grounds for suspecting insolvency “Incur a debt”

For certain actions, see the operative table in s588G(1A)
For other debts – case law is not always consistent but some principles are that the debt:
o mustbeforaspecificamount
o canbecontingent
o mustbeincurredvoluntarilybycompany
What is insolvency?

Section 95A: insolvency worked out using cash flow test (not just balance sheet test)
Question is: Is a company able to pay all its debts, as and when they become due and payable?
So: What cash does company have? What access to finance does a company have?
When is a company solvent?

• Note tests in ASIC v Plymin (No 1) [2003] o Continuinglosses

o Liquidityratiobelow1
o Overduetaxes
o Noaccesstoalternativefinance
o Poorrelationshipwithbankers
o Suppliersmakingdemands
o Creditorsunpaidbeyondnormaltradingterms o Post-datedcheques
o Legalaction

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o inabilitytoproducetimelyfinancialinformation

Step 2 – Contravention of s588G(2)

• Director failed to prevent company incurring the debt where: o thedirectorwasaware

o reasonablegrounds
o suspectinginsolvency(subjectivetest),
o or
o areasonableperson
o doingthatdirector’sjobinthatcompanywouldbeaware o reasonablegrounds
o suspectinginsolvency(objectivetest)

Step 3 – 4 x Defences

Director had reasonable grounds to expect, that company was solvent despite its debts and creditor-defeating transactions
Harder to “expect” than to “suspect”
o Ignoranceofcompany’sfinancesnoexcuse
Reliance on competent and reliable person
Absence from management, due to illness or other good reason
Director took all reasonable steps to prevent the company incurring the debt or making the
disposition of its property
Defences to insolvent trading and Creditor-defeating Dispositions

Reasonable grounds to expect solvency s588H(2)
o Doesnotapplytoacreditor-defeatingdispositionofpropertywithinthelast12 months
Reasonable reliance s588H(3)
o Doesnotapplytoacreditor-defeatingdispositionofpropertywithinthelast12
months
o MetropolitanFireSystemsvMiller(1997)
Absence from management s 588H(4)
o StatewideTobaccoServicesvMorley(1990)
o SouthernCrossInteriorsPtyLtd(inliq)vDeputyCommissionerofTaxation(2001)
Director took all reasonable steps to prevent the company incurring the debt/disposing of
property s588H(5)
o Usingexternalinsolvencyadministrationssuchasavoluntaryadministration(VA)or
entering into a small business restructuring plan is taken into account
Preventative

s588GA Safe harbour–taking course of action reasonably likely to lead to a better outcome for the company
https://aicd.companydirectors.com.au/membership/the-boardroom-report/volume-15-issue- 9/safe-harbour-reform-passes-senate-almost-certain-to-become-law
if directors start developing one or more courses of action that are ‘reasonably likely’ to lead to a ‘better outcome for the company than the immediate appointment of an administrator or liquidator.
s588GA safe harbour conditions: likely to lead to better outcome

Continuing to meet employee entitlements
Continuing to meet tax reporting obligations
9

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Director remains informed of financial position’
Whether advice was sought from appropriately qualified advisor
Company maintained appropriate records
Step 4 Consequences of Insolvent Trading and Creditor-defeating Dispositions

Civil penalty s1317E
criminal offence if dishonest ss588G(3)
Compensation orders s588J & s588M
o “liftingtheveil”
o Liquidatorcanbringproceedingss588M
o Creditorscanbringproceedingswithconsentofliquidatororthecourtss588R-588U
Consequences of Insolvent Trading

s588V allows holding companies to be liable for insolvent trading by subsidiaries
see ASIC RG 217

New Penalties since 2019

Individual person The greater of $1.11M

or three times the benefit gained/loss avoided

Revision Questions LO 8.6

corporation

civil

$11.1M

or three times the benefit gained/loss avoided or 10 per cent of annual turnover

criminal

15 years imprisonment
and/or the greater of $945,000
or three times the benefit gained/loss avoided

The greater of $9.45m
or three times the benefit gained/loss avoided or 10 per cent of annual turnover

Under what circumstances may a director be held liable for a company’s debts if the company cannot pay?
What is the rationale for the directors’ duty to prevent insolvent trading?
What are the defences to a breach of the duty to prevent insolvent trading?
Tutorial 6 Workbook: Directors’ duty of care Reading: CLIA Ch 8
Tutorial tips & tricks
The usual issues in these types of problems are going to revolve around:

Who is a director /officer of the company?
To whom are the duties owed?
What is the source of directors’ duties?
What is directors’ duty of care? What is the directors’ duty to avoid insolvent trading and
Creditor-defeating Dispositions?

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What are the substantive legal tests and principles for the duty? This is going to involve a lot of case law!
What are the defences or excuses to directors for breach of duty?
What are the consequences of a breach of directors’ duties?
Who enforces a breach of directors’ duties?

Start by revising the law for duty or care and insolvent trading:

Law:

Remember the first issue – definition – who are the directors and officers that the duty applies
to?
General Law:

o Atcommonlaw,directorsoweadutyof_______________________________________

(AWA v Daniels; Daniels v Anderson).
o Theminimumstandardrequiredis_____________________________________

o Adirectormustacquirea_______________________________________andmustbe familiar with the fundamentals of the company’s business.

o Directorsareunderacontinuingobligation _______________________________________

o Detailedinspectionofday-to-dayactivitiesisnotrequiredbut _______________________________________

o Whiledirectorsarenotrequiredtoauditthecompany’sbookstheyshould _______________________________________.

A _________________________________ has a greater responsibility to the company (ASIC v Adler)
Corporations Act 2001 (Cth)
o _________statesthatadirectormustexercisetheirpowersanddischargetheirduties
with the degree of care and diligence that a reasonable person would exercise if they: (a) wereadirectororofficerofacorporationinthecorporation’scircumstances;
and
(b) occupiedtheofficeheldby,andhadthesameresponsibilitieswithinthe
corporation as the director or officer.
s 180(2) – ____________________________________
A director satisfies their duties under s180(1) and equivalent duties at common law if they: (a) Make the judgement in ______________________________________; and

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(b) Donothavea____________________________________________inthejudgment; and
(c) ________________________ about the judgment to the extent _______________________________ to be appropriate; and
(d) _________________believethatthejudgmentisinthebestinterestsofthecorporation

A belief is ‘rational’ unless it is one that no reasonable person in their position would hold
• Other defences include delegation (s190(2)) and reliance (s189). Also, the court can exonerate a

person if they acted honestly and the court believes they ought fairly be excused (ss1317S, 1318).

Question 1 LO8.2-8.6

Regal (Burleigh) Ltd (“Regal) owned and operated a cinema in Burleigh Heads on the Gold Coast. Gulliver, Cate and Nicole were the only directors of Regal. Gulliver was appointed the managing director due to his extensive knowledge of operating cinemas. Both Cate and Nicole are non- executive directors. Regal has a number of unrelated shareholders.

Over the last few years, Regal’s financial position has steadily deteriorated. While Gulliver was aware of this, he did not pass any financial information onto the other directors. Indeed, he repeatedly told them that the company was performing wonderfully. While Cate and Nicole were given the company’s financial reports, they never looked at them closely as they assumed that the auditors or Gulliver would alert them to any problems.

By January 201X, things had started to get dire for Regal as attendance at its cinema dropped precipitously due to a competitor opening a new cinema nearby. Regal’s cash reserves were running low and Gulliver was post-dating cheques in order to avoid running out of money. In a few instances, cheques were presented when Regal had insufficient funds and they bounced. On January 20, 201X, the manager of Regal’s bank – Gold Coast Bank Ltd – called Gulliver and said that the bank would be forced to suspend the company’s overdraft facilities unless the company improved its financial position.

At a board meeting on February 1, 201X, Gulliver informed the board that he had a revolutionary idea for Regal. He proposed that Regal enter into leases for two more cinemas that were located in suburbs close to Burleigh Heads. He suggested that by undertaking this transaction, revenue would increase and it would even make the company a potential takeover target. Cate and Nicole were intrigued and told Gulliver to do whatever he had to do to get the transaction done.

After the meeting, Gulliver approached a commercial leasing agent who informed Gulliver he had two cinemas available for lease. The agent said the cinemas were in wonderful condition and would be just what Regal needed. Gulliver inspected the cinemas with his friend Hugh who is an accredited residential building inspector. Gulliver thought the cinemas were acceptable and Hugh said he couldn’t see any structural problems with the cinemas. Hugh wrote a report to the Board to this

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effect after Gulliver agreed that the company should pay Hugh $250,000 as his professional services fee

On March 1, 201X, the board had a further meeting and Gulliver updated the board regarding the leases; tabling Hugh’s report. Gulliver told the board that Regal needed $200,000 to place signage on the new cinemas. Gulliver said he had reached an agreement with Gold Coast Bank whereby it would loan the company $100,000 and suggested Cate and Nicole each contribute $50,000 equity in return for new shares in Regal. They agreed.

On March 5, 201X, the leases were signed, Cate and Nicole transferred $100,000 to the company and a credit agreement was entered into with Gold Coast Bank for $100,000. The new signage was completed on March 10, 201X and Gulliver arranged a grand opening scheduled for March 15, 201X.

On March 13, 201X, the company received a letter from the Gold Coast City Council saying that Regal was not permitted to open the two newly acquired cinemas as they did not have adequate fire exits and the fire sprinkler system needed to be replaced. After some preliminary investigations, Gulliver discovered that it would cost over $800,000 to install additional fire exits and upgrade the sprinkler system.

On April 20, 201X, the directors had no alternative but to place Regal into voluntary administration and it was subsequently placed into liquidation. The liquidator sees that the major debts are those owing to the Bank and to Hugh. The liquidator is considering action against the directors (1) alleging the directors breached their duty of care, skill and diligence; and (2) for insolvent trading.

Advise the liquidator on the likelihood of success. Q1: Answer guide

Facts: this is quite a long scenario – but notice that we are asked 2 questions regarding potential: breach of care, skill and diligence; and insolvent trading

Issues a: Look at the framework of issues 3 -8 Issues b: Look at the framework of issues 3 -8

Law: Start by defining the law on duty of care, the legal tests for what the standard of care expected of company directors.

Repeat this for the duty to avoid insolvent trading.
Application: Read the facts of the case study and make a recommendation.

Conclusion: Based on your recommendation, state what you think are some of the consequences.

Question 2 LO8.6

Jean and Brent develop a successful app which quickly gains popularity. Deciding to expand their business, they form a company and appoint themselves as directors. As the business begins to expand, they quickly realise that their skill in IT does not translate to their ability to run a business. Concerned about cash flow, they cast around for options.

Arseni is an experienced company director who specialises in helping start-ups through the transition to operating as an established business. Instead of immediately appointing an administrator and losing control of the company, Jean and Brent approach Arseni for advice. He

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agrees to become a director of the company, knowing that he will have the benefit of safe harbour and not be personally liable for the company’s debts.

Arseni puts in place proper corporate governance procedures and uses his contacts to negotiate a line of credit to fund the company’s expansion.

{Source: Explanatory memorandum, TREASURY LAWS AMENDMENT (2017 ENTERPRISE INCENTIVES NO. 2) BILL 2017}

Comment on the accuracy of Arseni’s views on the “benefit of safe harbour”. Q2: Answer guide

Facts: this scenario is taken verbatim from the Commonwealth parliament’s explanatory memorandum explaining the introduction of the safe harbor defence.

Issues a: Look at the framework of issues 3 -7
Law: Start by defining what “safe harbor” means, the legal tests for what standard is expected

of company directors.

Application: Read the facts of the case study and make a recommendation.
Conclusion: Based on your recommendation, state whether Arseni’s understanding for the law is correct.

Topic 6 problem question LO8.2-8.6

Wheelem N Dealem Ltd is a public company. Jules is the CFO and Chair of the Board, who has been managing companies for over 20 years (but whose previous company was liquidated in 2019; the creditors received less than 50c in the dollar). The other executive director is Shayne. Jackie is a non- executive director who never attends meetings and is content to leave management of the business to Jules and Shayne.

Wheelem cannot pay its debts, so Jules suggests a new share issue to raise money. Wheelem needs to find someone to provide a guarantee for the underwriters of the share issue. Jules is also CEO of Yulose Pty Ltd, a subsidiary of Wheelem. Jules causes Yulose to sign and provide the guarantee for Wheelem. Jiles doesn’t tell Yulose’s Investments Committee nor follow its procedures, and deliberately conceals the matter from all other directors of Yulose. Wheelem then issues a prospectus and many investors subscribe for shares. Wheelem raises $1M in new capital. Jules and Shayne then call a meeting and resolve to give all 3 directors a pay rise of $100,000 each as a ‘performance cash bonus’. They also purchase 3 new S-class Mercedes for directors’ exclusive use, described as ‘short- term incentives’ at $200,000 each. Wheelem’s financial position deteriorates sharply and debts mount up, but Jules and Shayne use the last $100,000 capital to buy land from Larry. Jules has told Shayne this is a bargain; but Shayne (and Jackie) don’t know that Jules has deliberately inflated the price to give Larry enough cash to buy a business from Gotcha Pty Ltd, one of Jules’s personal companies. To deflect attention from themselves, the Board decides to on-sell the land, and in obtaining $88,000 nett proceeds, they think they have done very well to dispose of the land in such a short time frame.

When it is time for the company’s first AGM, financial reports are prepared and audited by Jules’s sister Sharmaine. The cash bonus is disclosed. The cars and land purchase are not disclosed. Jackie signs the directors’ report without reading it, since she’s been busy on other boards. Anyway, she doesn’t know how to read financial statements. The meeting is validly called and convened. It opens with Jackie as Chair. A discussion of the company’s finances occurs, and worried members ask why

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the company’s financial circumstances have deteriorated. The corporate representative for Sweepem Clean Pty Ltd says ‘what has been left out of these reports? Why did the directors get a pay rise? The company is clearly in bad health.’ Sharmaine says that in her professional opinion the company is fine, it just has temporary cash flow problems.

After further arguments, the meeting closes. Shortly afterwards, Wheelem is placed in liquidation, and creditors get 32c in the dollar on their outstanding debts. Sweepem Clean reports the incident to ASIC.

You are an investigator at ASIC. What liability will Jackie face for Wheelem’s bad financial position? Write a memorandum of advice.

Facts: This is a particularly complex fact circumstance. However, you are only asked to investigate Jackie in regards to Wheelem, so focus on their transactions and relationship.

Issues:

What is Jackie’s relationship to the company?
What are directors’ duties to discharge duty of care, avoid insolvent trading and Creditor-
defeating Dispositions?
What are the substantive legal tests and principles for the duty?
What are the defences or excuses to directors for breach of duty?
Law: Duty of care
Directors have a duty of care, skill and diligence. This is an objective standard of care applies to all directors, although the nature of obligations imposed depends on the company’s size/nature, and the director’s position and responsibilities: Daniels v Anderson. The court considers the company’s nature and the director’s position and responsibilities, and then asks: “what would a reasonable person have done, taking into account the actual director’s role?” A CEO/managing director has a great responsibility to the company: ASIC v Adler.
S180(1) of the Act states that a director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) Wereadirectororofficerofacorporationinthecorporation’scircumstances;and
(b) Occupied the office held by, and had the same responsibilities within the corporation as, the
director or officer.
S185 of the Act also states that the statutory provisions in are in addition to the general law. Defences

• S180(2) sets out the ‘business judgment rule’, which can assist in avoiding liability under s180(1). Law: Insolvent trading and Creditor-defeating Dispositions

Under s588G(1), if a director is a director at the time a debt is incurred, and the company is insolvent at the time (or becomes insolvent by incurring the debt), and there were reasonable grounds for suspecting the company was insolvent or would become insolvent – then s588G applies.

AYB230 CORPORATIONS LAW
UNIT COORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

Under s588G(2), by failing to prevent the company from incurring the debt, the person contravenes the section if they were aware that there were grounds for suspecting (insolvency), or a reasonable person in like position in a company would have been aware.

If dishonesty is involved, the director may be criminally liable under s588G(3).

Under s588GAB, an officer must not make a disposition of property of the company, if: the company is insolvent; (or becomes insolvent because of the disposition); less than 12 months later the company goes into external administration and –

the officer knows, or a reasonable person in the position of the officer would know, that the disposition is a creditor–defeating disposition.

See s588H for defences, especially s588H(2) reasonable grounds to suspect solvency.

Application: Did Jackie contravene s180(1)?

The company has entered into several transactions, which have had a deleterious effect on the company’s financial position. Directors cannot just ‘rely’ on a MD – they have a responsibility to be active, and meet the minimum standards set out in AWA case; including financial literacy and signing off financial reports: ASIC v Healey; ASIC v Sino Australia Oil and Gas.

It is unfortunate where one director “appears to be” mislead by other directors guilty of more obvious wrong doing. However, AWA case sets minimum standards or expectations on all directors individually.

Are there any defences for Jackie? Consider s180(2); s189, s190.
Did Jackie contravene s588G?
J was a director at the time Wheelem incurred a debt and at the time of liquidation.

The debt: in the form of the land transaction (it was obliged to pay $100,000 for land worth substantially less than this). It appears the company may have been insolvent at the time, because after the cash bonuses were given and the cars were purchased, Wheelem’s “financial position deteriorates sharply and debts mount up”.

Under s95A, if the company could not pay its debts as and when they became due, then it will be insolvent. If Jackie was aware of grounds for suspecting insolvency, or a reasonable person would have been aware, then she will have breached s588G(2) by failing to prevent the company from incurring the debt.

Jackie may try to argue that she was not aware of the grounds for insolvency. Even though Jackie is only a non-executive director he will have the same duty to monitor the company as any executive director: Daniels v Anderson. If she does not have the ability to read financial statements, she should either get the appropriate training or refuse to act: Daniels v Anderson; ASIC v Healey.

Applying the case law that does not permit directors to be passive or rely on other directors, and s588G(2), if a reasonable person in Jackie’s position would have been aware of grounds for suspecting insolvency, she will be held responsible for the company’s insolvent trading.
If Sharmaine’s financial reports had disclosed problems with the company’s solvency, then Jackie will

AYB230 CORPORATIONS LAW
UNIT COORDINATOR PROF Ellie Chapple LECTURER PROF Ellie Chapple

be liable. In any event, the reasonable person may have had grounds for suspecting insolvency, because of the errors in Sharmaine’s reporting – the cars and land purchase were not disclosed, yet very clearly Jackie received the benefit in the form of cash and cars. Directors need to take notice of the matters involving the company’s operations, they are required to be active. At the very least, if Jackie had read her reports (as the reasonable director would have done) she would have been on notice that they were incorrect, and would have been under a duty to inquire further.

Did Jackie contravene s588GAB?

Jackie as director is an officer (s9). Has the liquidation occurred with in 12 months – appears so.
A “creditor-defeating disposition” is defined in section 588FDB(1) as disposals of the company’s property that are for less than the market value or the best price that was reasonably obtainable for the property (having regard to the circumstances existing at that time) and has the effect of preventing, hindering or significantly delaying that property from being available for the benefit of creditors in a winding up.

We are told that the Board thought it was a “good deal” but we are suspicious as to the circumstances of the disposition.

Applying the elements of s588GAB, we would argue that the board’s actions, of which Jackie is a part, have contravened these anti-phoenix laws.

Conclusion It is likely a court would find her liable for breach of duty of care and the company’s insolvent trading and creditor-defeating dispositions, and it is unlikely any of the defences in s588H apply, especially given the 12 month time frame for the winding up.

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

Lecture topic 7: Members’ remedies

Overview

o Disruptiveexample
o Identifyingrightsandremedies
o Statutoryremedies:oppression,windingup&injunction o Statutoryderivativeaction
o Personalactions

! Disruptive example: what is expected of company directors?

LO12.1 LO12.2 LO12.3 LO12.4

Similar to the Grill’d case…
o Let’slookatthebusinessWelleCo,foundedbyfriendsAndreaHorwood&Elle
Macpherson
Is this just a quarrel/disagreement?
Or oppression?
What remedy would you recommend?
o SMHnewsvideo
{Case was ultimately settled by mediation}
into mediation, court said two options:

o thecompanycouldbewoundupor
o Horwood’sshareholdingcouldbepurchased

………………………………………………………………………………………………………….

Members’ rights

LO 12.1 Recap

voting rights
distribution rights
rights to receive information
where the shares are divided into more than one class, class rights
Topic 7 -> enforcing rights
It is debatable whether the rights of majority and minority shareholders are balanced.
o SeeGambottoprinciple,chapter3
While a member cannot interfere in the management of the company: Organic principle

o if the company’s directors make decisions that are unfair to the member, o themembermaybeabletoseekaremedy.

Members’ remedies
A member can:
o seekastatutoryremedy
o bringastatutoryderivativeaction
o takepersonalaction
o suethecompanyatcommonlawforbreachoftheirpersonalrightsasmembers o selltheirsharesandexitthecompany?

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

Revision Question LO 12.1
1. In what circumstances can majority shareholders effectively extinguish the rights of minority shareholders?

What actions can a member of a company pursue when their rights have been breached?
Why are public companies less prone than proprietary companies to having officers act in
ways that are unfair to members?

Statutory remedies

LO 12.2 Statutory remedies

the oppression remedy: Pt 2F.1
winding up the company because it is just and equitable to do so or because directors of the
company are acting in their own interests: s 461
an injunction to prevent a contravention of the Corporations Act: s 1324.
The oppression remedy

• Overview:

o astatutoryremedythatexistswhenconditionsspecifiedins232aremet

o isprovidedwhenacourtmakesanorderbecausetheconductoftheaffairsofthe company is contrary to the interest of the members as a whole or unfair to a member.

o Amember,formermember(insomecircumstances)oranyoneelseASICconsiders appropriate can apply for the oppression remedy (s 234).

o Most commonly used in proprietary companies where a minority interest cannot satisfactorily deal with other shareholders.

S 232-234 – 4 requirements (Aherns lawyers):
Who? s234
What? s232
Why? s232
Result? s233
Who applies s234

application may be made by
a member
A person removed as a member
A person ASIC allows
“An act of directors or majority members can oppress a member even if the act affects the
member in a capacity other than as a member”: See s234
! Class activity: who applies?

Think about it – WHO APPLIES
Are there circumstances where:
o Intheory,theremedyisavailabletoanyshareholder/memberinanycompany o Butinpracticemostactionsarebroughtbymembersofproprietaryorallfamily

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

companies
o WHY?–Whatisaquasi-partnership?

What? S53, s232

Available in respect of:
the conduct of the company’s affairs, See s53
Act or event or series of events
an actual or proposed act or omission by or on behalf of the company, or
a resolution, or a proposed resolution, of members or a class of members
See s232
Why? s232

conduct complained of is either
contrary to the interests of the members as a whole s232(d) , or
oppressive to,
unfairly prejudicial to, or
unfairly discriminatory against, s232(e)
Need to find the legal tests/meanings of these concepts -> case law
Oppression remedy – what are the tests?

Wayde v NSW Rugby League
Was directors’ decision one that no board of directors acting reasonably would have made?
“Reasonable expectations”:
Boyd v Feeney Test of ‘reasonable expectations’ is objective
Unfairness: Conduct that is “burdensome, harsh and wrongful to other members” or `”a lack or
probity or fair dealing to a member in the matter of their proprietary rights as a shareholder”
Tivoli Freeholds
Oppression remedy – what are the tests?

• Not necessary for directors / majority shareholders to have acted dishonestly or intended to harm the minority – it is a question of impact – is the conduct oppressive in effect?

Examples

Diversion of business opportunities
Improper exclusion from management
Unfairly restricting dividends
Oppressive conduct of board meetings
Breaches of directors’ duties (failure to act in the interests of the company)
Boyd v Feeney

closely held family company – where relationship between shareholders has broken down Failure to pay dividends
Consider the history of the company
Its financial needs
Reasonable expectation of members
But failure to pay dividends over a course of time may be oppressive:
Sanfords case Shamsallah Holdings case
Wayde v New South Wales Rugby League Ltd (1985)

• Held: no ~oppression. TEST:

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

The decision was NOT one that no Board acting reasonably would make
Although there was some ‘prejudice’ to Wests, this was insufficient to show that reasonable
directors, with their special qualities (expertise), were acting unfairly
Sanford v Sanford Courier Service P/L

Diversion of profits:
Majority diverted business away from the co to another co which they controlled
Paid themselves unduly high salaries
Provided themselves motor vehicles, superannuation
Refused to pay dividend
= oppressive
Remedy: Majority s/h but out minority shares
Fexuto

Diversion of corporate opportunity
Classic case of minority oppression
Family company; family dispute
Carol & Jim, 2 of 3 directors, diverted the company’s work to their own company
Remedy: Carol and Jim should buy out the plaintiff’s shares
Overton Holdings

Directors’ failure to act in the interests of the company
Director entering into transactions (here, loans) where there was no commercial benefit to the
company to do so.
Family farming business, several interconnected companies.
Faye (brother) took control of family companies, borrowed $1M from NAB and on lent the
funds to other companies in the group, with no security other than personal guarantees from other family members
o Noprospectthatthecompanycouldrecoveritsfunds
o NoprospectthatthecompanycouldsuethedebtorcontrolledbyFaye o NoprospectthecompanywouldsueFaye
o Companylostalotofmoneyfromatransactionofnobenefit
Re Spargos Mining NL (1990)

Not acting on company’s interests
Spargos taken over by Independent Resources Ltd
quite prosperous at the time of the takeover, but new board “asset stripped” the company for
short term gain
failure of directors to act in the interests of the company
o provedtobeoppressiveasdecisionsmadewerecommerciallybeneficialto Independent Resources Ltd.
Remedy: appoint a receiver to manage the company’s business
Remedies? s233

Company be wound up
Constitution be modified or repealed
Regulating the future conduct
For the purchase of shares
That the company institute or defend legal proceedings
Appointing a Receiver
Restraining a person from engaging in specified conduct

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

• s 1324 injunction

Winding up remedy

The winding up remedy
A court will usually only order the winding up of a company as a last resort.
Members are less likely to benefit from winding up than one of the other remedies.
Section 461(1)(e), (f), (g), (k)
A member (and eg a creditor, ASIC) can apply to court to have company wound up where :
o justandequitable,or
o directorsactinginowninterests,or
o oppressive,unfairlyprejudicialorunfairlydiscriminatoryconduct
Court-ordered winding up just and equitable ground s 461(1)(k)

• Failure of substratum (company can no longer conduct business its members believe it should conduct)

o ReTivoliFreeholds[1972]
o Tiviloiwasforentertainmentbusinessbutanewmajorityshareholdermoveditmore

into corporate raiding investments.

Deadlock/breakdown in mutual trust
o EbrahimivWestbourneGalleriesLtd[1972]
o Ebrahimiinvolvedinitialpartnershiptoimportandsellcarpets;breakdownintrust
Justifiable lack of confidence in the company’s affairs

o LochvJohnBlackwoodLtd(1924)
o companyconducteditsaffairsinbreachofthelawbyrefusingtoholdgeneralmeetings

or pay dividends, to force the members to sell out
• Public interest ASIC v West (2008) Repeated breaches of the Act s461 winding up: fraud or oppression

largely subsumed by the s232 oppression remedy,
o oneofthemainremediesavailableins233iswindingup:s233(1)(a).
Under s233(2), if an order is made that a company be wound up, the Act applies as if it were an
order for winding up under s461 anyway
Re Tivoli Freeholds

Tivoli was set up with the stated object of carrying on entertainment business
The company owned 2 theatres and shares in a TV company
However, in 1969, Industrial Equity got majority control (55%) and control of the business
Under the new management, the company’s assets were sold and the cash used to become a share trader
Minority shareholders applied for winding up on just & equitable ground, even though the company was profitable
Held: winding up granted
o thegeneralintentionandcommonunderstandingofthememberswhentheyjoined?

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

o Looknotjustattheconstitution,
but consider: the company’s name; business activities; prospectus

Ebrahimi v Westbourne

E & N started out in a partnership, then incorporated the business, then falling out
Court considered as significant to the company the underlying trust and personal relationship of
the 2 owners
Where that was destroyed, it was only ‘just & equitable’ to wind the company up as well
Statutory Injunction s1324
- an order of the court which requires a person to do, or stop doing, a particular action 1. ASIC or
  2. a person whose interests have been or would be affected by the conduct which contravenes the Corporations Act
  3. This would include members
- BUT – members cannot get an injunction for a breach of a civil penalty provision!
  Mesenburg v Cord Industrial Recruiters (1996)
  Revision Questions LO 12.2

1. What tests will a court apply when examining whether conduct is oppressive?

In what circumstances could a court find that it is just and equitable that a company be wound
up?
Who can apply for an injunction under s1324?

Derivative action

LO 12.3

What is a derivative action?
An action to enforce a right of the company
÷ eg to enforce a breach of directors’ duties
Even though a member brings a derivative action, the action is not for the benefit of the member – it’s for the company’s benefit
÷ any remedies go to the company Derivative action
Originally – no common law remedy

Deals with “standing” of the applicant – not the “merits” of the case
Who may apply? s236

a member, former member, or person entitled to be registered as a member of the company or
a related company
an officer or former officer of the company
Statutory “derivative” actions: s236 To get the court’s leave:
Need to satisfy all 5 criteria, s237(2):
a) The co probably won’t bring the proceedings itself (eg. majority/liquidator is unwilling)
b) The applicant is acting in good faith

They honestly believe there is a good cause of action. Must not bring the action for a “collateral

purpose”:

Swansson v RA Pratt Properties

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

Statutory “derivative” actions: s236
c) It is in the company’s best interests

The applicant will need to show:
How the litigation may affect the business;
Whether there are other ways of obtaining a remedy;
Whether the defendant could pay damages (ie practical benefit)

Statutory “derivative” actions: s236
S237(3) It is NOT in the company’s best interests if all directors that participated in the decision: Made the decision in good faith for a proper purpose;
The directors did not have a material personal interest in the decision;
informed themselves about the matter to an extent they believed appropriate;
rationally believed the decision was in the best interests of the co.
That is the business judgment rule

Statutory “derivative” actions: s236
d) There is a serious Q to be tried

The applicant must show an arguable case.
The applicant does not have to show they would win – they only need to show there is some
likelihood of success.

e) The applicant gave the company 14 days’ notice before making the application

Swansson v Pratt

Wife was a director and shareholder of R A Pratt Properties Pty Ltd (“RAPP”) – H&W divorced

W wanted company to sue Husband for breach of directors duties arising from his management
of RAPP
Ws application for derivative action rejected

o o

realissuesbetweenW&HwouldbemoreappropriatelydealtwithbywayofFamily Court property settlement. Collateralpurpose-whethertheapplicantisseekingtobringthederivativeactionfora collateral purpose. If so, this would amount to an abuse of process.

Revision Questions LO 12.3 1. What is a statutory ‘derivative action’?

2. Why was the statutory derivative action remedy included in the Corporations Act?

3. What elements need to be satisfied under section 237(2) of the Corporations Act 2001 (Cth) before a court must grant leave for an applicant to bring a proceeding on behalf of a company?

Members’ personal rights

LO 12.4

Personal action = a legal action to enforce a personal right
Individuals’ personal membership rights include the right to:
o havetheirvotecountedandrecorded
o haveascrutineeriftheyarestandingforelectionasadirector o enforceadeclareddividendasalegaldebt
o haveadividendpaidincashifsorequiredbytheconstitution

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

o nothavetheirshareholdingdilutedbyanissueforanimproperpurpose o havetheconstitutionobservedinrelationtoparticularprocesses.

Personal action:

• •

statutory contract
• A member can take personal action to seek enforcement of personal rights conferred on

them by the company’s constitution (as per topic 3) general law remedies

Representative or class action: to enforce personal rights that are conferred on members generally
involves a single proceeding against a defendant on behalf of many individuals.
Revision Question LO 12.4
1. What are some examples of members’ personal rights?
2. What actions may be pursued by a member for breaches of their personal membership
rights?
What is a class action?

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

ISSUE #1 ISSUE #2 ISSUE #3 ISSUE #4

Tutorial 7 Workbook: members’ remedies

Reading: CLIA Ch 12

Tutorial tips & tricks

Start by revising the law you need:

Who is the applicant?
When (what circumstances) is the remedy available? What does the applicant have to prove?

Why? What does the applicant want?

In answering this question, note it is also about a general; meeting, so you may also have to revise material from past topics.
Start by revising the law you need, for example, for the oppression remedy:

Law:
• Who can apply for order s233

(a) ____________ (b) ____________ (c) ____________

•

Under s232, a court may make an order under s233 if:

The conduct of _______________________________________________; or
An ____________ or _____________________ or ___________________ by
or on behalf of a company; or
A ___________________, or a _________________________ of members or a class of members of a company is either:
contrary to ____________________________________________________________ or
__________________________ to, ___________________________________ to, or
____________________________________________________, a member or members whether in that capacity or in any other capacity.

The case of __________________ v _____________________________________ established that, where a member had been excluded from participation, it may not be

•

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

• • •

oppressive if the decision was not a decision which no Board acting reasonably could make. The case of __________________ v _____________________________________

established the reasonable expectations test.

The case of __________________ v _____________________________________ established the commercial unfairness test

The court has wide discretionary powers under s____________ to give relief from oppressive conduct.

You can also produce similar flashcards for each of the members’ remedies.

Question 1 LO12.1-12.2

Stella, Marcus, Ioan and Magda are the only directors of President Watches Pty Ltd (President), a company that sells expensive antique watches. Each director holds one share and they are the only shareholders.

The directors have been friends for many years and they had all previously worked for the same employer. They decided to start the watch business after they were all made redundant by their former employer. They thought the watch business was a great idea, as they all had some knowledge about antique watches and starting the business meant they would all effectively be employed. Although the business is performing well, Stella, Marcus and Magda become frustrated with Ioan because he is always absent from the business due to family issues. At the annual general meeting held in April, a resolution is passed removing Ioan as a director.

In June, a customer comes into the President shop looking to sell a very rare antique watch. Stella, Marcus and Magda are all in the shop at the time. They admire the watch and decide to buy it themselves. After negotiating the price, they purchase it for $100,000 and later sell it at an auction for $1 million. The three directors shared the profit among themselves.

When Ioan discovers that the other directors profited from the sale of the watch he is furious. Sensing Ioan’s anger, at the next shareholder meeting the three directors present a resolution to exonerate the directors from any liability in connection with the watch transaction. The resolution passes three to one — Ioan votes against it.

Advise Ioan about what shareholder remedies are available to him.

SOLUTION OUTLINE

As the question is open ended, set out the framework of members remedies eg Figure 12.2.
Then use the flashcard approach above to set out the framework of laws.
Identify in general terms the conduct being complained of – what is the conduct and who (which organ) is responsible. Think about the “remedy” that would be most useful to Ioan.
Apply the case law and legal tests.
Reach a conclusion.

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

Question 2 – Short Answer Questions – if time permits

Short answer exam questions may take the form of ‘flashcards” eg fill the blanks or matching lists; or short answer. Question 2 provides an example of this type of question for topic 7 material.

Part (a)

In two or three sentences, describe what s 236 does.
Note, do not simply state what the section says. You are expected to describe its significance.

———————————————————————————————————————————- ———————————————————————————————————————————

Part (b)

Section _____ sets out the requirements for the court’s leave to sue under s 236(1).

Part (c)

Who can apply for an injunction under s 1324?_________________________________ Use one sentence to describe. Your answer is not case sensitive.

Part (d)

As regards inspecting a company’s books in s 247D and s 247A:
The first column contains a statement and the second column contains the correct phrase in response to complete the statement. Every statement has a correct response, but you can only use each response once, so choose the best response:

Note: there are more responses than statements.
Note: for developmental purposes of the tutorial you have been provided with the section pinpoints, in the exam you may not be provided specifically with the sections.

Statement
A member may inspect the company’s books
A court may order another person to inspect the books on the member’s behalf

List of responses
A. if the member is acting in good faith;

and for a proper purpose
B. if the applicant in acting in good faith

C. by authorisation of directors D. by paying the fee

Your answer

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer) Topic 7 Problem question:

LO 12.2.1

For many years Kelly, Beyoncé and Michelle conducted the business of musical producers as a partnership. In 2013, Destiny’s Child Pty. Ltd. was incorporated with the purpose of purchasing and conducting the partnership business. The share capital of the company was held equally by Kelly, Beyoncé and Michelle who were also appointed directors of the company. The company operated very successfully with substantial dividends declared in each year.

After several years, the relationship between Kelly and the other directors deteriorated to such an extent that Beyoncé and Michelle refused to talk to Kelly. At a board meeting (that Kelly did not receive notice of), Beyoncé and Michelle passed resolutions:

(1) removing Kelly as a director,
(2) determining that no further dividends be declared despite the continuing profitability of
the company, and
(3) issuing further shares to Beyoncé and Michelle.

In addition, Beyoncé and Michelle incorporated another company, Girl’s Tyme Pty. Ltd. and it came to Kelly’s notice that a lucrative contract entered into by Destiny’s Child Pty. Ltd with Solange, a famous recording artist, was going to be transferred to Girl’s Tyme Pty. Ltd. Beyoncé and Michelle have refused Kelly access to the records of the company and have given notice of a general meeting to pass a special resolution altering the Constitution so as to provide for the compulsory acquisition of Kelly’s shares.

Advise Kelly of any remedies under the Corporations Act

Facts: A typical small business scenario where the underlying social or family relationship among participants deteriorates, affecting the company. Look at what has happened to Kelly, as a minority (1/3) shareholder.

removed as a director
no future dividends
no notice of board meeting
shareholding diluted through a new issue

Issues: ISSUE #1 ISSUE #2 ISSUE #3 ISSUE #4

Who is the applicant?
When (what circumstances) is the remedy available? What does the applicant have to prove?

Why? What does the applicant want?

Law:
Members can apply for a winding up under s461 Members of a company may apply for relief under s234.

Section 232 criteria:

the conduct of a company’s affairs; or
an actual or proposed act or omission by or on behalf of a company; or 12

AYB230 SEMESTER 1,2023 PROF Ellie Chapple (UC & Lecturer)

• a resolution, or a proposed resolution, of shareholders or a class of shareholders of a company,

is either:
o contrary to the interests of the shareholders as a whole; or
o oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a

shareholder or shareholders whether in that capacity or in any other capacity.

The court considers the legal tests examining whether the conduct is contrary to the interest of the members as a whole or oppressive of unfair to a member or members. In determining oppression, there are 2 main tests:

Whether the actions of the directors in managing the affairs of the company are reasonable (Wade v NSW Rugby League Ltd)
What are the reasonable expectation of members based on the history and background of the company (Boyd v Feeney)?
They may be depriving A of the right to management: Re Bright Pines Mills Pty Ltd.
Nonpayment of dividends where dividends have been paid in the past. Is it because of low profits (it was trading profitability before) but has it now stopped and need to retain funds?) Are B & M paying themselves large bonuses? See Sanford case, Shallamah Holdings case
Is the issue of further shares for a proper purpose (see s181) if not for a proper purpose then breaches of directors’ duties can be seen as oppressive? What is a proper purpose see the case of Howard Smith v Ampol Petroleum Ltd.?
The creation of a new company to take over the business see the case of Fexuto Pty td v Bosnjak Holdings Pty Ltd.

that the company be wound up;
that the existing constitution be modified or repealed;
regulating the future conduct of the company’s affairs;
the purchase of the shares of any shareholder by other shareholders or a person to whom a
share has been transmitted by will or by operation of law;
the purchase of the shares with an appropriate reduction of the company’s share capital;
that the company institute or defend legal proceedings or authorise a shareholder to
institute or defend legal proceedings in the name of the company;
appointing a new receiver or a receiver and manager;
restraining a person from engaging in specified conduct or from doing a specified act; and
requiring a person to do a specified act.
Application
You need to look at the decisions here, and evaluate against the case law.
Conclusion As shareholder, Kelly may seek winding up, or an order to sell her shares at fair value.

The ‘company’s affairs’ includes conduct of the directors, majority shareholders, substantial shareholders as well as the company itself: s53

The court has wide powers to make any order it considers appropriate if shareholders can prove that the conduct of a company’s affairs is contrary to the interests of the shareholders as a whole, oppressive, unfairly prejudicial or unfairly discriminatory. Examples of orders that may be appropriate are set out in s233, which include:

Lecture week 7 special topic: Current issues in risk management

Lecture week 7: Overview

o Disruptive example o Climate change risk o Privacy principles
o Data protection

LO-CC LO-PP LO-DP

Lecture special topic: Disruptive example

! Refer to the Whitehaven Coal example discussed in Topic 3 https://www.abc.net.au/news/2020-08-13/shareholder-fossil-fuel-resolution-whitehaven-

coal/12546830

What would your response be if you were on the Board and members are agitating to divest from fossil fuel activity? For example, would you be surprised? …………………………………………………………………………………………………………………………………………………………..

…………………………………………………………………………………………………………………………………………………………..

LO Climate Change Discuss the contemporary view of

directors’ duties in assessing climate change risk

Suggested reading & references: see QUT Readings

AICD, Climate risk governance guide, 2021
GIA, Guide for boards and management on the path to net zero, 2022
AASB Guidance for Climate-related and other emerging risks disclosures under Practice
Statement 2, 2019
LOCC Describe how Boards should deal with climate change risk
How do boards identify climate change risks? Significant global events

AYB230 SEMESTER 1. 2023 | WEEK 7 CURRENT ISSUES risk management | UC Prof Ellie Chapple

2017: TCFD: Disclosure standards for climate change induced financial risk
Recommendations | Task Force on Climate-Related Financial Disclosures (fsb-tcfd.org)
2020: SAY ON CLIMATE.ORG: Recommend disclosure & stakeholder engagement
https://sayonclimate.org/
2020: VALUE REPORTING FOUNDATION: IIRC & SASB merged to form VRF
https://www.valuereportingfoundation.org/about/
2021 IPCC: Declares climate change emergency
Sixth Assessment Report (ipcc.ch)
IPCC, Climate change 2021

Human activity contributes to atmospheric gases (GHG) that heat the earth.
Average temp change in Australia 1.4 degrees
TCFD 2017

• See Figure 2 Climate related impacts, risks and opportunities

Value Reporting Foundation 2020

Merger of Integrated reporting & Sustainability Accounting Standards Board
Merged with IFRS
Significant Australian events

CPD opinion: 2 lawyers first published an opinion on Australian company directors’ liability for climate change risk 2016-2020
ASIC RG 247: ASIC adopts TFCD recommendations for climate change risks and impacts to be disclosed in OFR
AASB Practice statement 2 Guidance for Climate-related and other emerging risks disclosures
AICD Climate risk governance guide Why is climate change an issue for boards?

The risks
What are companies’ physical risks from climate change?
o Extremeweatherevents
o Ecosystemloss
o Damagetobuiltenvironment&physicalassets o Supplychaindisruption
o Strandedassets
What are companies’ economic risks from climate change?
See TCFD figure 2 above
o Transitionrisksinchangingregulations o TechnologyR&Ddevelopment
o Stakeholder&customerpreferences o Transitiontonetzero2050
What are the reputation & litigation risks for companies? o Reputation:

AYB230 SEMESTER 1. 2023 | WEEK 7 CURRENT ISSUES risk management | UC Prof Ellie Chapple

o notmeetingstakeholders’expectationsforaccountability
o Questioningthe“sociallicencetooperate”
o Unreliableinprovidinggoods&servicesduetobusinessdisruption

• Litigation
o Misleadingcompanydisclosures
o Failingshortofdirectors’duties
o Insolventtradingduetofluctuatingsolvencyissues

• Activism
o ShareholdersexercisingtheirrightstobringmatterstotheBoardintheformof

resolutions
o Forexample,WhitehavenCoal
o Banks’investorsdemandingthebanksexitfinancingfossilfuelindustries

Case: McVeigh v REST (2018)

In 2018 Mark McVeigh, then 23-year-old superfund member, filed suit against Rest alleging that the trustee violated the Corporations Act 2001
failing to provide information related to climate change business risks and any plans to address those risks.
McV settled when REST agreed to more proactively manage the portfolio for climate change risk & more disclosure
Case: CBA v Abrahams (2021)

• •

•

Commonwealth Bank of Australia (CBA) ordered to release documents regarding its decision to finance seven oil and gas projects.

Relying on their rights as members, Guy and Kim Abrahams as trustees for the Abrahams Family Trust (Abrahams), as long-term shareholders of CBA, applied for access to the documents

Abrahams requested the documents to determine whether CBA infringed its own environmental and social policies and whether the projects are consistent with the goals of the Paris Agreement.

Case: ACCR v Santos (2021)

• •

•

Australia’s first ‘greenwashing’ case

the Australasian Centre for Corporate Responsibility (ACCR), commenced a proceeding against Santos Limited (Santos) over its claims that natural gas is ‘clean fuel’ and that it has a ‘credible and clear plan’ to reach net zero emissions by 2040.

The ACCR claims these representations constitute misleading or deceptive conduct in breach of the Corporations Act

What does the law require of company directors?

• The company law o S181

o S180
Breaches for Misleading disclosure

• Called “greenwashing” when applied to company disclosures with vague or unrealistic statements about environmentally sensitive approaches

AYB230 SEMESTER 1. 2023 | WEEK 7 CURRENT ISSUES risk management | UC Prof Ellie Chapple

Especially in financial products/investing
Information Sheet 271 (INFO 271)
Diversa Trustees Limited
o vagueclaimsthatitexcludedinvestmentsincompaniesinvolvedin‘pollutingand carbon intensive activities’.
Black Mountain Energy Limited
o Misleading company statements that its natural gas development would be net zero
What should boards do?

Boards are required to provide advice and monitor the company’s business direction
Climate change risk is part of overall risk management strategy

o Seekinformation

o Analyseinformation

o Disclosefinancialandnon-financialimpactsandprojectionsusingrelevantstandards & frameworks

o Engagewithstakeholders Advice for boards…

TCFD framework
AASB 2019: Climate-related and other emerging risks disclosures: assessing financial
statement materiality using AASB/IASB Practice Statement 2
Many reporting frameworks: GRI; CDP; IIRC; SASB (IFRS examining new standards during 2022)
Engage with stakeholders
• Say on climate
Revision Questions LO CC
1. List three risks of climate change that Boards should be aware of.
2. What is the TCFD and describe its recommended framework.
3. What role does the AASB play in climate change risk disclosure?
LO Privacy principles and LO Data protection: Data Protection and Privacy Principles in Australia: Issues for Boards
LOPP Outline what Boards need to be aware of in applying privacy
laws
Note, this LO is specifically required for professional accreditation: see CPA Suggested reading & resources: see QUT Readings

• AICD, Data and privacy governance, 2020 4

AYB230 SEMESTER 1. 2023 | WEEK 7 CURRENT ISSUES risk management | UC Prof Ellie Chapple

Ch 11, specifically 11.4, from Nickolas James, Business Law, 2020, Wiley.
Office of the Australian Information Commissioner (OAIC) www.oaic.gov.au
Australian Cyber Security Centre www.ACSC.gov.au
Privacy Act 1988
Privacy Act 1988 (Cth)

What is privacy?
A fundamental human right to establish boundaries to our physical person and identities
privacyinternational.org
How is privacy protected?
Privacy Act 1988 (Cth) is the principal piece of Australian legislation protecting the handling of personal information about individuals.
The Act includes the 13 Australian Privacy Principles (APPs).
Who does the Act apply to?
organisations: government agencies, companies with a turnover of more than $3 million
businesses whose turnover is below that threshold but where they deal with individual health records or they are data firms
Regulator: Office of Australian Information Commission (OIAC) Australian Privacy Principles

• Office of the Australian Information Commissioner (OAIC) APP 1 Open and transparent management of personal information APP 2 Anonymity and pseudonymity
APP 3 Collection of solicited personal information
APP 4 Dealing with unsolicited personal information
APP 5 Notification of the collection of personal information
APP 6 Use or disclosure of personal information
APP 7 Direct marketing
APP 8 Cross-border disclosure of personal information
APP 9 Adoption, use or disclosure of government related identifiers APP 10 Quality of personal information
APP 11 Security of personal information
APP 12 Access to personal information
APP 13 Correction of personal information.

Information subject to privacy s6

• The APPs protect personal information and sensitive information.
o Personalinformationisinformationoranopinionaboutanindividualwhoseidentity

is apparent, or can reasonably be ascertained

o Sensitiveinformationisasubsetofpersonaldata,suchmattersasracialorethnic origin, political opinions, membership of a political association, religious beliefs or affiliations, philosophical beliefs, membership of a professional or trade association, membership of a trade union, sexual preferences or practices, criminal record or health.

Compare with global privacy rights (7) EU

• Recent years EU is at the forefront of regulation 5

AYB230 SEMESTER 1. 2023 | WEEK 7 CURRENT ISSUES risk management | UC Prof Ellie Chapple

• •

2018, the European Union introduced General Data Protection Regulation (GDPR) tightening controls on the handling personal information to imposing significant penalties.

7 GDPR principles:

Lawfulness, fairness and transparency
Purpose limitation
Data minimisation
Accuracy
Storage limitation
Integrity and confidentiality (security)
Accountability

LODP Describe how boards should deal with data protection & cyber

security risk

Data protection

Technology has changed the way companies collect and process data.
Directors and boards have greater responsibility for directing their companies to leverage data-drive opportunities while still maintaining governance of the data (processes, systems and frameworks).
These processes, systems and frameworks cover using and management of data.
Two main issues to consider are: data protection and data privacy.
Data privacy is who has access to data, while data protection is the tools and policies to actually restrict access to the data.
- Data protection: safeguarding important information from corruption, compromise or loss. For example, backup and recovery. Normally a data protection officer who identifies the data that must be protected and designing a set of policies to ensure the data can be recovered.
- Data privacy: the company must determine what data in a computer system can be shared with third parties or individuals. Two main aspects: control (authorized access) and mechanisms to prevent unauthorized access.
  What should directors do?
- Directors have the responsibility to promote good privacy culture and practice.
- Directors should consider how their company or organisation can take advantage of greater
  availability of open public sector data.
- Directors of not-for-profit organizations and research sectors – should align their internal data governance measure with the requirements for becoming a trusted user.
- Government has vowed to enhance the penalty regime under the Privacy Act – including fines of up to 10 percent of a company’s annual domestic turnover.
- The breadth, time and resources focused on data and privacy governance depends on the company’s size, quantity and quality of data.
- Directors should assess the effectiveness of data and privacy governance.
- Directors should look for ways to improve data and privacy governance on a continual basis
  – competencies and capabilities. Key elements of regulation
- Australian Cyber Security Centre (ACSC) is a helpful resource for cyber security threats

AYB230 SEMESTER 1. 2023 | WEEK 7 CURRENT ISSUES risk management | UC Prof Ellie Chapple

Notifiable data breach scheme

• In the event of a data breach Organisations subject to the APP have a legal obligation o to notify OAIC and

o affectedindividuals

an “eligible data breach”:
o any unauthorised access to, or unauthorised disclosure of, personal data, where a reasonable person would conclude that the access or disclosure would be likely to result in serious harm to any of the individuals to whom the data relates.”
“serious harm” from the data breach, consider the kind of data and its sensitivity
the persons who obtained the data
whether the data are protected.

•

See the register for examples
See Australian Cyber Security Centre for Resources https://www.cyber.gov.au/

Revision Questions LO PP & LO DP

For each of the GDPR principles, find a sentence or 2 that describes each principle.
For each of the Australian Privacy Principles, find a sentence or 2 that describes each
principle.
What is the difference between data protection and data privacy?
Tutorial Workbook: Current issues in risk management
Note, there is no tutorial on this topic.
Instead, practice the revision questions and the online revision quiz.

CLIMATE CHANGE RISK

Q1. The Governance Institute Report (2022) Guide for boards and management on the path to net zero, says this at P14:
“In the last few years, Australian regulators have been increasing their oversight of climate related disclosure by organisations. Furthermore, liability risk is on the rise with Australia placing second in the world for climate litigation cases. This combination of increasing regulatory expectations and an evolving legal landscape makes it crucial for companies to recognise the importance of creating meaningful and transparent disclosure documents.”

Illustrate what the Governance Institute is referring to by discussing one relevant company law case.

DATA PROTECTION
Q2. Read the data breach scandal involving PEXA: PEXA stirs up seller guarantee after MasterChef hack

AYB230 SEMESTER 1. 2023 | WEEK 7 CURRENT ISSUES risk management | UC Prof Ellie Chapple

Joyce Moullakis
Senior Reporter AFR
Aug 3, 2018 – 11.00pm
Online property settlement group PEXA will offer up to $2 million of protection to sellers transferring funds over its system after a high-profile hack resulted in settlement funds being stolen from a former MasterChef
contestant. ASX-aspirant PEXA [https://www.afr.com/street-talk/pexa-readies-for-round-one- withfundies–h12p3c] has informed conveyancers and other stakeholders of a new initiative it is calling the PEXA Residential Seller Guarantee (PRSG), which provides a form of insurance for vendors of residential property.
The policy does, however, outline several exceptions and caveats such as only applying to the seller of a house and caps liability at $2 million.

“The PRSG applies to settlements of residential property on or after June 29, 2018and has been implemented to provide greater safeguards for your electronic settlements,” a document sent to conveyancers and obtained by AFR Weekend said. PEXA’s customer chief Lisa Dowie noted that the company had “listened” to concerns around its system.

PEXA and the security of the digital system were thrown into the spotlight for the wrong reasons in June when criminals targeted funds that were to flow through the platform.
The incident saw $250,000 stolen from former MasterChef contestant Dani Venn [https://www.smh.com.au/business/companies/masterchef-finalist-caught-in-conveyancinghacker- attack-20180622-p4zn4o.html] and her family after their conveyancer’s PEXA account was hacked by a scammer who added themselves as a user.

“That particular incident brought home the social responsibility that PEXA has, “PEXA chief executive Marcus Price said in an interview.
“We want to extend the safeguards … There is a matrix of insurance around property but we identify ed a gap that we had to step into.

“Our benchmark is to make this much, much safer than paper.”
‘You have to be ahead of the crooks’.
PEXA is owned by the big four banks, Macquarie Group, state governments, LinkGroup and Rich Lister Paul Little.
NSW Department of Finance, Services and Innovation secretary Martin Hoffman inlays said he believed an online platform remained less vulnerable to fraud and errors than a paper-based settlement system, despite “hacking risks”.
He noted that since 2013, the NSW Registrar-General had paid about $2.1 million for errors in paper transactions and $7.3 million for fraud.
The incident entangling Ms Venn was the second in as many weeks involving PEXA, where funds went missing, but Mr Price says many other attempts have been prevented.
He asserts that Ms Venn’s transaction would have been covered by the new guarantee had it been in place, allowing quicker access to the funds than other forms of insurance.
She and the other party subject to criminal behaviour have since recovered their funds after a shortfall was paid by PEXA.
“For anyone in any e-business you have to be ahead of the crooks … but it is part of all ecommerce,” he said. “Email is not a secure channel for financial institutions.”
The new guarantee is part of a series of measures PEXA is taking to bolster its defences after the embarrassing incidents.
Mr Price said PEXA had a cyber security team and worked closely with banks and the police to stop suspect transactions, and the company was also beefing up monitoring of transactions.
PEXA also plans to expand the insurance into other property transactions and is seeking to introduce new technology to ward against incorrect bank details being entered by conveyancers, an error that is not covered by the guarantee.

AYB230 SEMESTER 1. 2023 | WEEK 7 CURRENT ISSUES risk management | UC Prof Ellie Chapple

The investment community is keeping close tabs on PEXA and its security, as the company nears the pointy end of a dual track sales process.

Consider the following points:

a) The CEO of PEXA mentioned that the company has a “social responsibility” but what is the
company’s legal responsibility regarding its customers’ data?
b) Outline the steps a Board should take in the event of a data breach. (See the AICD reading
on What Boards should do in the event of a cyber breach, 2019.) https://aicd.companydirectors.com.au/membership/company-director-magazine/2019- back-editions/october/cyber-breaches

PRIVACY PRINCIPLES
Q3 Compare how the EU GDPR principles align with Australia’s privacy principles.

Q4 Consider a couple of recent examples as to how and what data companies collect from their customers, and how would you link this to the AAP.

Data collection

Notification of cookies pops up on a website that you are browsing

Your CV that you send in, in response to a particular job advert
Customer mail lists

Relevant APP
APP 5 Notification of collection of personal information

APP 3 Solicited information APP 7 Direct marketing

Retail stores such as Bunnings or Kmart using facial recognition software to track customers instore movements	APP 2 Anonymity APP 3 Solicited information APP 5 Notification of collection of personal information
Photographs taken at a university event	APP 2 Anonymity APP 3 Solicited information APP 5 Notification of collection of personal information

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

Lecture topic 8 Corporate liability

Overview

o BasedonCLIAChap5
o Disruptiveexample
o Howcompaniesexercisepower o Liabilityincontract
o Liabilityforagents
o Indoormanagementrule
o Statutoryassumptions
o Liabilityfortortandcrime

LO5.1 LO 5.2 LO 5.3 LO 5.4 LO 5.5 LO 5.6

! Disruptive example: how are companies liable?

Think about it – a company is an artificial person
How does it have an “intention”?
How does it have a directing mind and will?:
What is its culture?
Why is it relevant to legal liability?

o WesfarmersChairman
Michael Chaney on governance and corporate culture video

o http://2016.sustainability.wesfarmers.com.au/case-studies/governance/governance- and-corporate-culture

o AlsoseeAndrewHayVideoinCLIACh5e-text ………………………………………………………………………………………………………..

How companies exercise legal capacity

LO 5.1
How companies exercise power

Organic theory: recap
o Thecompanyactsofandbyitself. o Thecompanyactsdirectly.
o Theorgansofthecompanyare:
§ the members’ general meeting § the board of directors
§ the managing director
§ the company secretary
Agency theory:
o Thecompanyisaprincipal
o Thecompanyhasagentstoactonitsbehalf
o Thecompanyactsindirectly
If companies, as an artificial legal creation, can only act through the actions of people, then:
o Whatactionsisthecompanyliablefor? o Whoseactionswillbindthecompany?

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

Revision Questions LO 5.1

1. Explain the difference between the organic theory and the agency theory perspectives of how a company acts.

In the organic theory, what are the ‘organs’ of a company?
What is meant when we say that a company has acted ‘indirectly’?

Liability in contract

LO 5.2 Corporate contracts

Is a contract binding?
Contracting directly:
In writing
FOUR ways possible now:
o signthedocumentwithoutseal-signedasrequiredbys127(1)–2officers o signthedocumentwithseal–s127(2)andnecessarywitnesses–2officers
§ Optional for seal upon registration: s 123
§ However, pre 1.7.98 companies that still have a constitution will require a seal § As to use of seal, s 127(2)
§ As to protection for outsiders, s129(6)
§ use procedure set out in constitution
o Signthedocumentasadeed
o NEWIncludessignelectronicallysees110ATechnologyneutralsigning
o Remembercompaniescanstillmakecontracts‘verbally’–justlikeanindividual.
Is a contract binding? – Direct liability

• A contract entered directly is binding by and against the company if:
o itisinwritingandissignedinaccordancewiththeCorporationsActbyofficersofthe

company who have formal authority, and
o itissignedbycompanyofficersoragentswhohavethesubstantiveauthoritytoenter

contracts as the company itself:
§ members’ general meeting
§ board of directors, managing director, company secretary

Sign by seal

Optional for seal upon registration: s123
However, pre 1.7.98 companies that still have a constitution will still require a seal
As to use of seal, s127(2)
As to protection for outsiders, s129(6)
Is a contract binding? – Indirect liability

• A contract entered indirectly by an agent of the company is binding by and against the company if:

o theagenthadtheactualauthoritytobindthecompany,or o theagenthadtheapparentauthoritytobindthecompany.

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

Revision Questions LO 5.2

What requirements must be satisfied for a contract entered directly to be binding by
and against a company?
What requirements must be satisfied for a contract entered indirectly to be binding by and against a company?
What is meant by ‘substantive authority’??

Who has authority to act for a company?

LO 5.3
Substantive authority of an agent

An agent’s authority to sign a contract on behalf of the company may arise in several ways.
Actual
o Express
o implied
Apparent
Actual authority -express

• Express actual authority:
o Thecompanyhasgiventheagentoralorwrittenexpressauthoritytosignaparticular

contract on the company’s behalf.
o CanarisefromaprovisionintheActortheconstitutionegs198A

Actual authority – implied

Implied actual authority:
The company has implied the agent has authority to sign a contract on behalf of the company
by:
company position — the position of the agent in the company (e.g. managing director) implies
they have the authority to sign the contract
acquiescence — the company allows a person who has not been appointed as an officer or agent
to act in that capacity over a period of time and communicates its consent in some way
Officers’ Implied Actual Authority

CEO: Implied authority to do all things that fall within the usual scope of that office
Other executive officers: implied authority for things usual to their job
Director, acting alone – no implied actual authority to bind the company in contracts
Chairperson – same as director acting alone
o Hely-HutchinsonvBrayhead[1968]1QB549
Company secretary – administrative matters
o PanoramaDevelopmentscase
Customary Authority of Officers

Individual directors and chairperson- generally do not have power to bind the company with
outsiders
Managing directors can do all the board could do relating to ordinary business
Company secretary- administrative side of company’s operations
Apparent authority
3

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

The company has represented that the agent has authority, even though the company has not necessarily given express or implied actual authority.
A holding out – A representation is made that the agent has authority (e.g. use of corporate letterhead).
The representation is made by a person with actual authority.
The third party relies on that representation.
The company has the capacity to enter the contract.
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd

Architects sued Buckhurst for fees for work commissioned by Kapoor who had no actual authority. Court held there was apparent authority as Kapoor was
Acting as managing director as known by the board
The other directors left Kapoor in charge
So this was a holding out by someone with actual authority
On which another person relied
Company was bound by the contract
Revision Questions LO 5.3
1. What is the difference between express actual authority and implied actual
  authority?
2. How may implied actual authority arise by acquiescence?
3. What conditions must be met for an agent to have apparent authority when no actual authority exists?
Indoor Management Rule
LO 5.4
In common law, the indoor management rule provides that third parties can assume the company’s internal procedures have been properly followed, as long as they have no reason to suspect otherwise.
“persons dealing with a company in good Royal British Bank v Turquand (1856, UK): faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been irregular”.
Northside Developments
- –The director Mr Sturgess signed, and his son signed as secretary
- Co constitution required authorisation of use of the seal and signature by a director + director or
  director + secretary
  o Otherdirectorsdidn’tknowofthedeal
  o MrSturgesswasadirectorBUT
  o Hissonwasnotanofficerofthecompanyatall
- So effectively the mortgage was signed at the least, without authorisation, or at worst, as a forgery
- So should a coy be bound by a contract in this situation? What could the bank do?
  Northside Developments
- LIMITATIONS ON THE RULE
- Held: ND not bound by the mortgage

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

• •

The circumstances should have put Barclays on notice – there was no commercial advantage whatsoever for ND in entering the deal; B should have been suspicious
The correct people had not signed the document – one of the signatories was not an officer of the company – bank could have checked this.

Revision Questions LO 5.4-5
1. Describe the effect of the indoor management rule.
2. What are the exceptions to the operation of the indoor management rule?

Statutory Assumptions for the Indoor Management Rule

LO 5.5

Section 128(4) reflects the indoor management rule. Exceptions to the indoor management rule can arise if:

o theoutsidepartyhasactualknowledgeofanirregularity
o theoutsidepartyfailstomaketheenquiriesthatwouldusuallybemadebysomeonein

their position
o areasonablepersonintheoutsideparty’spositionwouldhavebeenputoninquiry

about a possible irregularity and be prompted to adequately investigate. o Evenincasesoffraudorforgery,theoutsider’sassumptionsarestillvalid.

• •

Statutory assumptions

Section 128 entitles a person dealing with a company
To make the assumptions outlined in s 129.
But limitation on assumptions s 128(4) if you have knowledge or a suspicion that assumption is
incorrect – see Northside case
o To’suspect’forthepurposesofs128(4),apersonmusthaveatleastanactual
apprehension or mistrust amounting to a slight opinion that the fact exists
Statutory assumptions s129

Statutory assumptions
Section 129(1) — the company constitution and replaceable rules have been complied with
Section 129(2) — a person listed as a director or company secretary on ASIC’s records has been
duly appointed and has authority to exercise the powers of their position
Section 129(3) — a person held out by the company to be an agent or officer of the company has
been duly appointed and has authority to exercise the powers of their position
Statutory assumptions
Section 129(4) — officers and agents properly perform their duties to the company
Section 129(5) — a document that appears to have been signed in accordance with s 127(1) has
been duly executed
Section 129(6) — a document that appears to have been fixed with the company seal in
accordance with s 127(2) and properly witness has been duly executed
Statutory assumptions
Section 129(7) — an officer or agent with authority to issue a document (or certified copy) also
has authority to warrant the document is genuine
Section 129(8) — the statutory assumptions can be made simultaneously
Designed to assist outside parties:
o BNZvFiberiPL–notintextbook 5

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

BNZ v Fiberi Pty Ltd

Did Doyle Snr have actual authority of Fiberi to make a representation as to Son’s authority?
he was only a director: NO
Therefore, neither Doyle nor his son had the appropriate authority to sign the contract
Outcome?
Company disputed validity of mtge, claiming that the persons who signed the seal had no authority
Bank could not rely on the assumption of sealing as the exception applied: the bank ought to have known that the wrong people signed. (Now see s128(4)).
Bank LOST: the contract was not binding Revision Questions LO 5.4-5

1. List the assumptions that outsiders are entitled to make in dealing with a company or its agents.

Under what circumstances can an outsider not rely on the assumptions presented in s 129 of the Corporations Act?
What must a party be able to demonstrate if they are to rely on the assumption that a person held out by the company to be an agent or officer has been duly appointed and has authority to exercise powers?

Corporate liability in tort and crime

LO 5.6

2 kinds of corporate liability: o Primaryliability;and
o Secondary,or‘vicarious’liability.
Distinguish
o Civilliability(tortsarewrongs)
o Criminalliability(crimesarewrongs)
2 sources:
o Commonlaw
o Statutoryliability
Primary liability at common law
- Company has primary liability for a tort or crime that the company itself has committed.
- Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705:
- Directing mind and will principle
  H.L.Bolton (Engineering) Co. Ltd v T.J.Graham & Sons Ltd [1957]
- ‘A company may in many ways be likened to a human body.
- It has a brain and nerve centre which controls what it does.
- It also has hands which hold the tools and act in accordance with directions from the centre.
- Some of the people in the company are mere servants and agents who are nothing more than
  hands to do the work and cannot be said to represent the mind or will.
- Others are directors and managers who represent the directing mind and will of the company,
  and control what it does. 6

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

The state of mind of these managers is the state of mind of the company and is treated by the law as such.
Whether their intention is the company’s intention depends on the nature of the matter under consideration, the relative position of the officer or agent and the other relevant facts and circumstances of the case.’
Secondary (vicarious) liability

Here the co does NOT commit a tort or crime
Company has vicarious (secondary) liability for:
o actscommittedbyemployeesinthescopeoftheiremployment o actsofthecompany’sagents.
o HollisvVabu
Corporate liability in tort
What is a tort?

• A tort:

o aharmfulact
o otherthanabreachofcontract
o thevictimhastherighttosueforcompensation o e.g.trespass,negligence,defamation

Whether a co has:
o Primaryliabilityforthetort;OR o Secondaryliabilityforthetort
Depends on the nature of the relations between the co and the person committing the tort.
In a corporate group, the court may lift the corporate veil to make a parent company liable for a
subsidiary’s torts.
“crime”

a harmful act or omission
leads to the state commencing criminal proceedings and seeking to have the offender punished.
o Criminallawrequiresforguilt
§ A guilty act (actus reus) – this is the physical element of the offence; § AND
§ A guilty mind (mens rea) – this is the mental element of the offence.
Whether or not the co has primary or vicarious liability depends on who committed the crime and their relationship to the co.
Liability in tort and crime

• Most likely to arise in:
o breachesofOHSregulations
o breachesofhumanrights
o damageofthenaturalenvironment.

Liability in tort and crime

Strict liability exists for offences where fault (or intent) does not have to be proved.
The company can use the defence of a reasonable ‘mistake of fact’ on the part of its agent,
employee of officer.
Absolute liability exists for a limited range of offences, where fault (intent) is not relevant.
Hollis v Vabu (2001, Aust)
Secondary liability 7

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

V operated a bike courier business
H was injured by a bike courier – employee?
Q: was the courier an independent contractor (thus V wouldn’t be liable), or was the courier an
employee (so V would be liable)?
The indicia of employment-v-contractor were:
o Theridersdidnotprovideskilledlabour
o Theycouldnotoperateasa‘free-lancer’tomakemoneyonthesideafterhours o Theyhadlittlecontrolovertheirwork,timeofsignin,etc
Tesco Supermarket v Nattras
Primary liability at common law

Here, Tesco was offering washing powder on sale
Posters in stores advertised the sale
When they ran out of the sale stock, the stocker filled the shelves with normal priced stock
Manager failed to take the posters down
Customer was charged at normal price
Tesco was charged (crime) false advertising
Held: Tesco was not liable for the actions of its store manager
The store manager was not a ‘directing mind and will’ of the co, so his mind was not the co
’s mind
S&Y Investments v Comm Union Insurance
Primary liability at common law

Hotel manager Holmes asked 2 electricians to do some work
Noticed someone in the bar servery area late (electricians had helped themselves)

o Didn’tthinkitmightbetheelectricians
o Pickedupaloaded.22rifleandshot‘toscarethepersoninside’
o Holmes’ conduct potentially = manslaughter (killing of a human being in the course of

committing an unlawful act; here the firing of the shot was a dangerous and unlawful act)

Problem with primary liability at common law

Under Tesco rule?

What types of employees are clearly the co’s ‘directing mind and will’
There are 2 ways to broaden the Tesco principle …
Hold lower management positions as the ‘directing mind and will’
Treat the analysis as a matter of statutory interpretation
Statutory criminal liability

Increasingly, statutes have to solve the problem by setting out fault and attribution issues, eg liability under THE CRIMINAL CODE ACT (1995)
All offences now require a

o Physicalelement(conduct);anda
o Mentalelement(mensreaorguiltymind)whichwillbemetbyshowingthecorporate

culture for compliance.
o Chapter2addresses‘GeneralPrinciplesofCriminalResponsibility’
o Corporatecultureandattribution
o Thefaultelement
o a‘corporateculture’existsthatdirected,encouraged,toleratedorledtonon-

compliance 8

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

o thebodycorporatefailedtocreateandmaintaina‘corporateculture’thatrequired compliance with the relevant provision.

! Class activity

More law reform!
Aust Law Reform Commission released its report on changing the rules for corporate criminal
lability (29.8.20)

o Simplifyattributionofcriminalconductbytheindividualstocorporation
o Newcriminaloffenceforcompanieswherethereisa‘systemofconduct’or‘patternof

behaviour’ of repeated breaches of the law, equates to criminal intent.
o Novideo,justnewsitem:
o Thereportdiscussestheimportantrolethatdirectorsandseniormanagersplayin

creating and maintaining corporate cultures, and the role that liability plays in ensuring corporate compliance. https://aicd.companydirectors.com.au/membership/membership-update/release-of- alrc-final-report-on-australias-corporate-criminal-responsibility-regime

………………………………………………………………………………………………………..

Revision Question LO 5.6

What is vicarious liability?
Explain how liability in crime applies to a company.

3. What are some examples of strict offences in relation to company conduct?

Tutorial 8 Workbook: Corporate liability

Reading: CLIA Ch 5

Question

Lucky Lady Pty Ltd (LL) owned a party ship by the same name that operated solely as a venue for Year 12 Formal parties. Billi Bligh was the Managing Director of LL and Captain of the LL. Bligh was well known in the industry for her non-existent maintenance program.

Billi has a standard form contract that the party hirers sign. It is on pre-printed form with her signature as managing director of LL. During a Formal party held on the LL in December 2019 booked by Part.Y.Bouy and his parents, the ship’s steering “key” failed, which controlled both the boat’s port and starboard steering units. The helmsman told Bligh ‘the Lucky Lady is no longer steering’; to which Bligh replied ‘that awful steering gear again!’ The LL was headed towards a pylon of the new duplicate Gateway Bridge. Despite Bligh ordering ‘full steam astern’ it crashed into the Bridge, causing structural damage of $1M.

No I.Dea was employed on the LL as “Party Person,” to look after the guests’ party needs. In safety drills, it was Dea’s responsibility to issue safety instructions, and guide passengers to the lifebuoys and lifeboats. However when the LL crashed into the Gateway Bridge he panicked, grabbed a lifebuoy, and jumped overboard, screaming ‘Jump! Save yourselves!’ Three young passengers (under 18 years) jumped ship, even though Bligh had lifeboats ready in the water. All three passengers that jumped made it to shore, but one boy was severely traumatised and his parents incurred $20,000 in

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counselling for post-traumatic stress disorder (PTSD) that he suffered after the ordeal. Bligh lowered all other passengers into the lifeboats without incident.

After all passengers were removed, Bligh could see another ship pull alongside and someone jumped on board. She couldn’t see well in the dark conditions. She grabbed a flare gun and fired it into the darkness near the person to scare them, yelling ‘I won’t have looters on this ship!’ It was a police officer with the Police Rescue Ship. He was hit by the flare and suffered injuries caused by the shot.

Advise on the following issues:

The State of Queensland sues Lucky Lady Pty Ltd for the tort of negligence in relation to the $1M
damage to the bridge. Will the company be primarily or vicariously liable?
To access their own personal property insurance, the Bouy family must produce a valid contract signed by LL. According to company law, do you have any concerns regarding the way the contract has been signed – is it binding on LL?

Optional for practice (it is unlikely there will be time to cover in tutes):

3. Finally, in a dispute with the police officer’s employer on compensation Lucky Lady Pty Ltd tries to claim on its insurance – the insurance company says it won’t pay because the company is responsible for crimes of violence involving intent to harm.

Will the company be held primarily or vicariously liable for the injury? Will Bligh be held liable in any way for her conduct?

Part 1 – Tort liability Law

The elements of a cause of action in negligence are:
1. a ___________________________________________
  was owed to the plaintiff;
2. there was a ____________________of that
  _______________________________;
3. the plaintiff suffered ________________________.
(No need to go into much detail here: negligence was covered in BSB111).
Corporate liability in tort is usually ________________ or
“_____________________ liability” for employees’ actions.
However, if a company is knowingly involved in a breach of the law then it may be
_____________________________ liable: ______________________________ v
___________________________.
If the person committing the wrongful conduct is the “_______________________
and ___________” of the company then their knowledge and action will be the knowledge and action of the company, and the company will be liable: ________________________ v

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______________________________.
• This is said to be the “_______________________ theory” of corporate liability: HL Bolton

Engineering Company Ltd v TJ Graham & Sons Ltd.

Part 1 – Application & Conclusion:

Your thoughts?? (First discuss whether Bligh was negligent, then discuss the principles of corporate liability to apply to the potential liability of LL).

Part 2 contract liability Law

A company ‘signs’ a contract directly by:

using its __________________, if it has one: s 127(2); or
having the document signed by __________________: s 127(1); or
using any other procedure set out in the __________________.
A company is legally bound by a contract made on its behalf by an agent with authority.
An agent can have ________________ or ________________ authority
Express actual authority exists when an agent has been given authority expressly, either through the Corporations Act (e.g. s 198A) or by a resolution of the board.
When a person is appointed to a particular position, there is a grant of implied actual authority to do whatever is usually incidental to the duties of that position.
For example:
A ______________________________does not have implied authority to bind the company
acting on their own unless they are a governing or managing director: ______________________________ v ______________________________.
In a single director company, that person would be equated with the position of managing director.
A managing director (also referred to as CEO) has implied authority to do ______________________________: ______________________________ v ______________________________
According to the “_______________________ ” persons dealing with a company in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular: Northside Developments Pty Ltd v Registrar-General

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s 129(1) ______________________________.
s 129(2) that anyone who appears, from information provided by the company that is available
to the public from ASIC, to be a director or company secretary
______________________________.
s129(3) that anyone who is ______________________________
s129(5) that the company has duly signed a document ______________________________.
s129(6) that the company has duly sealed a document if
______________________________.
Part 2 – Application & Conclusion:
Your thoughts?? (First discuss who made the contract on behalf of the company and their authority derived from the company to do so)
Part 3 – criminal liability – law

If the person committing the wrongful conduct is the “_______________________
and ___________” of the company then their knowledge and action will be the knowledge
and action of the company, and the company will be _______________________: ________________________ v ______________________________.
This is said to be the “_______________________ theory” of corporate liability: HL Bolton Engineering Company Ltd v TJ Graham & Sons Ltd.
Part 3 – Application & Conclusion:
Your thoughts?? (First discuss whether the elements of the crime exist – actus reus, mens rea, then discuss the principles of corporate liability to apply to the potential liability of LL).
Topic 8 problem question: LO 5.1-5.5
While attending a marketing conference, Perry Wright, a director of Monterey Film Studio Ltd (“Monterey”) meets theatre company director Madeline Mackenzie, who represents a company called Theatrical Concepts Pty Ltd. Madeline tells Perry that Theatrical Concepts is about to bring to the market an online ticketing and marketing system called “Boo”. Perry believes that the system would be suitable for Monterey’s business activities but knows that he will have to move quickly. He offers Madeline $3M for a licence. Madeline produces a licensing agreement, and Perry signs the document ‘for and on behalf of Monterey Film Studio Ltd’. Madeline says she will arrange for the agreement to be executed under seal by Theatrical Concepts and sent over to Monterey in a few days. The following week, Jane Chapman (Monterey’s company secretary) receives the agreement. She is not as enthusiastic as Perry about “Boo”. In her opinion, Monterey

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

is not bound by the agreement and is not required to pay the first instalment of the licensing fee due under the supposed contract. Is the licencing agreement binding on the company (Monterey)?

Facts: This problem is mostly about the laws of agency – Consider what position Perry has in the company and whether he had authority to bind the company. Note, this is a written contract.

There are usually three steps:
1. what power does a company have (s124)
2. who exercises the company’s power – officer & agents, so depends on their authority (s127,

s126)
3. have the procedures been complied with (s128, s129)

Issue: how is a written contract enforceable?
Law: A company has the power to enter into contracts under s124.

Check if the procedures in s127 complied with. A company can enter into contracts directly under s127 if the contract is signed in accordance with s127 (including electronic signing as permitted by s110A).

Apply: s127 requires the written contract to be signed by 2 officers. As Perry is a single director, s127 will not help. Therefore, need to see if Perry had authority to bind the company: s126.

Issue: Did Perry have the authority to bind the company?

Law: There are three types of authority: express actual authority, implied actual authority and apparent authority.
(a) Express actual authority – Where a company is concerned, express actual authority can arise (broadly speaking) in two ways:

from a provision in the Corporations Act or the company’s constitution (if it has one); or
by the board of directors (s198A) delegating its power (s198D).
(b) Implied actual authority – Actual authority can arise by implication from things the principal says and does. Included in ‘things the principal does’ are:

appointing someone to a particular position (usual or customary authority); and
otherwise acting to give the person authority, including through ‘acquiescence.
For example:

A director does not have implied authority to bind the company acting on their own unless they are a governing or managing director: Northside Developments Pty Ltd v Registrar-General (1990).
In a single director company, that person would be equated with the position of managing director.
A managing director (also referred to as CEO) has implied authority to do all such acts as are necessary to carry on the company’s business in the ordinary way. They may, for example: -borrow money and give security over the company’s property;
-guarantee loans made to their company’s subsidiary and indemnify persons who have given such guarantees: Hely-Hutchinson v Brayhead;

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-engage others to provide services for the company: Freeman & Lockyer v Buckhurst Park Properties.

Under the Corporations Act, a person contracting with a company may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or company secretary has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by a director or secretary of a similar company: s 129(2).

Where a company has more than one director, the courts have said that a director acting alone has no implied actual authority to bind the company in contracts with outsiders.

For a single director in a multi-director company to have any authority to bind the company contractually, either:

o theauthoritymusthavebeenexpresslygrantedtothem(forexample,wherethe board has expressly authorised one named director to negotiate a particular contract on behalf of the company); or

o theauthoritymusthaveflowedfromconductoftheboardaswhole.

(c) Apparent authority
Under the common law applying to Australian companies, there are three requirements for an agent to have apparent authority to act for a company:

o a‘holdingout’,
o bysomeonewithactualauthority, o onwhichtheotherpersonrelied.

Under the Corporations Act, a person contracting with a company may assume that anyone who is held out by the company to be an officer or agent of the company has been duly appointed and has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company: s 129(3).

Apply:

(a) Express actual authority – There is nothing in the facts suggesting that Perry has been given any express actual authority either by the board or by the CEO.
(b) Implied actual authority – A single director does not have implied actual authority to make contracts on behalf of the company. Perry therefore has no implied authority to commit Monterey to a contract.

(c) Apparent authority – Here, if anyone has made a representation or ‘holding out’, it is Perry himself, so clearly the second requirement for apparent authority is not satisfied. Perry cannot clothe himself with apparent authority. A representation that Perry was authorised to enter the contract on behalf of Monterey would have to be made by a person (eg. the CEO) who had actual authority.

CONCLUSION: Perry did not have the authority to contract on behalf of Monterey, and Theatrical Concepts cannot enforce the contract against it.

Issue: Would the indoor management rule assist Sales Concepts?
Section 129(2): Assumption about authority of certain officers – this is just implied usual authority.

Even assuming Perry is shown as a director in ASIC records, the assumption in s 129(2) does not assist Theatrical Concepts because a single director does not have implied actual authority to make

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

contracts on behalf of the company.
Section 129(3): assumption about apparent authority

Perry has not been “held out by the company…”

CONCLUSION: Perry did not have the authority to contract on behalf of Monterey, and Theatrical Concepts cannot enforce the contract against it. The indoor management rule does not assist.

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

Lecture topic 9: Financing companies

o BasedonCLIAChapter10 o Disruptiveexample
o Debt&equitycapital
o IssuingShares

o Types of shares
o Debt&debentures o Securityofdebts

Disruptive example:

LO10.1 LO10.2
LO 10.3 LO10.4-10.5 LO10.6

“do you see crowd funding as making investment capital more accessible to start ups?”
Watch this video from 2014, before CSF was legalised in Australia.
Does our regime live up to its promise?
https://www.malcolmturnbull.com.au/media/the-future-of-crowdfunding-in-australia
• ………………………………………………………………………………………………………..
Debt & equity capital
LO 10.1

Concerned with the company’s capital structure – the source of the funds it uses to carry on business
The “funding decision” is a crucial part of management o Seefigure10.1
Principal sources include:
o sharecapital(called“equity”)
o debtfinance
o offbalancesheetfinancingegequipmentleasing o tradefinance
o retainedearnings
Choosing debt or equity
- Equity financing:
  o issuingsharestoraisefundsfrominvestors
- Debt financing:
  o borrowingmoney
- Companies usually have some balance of equity and debt financing.
- Share investors:
  o seekcapitalgrowth
  o seekincome(dividends)
  o havenosecurityfortheirinvestment.
- Lenders:
  o seekinterest
  o seekrepaymentofprincipal

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o insistonsecurityfortheloan. Revision Questions LO 10.1

What is equity financing?
What is debt financing?
Distinguish between equity and debt in corporate finance.

Issuing shares

LO 10.2 What are shares?

A share is defined in s 1070A:
o atypeofpersonalproperty
o representsanownershipinterestinacompany o canbetransferredtoothers
o canbepassedtoabeneficiaryafterdeath.
Claims against a company to which rights attach, in particular: o distributionrights(interimandfinal)
o controlrights(eginformation,voting)
A “chose in action” – a form of personal property s1070A(1)
Not an interest in the company’s assets: Macaura
Issue of shares

“issue” in s 124 = “allot”
Five main steps to allotment
o Boardpowertoissuesharess254Aonanytermss254B
o Proposedmemberappliesandpaysfornewshares
o Applicationacceptedbymemberbeingplacedontheregisters231 o CompanymustnotifyASICs254X
Issue = 1st step, Allot = all steps
See figure 10.2
Power to issue shares

• Section 124 gives a company the power to: o issueandcancelshares

o issuedebentures
o grantacirculatingsecurityinterestoverassetsofthecompany o distributeanyofthecompany’spropertytomembers.

Rules governing share issue

• Directors determine if and when shares are to be issued. In doing so, directors must: o actingoodfaithandforaproperpurpose(CarltonvWhitehouse)
o complywiththecompany’sconstitutionegpre-emptionrightss254D
o complywiththes246Binrelationtovariationorcancellationofrights

o maintainamaximumof50non-employeeshareholdersinaproprietarycompany(s113) o meetdisclosurerequirementsforpublicfundraising(ch6D)
o seek shareholder approval if required. Eg financial benefit to a related party

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Revision Questions LO 10.2

Define a share.
What is the difference between a share issue and a sale of shares?
Who determines if and when shares will be issued?

Types of shares

LO 10.3 Types of shares

Section 124 enables a company to issue ordinary shares
all have identical voting & dividend rights
Section 254A enables a company to issue:
o bonusshares
o partlypaidshares
o preferencesharesredeemablepreferenceshares(similartodebtcapital,sharepricecan
be repaid without a liquidation).
Section 254B enables a company to create classes of shares that have different sets of rights and
entitlements.
Different rights means there are different classes, whatever the constitution may say
o ClementsMarshallConsolidatedLtdvENTLtd(1988)

o Re White Horses No 2 Pty Ltd (2016)

Ordinary shares:
Preference shares:
Redeemable pref shares:
o Allhaveidenticalvoting&dividendrights
o Preferencetoreceivedividend,fixedrate(%ofissueprice)
o Similartodebtcapital,sharepricecanberepaidwithoutaliquidation
Class of shares

• How do you know if there a different classes of shares?
o S117(2)(k)registrationapplication
o Subsequent to registration, pass a resolution and advise ASIC: s246F
o Forpreferenceshares,s254A&Grequiresthecompanytoapprovebyspecial

resolution, the rights attaching.

Crowd-sourced equity funding

ASIC RG 261
New Ch 6D.3A
Asset & revenue caps
ELIGIBILITY: S738H
(1) A company is an eligible CSF
(a) the company is a public company limited by shares, or the company is a proprietary company that:
(i) has at least 2 directors; and
(b) the company’s principal place of business is in Australia;
(c) a majority of the company’s directors (not counting alternate directors) ordinarily reside in Australia;
(d) the company complies with the assets and turnover test
(e) neither the company, nor any related party of the company, is:

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(i) a listed corporation; or
(ii) included in an official list of a financial market operated outside this jurisdiction;
(f) neither the company, nor any related party of the company, has a substantial purpose of investing in securities or interests in other entities or schemes.

The assets and turnover test
(2) The company complies with the assets and turnover test at the test time if:
(a) the value of the consolidated gross assets of the company, and of all its related parties is less

than:
(i) $25 million; or
(b) the consolidated annual revenue of the company, and of all its related parties, is less than: (i) $25 million

Asset & revenue caps S738H
o lessthan$25millioninassetsandannualrevenue
Offers of ordinary shares using a CSF offer document; S738J
Using a “licensed CSF intermediary’s platform” S738L
Eligible companies can raise up to $5 million in any 12-month period under the CSF regime:
s738ZC.
Revision Questions LO 10.3

1. What main rights are conferred by ownership of ordinary shares?

What main rights are conferred by ownership of preference shares?
What are the differences between ordinary shares and preference shares?

Debt finance & debentures

LO 10.4-LO10.5

Debt financing — the company borrows funds from: o investors
o financialinstitutions.
May be in the form of loan finance, or raised from many investors through an issue of
debentures
May be secured or unsecured
A secured debt is one the repayment of which is secured by rights over the company’s property
Debt financing

• A company will typically have a mix of:
o bankfinance—anoverdraftoraloansecuredagainstanassetofthecompany
o tradefinance—commercialbillsorotherfacilitiesprovidedbyacreditor,particularly

for purchase of stock
o privatedebt—aloanfromasignificantmemberordirector.

• A company considering debt financing must consider: o Willthecompanyqualify?

o Whatwillthebankwantintermsoffees,interestandsecurity? o Whatcontrolwillthelenderwant?
o Whatpenaltiesapplyforfailuretopay?
o Whathappensatthematurityoftheloan?

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o Arethedirectorsresponsibleforthedebt?
o Doesthecompanyhavethepowertoborrowunderthecompany’sconstitution? o IstheloanregulatedbytheCorporationsAct?
o Isadisclosuredocumentrequired?
o Isatrusteerequired?

Debentures

Defined in s 9
A debenture is a chose in action that includes an undertaking to repay money deposited with or
lent to the company.
Debentures are a type of secured loan.
A company wishing to issue a debenture must:
o appointatrustee—s283AA
o haveatrustdeed—s283AB
o meetASXlistingrulesrequirementsifthedebentureistobelistedandtradedonthe
ASX
o issueadisclosuredocumentifrequired—Ch6D
Duties of the debenture issuer (borrower):
o carryonbusinessinaproperandefficientmanner

o provideacopyofthetrustdeedtothetrusteeanddebentureholder
o makefinancialrecordsavailabletothetrusteeandauditor
o callameetingofdebentureholdersif10%ofthemrequestit,thetrusteerequestsitor

the court orders it
o notifyASICofthenameofthetrustee

Duties of the debenture issuer (borrower):
o givenoticeofanychargetothetrustee
o providequarterlyfinancialreportstoASICandthetrustee.
Duties of the trustee:
o ensurethepropertyissufficienttorepaythedebt
o ensuretheborrowerandguarantorhavenotcommittedanybreachofthedeed o ensuretheborrowerorguarantorremedyanybreachofthedeed
o notifyASICifaborrowerorguarantorfailstocomplywiththeirstatutoryduties.
Duties of the guarantor:
o carryonitsbusinessinaproperandefficientmanner
o makefinancialrecordsavailabletothetrusteeandauditor
o notifythetrusteewithin21daysiftheguarantorcreatesasecurityinterest.
The guarantor is usually a related party, e.g. a director or related company. Revision Questions LO 10.4-10.5
1. Under what circumstances may a company be required to issue a disclosure document related to debt financing?
1. What is a debenture?
2. List the key characteristics of a secured loan.
Security for debts
LO 10.6

• Lenders usually require some form of security so they can recover their funds if the borrower fails to pay.

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Registration of securities is governed by the Personal Property Securities Act 2009 (Cth).
Registration (perfection) of a security gives the security holder priority if the same asset has
been used as security for multiple lenders.
Types of creditors

Simply stated, there are 2 types of creditors o Secured
o Unsecured
2 types of secured creditors:
o Securityinterestovercirculatingassets
o Securityinterestovernon-circulating(fixed)assets
Secured creditors

• Secured creditors are a matter of private contract
o Aspecific,bindingloanagreementthatthecompanyhassigned,givingthecreditor

rights over the company’s property if the loan is not repaid – this gives the creditor a security interest

§ Debenture s9
§ real estate mortgage

Secured creditors

Registration of security interest are now dealt with the same as individual s (not in the Corps Act anymore) see the Personal Properties Security Register
https://www.ppsr.gov.au/
Secured creditors need to register their security interests to retain the benefit of their security
over the coys debts
Class activity

A short video outlining the importance of the PPSA
https://www.cgw.com.au/publication/an-introduction-to-the-personal-properties-securities-
act/
Consider the case study provided by the PPSR:
https://fbaa.h5mag.com/the_finance_professional_march_-_april/ppsr_case_study
What is Mr Smith’s position as creditor of the company ACE gardens.
! …………………………………………………………………………………………………………………………..
“Because he had registered a PMSI, Mr Smith’s Earth Moving Specialists security interest took priority over creditors with earlier non-PMSI registration.
Because Mr Smith had an enforceable agreement and effectively registered his PPS Lease on the PPSR, he was able to recover his front end loader back from the liquidators.”
Security of debts

If a borrower defaults on a circulating security interest and a receiver or liquidator is appointed to enforce the security, the liquidator must pay preferential creditors before paying the secured debt.
If a borrower defaults on a non-circulating security interest, the lender can take possession of the asset and sell it to recover their money.
This is particularly relevant distinction if a company is beige wound up in insolvency 6

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Other forms of ‘protection’ for debts

Lenders can further protect themselves through:

a negative pledge clause — the borrower cannot use the same asset for security on another loan
without permission
a Romalpa clause — title of goods does not pass until payment is received
Class activity

Consider the Retrofit activity
Samantha’s family from Singapore are interested in investing in Retrofit Pty Ltd. Their proposal is
to put in $900 000 by way of equity, but they want a guaranteed return per annum of 5.5 per cent. They suggest they will contribute the funds in three stages of $300 000 each time, provided certain milestones are met.
Samantha’s family want her to be a director of the company to look after their investment. They also want her to be an ordinary shareholder of the company. This is part of the condition of the $900 000 being invested in the company.
If Samantha’s family invests, would you recommend fully paid shares being issued each time or partly paid shares being issued and making a call each time?
Should Julian transfer 5 per cent of his shares to Samantha or should more shares be issued by the company? What is the consequence for Julian by transferring shares to Samantha?
If the company makes a profit from trading, does it have to pay the amount out as a dividend to all the shareholders?
If Samantha’s family take up preference shares, should they ask for cumulative or non- cumulative preference shares?
- ! …………………………………………………………………………………………………………………………..
- ! 4 points to note about financing:
- ! Point 1: New investors, Samantha’s family -> issuing new shares, what type of shares, fully
  paid or partly paid?
- ! Point 2: Transferring shares, Julian’s shares -> shares are personal property of their owner,
  are there any limits on Julian transferring his shares?
- ! Point 3: profits from trading. Dividends -> form of dividend, cash, property, shares?
- ! Point 4: cumulative or non-cumulative preference shares -> what are they, what is the
  difference?
  Revision Questions LO 10.6
  1. Why is it in the best interests of a lender to register their security interest for a loan? 2. List the priority interests, from highest to lowest.
  3. Describe the difference between a circulating and non-circulating security interest.

AYB230 SEMESTER 1,2023 Unit Coordinator PROF Ellie Chapple

Tutorial 09 Workbook: Financing a company

Reading: CLIA Ch 10

Question 1. LO10.1-10.6

Alex and Paco recently purchased a block of land in Surfers Paradise for $1 million. They want to develop the land by building an apartment block and selling the apartments at a profit. Unfortunately, Alex and Paco don’t have the money to proceed with the development.

Alex and Paco come up with a plan to develop the land whereby they will register a company called Bug Out Ltd. Alex, Paco and their friend Greta will be the directors of Bug Out Ltd. They plan to get investors to buy shares in Bug Out Ltd for $2 million.

Consider the following scenarios and advise Alex, Paco and Greta (the promoters) as to the company’s financing options:
(a) As regards raising the $2 million equity finance, describe and summarise the company’s options for equity capital raising. What is the difference between ordinary shares and preference shares?
(b) In registering a public company, the promoters have considered financing the capital acquisition by raising equity capital (in the form of shares), however they have not considered debt finance. Describe and summarise the company’s options for debt finance.
(c) Specifically consider whether crowd-sourced equity funding is an option for this start-up company.
(d) Alex tells you that in her past experience with bank finance, banks will always want collateral in the form of a security interest (such as a mortgage) over the company’s real estate and sometimes a personal guarantee from directors. Why do banks seek collateral to secure loans to companies?

SOLUTION OUTLINE – flashcards to get you started: Part a: Issues:

What is equity?
Who has the power to issue shares?

•

Law

• •

•

When do members have the power to veto an issue of shares?

Equity means …………………………………………………………………………………
the decision to issue new shares is made by …………………………………………………………………………………………………….: s ……………………………………… However, there are some restrictions on the directors’ powers to issue shares for example:

…………………………………………………………………………………………………………………………………………………

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…………………………………………………………………………………………………………………………………………….. …………………………………………………………………………………………………………………………………………………. ……………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………….. ………………………………………………………………………………………………………………………………………………….

• S254A states that preference shares can be issued if: ………………………………………………………………………………………………………………………………………………….

Question 2 LO10.1-10.5

Match the type of security in the first column to the most appropriate example or description in the second column. You can only use an example for one match so choose the best match. There are more examples than concepts, so choose the most accurate example to match the concept.
(This is a past exam question, and you will see it in its online format in the Topic 9 revision quiz.)

Question Items Preference shares Bonus shares Ordinary shares Debenture

Answer Items
A. Share in surplus assets in winding up B. No right to vote
C. Issued at no cost to shareholders
D. Needs a prospectus
E. Public company limited by

guarantee
F. Must appoint a trustee

Your answer

Question 3 (if time)
Slow Days Pty Ltd owns a block of land adjacent to the Everglade River on which it constructed 10 boatsheds. Each member of the company is issued one share and has the constitutional right to exclusively use and occupy one boatshed on a long lease. The yearly lease fees each member pays are calculated to cover holding costs of the land and minor maintenance work. There are nine members, and the tenth boatshed is used to store company owned equipment and all members are entitled to enter boatshed #10 and use the company’s equipment. The board comprises 2 directors who are also members.

Over time, the boat sheds have become very valuable and the shares change hands very rarely. In a recent family dispute, the member told the directors that a forensic accountant valued one share in Slow Days Pty Ltd at over $200,000. The directors believe that the company can raise a lot of capital by issuing another share to a new member with a lease of boatshed #10. From the funds raised, the board proposes to build a new common shed to rehouse the company’s equipment, with the other benefit that the company now has 10 sources of revenue from 10 lease fees.

LO10.2

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The board is able to win over five other members. Two out of the current nine members remain opposed to the plan to issue a new share, however the board tells them that it is too bad, as the company’s capital decisions and its operations are ruled by the board and the principle of majority rule.

Discuss the board’s power to issue the new share in a Slow Days Pty Ltd and whether the power is subject to any limits.

Problem question Topic 9 LO10.1-10.3

One of the proposals related to acquiring new plant and equipment that used a lot less water and reticulated used water so that it was recycled where appropriate. The other proposal related to acquiring only “fair trade” certified coffee.

Recall from Topic 4, the board originally deferred the proposals based on cost. However, the Board of OBC is now considering the various options for funding the sustainability initiatives. In order to raise cash, the directors of OBC decide to issue additional ordinary shares and new preference shares. The board would like your advice on the legal rules that govern the proposed issue of new shares in OBC.

The current shareholders’ register of OBC looks like this:

SOLUTION
Issues: Who has the power to issue shares?
When do members have the power to vote against an issue of shares?

Law: Section 254A provides rules for issuing bonus, partly-paid, preference and redeemable preference shares. It states:

(1) A company’s power under section 124 to issue shares includes the power to issue:

(a) bonus shares (shares for whose issue no consideration is payable to the issuing company); and

(b) preference shares (including redeemable preference shares); and
(c) partly-paid shares (whether or not on the same terms for the amount of calls to be paid or

the time for paying calls).

Renata Klein	30 ordinary
Gordon Klein	25 ordinary
Ed McKenzie	25 ordinary
Madeline McKenzie	20 ordinary
Celeste Wright	10 ordinary and 5 A class
Perry Wright	10 ordinary and 5 A class

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(2) A company can issue preference shares only if the rights attached to the preference shares with respect to the following matters are set out in the company’s constitution (if any) or have been otherwise approved by special resolution of the company:

(a) repayment of capital;
(b) participation in surplus assets and profits;
(c) cumulative and non-cumulative dividends;
(d) voting;
(e) priority of payment of capital and dividends in relation to other shares or classes of

preference shares.

(3) Redeemable preference shares are preference shares that are issued on the terms that they are liable to be redeemed. They may be redeemable:

(a) at a fixed time or on the happening of a particular event; or
(b) at the company’s option; or
(c) at the shareholder’s option.

The general rule is that the decision to issue new shares is a decision to be made by the board: s 254B(1). The directors will decide the number of new shares to be issued, the terms on which they will be issued, and the issue price. However, there are some restrictions on the directors’ powers to issue shares

Member approval – there are some situations, such as creating of varying classes (ss 246B–246G) that require member approval.

Follow the constitution – what does the constitution provide about issuing shares?

Restrictions on who shares can be issued to – directors can’t issue shares if the person isn’t eligible to be a member, eg a proprietary company can’t have more than 50 members: s 113.

Disclosure document – in many circumstances, a company will have to follow the process in Chapter 6D of the Corporations Act to issue a disclosure document to accompany the share issue.

Directors to issue shares for a proper purpose – recall from topic 5 that a share issue for an improper purpose will be invalid as a breach of fiduciary duty.

Notifications – if the share issue goes through, the company has to notify ASIC of the details of the issue: s 254X.

Application: A company can issue shares: s 124. This includes preference shares: s 254A(1)
The board generally has the power to issue the shares (s 254B), but the following restrictions apply:

Restrictions on the ordinary and preference share issue:

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• OBC is a proprietary company so can’t breach its restrictions in s 113. This means it can’t issue shares if that would result in more than 50 non-employee shareholders. It also can’t issue the shares in circumstances requiring a disclosure document (ie to the ‘public’). This is covered in more detail in chapter 11.

• If the replaceable rule in s 245D applies then when issuing shares of a particular class, the directors of a proprietary company must first offer them to the existing members.

Restrictions on the preference share issue
• As OBC already has different classes of shares, it must have a constitution allowing different classes of shares (as RRs do not allow for different classes of shares) however we do not know if the constitution actually permits preference shares as per s 254A(2).
• As the preference shares are a new class of shares, the directors will need special resolution by members to approve: s 254A(2)

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Lecture topic 10: Reporting & disclosure

o BasedonCLIAChapter11 o Disruptiveexample
o Reporting&disclosure
o Annualreporting

o Fundraising
o Defectivedisclosure

Disruptive example:

LO11.1-11.2 LO11.3 LO11.4 LO11.5

• Recall the Centro case under s180 (ASIC v Healy)
o https://www.youtube.com/watch?v=1CFyMbO0EbQ o Whatdidthecasedecide?
o Whydoesitmakedirectorsanxious?

• ……………………………………………………………………………………………………….. Corporate reporting & disclosure

LO 11.1-11.2

LO 11.1 – LO 11.2 Reporting & Disclosure

• The Corporations Act imposes disclosure obligations to:
o ensurethosewhomanageacompanyareaccountabletothosewhoownthe

company
o Balancetheprotectionofinvestorswithmaintenanceofanefficientandeffective

capital market.

Disclosure

Corporations Act 2001 (Cth) requires:

Periodic disclosure (e.g. annual reports)
Specific disclosure
o changeregisteredoffices142(28days),
o changeofdirector&secretary:s205B(28days),
§ subject to the new “DIN” regime
o changeofnames157(2)(14days)
o Changeoftypeofcompanys162(3)(14days).
ASX Listing Rules and Corporations Act require:
Continuous disclosure (of information that may affect investment decisions in relation to the

o Efficientmarkethypothesis:
o Anefficientandeffectivemarketexistswhenpricesofsecuritiesinthemarket

reflect all publicly available information.
o Whenthemarketisfullyinformed,asecurity’smarketpricewillbe‘correct’.

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company’s securities)

Regulators

• ASIC:
o Monitors,enforcesandadministerscompliancewithcorporationslegislation
o Publiceducationandadvocacy
o Promoteslawreform
o WorkscooperativelywithASX(e.g.intermsofcontinuousdisclosureregulations) o Regulationofdisclosure

• ASX:
o ASXListingRulesfunctionascontracttermsforentitieslistedontheASXexchange
o Requirescontinuousdisclosurebylistedentities
o ASXPrinciplesofgoodcorporategovernanceandbestpracticerecommendationsare

intended to promote best practice corporate governance

• AASB:
o Developsaccountingstandardsdesignedtoensurethatcompaniesproviderelevant,

reliable, understandable and comparable information that is useful for the decision

making of providers of capital • AUASB

o Developsauditingandassurancestandardstoguideauditorsinforminganopinion about and reporting on the compliance of an entity’s financial reports with the requirements of the Corporations Act

o Proposednewsustainabilityreportingstandardsfor2023 Revision Questions LO 11.1-11.2

1. What is the efficient market hypothesis?
2. Distinguish between periodic, specific and continuous disclosure.
3. List the principal bodies, laws and rules that regulate disclosure requirements.

Annual Reports

LO 11.3

Financial records:

o s286-allcompaniesmustkeepsufficientrecordstoenablethepreparationof financial statements if required

• Minute books
o Part2G.3-minutesofmeetingsandresolutionsofdirectorsandmembers o s251Arecordminuteswithin1month
o s251Brightofmemberstoinspectandcopy

Registers

• Chapter 2M of the Corporations Act
o S285overviewofobligations[AmendedbyCSFlegislation2018]

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• • •

•

o Annual(andhalf-yearlyfordisclosingentities)
o Appliestoallpublicandlargeproprietarycompanies(s45A);
o small proprietary company s293 and s294
o ReportsarelodgedwithASICandsenttoshareholders
o {fornon-accountingstudents,youmaybeinterestedintheCPAGuidetoAnnual

Reports}

Public company

o Anycompanythatisnotaproprietarycompanys9

o Canbelistedorunlisted Proprietary company

o Definedats45A&s113

o Distinguish‘large’and‘small’forreportingpurposess45A Small prop company

•

• •

•

o Directors’declaration Directors’ report: (s299 unlisted)

o Contextualisestheinformationinthefinancialreportandnotes

o Mustnotmisleadordeceive Auditor’s report: (s308)

o Providesanindependentopinion(s307)onwhetherthefinancialstatementsandnotes present a true and fair representation of the company’s actual financial position and performance (s308)

o Auditor’sindependencedeclaration(s307C)
Listed companies – in addition to above
o S299Aannualdirectorsreportforlistedcompanies
o S300Aremunerationreportforlistedcompanies
o S300(11)specificdisclosuresregardsdirectors’interestsandotherdirectorships
o S300(11B)specificdisclosuresabouttheauditor:non-auditfeesexpense;nonauditfee

expense is compatible with independence expectations; the reason directors are

satisfied with auditor independence
o S300(11C-E)thedollaramountofnon-auditservicesanddetailsofauditcommitteesign

•

o S292ifhasCSFshareholders
o s293memberswith5%ofvotingrightscanrequestthereports o s294ASICcandirectthatreportsareprepared

Disclosing entities

o Arerequiredtolodgehalfyearlyreports
o Definedats111Acand111AD
o Alllistedcompaniesareincluded
o unlistedcompaniesthathaveissuedsharescoveredbyChapter6Ddisclosure

requirements
Financial statements S 295
(a) the financial statements for the year; and
(b) the notes to the financial statements; and
(c) the directors’ declaration about the statements and notes

Financial report:

o Financial statements s 295 § Incomestatement

§ Statement of financial position § Statementofcashflows
§ Statementofchangesinequity

o Notes to the financial statements

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off.
• Annual reporting:

o Sendthefinancialreport,directors’reportandauditor’sreporttomembers:s314
o Lodgethefinancialreport,directors’reportandauditor’sreportwithASIC:s319
o Inthecaseofpubliccompanies,providethefinancialreport—whichusuallyincludes

the directors’ report and the auditor’s report — to members before the annual general

meeting. s250N and s317

Audited financial reports

Disclosing entities MUST have their annual financial report audited : s301 [Amended by CSF
legislation2018]
CSF small pty ltd does not have to have audit report until reach CSF threshold of $3M
o Publiccompany-mustappointanauditorofthecompanywithinonemonthafterthe
date of the company’s registration: s 327A.
o Alargeproprietarycompanymusthaveannualfinancialstatementspreparedand
audited, s292
o Proprietarycompany-directorsofaproprietarycompanyappointanauditoronlyifan
auditor has not been appointed by the company in general meeting: Sec 325. AWA case

• • • •

Auditors were negligent in relation to two audits conducted for the company
but that the auditors could file a contributory negligence claim against management.

The executive directors of the company did not exercise a proper duty of care. Share of the loss: AWA mgt. 33.3% of the loss; Auditors liability 66.6%.

Periodic vs continuous disclosure

Australia (and NZ) have a unique system of ensuring timely information to the market – combining listing rule requirement with statutory enforcement
Companies disclose – make announcements – every day • http://www.asx.com.au/

• See price sensitive announcements box

What must be disclosed?

S 674 and 675
o Informationnotgenerallyavailable
o materialeffectonpriceorvalueofthecompany’ssecurities o mustbedisclosedtoASICunlistedpubliccoy
o DisclosedtoASXiflisted
o Assoonaspracticable/immediately
ASX LR 3.1 & Exceptions
Cover in more detail AYB232/AYB205
Consequences

Civil penalty:
o Failuretocomplywithfinancialreportingss286-323DA(Thatispart2M.2-2M.3)isa
civil penalty under s1317E: s344
o Failuretocomplywithcontinuousdisclosuress674-675isacivilpenaltyunders1317E
Criminal penalty
o Failuretocomplywithcontinuousdisclosure o Failuretokeepproperfinancialrecordss286
• Other
o Failuretokeepproperfinancialrecordss286meansdirectorscannotrelyonthesafe
harbour defence to insolvent trading in s588GA

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• Annual reports that are claimed to be misleading or deceptive due to failures to adequately disclose

o CBAvAbrahams(2020)–failuretoaddressclimatechangeriskinreportdislcosures o AustralasianCentreforCorporateResponsibility(ACCR)vSantos(2021)-misleading

statement in annual report over carbon net zero targets

Class activity

Back in 2017, the government backed the concept of a director identification number
“Dodgy Directors: The Turnbull Government says it’s putting dodgy directors and their advisors on notice.” https://search-informit- org.ezp01.library.qut.edu.au/doi/10.3316/TVNEWS.TSM201709120129

What is the problem?
Fake Homers get boot from Australian companies By AAP Jun 12, 2020
Treasury Laws Amendment (Registries Modernisation and Other Measures) Act 2020 (Cth) (passed on 22 June 2020.)

Revision Questions LO 11.3

1. What are the main components of an annual financial report?
2. How does a directors’ report contextualise information in the financial report? 3. How does an auditor’s report help financial statement users? Managers?

Ch 6D fundraising

LO 11.4

The Corporations Act imposes disclosure obligations to ensure investors are informed about shares and other securities. This helps make the market efficient and effective.
Disclosure documents must not contain misleading information or omit material information.
What are ‘securities’? S700 & s761A
When is disclosure required? s706 general rule
5 types of disclosure documents

• S705 defines 5 types of disclosure doc:

1. Prospectus
2. Short form prospectus
3. 2 part corporate bond prospectus 4. Offer information statement
5. Profile statement

Disclosure documents are NOT required — ss 708 and 708AA for:

o Small-scaleofferings
o Sophisticatedinvestors
o Executiveofficersofthecompany
o Existingsecurityholders
o Professionalinvestors
o Giftsofsharesorsecurities
o Compromisesorarrangementswithcreditors o Takeovers
o DebenturesregulatedbyAPRA

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S708 small scale

may only be accepted by the person to whom the offer is made & the person is likely to be interested in the offer, due to:
o previouscontactor
o someprofessionalconnection,
o Statementsbythemthatindicatetheyareinterestedinoffers
Must not breach 20/$2M/12mth rule= 20 issues in 12 months raising over $2 million:

o Noofpeoplewhoacquiresharesmustnotbemorethan20(ieno.ofactualissues

made);
o Theamountraisedmustnotexceed$2M, o InANY12monthperiod

S708 sophisticated investors

Private placement offers:
min amount payable = $500K+
o Peoplewhoinvestsuchlargeamountsarepresumedtobeabletolookaftertheirown interests
‘wealthy investors:
o certificatefromaccountantthattheinvestorhas:
§ net assets of at least $2.5M, or
§ gross income for last 2 financial years of at least $250K. o S708sophisticatedinvestors
experienced investors:
§ Offer is made through financial services licensee (eg stockbroker) and they are
satisfied that the offeree has previous experience that allows them to assess the
benefits, risks, adequacy of information § Investor must sign acknowledgment
professional investors:
§ ‘professional investors’ defined in s9
§ Includes institutional investors, eg financial institutions, superannuation funds S708 Associates

‘PEOPLE ASSOCIATED’:
EXISTING SECURITY HOLDERS:
RIGHTS ISSUES/CLEANSING NOTICES
Prospectuses: Form & Content

• 2 levels of disclosure:
o s711specificegnatureofsecurities o s710general:

all information investors and professional advisers would reasonably expect to make an

informed investment decision o consider:

§ the nature of securities
§ Financial position, performance & prospects of company § … And see also s715A:

Short form Prospectuses s712

Alternative disclosure for listed companies:
S713 relaxes disclosure for listed co’s:
o Prospectusmustdisclosealltheinfoinvestors,professionaladvisorswouldreasonably require in order to make an informed assessment of, eg:

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§ the effect of the offer on the body

§ the rights and liabilities attaching to the securities

Short-form prospectuses s712
‘Referred’ documents (ie the document lodged with ASIC) are regarded as part of the prospectus (s712(3));
If information in the referred document is primarily of interest to analysts or advisers, the reference in the short-form prospectus to the document lodged with ASIC must include:
o astatementtothiseffect;
o adescriptionofthecontentsofthelodgeddocument.
Offer Information Statements

S715(1): Less disclosure requirements:
Key point:
o nomorethan$10Mtoberaised,
o includingallotheramountspreviouslyraisedbyOIS, o Eitherby:
§ The company itself; OR
§ A related body corporate; OR § Controlled entities.
Lodgement with ASIC

S718: a disclosure document must be lodged with ASIC
S727(1): offence to offer securities or distribute applications that needs disclosure unless the
disclosure document has been lodged with ASIC.
S727(2): The application form for the securities must be IN the prospectus or ACCOMPANIED BY
the prospectus.
BUT for non-listed securities a 7-day waiting period applies – can’t accept applications during
this time. (ASIC can extend this to 14 days).
Crowd sourced equity funding
- CSF offer document: s738J
- Worded clear, concise & effective manner: s738K
- Not misleading or deceptive: s738U
  CSF offer document vs disclosure document
- CSF is not lodged with ASIC
- CSF document is accessible on CSF intermediary site
  o CSFintermediaryresponsibleforvettingtheofferdocument
- CSF has minimum prescribed information, but not a general “all information reasonably
  expected” requirement
- Template in RG261
  Revision Questions LO 11.4
  1. List the five main types of disclosure documents in order from least information to most informative.
  2. What is meant by the term ‘anti-avoidance’ in relation to disclosure?
  3. Why are secondary sales of securities not generally subject to disclosure
    requirements?

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Misleading & deceptive disclosure

LO 11.5

S728 Disclosures are ‘defective’ if they:

Mislead
Deceive
Omit required information
in a way that would be materially adverse from the perspective of a reasonable person
considering the financial product. Misleading and deceptive disclosure s729

Misstatements or omissions in disclosure documents can lead to civil or criminal liability for:
o thecompanyorpeoplemakingtheoffer o directors
o proposeddirectors
o theunderwriter
o professionaladvisersandserviceproviders.
There are due diligence and reasonable reliance defences: s731-733 Misleading & deceptive disclosure: CSF offer document s738U

misleading or deceptive statement; or
there is an omission of information required by section 738J
a new circumstance has arisen requiring disclosure
Who is responsible?

o ThecompanyandtheintermediarymusttakeactioniftheCSFofferdocumentis defective: s738V

o Intermediarymustcloseorsuspendtheoffer:s738X
o Intermediaryisliableforlossordamages738Y,aswellas: o thecompanyorpeoplemakingtheoffer
o directors
o proposeddirectors
o theunderwriter
o professionaladvisersandserviceproviders

• CSF offer defences: s738Z o Didnotknow

o Reasonablerelianceoninformation o Withdrawconsenttobenamed

NRMA v Fraser (1995)

• This case concerns “demutualisation” of NRMA
o NRMAisacompanylimitedbyguarantee,formedtoprovidemotoringservicestoits

members
o ‘demutualised’
o TheprospectusofferedFREESHARESinHoldingstomembersofAssociationand

Insurance in return for giving up their rights of members
o Theprospectusdiscussedtheadvantagesoftheofferbutdidnotdiscussthe

disadvantages.

Held: Failure by the directors to discuss the NO case was misleading
Directors had a duty to disclose the NO case because of their FIDUCIARY duty AND s710
Result:

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o Demutualisationunsuccessful
o Nopersonalliabilityofdirectors,BUT
o Injunctionawardedtopreventthecirculationofthemisleadingprospectus

Revision Questions LO 11.5

1. What is defective disclosure?

2. What are the three types of statutory liability for defective disclosure? 3. Who can be held liable for defective disclosure?

Tutorial 10 Workbook: Reporting and disclosure

Reading: CLIA Ch 11

Tutorial tips & tricks

The usual issues in these types of problems on disclosure are going to revolve around the same issues:

What? Definition – what type of disclosure is being referred to
When? What are the rules for when this disclosure is required?
What format is disclosure to be made? The content
How is disclosure to be made – the process or procedure to be followed?
What are the consequences for breach?

Question 1 LO11.4

Bill and Melinda (along with Ravi, based in the US) are the directors of an unlisted company called TechTalk Australia Ltd, which runs a number of schools teaching students programmer skills.

Bill and Melinda recently saw an opportunity to invest in a block of land at the back of the Gold Coast, with the intention to develop it into a mini-tech estate. They believe that there will be demand for the warehouse style units they will build and sell at a profit. Businesses like TechTalk could operate from their proposed “campus”. TechTalk Ltd could buy the land for $1 million. Unfortunately, the company would need more money to proceed with the development. They decide on a seasoned equity offering to raise equity capital. The offer will not be a rights issue.

If Bill and Melinda proceed with their plan what disclosure requirements would the company be subject to under Ch 6D of the Corporations Act (Cth) 2001?

Could TechTalk raise capital under the CSF regime in Ch6D.3A instead?

Question 2 LO11.4 & 1.5

In the situation above, Bill and Melinda devise overly optimistic forecasts of the proposed sale price

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of the units; and the resultant projected profit. Ravi queries this, to which Bill replies that investors expect to see good news in a fundraising and there is considerable latitude for getting it wrong. Ravi is unconvinced and seeks your advice on the Australia law. What is Ravi’s liability if the shares in the new offer are worth less than the directors lead investors to believe?

SOLUTION OUTLINE

Law Disclosure Docs:

Securities include …………………………..………………………………………………………………………………………………….
………………………………………………………………………………………………………………………………………………..
Sections ……………………………………………………………………………………………………………………………………………
Under s 706, general rule …………………………………………………………………………………………………………………
Section 708 lists all of the excluded offers, such as
• …………………………………………………………………………………………………………………………………………………….
- …………………………………………………………………………………………………………………………………………………
- ………………………………………………………………………………………………………………………………………………
- …………………………………………………………………………………………………………………………………………………
  Section 705 sets out the 5 types of disclosure documents:
  1. _____________________________________________________________________________ 2. _____________________________________________________________________________ 3. _____________________________________________________________________________ 4. _____________________________________________________________________________ 5. _____________________________________________________________________________
  All offers must be made in, or accompanied by, the prospectus, profile statement or offer information statement: _s………………………………………………………………………………………………………………………………………….

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It is an offence to issue an application form for securities unless the form is attached to a prospectus: s………………………………………………………………………………………………………………………………………………………….

The disclosure document must be lodged with ASIC: _s________________________________________ .

Section 711 lists

…………………………………………………………………………………………………………………………………..

A more general requirement is contained in s 710 which requires the prospectus __________________________________________________________________________________ Under s 728, a person must not offer securities if the disclosure document:

……………………………………………………………………………………………………………………………………………….

Law Liability for Disclosure Docs:

• Under s 728, a person must not offer securities if the disclosure document: _____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________ Under s729, remedies are available against:
_________________________________________ __ ________________________________________________ ________________________________________

____________ ________________________________

________________________________________ ____________________________________ __________ ________ Under s 731, the defence for prospectus preparers is _________________________________________ __________________________________________ ______________________________

_______ ____________________ __________ ________________________________________

Under s 732, the defence for OIS prepares is 11

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_________________________________________ __________________________________________ ________________________________________ ________________________________________ Under s 733 the 3 defences for all preparers are:

__________________________________________ ________________________________________

Law

What does CSF stand for?

________

…………………………………………………………………………………………………………………………………………………………

QUESTION 3 LO11.2

Provide three additional matters the directors of a listed company must address in the annual financial report of a listed company that relate to the provision of audit services: [A], [B], [C]. What section does this come from? [D]

[This is a past exam question – you will see it online in the practice final exam and Topic 10 revision quiz].

students

do this online in the quiz

Instructions: keep your answers brief by providing 3-6 words per response. Responses are not case sensitive. Part marks are awarded for partially correct responses.

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Topic 10 Problem question LO 11.1-11.3

a) Is Retrofit Pty Ltd required to prepare financial reports? Should those reports be audited? Should those reports be lodged with ASIC? Give reasons for your answer.

b) If Reece Witherspoon has been appointed auditor, what is her primary responsibility? Facts: Consider that RP is a proprietary company.

Issue: what companies are required to prepare financial reports and have them audited? What is the role of the auditor?

Law:
Section 285 provides an overview of companies’ financial reporting obligations under Ch 2M. All companies are required to keep financial records: s286.
Chapter 2M (s292) requires that:

all public companies, (other than certain small companies limited by guarantee), and
most large proprietary companies,
prepare a financial report and a directors’ report annually.
Small proprietary companies (and small companies limited by guarantee) can be required to prepare a financial report and a directors’ report when requested by ASIC or at least 5% of their shareholders to do so: s293 & s294. Otherwise, small proprietary companies are generally not required to prepare these reports: s292
Financial reports must also be audited: s301.
The auditor is appointed by the members or in a prop coy, by directors: The directors of a proprietary company may appoint an auditor for the company if an auditor has not been appointed by the company in general meeting: s325
The auditor’s obligation is to report to members: s308
They must provide an opinion on whether the reports present a true and fair view: s307
The auditor does this according to the auditing standards: The auditor shall obtain reasonable assurance as to whether the financial report taken as a whole is free from material misstatement, whether due to fraud or error, when conducting an audit in accordance with Auditing Standards.
Apply:
You first need to determine what type of company RP is. You know it is a Proprietary Ltd company.
Is it “small” or “large”? You need to apply the tests in s45A. In any financial year, a proprietary company is a small proprietary company if it satisfies at least two of the following three tests: Before 1 JULY 2019

AYB230 SEMESTER 1, 2023 Unit Coordinator PROF Ellie Chapple

the consolidated gross operating revenue for the financial year of the company and the entities it controls (if any) is less than $25 million;
the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $12.5 million;
the companies and the entities it controls (if any) have fewer than 50 employees at the end of the financial year.
After July 2019

the consolidated revenue for the financial year of the company and any entities it controls is
$50 million or more
the value of the consolidated gross assets at the end of the financial year of the company
and any entities it controls is $25 million or more, and
the company and any entities it controls have 100 or more employees at the end of the
financial year.
Based on what we know about RP, it has less than 100 employees; but it is not clear whether it meets the first two tests.
If it is a large pty ltd, it is required to prepare audited financial reports and lodge them with ASIC under s319.
c) How would your answer differ if we asked the same questions about TechTalk Ltd, a listed public company?
A listed company is a disclosing entity so the usual financial reporting (s285) and auditing (s301) requirements apply.
In addition, listed companies also have to disclose/comply with the following:

senior executives must sign off on the accounts – s295A;
include a management discussion and analysis in its annual report – s299A;
include a remuneration report – s300A.

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