Corporate Law

Directors Duties
Cases before 2001 establish com law

Cases after interpret the act
Management powers
s 198A
(1) The business of the co is to be managed by or under the direction of the
directors
(2) The directors may exercise all the powers of the company except any powers
that this Act, or the cos constitution (if any) requires the co to exercise in GM
Relationship with SH
Ds, within their management powers, may take decisions against the wishes of the
majority of SHs, and indeed that majority of SHs cannot control them in the exercise
of these powers while they remain in office Howard Smith Ltd v Ampol Petroleum
[1974]
Is the person a D?
S 9 a person who:
(a) Is appointed to the position of a D; or
(b) Is appointed to the position of an alternate D and is acting in that capacity;
regardless of the name that is given to that position
However can also be:
Shadow D - Does the person openly participate in the firms governance where
directions/instructions complied with by employees or other Ds?
Australian securities commission v AS Nominees and Standard Chartered
Bank of SA
De facto director not technically a D but acts as one Deputy Commissioner of
Taxation v Austin (1998)
Nominee D can be appointed by a special interest group (major SH, class of SHs,
a major creditor, or employees represent appointees interest
What type of D are they? (not in corp act)
Managing D
Alternate D
Is the D managing the affairs of the co?
Executive D managing the affairs of the co on daily basis full time

employees
Non-executive not involved to the same extent
Was the person nominated by a creditor?
Nominee D creditor will loan money if someone can be appointed to look

after their interests
Does the person have specialized knowledge and does not deal with co on
daily basis?
Non-executive D do not deal with the co on a daily basis, they have specific
and specialized knowledge who advise on particular matters
What are the Ds Duties?
Corporations Act
Statutory duties
s 181: duty of good faith

and for a proper purpose
s 182: corporate opportunities
s 183: corporate information
s 191: disclosing material personal
interest
Ch 2E: Related party transactions in
public companies
s 180: care and diligence
s 189: reliance on others
s 190: delegating duties
General Law
Fiduciary duties
* members can ratify conduct that would
otherwise amount to a breach
-
Good faith in the best interests of

the corporation (the SHs interests
- Proper purpose
- Maintain unfettered discretion
- Avoid conflict of interest
1. Corporate opportunities
and info
2. Personal interest in matters
of the corporation
General law
Duty of Care, skill and diligence
Duty to act in good faith in the best interests of the corporation

*treat good faith and proper purpose issues as separate considerations Whitehouse v Carlton Hotel
FIDICUARY DUTY
Bell Group Ltd (in liq) v West Pac Banking Group

o Held that Ds fiduciary duties included duties not to act in the interests of
someone other than the company or in a way that is not in the best interests of
the company and not to exercise powers for an improper or collateral purpose
In the interest of who?
The co as a
commercial entity
Individual
shareholders
Nguril v McCann (1953) 90 CLR 425

The interests of the company and the SHs as a general
body (not individual shareholders)
Percival v wright [1902]
General principle: Directors fiduciary duties are owed to the
company (shareholders as a whole), not to individuals
Coleman v Myers [1977] distinguished Percival
In a transaction between a SH and a D there could be
surrounding circumstances which could give rise to a
fidicury duty to individual SHs. Fidicuary relationship
between father and son was held having regard to family
character of the co, the position of the Ds in the family and
the co, their high degree of inside knowledge, and the way
SHs were persuaded to sell.
Brunninghausen v Glavanics
If there is a close relationship, court may recognise special
fact fiduciary relationship. A conflict will arise if they prefer
their interests over the joint interest
- G took no part in the business of co, was dependent on
B for info and advice about negotiations that were
happening to sell the business
Mills v Mills (1938)
If different groups of SHs have divergent interests, there is a
duty to act fairly between members
Creditors
Walker v Wimborne (1976)

Do not owe a duty to creditors BUT if there are concerns
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about insolvency, Ds have a duty to consider creditor

interests
No standing to enforce Spies v R
The Bell Group (in liq) v Westpac banking Corporation
(No 9)
Breach of D duties as they refinanced when companies were
in an insolvency context
Kinsela v Russell Kinsela Pty Ltd (1986)
Shift in interest from SHs to creditors when approaching
insolvency
Employees
Parke v Daily news Ltd [1962]

No special duty or obligation to protect employee interests
(except to the extent that these interests coincide with the cos interests)
No benefit to the co was found
Groups (holding or
subsidiary)
Each co in a group must
be treated as having its
own interests even when
they are wholly-owned
subsidiaries
o
o
o
o
Charterbidge Corp Ltd v Lloyds bank [1970]

Walker v Wimborne (1976)
Equitcorp Finance Ltd
Maronis Holdings Ltd v Nippon Credit Aus (2001)
o BREACH OF FIDICUARY DUTY equitable compensation

STATUTE
S 181(1) a D or other officer of a corporation must exercise their powers and
discharge their duties:
(a) In good faith in the best interest of the corporation and;
(b) For a proper purpose
Is it a D of a wholly owned subsidiary?
S 187 A D has acted in good in the best interests of the subsidiary if:
(a) The constitution of the subsidiary expressly authorises the D to act in the best
interests of the holding co and;
(b) The acts in good faith and in the interests of the holding co; and
(c) The subsidiary is not insolvent at the time the D acts and does not become
insolvent because of the Ds act
Consequences for breach of statute
1317E
Remedies
if court satisfied that a person has contravened the provision
provision, it must make a declaration
Once submitted with ASIC the court can then seek a pecuniary penalty
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order
1317G(1) court may order a person to pay the CTH penalty of up to $200,000 if
contravention:
- Materially prejudices interests of the corporation, or its
members OR
- Materially prejudices the corporations ability to pay its
creditors OR
- Is serious
s 206C
OR disqualification court may disqualify person from managing
corporations for a period that the Court considers appropriate if
section met
1324(1)
OR court may grant an injunction if whose interests are have been or
would be affected by the conduct, grant an injunction to restrain person
from engaging in conduct
S 184
commits an offence if they:
o reckless or
o are intentionally dishonest
and fail to exercise their duties in:
o good faith in the best interests of the corporation and
o for a proper purpose
may be fined up to $220,000 or imprisoned for up to 5 yrs or both
Duty to act for a proper purpose

ASK: Has the D acted for a proper purpose? (for the purpose of
S 181(1) - a D or other officer of a corporation must exercise their powers and
discharge their duties:
(b) For a proper purpose
Howard Smith v Ampol Petroleum Ltd [1974]
1. The legal question what are the purposes for which the power may or may
not be exercised?
Examples of improper purposes:
o issuing shares for a purpose of defeating a takeover Hogg v
Cramphorn
o facilitating a friendly takeover by destroying an existing majority, or
creating a new majority that did not exist Howard Smith v Ampol
Petroleum Ltd [1974]
o giving control of the co in one group of SHs at the expense of others Whitehouse v Carlton Hotel (1987)
2. The factual question for what purposes were the powers exercised?
The substantial purpose test - Howard Smith v Ampol Petroleum Ltd [1974]
The But for test - Whitehouse v Carlton Hotel (1987)
o but for that purpose, would the company have exercised that power?
Reconciled both tests - Darvall v North Sydney Brick and Tile Co (1989)

1317E
Remedies
order
contravention:
members OR
creditors OR
- Is serious
s 206C
section met
1324(1)
S 184
o reckless or
Duty to maintain an unfettered discretion
*an obligation to give active consideration to each X exercise of their discretionary

powers and to keep these discretions unfettered (free from restrictions/influence from
others)
E.g. when a d is at a board meeting and have to pass a resolution, D has to vote in
the best interests of the co at that time and not be influenced or fettered by
exercising vote in another way
Automatic self-cleansing filter syndicate Co Ltd v Cunninghame [1906]
Thorby v Goldberg (1964)
if at the time they are bona fide of opinion that is in the interests of the company that
the transaction should be entered into and carried into effect, no reason why they
should not bind themselves and do whatever is to be done under the transaction by
the board
Duty to avoid a conflict of interest

FIDUCIARY DUTY
People who owe fiduciary obligations:
executive and non-executive Ds
shadow Ds because of the nature of their office
senior executives Canadian Aero Services
STATE: X has a fiduciary duty to serve (X the cos) interests which implies that X
must avoid placing himself in a position where he will be tempted to prefer his own
interests or the interests over X
Broadman v Phillips
A fundamental rule in equity that a person in a fiduciary capacity must not make a
profit out his trust which is part of a wider rule that a trustee must not place himself in
a position where his duty and his interest may conflict
Did the director benefit from the fiduciary position?
ASK:
o Has the D made a profit flowing from his position as a D?
o Has there been a misappropriation of property?
o Has the D (as an outsider) contracted with the company?
Fitzimmonus v R depends on:
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subject matter, the state of knowledge of the adverse info, the degree to which the D
has been involved in the transaction, whether the D has been promoting the cause,
the gravity of the possible outcome, the extigencies and commercial reality of the
situation
The circumstances may require the D to take some positive action to identify the
perceieved conflict and to suggest a course of action to limit possible damage
The conflict rule

Ds must not within their scope of
employment have a personal interest or
inconsistent arrangement with a 3rd party,
except with the cos fully informed
consent
No conflict of interest
No conflict of duty
Elements
D and SHs
Is there a personal interest in the
matter?
Is this inconsistent with co
interests?
Has the D ratified conduct at GM?
Ds must avoid putting themselves in a

position where they will be tempted to
prefer their own interests or someone
elses interests instead of the cos .
Material interests
Contracts or proposed contract
A D who is in any way directly or
indirectly interested in a contract or
proposed contract with the co shall, as
soon as practicable, after the relevant
facts have come to his knowledge
declare the nature of his interest at a Ds
meeting
Is there a real sensible possibility of

conflict with the interests D is bound
to protect? Boardman v Phillips
Has the D (as an outsider with an
interest) contracted with the
company?
Contracts between Ds and companies
are voidable at the option of the
company
UNLESS:
- the D disclosed his interest and it
was ratified OR
- if the constitution allows for those
types of contracts and terms of the
constitutional provision have been
fully complied with
NOTE: s 193 it doesnt matter what the
constitution states or the general law, Ds
have a statutory duty to disclose these
interests
Aberdeen Railway Co v Blaikie Bros
(1854) 1 Macq 461
a GM and a partner of outsider
partnership
Couldnt give the co the benefit of his
impartial deliberation
Must give notice
A director cant enter into engagements

in which he or she can have a personal
interest conflicting or which could
possibly conflict with the interests of
whom he is bound to protect
Can be interested if not his own

material interest
No conflict - Removal of opportunity

from the companys interest if time
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Has it been ratified by GM or is it in the

constitution?
Directors on boards of competing
companies
In the absence of contractual
arrangements that Ds services will be
devoted solely to that co, D can sit on
other boards as long as:
No confidential info is divulged
Not contrary to const and
Not contrary to an express or
implied agreement
and consent
The company, be rejecting the
opportunity, had put it outside the scope
of Hs relationship with the company or
because the company had given consent
ti go ahead
Example of breach of conflict but not
breach of profit rule - Green v Bestobell
Industries Pty Ltd [1982] WAR 1
Held: the manager who tendered for a
govt contract, which he knew the co
would also tender, was held to be in
breach of conflict rule. However, since
tenders were called for by public
advertisement and anyone was free to
respond, it could probably not be said
that his profit as successful renderer
arose in connection with his fiduciary
position
Can be non-pecuniary interest
Bell Group v Westpac could be a
breach of duty in not disclosing an
outside non-pecuinary interest which is
incompatible with the Ds duty to act in
the interests of the co
The profit rule

*codification of s 182 (improperly using position) and 183 (improperly using info
acquired because of the position)
Ds must not missue their position for
Profit made from being a D
rd
their own or a 3 partys possible
- Regal (Hastings) Ltd v Gulliver [1942] 1
advantage except with the cos fully
All ER 378
informed consent, and must account to
Ds are not entitled to any benefit flowing
the co for any gain which they make in
from holding the office of D other than D
connection with their position
remuneration agreed upon by the co
Corporate opportunity? Also apply
legislation
If a D profits from using co info or their
position, the D is accountable to the co
for those profits
Fiduciary duty arises from the fact that
Even if co cannot use the opportunity, the

D is still unable to take it up personally
(doesnt matter if they are acting in good
faith)
Boradman v Phillips
- used his position as solicitor to the
trust to obtain the opportunity to
make a profit out of the shares and
knowledge that the profit was there
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profit has been made by reason and in

course of their fiduciary relationship
Recovery of profits or damages for
breach
If that D or any other person made a
profit as a result of the contravention
an equal amount to that profit and
If the co has suffered loss or damage as
a result of the contravention an equal
amount to that loss or damage
to be made, and was therefore

liable to account for profits
he used information to gain a
personal benefit
Keech v Sandford arise from the fact

that profit was actually made
Furs Ltd v Tomkies (1936) 54 CLR 83
obtained benefit because of his role
No director shall obtain for himself a
profit by means of a transaction in which
he is concerned on behalf of the co
unless all material facts are disclosed to
the SHs and by resolution at a GM
approves of him doing so, or all SHs
- unauthorised profit belongs to the
co in equity
Opportunity taken
Cooks v Deeks delibratelty excluded
the co whose interests was their first duty
to protect, An opportunity was taken and
it was held that the benefit of the contract
belonged to the co
Opportunity was companys line of
business and had learned about the
opportunity in their capacity as Ds
The misappropriation rule

Ds must not misappropriate property for
their own, or a 3rd partys benefit
Misappropriation of co property Misappropriation of property cannot be

ratified by a majority - Cook v Deeks
[1916] 1 AC 554
The use of funds or property for a purpose
other than that for which they are intended or
legally required to be used
Remedy: equitable compensation

court may order payment for damages in addition to penalties for contravention of
the Act
If the court is satisfied that the co has suffered loss or damage as a result of D doing
X (breach of fiduciary duty) that constituted the offence, in addition to the penalty, the
court may order X (the D) to pay compensation of such amount that the court
specifies.
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Profit made from being a D

Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
Facts:
o Co had insufficient paid up share capital to secure leases that the company
need to continue to the business. The leaseholders said to the Ds that they
were willing to enter into a contract for these leases provided that the paid up
share capital reaches that level company wasnt at that level.
o To enable the company to obtain these leases, to continue with the business,
the Ds brought shares to get the required share capital. Co obtained leases
needed for its business
o When co was sold, Ds made a huge profit because of the shares they brought
in the company.
New SHs argued
o conflict of interest as the Ds profited from their position as Ds.
Court held
o Ds accountable for the profit and had to return it idea based on this that Ds
are not entitled to any benefit flowing from holding the office of D other
than D remuneration agreed upon by the co
o if the Ds went to the SHs asked to ratify/approve the profit that they made it
would have not been a problem power is still with the SHs whether Ds
could do it
o Even if the company is for some reasonable unable to exploit the opportunity,
the D is still unable to take it up personally
Misappropriation of co property
Opportunity taken
Cook v Deeks [1916] 1 AC 554
Facts
o Ratification of SHs if they say it is ok then Ds can do it
o 4 Ds/Shs of the co, 3 decided to form their own co in conducting similar
business so 3 Ds sold assets from first company to the second company that
they formed for their own benefit, in the process got rid of the 4 th D.
o Conflict of interest? 3 said that it was ratified by the majority as they were the
majority (in terms Regal hasting can do court said if it is a misappropriation
of co property than you cant ratify
Held: Misappropriation of property cannot be ratified by a majority
Removal of opportunity from the companys interest
Queensland Mines Ltd v Hudson (1978) 52 ALJR 399
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Facts
-
H used the resources and good name of the company for the negotiations but
used his own name on the application
Company was unable to finance company and said to D they had no objections
with him going ahead
The mine took place 14 yrs after the event
The company, be rejecting the opportunity, had put it outside the scope of Hs
relationship with the company or because the company had given consent ti go
ahead
Example of breach of conflict but not breach of profit rule
Green v Bestobell Industries Pty Ltd [1982] WAR 1

Held: the manager who tendered for a govt contract, which he knew the co would
also tender, was held to be in breach of conflict rule. However, since tenders were
called for by public advertisement and anyone was free to respond, it could probably
not be said that his profit as successful renderer arose in connection with his
fiduciary position
Has the D (as an outsider with an interest) contracted with the

company?
Contracts between Ds and companies are voidable at the option of the company
UNLESS:
- the D disclosed his interest and it was ratified OR
- if the constitution allows for those types of contracts and terms of the
constitutional provision have been fully complied with
NOTE: s 193 it doesnt matter what the constitution states or the general law, Ds
have a statutory duty to disclose these interests
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
a GM and a partner of outsider partnership
Facts:
o Railway company contracted to purchase chairs from a partnership
o Railway company sought to avoid the contract on the basis that Blaikie was a
D and chairman of the co and a partner in the partnership at the time the
agreement was entered into
Lord Cranworth LC
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no one having such duties to discharge shall be allowed to enter into engagements
in which he or she can have a personal interest conflicting or which could possibly
conflict with the interests of whom he is bound to protect
possible conflict
Boardman v Phillips
Means that the reasonable man looking at the relevant facts and circumstances of
the particular case would think that there was a real sensible possibility of
conflict
Can be non-pecuniary interest
Bell Group v Westpac could be a breach of duty in not disclosing an outside nonpecuinary interest which is incompatible with the Ds duty to act in the interests of the
co
Furs Ltd v Tomkies (1936) 54 CLR 83
T obtained payment in the course of a transaction he was carrying out on behalf of
the co in execution of his office as MD, and it was only because he was in that role
that he was able to obtain the benefit
No director shall obtain for himself a profit by means of a transaction in which he
is concerned on behalf of the co unless all material facts are disclosed to the
SHs and by resolution at a GM approves of him doing so, or all SHs
Corporate opportunities
*fiduciary obligation codifies s 182
STATUTE
ASK: Has the D improperly used their position to gain an advantage or cause
detriment to the co?
S182(1) a D or sec, other officer or employee of a corp must not improperly use
their position to:
(a) Gain an advantage for themselves or someone else (relative, another co in
which the D is on the board); or
(b) Cause detriment to the corporation
Forge v Australian Securities and Investments Commission [2004] breach of s 182
-
held to be an improper use of position as the payments were not bona fide and
that the cos funds were being treated for the Ds private use
D entered into a consultancy agreement involved excessive payments to

another company who were associates of the D
ASIC v Adler [2002] breach of s 182

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Non-executive D who was involved in a scheme to use co funds to acquire shares in

the co
Dealt with the statutory version of the rule under Regal Hastings
However: court said Ds under a duty not to make undisclosed personal profits
arising from their position
*An officer will contravene this section whether or not the advantage is obtained or the detriment
suffered Chew v

1317E
Remedies
order
contravention:
members OR
creditors OR
- Is serious
s 206C
section met
1324(1)
S 184
o reckless or
Corporate information
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*fiduciary obligation codifies s 183

STATUTE
ASK: Has someone used their position to obtain info and used it improperly to
gain an advantage or cause detriment?
S183(1) a person who obtains info because they are, or have been a D or other
officer or employee of a corporation must not improperly use the info to:
(a) Gain an advantage for themselves or someone else; or
(b) Cause detriment to the corporation
ASIC v Vizard [2005] FCA 1037; (2005) 145 FCR 57
-
Vizard obtained confidential info in his capacity as a D of Telstra about cos

in which Telstra invested
He used the info in share trading 3 times for the purpose of benefiting himself
and his family
He admitted this, case concerned with the penalty
Pecuniary penalty of $130 000 and disqualified for 10 years from managing a
co
ASIC v Adler [2002] breach of s 183

- Held to have breached s 183, having improperly used info which he obtained as
a D and to gain a personal advantage for himself or for Alder Corp
S 185 section applies in addition to common law principles
General law
Grove v Flavel
- Held that a d had applied co information improperly under a predecessor of s
183
- Obtained info that the co had liquidity problems
- Held to have acted improperly because he acted to protect himself to the
possible detriment of other creditors
Industrial Development Consultants Ltd v Cooley
- Information came to him while he was MD and it was info of concern to the co
which was info where it was his duty to pass on the co
- Held the MD had concealed information necessary to disclose given fiduciary
relationship and had used this to his personal advantage
Effect of resignation?
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The fact that a senior executive who fiduciary duties to a co cannot resign to take up
an opportunity that would otherwise be a breach of duty Canadian Aero Service Ltd
v OMalley
suffered Chew v R

1317E
Remedies
order
contravention:
members OR
creditors OR
- Is serious
s 206C
section met
1324(1)
S 184
commits an offence if they: (basically have the requisite mens rea, if
used position dishonestly)
o reckless or
Directors personal interests in matters of the corporation

*relates to business matter of the co, regulating disclosure of conflicts of interest
(may not apply to all cases of conflicting duites)
STATUTE
*treat separately from other corp opportunities and info
STEP ONE
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ASK: Does the D (DS ONLY) have a personal interest in the matter?
S 191(1) a D of a company who has a material personal interest in a matter that
relates to the affairs of the co must give the other Ds notice of the interest unless
subsection (2) applies
McGellin v Mount King material interest - something have the capacity to

influence the vote of the particular D upon the decision to be made
If the personal interest was the actuating motive rather than some bona
fide concern for the co as a whole or for fairness as between members Mills
v Mills
Extent of interest whether the interest is such that a reasonable person

would think there is a real or substantial possibility of the D being swayed by it
Bell Group v Westpac
if a D has shares in another co would not amount however;

if a D has so large a shareholding that in the circumstances he or she has
effective control at a GM the holding will be adverse to the dependent co
S 191(4) if 191 contravened, this does not affect the validity of any act, transaction,
agreement, instrument, resolution or any other thing - But is an offence under the
Act
In contract: a contract entered into in breach of general law no conflicts rule is
voidable at the option of the co
*However: the 3rd party with whom the voidable transaction was made is protected
from having the transaction set aside if they can prove they acted in good faith and
without notice of the breach of duty s 128(4) hard to prove in this circumstance
Co constitution: if this imposes a different disclosure obligation then s 191, and this
is not complied with, the contract would be voidable.
Notice
S 191(3) content of notice required
NOTE: special fact fiduciary relationship were disclosure necessary to SH
SHs dependence upon information and advice
Significance of a particular transaction for the parties
Extent of positive action taken by, or on behalf of, the Ds to promote the
transaction
Structure of SHs in the co e.g. 2 shs and 2 ds
Brunninghausen v Glavanics
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G took no part in the business of co, was dependent on B for info and advice about
negotiations that were happening to sell the business
HELD: B was in a fiduciary relationship with G as B, as the sole effective director,
occupied a position of advantage in relation to G and was in breach of the duty
owed to G when he preferred his own interests by not disclosing negotiations to
sell the business
STEP TWO
Does D have to give notice?
192(2) where directors dont need to give notice of their interest
*Distinction between Ds of pty ltd co and public cos
b) unnecessary for D to disclose interests in a pty ltd co where other directors
are aware of the nature and extent of the interest
c) if a new D joins the board, notice only has to be given to that D if the other Ds
are already aware
Basically: doesnt matter whether constitution authorises no disclose and
therefore no breach at general law, Ds have a statutory duty to disclose these
interests s193
-
in certain circumstances mere disclosure of a conflict between interest and duty

and abstaining from voting on the matter in insufficient to satisfy fiduciary
obligations may need to take steps to prevent the transaction from going
ahead Permanent Building v McGee
S 193: - general law and co constitution apply in addition to statute

Sections 191 and 192 have effect in addition to, and not in derogation of:
(a)
any general law rule about conflicts of interest; and
(b)
any provision in a companys constitution (if any) that restricts a director from:
(i)
having a material personal interest in a matter; or
(ii)
holding an office or possessing property;
involving duties or interests that conflict with their duties or interests as
a director.
Has the material interest arose yet?
S 192 standing notice of interest can be given at a Ds meeting includes
interests that have not yet become material personal interests
Civil: fine of $1000 (s 191(1A) or
Criminal: strict liability offence, imprisonment for 3 months or both
STEP THREE
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If D has a material personal interest and discloses

Pty ltd company
S 194:
If a director of a proprietary company has a material personal interest in a matter
that relates to the affairs of the company and:
(a) under section 191 the director discloses the nature and extent of the interest and
its relation to the affairs of the company at a meeting of the directors; or
*notice must be given at a Ds meeting as soon as practicable after the D becomes aware of
the interest and the details must be recorded in the minutes s 192
(b)
the interest is one that does not need to be disclosed under section 191;
Then:
If the D discloses or does not need to:

(c)
(d)
(e)
(f)
the director may vote on matters that relate to the interests; and
any transactions that relate to the interest may proceed; and
the director may retain benefits under the transaction even though the
director has the interest; and
the company cannot avoid the transaction merely because of the existence
of the interest.
If disclosure is required under section 191, paragraphs (e) and (f) apply only if
the disclosure is made before the transaction is entered into.
Is it an ED?
o The employment contract may contain an express/implied term that services
will be devoted solely to the co so that the ED could not sit on the board of a
competing co
Is it a non-executive D?
o Generally not a breach of fiduciary duty to be a D of 2 competiting companies
as long as:
- Confidential info is not given
- Not contrary to the constitution and
- Not contrary to any express or implied agreement
Public company
S 195: (in addition to s 191)
(1)
A director of a public company who has a material personal interest in a
matter that is being considered at a directors meeting must not:
(a)
be present while the matter is being considered at the meeting; or
(b)
vote on the matter.
19
General law in power shareholders to have notice of the contract, disclosure to the
Ds will not necessarily validate the contract
Civil consequence: 5 penalty units ($500)
Ch 2E - Related party transactions with public companies
*applies to in addition to other Ds duties that they have in a co, just because satisfy below does not
mean the statutory and fiduciary duties do not apply
ASK: Has a public company given a financial benefit?

S 208 - a public co must not give a financial benefit to a related party OR to an
entity that is controlled by the related party of the public co
UNLESS have member approval for financial benefit
Control
S 50AA an entity controlled by the co
- whether one entity is in a position to control the outcome of decisions in another
entity (not req to have a certain no. Of shares)
Related party
S 228 - related party of a public company is a Director, relatives of a D, entities
controlled by the directors, another entity controlled by the company
Financial benefit
S 229 defined broadly, does not mean just the giving money, buying assets at an
inflated price, providing services, and look at commercial substance of the
commercial transaction
Exempt transactions
SS 210 216 - arms length transactions, financial benefit below a certain amount,
reasonable remuneration for officers and employees of the co
Note: requirements cant be overridden by provisions of co constitution
ASIC Alder
- financial benefit given of $10 million without SH approval
- amounted to a financial benefit to a related entity for purposes of 229, and
therefore contravened s 208
Consequences of contravention
does not invalidated transaction
entity that gave financial assistance/benefit is not guilty of an offence (those
who caused the entity to enter into the transaction could be liable)
20
Breach of s 209(2) by those involved in transaction - Civil: fine up to $200,000 (s

1317G) or disqualification order (s 206C)
Criminal - dishonest involvement in contravention offence
Breach of 209(3) an offence if they are dishonestly involved in contravention of
s208(3) - $200,000 (2000 penalty units) and/or 5 yrs imprisonment
Relationship with general law and constitution
requirements of Ch 2E cannot be overridden by provisions of constitution
compliance with Ch 2E does not relieve person of a duty in terms of Act,
general law or companys constitution.
suffered Chew v R
Care, Skill and diligence
what is expected from Ds in terms of duty of care
STATUTE
s 180(1) - Content of the duty:
A director or other officer of a corporation must exercise their powers and discharge
their duties with the degree of care and diligence that a reasonable person would
exercise if they:
(a)were a director or officer of a corporation in the corporations circumstances;
and
(b) occupied the office held by, and had the same responsibilities within the
corporation as, the director or officer
Skill in statutory context
ASIC v Vines skills still part of Ds duties, even though this isnt mentioned in the
statute.
Australian securities and Investments Commission v Alder - means that skill is a
component of the statutory duty despite the absence of the word skill from the
statutory formula
General law rules are still relevant s 185
Civil: fine up to $200,000 (s 1317G) or disqualification order (s 206C)
21
GENERAL LAW
Daniels v Anderson (1995) 13 ACLC 614
-
Common law duty to exercise powers with reasonable care, skill and diligence
(same standard of care applies for non-executive Ds)
What constitutes reasonable care?

o Depends on the type of the co
o the size of the co and
o the distributions and functions of the co
ASK: whether the officer exercised the degree of care and diligence that a
reasonable person in a like position in a corporation would exercise in the
corporations circumstances
Skill
Daniels v Anderson (1995) 37 NSWLR 438 establishes financial competence and
knowledge of the business as a base line in terms of skill
Special skill?
ASIC v Vines held that the CFO was expected to exercise the objective
degree of care and diligence from the position of CFO encompassing the
special skill that is to be brought to such an office
Gamble v Hoffman (1997) 24 ACSR369 this level of skill cannot be reduced
by reference to individual circumstances of the D.
Financial
Cth v Fedrick
the D is expected to understand the company affairs objective test. They are
required to have the skills to understand financial statements
expected to understand the companys affairs and reach a reasonably
informed opinion of its financial capacity
Reliance on others (defence to breach of duty)

(only applies to Ds NOT officers)
S 189 - creates a rebuttable presumption that Ds reliance on information or advice
provided by certain categories of people is reasonable.
- employees, professional advisors or experts, other Ds or officers, and
committees of Ds
ASK:
22
1. Was the info reasonably relied upon?

2. Was it made in good faith?
3. Has the D made an independent assessment of the advice?
3 main conditions to reasonably rely on advice:
1) the reasonableness of the reliance requires that the reasonably
believed that the matter relied upon is within the professional competence of
the employee, professional advisor or expert that the matter is within the
authority of the D or officer or relevant board committee.
2) The reliance must be in good faith
3) The D must make an independent assessment of the information or advice
having regard to the Ds knowledge of the corporation and the complexity of
the structure and operations of the corporation
Delegating duties
ASK: Has the D delegated a power?
S 190 (1) If the Ds delegate a power under s 198D, A D is responsible for the
exercise of the power by the delegate as if the power had been exercised by the D
Defence A D is not responsible under s 190(1) if:
ASK: Did the D believe on reasonable grounds that the delegate would exercise the
power in conformity with Ds duties imposed on Ds by the Act and the co
constitution? - 190(2)(a)
(b) Did the D believed:
(i)
On reasonable grounds and
(ii)
In good faith and
(iii)
After making proper inquiry if the circumstances indicated the need for
inquiry; that the delegate was reliable and competent in relation to the
power delegated
Business judgment rule

ASK: Has there been a decision to take or not to take action relevant to business
operations?
S 180(3) business judgement means any decision to take or not take action in
respect of a matter relevant to the business operations of the co
*this does not extend to not thinking about it at all (Re HIH Insurance)
ASK:
1) Are there circumstances/conduct where Ds conduct could have been
unreasonable?
2) If so, has there been a business judgement by the Ds?
23
3) Is a D dissatisfied? Onus of proof is on the D

4) If so, then business judgement rule may apply
s 180(2):
A director or other officer of a corporation who makes a business judgment is taken
to meet the requirements of subsection (1)-acted with necessary care, skill and diligence),
and their equivalent duties at common law and in equity, in respect of the judgment if
they:
(a)
make the judgment in good faith for a proper purpose; and
(b)
do not have a material personal interest in the subject matter of the

judgment; and (in good faith and for a proper purpose)
(c)
inform themselves about the subject matter of the judgment to the extent
they reasonably believe to be appropriate; and emphasis on diligence, if they did
so blindly then they wont be protected. It is based on the info the D actually had (actual
knowledge) NOT what they should have had.
(d)
rationally believe that the judgment is in the best interests of the

corporation.
The directors or officers belief that the judgment is in the best interests of the
corporation is a rational one unless the belief is one that no reasonable
person in their position would hold.
Q: Application of business judgment rule to officers?

*cases have taken the approach that the burden of proof is on the D to establish the defence
CONSEQUENCES OF BREACH
BREACH OF GENERAL LAW DUTIES
Fiduciary duties
Full range of equitable remedies are available.
ASK: Has the D profited from the breach?
If D has NOT profited (e.g. breach of duty to act for proper purpose)
avoid transaction
equitable compensation
If D HAS profited from breach
account of profits
constructive trust (money on trust for the company)
24
equitable compensation
Breach of duty of care, skill and diligence
ASK: which one will be most beneficial/appropriate?
Equitable duty equitable compensation.

Common law duty of care damages for negligence (Daniels v Anderson
(1995) 37 NSWLR 438)
Both remedies are designed to compensate the co for the loss caused by the
breach
STATE: If the court is satisfied that the co has suffered loss or damage as a result of
D doing X (breach of fiduciary duty) that constituted the offence, in addition to the
penalty, the court may order X (the D) to pay compensation of such amount that the
court specifies.
The plaintiff can apply for:
Derivative action: see pg X
Winding up of company: s 461(e)

o where Ds have acted in affairs of the co in their own interests rather
than in the interests of members as whole
o unfair or unjust to other members
o oppressive, unfairly prejudicial or unfairly discriminatory conduct (note
there is also the oppressive remedy)
Member: breach of fiduciary relationship between directors and

shareholders (personal action in equity)
Glavanics v Brunninghausen (1996) 19 ACSR 204 (special fact,

individual SHs rights recognised)
Coleman v Myers (1999) 46 NSWLR 538
Member: allotments of shares for an improper purpose (personal action

in equity)
Residue Treatment and Trading Co Ltd v Southern Resources Ltd (no

4) (1988) 14 ACLR 569
Ratification if SH ratify conduct (only breach of general law duties) they are
normally informed that Ds off the hook
Modification by constitution
Ratification not effective under these circumstances:

company insolvent or nearing insolvency
25
ratification amounts to misappropriation of company property

directors benefiting themselves at the expense of the company
member has a personal right
Effect of ratification on breach of statutory duties cant ratify breaches of

statutory duties
Forge v ASIC (2004) 213 ALR 574, 654:
In this sense civil penalty proceedings involve public rights. The shareholders
cannot remove the declaration of contravention by ratifying the original acts.
Angas Law Services Pty Ltd v Carabels (2005) 215 ALR 110, 121 2:
The shareholders of a company cannot release directors from the
statutory dutiesIn a particular case, their acquiescence in a course of
conduct might affect the practical content of those duties. It might, for
example, be relevant to a question of impropriety.
Public companies have to comply with these focuses on Ds duties and the way in
which the board is structured
BREACH OF STAUTORY DUTIES (civil penalty provisions)

Civil consequences
Step one
ASIC may apply for a declaration of contravention - s1317J
Step two
If a court is satisfied that a statutory duty has been breached, it must make a
declaration of contravention s 1317E
Once a declaration has been made, ASIC can then seek:
o A pecuniary order s 1317G
o A disqualification order s 206C
Pecuniary order
1317G
The court may order a pecuniary penalty of up to $200 000 if:
a) Delclartion of contravention has been made under 1317E and
b) Contravention in a civil penalty provision and
If the contravention has:
o Materially prejudiced the interest of the co and its members OR
o Materially prejudiced the cos ability to pay its creditors OR
26
o Is serious
Disqualification order
206C
ASIC can apply to the court for an order disqualifying the person from managing
corporations for a period that the court considers appropriate
Compensation order
s 1317H; s 588J
Court can order that a person who had contravened a civil penalty provision
compensate the company for damage resulting from the contravention
S1317H(1) order can be made whether or not a declaration of contravention
has been made
S1317H(2) calculation of compensation order can include profits made by a
person as a result of the contravention
Criminal consequences
If breached duty to act:
o in good faith and for proper purpose (s181)
o improperly used position (s182)
o improperly used info (s 183)
If s 181-183 breached consequences in s 184
S 184 commits an offence if they:
o reckless or
s 209(3) related party if in breach of member approval for financial benefit
s 588G(3) consequences for Ds failure to prevent a co incurring a debt
s 191(1A) personal interests in matter of corp 10 penalty units and 3 months
imprisonment
s 195(1B) public co restrictions on voting strict liability offence
27
Injunctive relief
S 1324 where a person is guilty of contravention of the act, the person whose
interests are affected can apply for injunctive relief
Relief by the court

Gives the court the power to excuse a D or officer from liability where they have
acted honestly in all circumstances and the court thinks they ought to be excused
*1318 applies to civil proceedings against a person for negligence, fault, breach of
trust or breach of duty relevant to breach of Ds general law duties
S 1317S; s 1318
Relief denied:
Australian Securities Commission v Nandan (1997) 23 ACSR 743
ASIC v Adler (2002) 42 ACSR 80
Vines v ASIC (2007) 62 ACSR 1
Morley v ASIC (No 2) [2011] NSWCA 110
Partial relief granted:
Hall v Poolman (2007) 215 FLR 243
Ratification if SH ratify conduct (only breach of general law duties) they are
normally informed that Ds off the hook
Modification by constitution
Ratification not effective under certain circumstances:
company insolvent or nearing insolvency
ratification amounts to misappropriation of company property
directors benefiting themselves at the expense of the company
member has a personal right
Effect of ratification on breach of statutory duties cant do it

Forge v ASIC (2004) 213 ALR 574, 654:
In this sense civil penalty proceedings involve public rights. The shareholders
cannot remove the declaration of contravention by ratifying the original acts.
Angas Law Services Pty Ltd v Carabels (2005) 215 ALR 110, 121 2:
The shareholders of a company cannot release directors from the
statutory dutiesIn a particular case, their acquiescence in a course of
conduct might affect the practical content of those duties. It might, for
example, be relevant to a question of impropriety.
Public companies have to comply with these focuses on Ds duties and the way in
which the board is structured
ASX Corporate Governance Principles and Recommendations:
28
Principle 1: Lay solid foundations for management and

oversight
Principle 2: Structure the board to add value
Principle 3: Promote ethical and responsible decisionmaking
Principle 4: Safeguard integrity in financial reporting
Principle 5: Make timely and balanced disclosure
Principle 6: Respect the rights of shareholders
Principle 7: Recognise and manage risk
Principle 8: Remunerate fairly and responsibly
29
Members remedies
o One set of circumstances can give rise to more than one remedy
ASK: which remedy is more appropriate in the circumstances?
o Look to the cases to see what circumstances give rise to what remedy
Purpose of members remedies: to protect the interests of the members and to
ensure Ds comply with their duties
Personal action where the member is affected OR
Derivative action where the company has been affected
Foss v Harbottle
Co wronged and no action taken as wrongdoers in control

The wrong against the co is not ratifiable by an ordinary majority (small
cos where Ds also SHs)
= minority SH allowed to institute action
If a company is wronged, the proper party to institute the action is the co BUT
if the co does not institute the action to recover the wrong because the wrong
doers are in control of the company then a minority SH is allowed to institute
action on behalf of the co provided that the wrong against the co is not
ratifiable by an ordinary majority.
Factors to consider:
Who is going to get the benefit?
The cost who is potentially liable for cost order?
What relief are you seeking? compo, D dismissal?
Type of conduct, the circumstances giving rise to the
action
Standing
Type of relief ordered
PERSONAL ACTIONS
*where member affected
o A legal action that a SH brings to enforce a legal duty that is owed to them
specifically
o Remedies are to enforce personal rights (not the rights of the co)
Sources of personal rights:
Equity
30
Contract
Legislation
STEP ONE:
Separate and distinct losses
ASK: Did the member suffer a distinct loss that was separate to what the company
suffered?
Prudential
o For a member to rely on a personal action there must be a separate and
distinct loss suffered by that member specifically
o Recognises salamon, idea that when the company suffers a member cant
claim
Reduction in the value of shares does NOT give member standing
Prudential Assurance Co Ltd v Newman Industries Ltd (no2) [1982]

o Loss was suffered by the co, often reducing the value of the shares and
causing indirect loss to the SH does not give a SH standing to bring a
personal action for the wrong
Reaffirmed by HOL in Johnson v Gore Wood & Co [2002] 2 AC 1
o However, it Is possible in certain circumstances for a SH to sue in a personal
capacity even though the company was harmed
o E.g. where the company does not have a cause of action against the
wrongdoer or if the SH suffers a loss separate and distinct from that suffered by
the company
IF SO, can apply for personal actions in:
Equity
Contract
Statutory rights
Personal action in equity
Was there a special fact fiduciary relationship? (Ds owe duty to the
specific SH/SHs)
- Coleman v Myers small no of Ds and SH
- Glavanics v Brunninghausen - small no of Ds and SH
- Has there been a share sale or attempted share sale? often arises in
share sales between Ds and SHs
31
Was there an allotment of shares for an improper purpose?

- Where shares have been issued for improper purpose to take away
power from existing majority
- its not the co that directly suffers harm, its the particular SH who is
affected directly and therefore can apply to have transaction set aside
-
Residue Treatment and Trading Co Ltd v Southern Resources Ltd (NO

4) (1998)
Did the company exercise power to alter the constitution in a way that
harms some SHs? (special resolution of 75% required)
Allen v Gold Reefs of West Africa Ltd [1900] 1 ch 656:

SHs must exercise power of alteration in:
bona fide (good faith)
for the benefit of the co as a whole (the SHs)
Gambotto v WCP Ltd (1995) 182 CLR 432
HCA where the constitution is altered and where the alterations involve
expropriation of valuable proprietary rights attaching to shares (e.g. the right
to vote or receive dividends)
the alteration will only be valid if its for a proper purpose and is fair in all the
circumstances
What is a proper purpose?
-
prevents company from suffering harm or detriment
3 requirements
1) For a proper purpose court said tax and admin benefits was not enough
2) Was the expropriation fair in circumstances? (should not be oppressive
for minority SHs)
o substantive fairness value of shares (what price are they offering to
minority SHs
o procedural fairness minority SHs should have relevant info
*factors considered: whether independent evaluation obtained
Other examples where equitable limitation constrains majority members

-
Where the majority of SHs use their voting power to ratify conduct of the
majority
Nguril v McCann (1953) 90 CLR 425, 438:

32
Nor can the majority of shareholders exercise their voting power in

general meeting so as to commit a fraud on the minority. They must not
exercise their vote so as to appropriate to themselves or some of
themselves property, advantages or rights which belong to the company.
Cook v Deeks [1916] 1 AC 554

- Majority cannot ratify their own breach confined to the idea of
misappropriation of the co
- Misappropriation of property using funds or property in a way that it
was not intended
Personal actions in contract
Enforcing express contracts a member could have ordinary contract with

company
Enforcing statutory contract under s 140 (stat contract between co and

member)
-
Constitution and RRs are enforceable as a contract between the co and

members
Scope of enforcement is limited and only applies to the enforcement of
rights that members have in their capacity as a member. It cant be used
if it is not directly related to members rights
Not always clear whether a personal or member rights can use
oppression remedy
Personal action statutory rights
Right to enforce the statutory contract in s 140.
Right to seek injunctive relief in relation to contraventions of the Act under s

1324.
Right to challenge variation of class rights under s 246D.

- Only in instances where not all members agree
- Need 10% of votes and has to be done within a month
- Judicial review available under special circumstances
Disclosure breaches - For listed companies (continuous disclosure needed)

-
ASX Listing rule 3.1 imposes an obligation on listed cos to disclose to

ASX info that a reasonable person would expect to have a material
effect on the price of value of the cos securities immediately when the
co comes aware of it
Obligation on co to keep the investing market aware of share prices
33
S 1317HA potential to seek compo for breach for a person who suffers
loss as a result of the breach
Winding-up remedy in terms of s 461.
Oppression remedy
OPPRESSION REMEDY
STANDING
Who can apply?
Standing: s 234
Member: s 231
- Is a member when on the register of members
- Former members
- Any person that ASIC thinks is appropriate
Membership does not have to be at time of oppression:

Re Spargos Mining NL (1990) 3 WAR 166
Member does not have to be a minority shareholder
Jenkins v Enterprise Gold Mines (1992) 6 ACSR 539

o became SH after oppressive conduct occurred but still wanted to
take action
o The moment you are a member you can apply - s 234(a)
o You dont have to be the member that was affected - s 234(a)(ii)
Vujnovich v Vujnovich [1989] 3 NZLR 513

o 3 brother where one was fed up with the other 2 so he started a
business in another company
o Court found oppressive conduct on both sides
o Solution was winding up
Capacity as member? Not focused on membership rights
John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Australasia) Pty
Ltd (1991) 6 ACSR 63
o Obita: not allow a member to enforce rights as a franchisee
Re Bellador Silk Ltd [1965] 1 All ER 667

o D tried to force co to pay other co which had an interest
o Court said if you use the remedy for a collateral purpose, the
provision will be read down and access will not be allowed
34
GROUNDS FOR ORDER

ASK: Is the act or conduct contrary to the interests of members or oppressive/
unfairly prejudicial/ unfairly discriminatory against a member/s?
Relief may be granted if (s 232):
the conduct of the companys affairs OR
an actual or proposed act or omission by or on behalf of a company OR
a resolution, or a proposed resolution, of members or a class of members of a
company
IS EITHER
contrary to the interests of the members as a whole
oppressive to, unfairly prejudicial to, or unfairly discriminatory against,
a member of members whether in that capacity or in any other capacity.
Examples of conduct considered to be oppressive or unfairly prejudicial
Improper diversion of business

Payment of excessive remuneration to a controller or associate
Failure to prosecute an action
Unfairly restricting dividends
Share issue with dominant purpose of reducing shareholders proportional stake
in company
Improper exclusion from participation in management
Denial of access to information
Misstatements and omissions by directors in breach of fiduciary duty
Use of company funds to defend oppression proceedings
Oppressive conduct of board meetings
Decisions for benefit of related companies rather than shareholders in company
Unlawful divestiture of shares
Misappropriation of company funds constitution breaches of fiduciary duty
Improper action to secure incumbency of board of directors
How is this interpreted?

Interpretation of s 232:
objective test would a reasonable person with the same knowledge

and skill find it oppressive?
o if a reasonable bystander would have the same knowledge and skill that the
alleged oppressor has then it could be considered oppressive
35
reasonable expectations (or legitimate expectations)
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692

o Expectations can change depending on the circumstances
Reliance of intention of oppressor (not really an issue)

-
Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459
o Whether the reasonable bystander would not see it as
oppressive conduct
o No grounds for oppression
Conduct may be oppressive regardless of no intention to oppress Re

M Dalley and Co
Intention may be relevant for determining whether conduct is unfair
Re HR Harmer Ltd [1959] 1 WLR 62

o If the oppressor continued with the conduct knowing that it was
wrong
o Held much more stringent order need in the circumstances. The
conduct would continue in the future
Reliance on conduct of applicant

- Conduct may be relevant if they have behaved in such a way that
encourages the conduct of the respondent
-
Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273

The applicants disinterest in co affairs lead to a finding that a failure to
consult him was not unfair and this was fatal to his action
Re London School of Electronics Ltd [1986] Ch 211
Complained about other co taking its students court found them

unreliable
dissatisfaction with management not sufficient
Re G Jeffery (Mens Store) Pty Ltd (1984) 9 ACLR 193

- SH felt the brother in charge was crap. Held only to be dissatisfaction not
oppressive
- The remedy does not assist a locked in minority SH who wants to extract
their investment
oppressive to, unfairly prejudicial to, or unfairly discriminatory against

- Read as general description of conduct that entitles applicant to access
remedy (not 3 different things)
36
Although exclusion for competition was prejudicial, the decision was
bona fide and was not made of an improper purpose
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
contrary to the interests of members
Jenkins v Enterprise Gold Mines (1992) 6 ACSR 539

RELIEF IF ORDER GRANTED
Orders that the court can make (s 233):

Court can make any order that it considers appropriate, including:
(a) company be wound up
s 233(2)
if court considers appropriate, court will make an order as if it wew
made under s 461
John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Australasia) Pty Ltd (1991) 6
ACSR 63
- If it is at all possible to avoid winding up, another type of remedy should
be granted. One of the circumstances is whether the conduct will stop or
whether it is particularly serious
(b) constitution be modified or repealed s 233(3)
- whether it has provisions that are oppressive
- once the court has ordered it to be amended in a particular way, the SH
in a GM cannot change it back
(c) regulating future conduct
Re HR Harmer Ltd [1959] 1 WLR 62

o Court ordered the removal of Ds and appointed different Ds
Turnbull v NRMA Ltd (2004) 186 FLR 360

o Court ordered that a meeting the company was proposing
should not be held (the GM was held to be oppressive to some
members of the company)
(d) for purchase of any shares by any member

37
where one other member is buying the shares of the SH who is

complaining about oppressive conduct
Fedorovitch v ST Aibins Pty Ltd (1999) 17 ACLC 1558
(e) purchase of shares with appropriate reduction of capital

- recognition that it might not be possible that other members of the
company to buy back shares off the oppressive member
- it is then possible to use the share capital to accommodate member who
is being oppressed in that way
- at what value? Court has absolute discretion to tell them how much they
should pay for shares from oppressed applicant
(f) company must institute, prosecute, defend or discontinue specified
proceedings
(g) authorising member to institute, prosecute, defend or discontinue
specified proceedings in the name and on behalf of the company
Re Overton Holdings Pty Ltd [1985] WAR 224
Fexuto v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672
Re Spargos Mining NL (1992) 6 ACSR 539
*Effect of (f)&(g) is to give the member authority to bring on behalf of the company
(h)
appointing receiver or receiver and manager for company property
(i) restraining a person from engaging in specified conduct or from doing
specified act
(j) requiring person to do specified act
Re Dernacourt Investments Pty Ltd; Baker Davis Supply Co Pty Ltd v
Dernacourt Investments Pty Ltd (1990) 2 ACSR 553
*Effect of (i)&(j) is injunctive relief where Ds are doing something that they shouldnt
be where the SHs want to stop it.
- if there is a possibility that a creditor who has security over some assets of the co,
and if the co defaults, the creditor can appoint someone to take charge of the assets
where the Ds no longer have control
WINDING-UP REMEDY s 461

Circumstances under which members may apply for winding up of a company under
s 461:
1. Is it just and equitable for the co to be wound up?
2. Are directors are acting in their own interests and not in those of the
company in running the affairs of the company?
38
3. where there is oppressive, unfairly prejudicial or unfairly discriminatory

conduct (note there is also the oppressive remedy)
*act states that certain ppl can apply for the winding up of a co on certain grounds: standing +
reasonable grounds = can apply to the court
1. Just and equitable (not defined in act look to cases for definition)
Equitable considerations and partnership analogy

- often relied on in small cos where SHs are also the Ds of the co where it is
being conducted like a partnership
o Re Westbourne Galleries Ltd [1973] AC 360 (2 of 3 SHs, D
removed) 2 of 3 SH/Ds removed 3rd D
o International Hospitality Concepts Pty Ltd v National Marketing
Concepts Inc (No 2) (1994) 13 ACSR 368
Lack of mutual trust and confidence

- Has to be more than subjective
Deadlock
- Often happens
- Happens because of a breakdown of relationship w SHs, 50% votes and
cant move forward
- Resolution is to apply for the co to be wound up
o Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426
Failure of substratum
- Company not realising its object anymore
- Not so relevant
o
Re Tivoli Freeholds Ltd [1972] VR 445
Qasi-partnership companies (resembles a partnership but isnt one)
Ebrahimi v Westbourne remedy was established to situations where conduct of the

majority represented a departure from common assumptions and understandings
upon which the company was based that were not embodied in the co constitution
Clean hands?
- Whether the member who applies for the winding up should be innocent
of any conduct that is detrimental to the company
-
o Re Westbourne Galleries Ltd [1973] AC 360 REQUIRED

SH that applies for winding up because he/she is being oppressed must
not be guilty of being involved in conduct that could be complained of
39
o Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 ONLY A

FACTOR TO BE TAKEN INTO ACCOUNT
Different approach: an applicants wrongful conduct. In this context it
could be taken into consideration to determine whether just and
equitable but it wont serve as a bar to allow member to access remedy
Relationship with statutory oppression remedy

-
The conduct has to be so serious, a continuous breach by the Ds and it

indicates that the co can no longer conduct its affairs
it is in a deadlock and
no other remedy is appropriate and winding up is the only option
Section 467(4):
Where the application is made by memberson the ground that it is just and
equitable that the company should be wound up or that the directors have
acted in a manner that appears to be unfair or unjust to other members, the
Court, if it is of the opinion that:
(a) the applicants are entitled to relief either by winding up the company or by
some other means; and
(b) in the absence of any other remedy it would be just and equitable that the
company should be wound up;
must make a winding up order unless it is also of the opinion that some other
remedy is available to the applicants and that they are acting unreasonably in
seeking to have the company wound up instead of pursuing that other
remedy.
DERIVATIVE ACTION
General law
Foss v Harbottle (1843) 2 Hare 461:
internal management
proper plaintiff
- If the company is wronged, then the co must institute the action
- Court recognised in these situations it may be impossible, particularly
where the wrong doers are in control of the company
- Court said: co must institute proceedings as a proper plaintiff BUT if the
co cant because wrong doers are in control, a SH can bring the action
on behalf of the co provided the wrong is not ratifiable by an ordinary
majority as court will not interfere with internal management
NOW only ratifiable wrongs will give rise to an action
Violation of statute
40
Misappropriation of property
Fraud on minority
Conduct in breach of general law e.g. Ds commit fraud, conduct in breach of
companys constitution
Standing: Section 236

When:
S236
(1)
AND
When Ds breach their duties to the co or

The co is a victim of a wrong by 3rd parties
= the co is wronged, not the SHs but they suffer indirectly
Recognition of right to bring proceedings on behalf of a company, IF
Member (name on register)
entitled to be registered as member
former member
officer of the co
former officer
person obtained leave under s 237 (person has applied for relief and court
has granted this)
(2)
Proceedings must be brought in companys name. (this means that benefit will
go to the company, member indirectly benefis)
(3)
Right to bring general law derivative action
Can only apply if applied and obtained leave under s 237

Practical considerations:
any benefit of the litigation goes to the co and not the applicant
the applicant is not entitled to costs without a court order
if action is unsuccessful there is a risk that the applicant will also have to meet
the costs of the defendant
Grounds
ASK: will the court grant leave to applicant to apply on behalf of the co?
237(2)
(a) Probable that company will not bring proceedings. (e.g. where the MD has
60% of shares indicates that those in control will not allow proceedings)
41
- need to demonstrate that the alleged wrong doer has a dominant influence
over the board of Ds
(b) Applicant is acting in good faith.
-
Whether the applicant honestly believes that a good cause of action

exists and has a reasonable prospect of success and
Whether the applicant is seeking to bring a DA for such a collateral
purpose as would amount to an abuse of process
(c) It is in the best interests of the company that the applicant is granted leave.
-
Does the cost of taking proceedings outweigh the benefit to the co?
Not available to a co in liquidation (Chahwen)
(Rebuttable presumption that not in the best interests of company in some

instances: s 237(3)- list of requirements when it is presumed that its not in the
best interests of the company all requirements have to be complied with)
Rebuttable presumptions:
1. Action is against an outsider and not someone related to the co
2. Co decided not to bring proceedings have a resolution that was proposed that
co was to but resolved it would not bring proceedings
3. Ds that were involved with the decision not to go ahead with proceedings acted
in good faith for a proper purpose, did not have material interest in the
decision, informed themselves about the subject matter of the decision and
rationally believed the decision to be in the best interest of the co
*If satisfied, the presumption can be rebutted and applicant cant bring action
(d) There is a serious question to be tried.
(e) Notice of proceedings to company (notice was given to co that applicant
instituting proceedings and co has done nothing about it)
Good faith
Honest belief that a good cause of action exists
Swansson v RA Pratt Properties Ltd (2002) 42 ACSR 313

- Applicant is acting in good faith if the applicant has an honest belief that a
good cause of action exists and that the action is going to be instituted or that
relief is being sought not for a collateral purpose e.g. not to force a co to pay a
debt to a creditor
42
Assume applicant is acting in good faith if they would suffer real

and substantive injury if DA not permitted
Chahwan v Euphoric Pty Ltd t/as Clay & Michel (2008) 65 ACSR 661
- Confirmed Swansson acting in good faith required.
- Court gave its own interpretation as a current or former D or SH if the
applicant can show that he/she they would suffer real and substantive injury if
derivative action is not permitted provided the action is commenced with
personal status as a D or SH, assume applicant is acting in good faith
Charlton v Baber (2003) 47 ACSR 31
- Alleged wrongdoer had influence over the board of Ds couldnt act
w/out consent of the wrongdoer which made it apparent co could not
bring proceedings
ASK: Does minority SH need access to information?
Powers of court: Section 241
Court can actively manage proceedings.
Court can appoint independent person to investigate affairs and report back to
the Court.
Person may inspect books of company: s 241(2).
Remuneration of person so appointed? s 241(3).
Power of Court to make cost orders: s 242.
Effect of ratification by members: s 239
Ratification by members does not prevent person from bringing or intervening

in proceedings with leave under s 237 or from applying for leave.
Court may take ratification into account in making a decision, keeping in mind:
how well-informed members were; (when made decision to ratify)
whether members were acting for proper purposes.
Injunctions
ASK: Are there any other statutory remedies available?
If no
ASK: Is person engaging or proposing to engage in conduct that contravenes the
act?
If so: Can apply to restrain person from engaging in conduct or require them to do
an act or thing
Section 1324
43
(1) Where a person has engaged, is engaging or is proposing to engage in

conduct that constituted, constitutes or would constitutea contravention of
the Actthe Court may, on the application of ASIC, or of a person whose
interests have been, are or would be affected by the conduct, grant an
injunction, on such terms as the Court thinks appropriate, restraining the firstmentioned person from engaging in the conduct and, if in the opinion of the
Court it is desirable to do so, requiring that person to do any act or thing.
*umberella remedy
*anyone who interest who/has/could been affected has standing dont have to be a
member
(10)
Where the Court has power under this section to grant an injunction
restraining a person from engaging in particular conduct, or requiring a person
do to a particular act or thing, the Court may, either in addition to or in
substitution for the grant of the injunction, order that person to pay damages
to any other person.
Section 1324: Uncertainties
Is the ability to claim damages only available where claim is also made for an
injunction?
Permanent Trustee Australia Ltd v Perpetual Trustee Co Ltd (1994) 15

ACSR 722
o Court interpreted it as no limitation to where injunction granted
Executor Trustee Australia Ltd v Deloitte Haskins & Sells (1996) 135
FLR 314
o Court said compo can only be granted only where there is also a
claim for injunctive relief they have to go together
Does s 1324 provide an alternative statutory derivative action? (Should

section be read down in light of existing statutory remedies and
requirements?)
Mesenberg v Cord Industrial Recruiters Pty Ltd (Nos 1 & 2) (1996) 39

NSWLR 128
o
o
S1324 remedies are only available when there are no other

available statutory remedies available
Dealt with breach of Ds duties remedies where the civil liability
provisions
Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 23 ACSR 715

o
o
Court has discretion whether or not relief is granted

Court will decide whether it is appropriate to use
Access to Information
Members have access to information in specific instances:
As a matter of course
44
The register of members

Notices of meetings
Financial reports
Material change (specifically listed cos)

- Continuous disclosure
- Info that affects shares must be disclosed in market so info reflected in
share prices
Upon request
Inspection of books under Corporations Act - s 247A
Application by a member
ASK: Is the member acting in good faith and acting for a proper purpose? If so can
apply
(1)
On application by a member of a company or registered managed investment

scheme, the Court may make an order:
(a)
OR
(b)
authorising the applicant to inspect books of the company or scheme;
authorising another person (whether a member or not) to inspect books

of the company or scheme on the applicants behalf.
The Court may only make the order if it is satisfied that the applicant is
acting in good faith and that the inspection is to be made for a proper
purpose.
Authorised person may make copies.
(2)
Someone who has been authorised or granted leave under s 237 ( a DA)
* s 247A(3) if you are someone who instituted a DA on behalf of the co or is planning or entitled to
do so, then can apply to court to access books
(3)
(4)
(5)
Standing of appointed person.

Orders Court may make.
The Court may make the order only if it is satisfied that:
(a)
the applicant is acting in good faith; and
(b)
the inspection is to be made for a purpose connected with:
(i)
applying for leave under section 237
(ii)
bringingproceedings with leave under that section.
What are the Books?

- S 9 definition financial records, unregistered members minutes,
resolutions of board meetings, a document (covers most things)
What is a proper purpose?
45
Quinlan v Vital Technology Australia Ltd (1987) 5 ACLC 389
Re Augold NL [1987] 2 Qd 297 no proper purpose found
Czerwinski v Syrena Royal Pty Ltd (No 1) [2000] VSC 125
Tinios v French Caledonia Travel Service Pty Ltd (1994) 13 ACSR 658
Application to inspect minutes of board meetings?
Re Claremont Petroleum NL (No 2) [1990] Qd R 310 Y
Rowland v Meudon Pty Ltd [2008] NSWSC 381 N
Gibson v Opalspectrum Pty Ltd BC9400179 good faith and proper

purpose found
Willingness to order provision of information in respect of listed

companies.
Smartec Capital Pty Ltd v Centro Properties Ltd [2011] NSWSC 495
- Court made distinction on listed and non-listed companies
- The purpose of s 247A is to enable SHs to access info reasonably
assumed to be relevant to that co
- Where co is listed and subject to a continuous disclosure regime, the
court will be less willing to order further access to info
- Where there is a large no of investors, any need for info is more likely to
be shared by all investors than one specifically so court less likely to
allow access to individuals
Purpose for which information sought.
London City Equities Ltd v Penrice Soda Holdings Ltd [2011] FCA 674
- Court said that the documents the applicant wants to access to would
have to be linked to the purpose for which access is sought
- Has to fulfil the purpose for which it is being sought
- Court granted access to some but not all
Lack of access to information as oppression
Re Dernacourt Investments Pty Ltd (1990) 20 NSWLR 588

46
If application is for the sole basis of establishing oppression then

probably wont be granted
Lack of info needs to be linked to something else to indicate oppression
47
Accounts and Audit

*Pull stuff from last semester
The general information that has to be given to:
Prospective investors (SHs)

Banks (voluntary creditors)
Trade creditors buying services
Involuntary creditors employees, tort victims owed money
Financial records
S 285 - every co in Aus has to comply
ASK: Has the co kept financial records?
If so: do the financial records correctly and explaining cos financial position where a
person can ascertain the financial position at any time (Van ressema)
S 286 obligation for every co to keep financial records
- Must correctly record and explain co transactions as well as co financial
position and performance and enable a true and fair set of financial
statements to be prepared and audited
- Why? If dont have information how could this be given to those that require it
to make correct financial decisions about the co
- *can also be a presumption of insolvency
S 286(2) documents are to be kept at least 7 years
S 287 can be kept in any language, English translation available
financial records under section 286
Van Reesema v Flavel (1992) 10 ACLC 291
-
The co only kept source documents but did not have any written records or
official documents
Court said at the very least s286 requires at least a general ledger and a
general journal
Emphasize on the financial records correctly and explaining cos financial
position where a person can ascertain the financial position at any time
ASK: Has the co failed to keep financial records?

S 344 contravention is a civil penalty
- 1317E declaration of contravention
48
1317G pecuniary penalty up to $200,000

Schedule 3 penalties -25 penalty units ($2500) or imprisonment for 6 months,
or both
(s 1375 1 penalty unit = $100)
Disqualification s 206C
Annual Financial Reports (292-323D)

Who has to prepare these?
-
S 292 Ds have to prepare these (public and pty co)

S 292(2) small pty co only have to do if directed to
ASK: Is it a pty small/pty large or public co?

To be a large pty have to satisfy 2 of the 3 requirements
1. Consolidated revenue of at least 25 mil p/y
2. Gross assets of at least 12.5 mil
3. At least 50 employees or more full time employees
Pty Co
- S 293 SH discretion may give co direction to prepare financial report
- S 294 ASIC may give direction to prepare financial report for the financial
year
Content of annual financial report
S 295(1) consists of:
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
Accounting standards
S 295(2) - financial statements are those required by accounting standards
Notes
S 295 (3) the notes to the financial statements are:
Disclosures required by the regulations and

Notes required by accounting standards
Any other info available to give a true and fair view (right now)
Directors declaration
S 295(4) used to make sure Ds understand that a true and fair view is presented
of the cos financial position
True and fair view
49
S 297 must give a true and fair view of:

- Financial position and performance of the co and
Directors Reports
Directors are required to prepare report every financial year s 298
Must provide the reports (annual, directors, auditors) to members for that
financial year s 314
S 315 has to be provided 4 months after financial year or 21 days before the
next AGM revising (small pty only if req but SHs)
Content:
Is to include general information about operations and activities s 299

Is to ensure that Ds turn their mind to the big picture and
To help others understand the position of the co
Must also contain information that members would reasonably expect to have
to make an informed assessment about cos operations, financial position,
business strategies, future prospects of the co s 299A
Auditors
-
To keep track of co accounts and check accuracy

Watchdog required
Small pty
- Only need an auditor when 5 % of SHs require it or ASIC directs it (s
293,294)
Appointment of auditor
S 325 Ds of a pty co can appoint an auditor if not already appointed at GM
S 327A Ds of a public co MUST appoint an auditor within 1 month of registration
unless the company at GM has appointed
Third parties duty of care?; Esanda Finance Corporation Ltd v Peat
Marwick Hungerfords (1997) 15 ACLC 483
- Q: whether or not auditors liable beyond the immediate liability of ppl who
hired them?
- HCA said that the duty of care in relation to negligence owed was definitely
owed to the co but not necessarily to third parties simply because that 3 rd
party had relied on the accounts
-
Firm was not liable for third parties relying on accounts
50
Qualification (sections 324AA, 1279 & 1280);

Auditing Independence
- not to have conflicts or reasons not to see problems in reports
- have to wait 2 yrs before being involved in a co that auditor has previously
audited
Rights and Duties of Auditors
Nature and terms of the relationship is a contract
Rights - power to obtain information s 310

(a) Auditors right to access records
Duties
S 308 must report to members on whether auditor is of the opinion that the
financial report is in accordance with the act; that the financial report complies
with accounting standards and true and fair view (accurate)
If not of the opinion must explain why
S 311 obligation to tell ASIC if a problem found
Common law duties:

(a)
Duty to be independent
(b)
Duty to use reasonable care and skill
Daniels v Anderson (1995) 13 ACLC 614

Accounts were manipulated to look like co was making money
Daniels told the board, the matter was not pushed further
Breach of duty by Ds and contributory negligence by the auditor to exercise
reasonable care and skill.
Resignation
ASK: Does the auditor want to resign?
- S 329(5) Public co seek ASIC approval for resignation
- S 329(9) pty co dont need ASIC approval to resign
Removal
S 329 auditor may be removed by resolution of a co at GM where 2 months notice
of intention to move the resolution has been given to the co
Issues
Auditor Regulation by the Auditing and Insurance Board and Fiancial

Reporting Counsel
Auditing Rotation s 324DA moved around every 3 years to ensure no
conflict of interest
51
Retention of Audit working papers for 7 years

who watches the watchdogs? Company Auditors and Liquidators
Disciplinary Board s 1292 enables ASIC to suspend auditors resignation
52
Corporate Governance
Corporate governance
- It refers to control of corporations and systems of accountability by those
in control
- Accountability: legal restraints, systems of self regulation, the norms of so
called best practice
Legal regulation
The role of the board of Ds and the GM (corporate organs)

Directors duties
The conduct of GM
Shareholders rights and remedies
The role of auditors and ASIC
Justice Owen in the HIH Royal Commission Report on the failure of HIH Insurance:
Those companies with an ethical culture are likely to adopt appropriate corporate
governance practices, while those where this culture is lacking are more likely to
continue to adopt an idiosyncratic or expedient approach
1. Central circle: mandatory, regulatory
- Legislation and the general law
2. Second layer: ASX listing requirements, accounting requirements
- If a listed company have to comply with ASX requirements
- Accounting requirements have to know what is relevant
3. Third circle: soft law ASX Corporate Governance Principles
- Not legislation but has influence and effect
- ASX applies to public cos because co agrees to comply with them
4. The outer penumbra: business ethics (things that arent a good idea)
- Does not necessarily appear in corporate guidelines
- Good lawyers advice needs to extend to this
the need to entrepreneurship to be balanced by responsibility
ASK: Does the co? (only soft law, influentially to pty co)
1. Does the co established and disclosed roles and responsibilities of the board?
2. Does the co have an effective board in terms of size, composition and
commitment to adequately discharge responsibilities and duties?
3. Does the co promote ethical and responsible decision making?
53
4. Does the co have a structure to independently verify and safeguard the

integrity(bona fide) of their financial reporting?
5. Does the co promote timely and balance disclosure of all material matters
concerning the co?
6. Does the co respect and facilitate the rights of SHs?
7. Does the co have a system of risk oversight and management and internal
control?
8. Is the level and composition of remuneration sufficient and reasonable?
Public Companies
ASX Involvement
-
how companies should manage company and governance within their

corporation
things that Ds should be doing beyond mandatory compliance
NOT Mandatory but soft law
Influential on non-listed companies lays out basic requirements that
every co should be complying with
Mandatory (eg disclosure: LR 3.1)

Corporate Governance Principles: LR 4.10.3
The 8 Principles:
1. Companies should establish and disclose the respective roles and
responsibilities of board and management
2. Companies should have a board of an effective composition, size and
commitment to adequately discharge its responsibilities and duties
3. Companies should actively promote ethical and responsible decisionmaking
4. Companies should have a structure to independently verify and safeguard the
integrity of their financial reporting
5. Companies should promote timely and balanced disclosure of all material
matters concerning the company
- In addition to compulsory disclosure, co should establish written policies to
ensure compliance with the listing rules to ensure accountability to a
senior executive level for the compliance
54
6. Companies should respect the rights of shareholders and facilitate the

effective exercise of those rights
- cos should design a communication policy for promoting effective good
communication with SHs and encouraging participation at meetings
7. Companies should establish a sound system of risk oversight and
management and internal control
- Need a system between the board and daily risk taking
8. Companies should ensure that the level and composition of remuneration
is sufficient and reasonable and that its relationship to performance is clear.
- Has an independent chair with at least 3 members
- Need a clear distinction between what you pay executive members of the
board (Ds as employees) and what you pay the independents of the board
- Provisions of info provide better info as to what Ds should be paid
Business Ethics
Business ethical decisions
How do we deal with conflict of interest

Is it right to change the nature for a profit
How can we combat sexual harassment in the workplace
Whose job is it to protect consumer health
How safe is our product
How do we deal with the population
What are our responsibilities for human rights and welfare in a 3 rd world
country
What are our responsibilities to communities in Australia threatened by
closure of a corporate plant?
*need ethical enquiry about what is the course of action the company should
adopt in the circumstances
Reasons
Bad ethical behavior may attract external regulation

Good publicity can be attracted by good ethical behavior, bad publicity by bad
ethical behavior
Good ethical conduct leads to a greater sense of professionalism among the
workforce. People like to work for the best companies in Australia
Primary norms of business ethics
Caring respect for the individual

Honesty operating in good faith
Accountability responsibility for ones actions
Promise keeping ones word is ones bond
55
Pursuit of excellence ensuring equlity

Loyalty to employees and persons with whom one has dealings
Fairness treating people properly and not taking advantage of them
Integrity avoiding conflicts of interest
Respect for others in the workforce and suppliers and consumers
Responsible citizenship obeying the law and behaving in an upright fashion
Advertising governed by Trade Practices Act 1974 and industry codes
Codes as a form of education and training for staff something that should be
produced by management under the supervision of the board of directors
o
o
o
o
It identifies key principles

Serves as an education medium
It signals the companys commitment to ethical standards
It can be used as a method of monitoring managerial and employee
misconduct
Corporate Groups
-
Conducting business as a group of companies (buy the company and

make it a subsidiary)
Need to be competitive due to globalization
ASK: Is there a group of companies involved?

Reasons for corporate groups
Economic and commercial benefits, eg:
reducing commercial risk or maximising potential financial return;
preserving intangible commercial property of existing companies by acquiring

companies themselves to expand enterprise or increase market power; tax
benefits;
attracting capital without forfeiting overall control;
lowering the risk of legal liability by confining high liability risks, eg

environmental and consumer liability, to particular group companies, with a
view to isolating remaining group assets from potential liability;
providing better security for debt or project financing;
simplifying process of partial sale of an enterprise;
complying with various regulatory requirements.
56
Entity approach (each co a separate legal entity) v Enterprise approach (group as

unitary economic functioning for the interests of the whole)
Regulation of corporate groups in Australia

Traditionally applied separate entity approach to corporate groups; separate legal
personality of each company must be maintained (limited statutory exceptions).
Establish how each is regulated
Salomon v Salomon & Co Ltd [1897] AC 22 separate entity
each co will be liable for own debts general law
each co has own profits to pay dividends
even if they share the same D, treated separately
Liability of Holding Company

ASK: Is the holding company liable to pay debts of the subsidiary?
GENERAL
subsidiary company within a group, can look only to that company for
payment of their debts (HC not liable)
Industrial Equity Ltd v Blackburn (1977) 137 CLR 567, 577:
it can scarcely be contended that the provisions of the Act operate to deny
the separate legal personality of each company in a group. Thus, in the absence of
contract creating some additional right, the creditors of company A, a subsidiary
company within a group, can look only to that company for payment of their
debts. They cannot look to company B, the holding company, for payment.
-
The fact that holding company has control or the same Ds as subsidiary
does not mean we should automatically regard them as one and the same
EXCEPTIONS
Could be liable if in partnership or a sham
Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 11 ACLR 108, 119:
it is only if the court can see that there is in fact or in law a partnership
between companies in a group, or alternatively where there is a mere sham or
faade that one lifts the veil. The principle does not apply n the instant case where it
would appear that there was a good commercial purpose for having separate
companies in the group performing different functions even thought the ultimate
controllers would very naturally lapse into speaking of the whole groups as us.
Could be liable if subsidiary acting as an agent for the principal

57
*only applied in very limited situations
Spreag v Paeson Pty Ltd (1990) 94 ALR 679, 712:

Facts:
-
Didnt even have its own bank account was reliant on HC to function
(little distinction between HC and subsidiary co)
Contract of sale, P brought machinery and made false promises which
was an inducement of the sale
The plaintiff wanted to enforce the claim against the HC instead of the
subsidiary with whom he entered into the contract with
I have decided that I should uphold the submission that Paeson was
carrying on such business as it did carry on for Componere and was, at least by
analogy, in the position of an agent acting for an undisclosed principal. In
those circumstances I have reached the conclusion that the Spreags are entitled to
recover not only from Paeson, but also from Componere.
Tort liability for Holding Co

General principle: a holding company and other group companies are NOT liable
for any torts incurred by that group company, even if it is a wholly-owned subsidiary.
Exceptions:
agency or assumption of responsibility (if no express agreement, hard to
establish)
incorporation to avoid an existing tortious obligation
controlling company has a direct duty of care for the activities carried out by
its controlled companies (degree of control exercised over subsidiary)
statutory exceptions.
General law
mere fact that co exercises complete control over another co does not
give rise to the conclusion that the corporate veil should be lifted
Briggs v James Hardie & Co Pty Ltd (1989) 7 ACLC 841, 862:
the proposition advanced by the plaintiff that the corporate veil may be
pierced where one company exercises complete dominion and control over another
is entirely too simplistic. The law pays scant regard to the commercial reality that
every holding company has the potential and, more often than not, in fact, does,
exercise complete control over a subsidiaryIt remains to be seen whether the time
has come for the development of a more principled approach than the authorities
provide at present.
58
ASK: when this corporate structure was put in place was there any existing liabilities
already?
IF not: strict entity approach each co liable for tort liability
If the corporate group structure used to avoid liability by HC, it will be

considered a sham to avoid existing liabilities and HC liable if debts
already existent
Can be used to avoid potential liabilities
Adams v Cape Industry plc [1990] Ch 433, 544:

We do not accept as a matter of law that the court is entitled to lift the
corporate veil as against a defendant company which is the member of a corporate
group merely because the corporate group structure has been used so as to ensure
that the legal liability (if any) in respect of particular future activities of the group (and
correspondingly the risk of enforcement of that liability) will fall on another member
of the group rather than the defendant company. Whether or not this is desirable,
the right to use a corporate structure in this manner is inherent in our corporate law.
Corporate Social Responsibility

*soft law
continuing commitment by business to behave ethically and contribute to economic
development while improving the quality of life of the workforce and their families as
well as the local community and society at large.
Arguments FOR
It is in the companys long term interest.

It will enhance the companys reputation.
It will lead to retention of good quality staff.
It will lead to better risk management.
It will facilitate brand differentiation.
It will avoid government and regulatory intervention by demonstrating the
capacity of the company to observe the norms of good practice.
It will help to divert attention from negative aspects of the companys business
as a matter of public relations.
Arguments AGAINST
Economic arguments about shareholder wealth and ability to monitor

management.
Social issues are not the concern of business people.
Impact on cost and disadvantage in terms of competitiveness.
Companies are not equipped to engage in those types of activities.
59
Debt Finance and Fundraising

*good for the economy if cos borrow responsibly and if there is a reasonable level of
protection for investors, otherwise no one would invest and economy doesnt grow
DEBT FINANCE
Term
Loan capital
Can a co borrow
money?
Debenture
Definition
Capital raised through a loan lend us money and we pay
you back
S 124(1) gives co power to borrow money (note co
constitution can have restrictions on this)
*normally asset gives as security for loan
S 124(1)(b) gives the co power to issue debentures
An unsecured loan certificate issued by the co, backed by
general credit (borrowers integrity) rather than specified
assets (collateral)
S 283B(h) types of debentures that co can issue
Does not have a property right attached to it
A chose in action a right to take legal action to enforce
your legal right
charge
CHARGES
Company security for a loan in the form of charge
ASK: Has the company secured a loan in the form of a fixed or floating charge?
S9
Fixed charges assets which are unchanging (not about to alter, change, modify)
- Normally land or serious machinery
- Gives the bank an immediate interest in that asset
Floating charges floats over what the co owns, but not fixed (over things that are
always changing/shifting hands)
- E.g. you promise then bank that nothing covered by the floating charge will
leave your possession without being placed by something equivalent (stock
for money)
Distinction defined in Evans v Rival Granite (1910)
A floating security is not a future security; it is a present security, which presently
affects all the assets of the company expressed to be included in it. On the other
hand, it is not a specific security; the holder cannot affirm that the assets are
60
specifically mortgaged to him. The assets are mortgaged in such a way that the
mortgagor can deal with them without the concurrence of the mortgagee. A
floating security is not a specific mortgage of the assets, plus a licence to the
mortgagor to dispose of them in the course of his business, but is a floating
mortgage applying to every item comprised in the security, but not specifically
affecting any item until some event occurs or some act on the part of the
mortgagee is done which causes it to crystallise into a fixed security.
the holder cannot affirm that the assets are specifically mortgaged to
him bank cant come in and state have security over the goods
that the mortgagor can deal with them without the concurrence of the
mortgagee important distinction:
Fixed charge: gives the bank a present interest in the factory and prevents the
co from selling without the consent of the bank because the bank has an
immediate interest in it
Floating charge: Do not have to tell the bank provided it is in the ordinary
course of business
will be floating until an event by the mortgagor causes it to crystallise
into a fixed security
e.g. default, if activity made illegal (material adverse change in the co)
Make a note: floating charges are to become circulating security interests under the
PPS regime changes scheduled for reform early 2012.
ASK: Has the charge been registered?
Charges need to be registered s 262
-
land doesnt need to be registered LTO deals with it

s 263 have to notify ASIC, liability, property charged and whether negative
pledge
if dont will loose priority
s 279
s 280 general priority rules for registered charges
s 281 general priority rules for unregistered charges
s 282 special priority rules
ASK: Is there a contract retaining goods until payment? Or a term prohibiting a

security interest over the asset?
Negative pledges a provision in a contract prohibiting a party from creating

a security interest over certain property specified in the contract
retention of title clauses (pretty much a romapla clause)
a seller to the co retains title in the assets they sell to the co until they are paid
61
the sale of contract will retain ownership paid

if bank has security over the land, and product on the land, bank cannot take
if on the land as it is still the cos asset
Issues with charges

-
no present security interest BUT operates as a de facto security

where banks are looking for prospective investments, they will finance without
security (80s) not now with GFC2
Operation of charges system
Effect of failure to register a charge changes in priority

S 266 where a co does not lodge a charge within the prescribed period and
co is placed in liquidation within 6 months, the charge is void against the
liquidator and loss of priority
Variations
Commercial arrangements can change
Officers and charges

Can be enforce by co Ds
Payment
When payment fulfilled, charge is to be released and ASIC notified to change
register (the central public register)
Rectification of Register
If there are any errors/terminations/completions of charges
FUNDRASING
By issue and sale of securities

-
Needs to be sufficient profits to pay dividends (no interest on their money)

No promise of payment so it has to be regulated
Principle of investor protection assumes that the economy is best served by
investors being protected it allows them to buy into companies, to raise
funds and grow
Disclosure
S 705 - Four categories of disclosure documents used if an offer of securities needs
disclosure to investors
Standard full disclosure document standard prospectus

A short form prospectus
A profile statement
An offer information statement
62
S 708 offers that dont need disclosure

Public cos obliged under corp act and listing rules of continuous disclosure (info
about whats happening in the co)
Contents of disclosure documents
S 711 things required in a disclosure document

Test: what an investor and their advisor reasonably would want to know in
order to make an informed decision
Must always have terms and conditions of the offer
s708(4) greater detail required for larger offerings experienced investors
ASICs involvement: s718 acts as a watchdog

s741 power to exempt and modify to make it easier for co to raise
funds where reasonably based on cos activities and objectives of
fundraising
s739 power to issue stop orders where fundraising to be prevented,
has power to issue stop orders
Consequences of breach
ASK: Does an investor feel that they have not been protected sufficiently and the
prospectus was misleading?
Some aspects:
Class actions can have power from statute or fid duties
Fiduciary duties (equitable compensation)
S728 statutory liability for misleading and deceptive statements in
a disclosure document
S180 general directors duty (care and diligence) where prospectus
misleading
S729 civil liability to pay compensation where Act breached
63
External Administration
ALTERNATIVES TO WINDING UP
Workouts
o an informal agreement or payment plan to pay off debt (needs 100% from all
creditors)
Purpose: when co is struggling and to avoid winding up
Advantages
> flexible
> minimal costs
Limitations
> dissenting creditors not bound
> identification of creditors
Schemes of Arrangement
*between co and its creditors
NOTE: does not necessarily help turn the company around
Agreement between company and creditors, approved by court, to avoid winding up.
Process: co will go to creditor with a proposal (debt reconstruction idea) and if a
75% of creditors agree and it becomes sanctioned by court, it becomes binding on
all creditors
The role of the court
o involved in the whole process the meeting with all creditors is convened by
the court
o have to present the court the payment plan court decides whether it should
go ahead
o If 75% agree to payment plan, the co has to go back court to get it
Benefit = flexibility
Limitation = court involvement (costly and slow something that the co may not be
able to afford)
64
MORTGAGE IN POSSESSION
*SECURED CREDITORS
Secured Creditors
If co in default/cant pay debts, SC can take control of asset/s can be taken away
from Ds control (although co still has ownership)
*where a secured creditor has a mortgage over some asset that serves as a security
for the creditor
ASK: Does the secured creditor want to take charge of the whole process? (taking
and selling the asset)
IF SO: Is there a term or agreement in mortgage document between the debtor and
creditor to appoint a receiver (a registered liquidator) to take charge of the process
on their behalf if co in default? (Selling the particular asset for the loan where any
residue is given back to the co)
IF there is a term: Appoint a receiver take into account liabilities
*S 9 (a) in relation to a corporation a controller means a receiver
IF no power to appoint: creditor can take charge of the asset and become a
mortgagee in possession where it releases the asset itself
Receivership
*appointed by secured creditor (the bank)
General law duties of a receiver
Receiver appointed by secured creditor
*SC will appoint if term in mortgage agreement to appoint a receiver if in default but
does not automatically have a right to do so
Expo International Pty Ltd v Chant [1979] 2 NSWLR 820
o Receivers do not owe a duty of care under general law However
o S 420A enforces a duty
Duty: receiver is the agent of the co NOT the creditor (funds to pay receiver come
out of company assets)
o although receiver is acting for the benefit of the secured creditor, for the
receiver to take control of co assets, the receiver should be recognised as an
agent for the co
65
o owes a duty to secured creditor and to co to pay surplus assets to co and to

obtain the amount of the loan from the sale of asset
Receiver can be appointed by court order
Potential liabilities
Statutory duties and liabilities of receiver
1. Duty of care s 420A
Duty of care to sell property at market value
Section 420A:
(1) In exercising a power of sale in respect of property of a corporation, a
controller must take all reasonable care to sell the property for:
(a)
if, when it is sold, it has a market value not less than that market
value; or
(b)
otherwise the best price that is reasonably obtainable, having
regard to the circumstances existing when the property is sold.
Duty of care owed to co and guarantors
Jovanovic v Commonwealth Bank of Australia (2004) SASR 570
o Co defaulted, bank had mortgage in possession and sold property for 800,000
when the internal bank valuation was 950 000
o J held liable for the residue of 150 000 as the guarantor of the loan
o Held bank liable as the duty of care owed by controllers (s420A) was not only
to the co but also to guarantors because they are affected by bank conduct
2. Personal liability for controllers s 419(1) + s 419A
S 419 receiver becomes personally liable for debts incurred during
receivership, possession or control for services rendered, goods purchased or
property hired, leased, used or occupied but it must entered into by the receiver in a
new agreement
S 419A if co continues to use or occupy, or possess property which belongs to
someone else, the controller is liable for rent or other amounts payable by the
corporation that begins 7 days after the control day
2. Receivers are subject to duties imposed on directors and officers (Pt
2D.1 of Corporations Act) ss 180 183
180 duty of care, skill and diligence
181 duty to act in good faith and in the best interests of the corporation and for
a proper purpose
182 must not improperly use their position
183 must not improperly use information
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Voluntary Administration
If co insolvent, or likely to become insolvent, co
should appoint an administrator to deal with co
assets and property
*Ds to do this to avoid liability (co needs to appoint to
show reasonable action)
*winding up of a co CANT happen under this,
UNLESS leave from the court
Purpose:
o a formal mechanism used instead of winding up
o action should be taken immediately upon knowing of something wrong
If administrator appointed by co - can establish defence to insolvent
trading provisions s588H(5) D took all reasonable steps to prevent
incurring more debts and (6) placing a co in voluntary administration
constitutes a reasonable step
WHY?
ASK: Will appointing an administrator help?
the co continue business? (a)
If no, will it result in a better return than winding up of the co? (b)
S 435:
The object of this Part is to provide for the business, property and affairs of an
insolvent company to be administered in a way that:
(a) maximises the chances of the company, or as much as possible of its
business, continuing in existence; or
67
(b) if it is not possible for the company or its business to continue in existence
results in a better return for the companys creditors and members
than would result from an immediate winding up of the company.
*use this in reasoning as to why the co would appoint an administrator
Overview of process
1. Must appoint an Administrator appointed if co is insolvent, or is likely to
become insolvent
by company (s 436A) qualify as defence for insolvent trading OR
liquidator (s 436B) OR
chargee (s 436C) someone who is entitled to enforce a charge on
the whole or substantially the whole of cos assets/property
2. Administrator must give notice of appointment (s 450A)
Publish in newspaper (within 3 business days)

Lodge a notice with ASIC (before the end of the next business day)
substantial chargeholder (as soon as practicable, before the end of
the next business day)
3. First creditors meeting (s 436E) held within 8 days after administration

begins
4. Investigation (s 438A) administrator must investigate co affairs. Must form
an opinion about: whether to execute a deed of co arrangement, whether
creditors interest to end the administration or wind up co
5. Second creditors meeting (s 439A) given opportunity to say what they
want to do
OUTCOME:
Give co back to control of Ds OR

Wind up co
Execute deed of co arrangement (separate from external admin) agreement
of debt reconstruction while co carries on business
*secured creditors allowed to vote equally with unsecured creditors because of moratorium
Execution of deed
- co needs to execute deed 15 business days after the end of second creditor
meeting (s 444B(2)) and
If administrator: as soon as practicable after company executes it (s
444B(5))
Notice (s 450B)
68
As soon as practicable must send each creditor written notice of the execution
of the deed
Lodge a copy of the deed with ASIC
What happens when an administrator is appointed?

o Moratorium legally authorized period to delay payment on enforcement of
debts is in place while co under V.A
Moratorium creditors unlikely to put in VA because of this
o Stay of proceedings (s 440D)
- A proceeding in a court against the co cant begin or proceed unless leave
of court or administrator
o Winding up cant happen
o Criminal or prescribed proceedings (s 440D(2))
- Criminal can still proceed
o Suspension of enforcement and execution action (s 440F and s 440G)
- No enforcement of property can happen unless leave of court or
administrator
o Exceptions to moratorium
chargees who act before decision period
charge over perishable property (goods or commodities that are subject to
imminent spoilage) can be enforced 441C
o Chargeholders if charge NOT over whole or substantially whole of
companys property
-
Cannot enforce charge while under VA unless creditor has leave of the
court (court very reluctant to grant the right to enforce charge against co)
Co can dispose of assets if it is in a reasonable course of business
(manufactured goods) or with leave from the court
o Chargeholders charge over whole or substantially whole of companys

property
- They have the right to appoint an administrator
- Have 10 business days after appointment whether they will enforce their
right against co
o Owners and lessors
Cannot reposes property unless given court approval
o Officers
Ds no longer in control
69
o Employees
Contracts not terminated
Termination of voluntary administration

When:
co executes a Deed of Arrangement or
liquidation or
termination of VA (control given back to Ds)
*all occur when resolution passed (either by members or creditors)
Point in time important as legal effects of VA will also terminate

Once ended, moratorium lifted, creditors can attack co
Creditors terminate
VA normally ends when:

creditors decide on DOCA when executed by co and Administrator
creditors decide to end VA or wind up co when resolution is passed
Did something other happen so VA can be terminated?
Other reasons for termination of VA (s 435C):

court order e.g. court satisfied co solvent
2nd creditors meeting not convened within prescribed time period
creditors did not pass one of resolutions in s 439A
company fails to execute DOCA
court orders company be wound up
Deed of Company Arrangement

*if co fails to comply with terms or it is terminated co will end in winding up
> Effect binding on co, officers, members and creditors
70
WINDING UP
Voluntary
Has the co decided to wind up?

Is the company solvent or insolvent?
Compulsory
VOLUNTARY
*if co decides it should be liquidated
Has the court ordered winding up?

Is the company solvent or insolvent?
COMPULSORY
*court order that it should be liquidated
71
(someone has applied)

SOLVENT CO by special resolutions of
OTHER GROUNDS not necessarily
members e.g. solvent cos being wound
insolvent
up because of oppression
INSOLVENT CO by special resolution
INSOLVENT
of creditors
Voluntary winding up
o No court order control rests with members/creditors (depending of
solvent/insolvent
o Meetings of members/creditors must pass a special resolution to wind up
co s 491(1)
ASK: Have Ds made a declaration of solvency? S 494 (*declaration must be
reasonable - s494(4))
*If no declaration made creditors could do the voluntary winding up (resolution
passed at creditor meeting)
*If yes members have the power to wind up (but wont if co solvent)
o Not always available.
o Initiated - passing of a special resolution
o Committee of inspection can be appointed to investigate affairs
o Commencement of voluntary winding up the date special resolution is
passed (*important to know date co declared in liquidation)
If members winding up
o The co in GM must appoint a liquidator for the purpose of winding up affairs
and distributing the property of the co s 495
o S 496 - If declaration of solvency made by Ds under s 494 and the appointed
liquidator forms opinion of insolvency (not able to pay debts when due) then
must:
appoint an administrator or
Apply to the court for winding up or
Convene a creditors meeting
72
If creditor winding up
o If no declaration of solvency creditors meeting must be convened within 11
days of members meeting at which a resolution for winding up is passed s
497
o At the meeting, creditors may appoint a liquidator s 499
o If liquidator (the one appointed by members) convenes a creditor meeting
winding up then in the hands of the creditors who may appoint a new
liquidator s 496
Compulsory Winding Up
*by court order
INSOLVENT
Who has standing? s 459P (1)
SOLVENT
Who has standing? s 462(2)
The company
A creditor (secured or not)
A contributory
AD
A liquidator
ASIC
If one of these, can apply to court for a
co to be wound up in insolvency
Grounds
The company
A creditor (secured or not)
A contributory
AD
A liquidator
ASIC
If one of these, can apply to court for a
co to be wound up in insolvency
Grounds s 461(1)
Special resolution passed
Insolvency presumptions normally relied

on s 459C
*rebuttable presumption that co is

insolvent if the event occurred 3 months
before the application was made s
459B(2)
*refer to members remedies to establish

these
Ds have conflict of interest
Affairs of the co are prejudicial

oppressive to members
Court is of the opinion that it is

just and equitable to wind up
If ground established, s 462 allows

application for the winding up of a
company
S459A on application under s 459P,
court can order that an insolvent co be
wound up
S 459B for order made under s 462, if

court satisfied that the co is insolvent, the
court may order that the co be wound up
in insolvency
S 459P(2) if creditor with a contingent

73
debt (something else needs to happen

for debt) application for leave needed
S 459P(3) Court will grant leave if
satisfied there is a prima facie case that
co is insolvent
Insolvent winding up
Advise client aims of liquidation for insolvent co:
> Stop insolvent cos from trading and incurring more debt
> Provide equitable distribution where there are not enough assets to pay
everyone
> Investigate co affairs could find Ds liable for insolvent trading
How this will happen:
> Creditors voluntary winding up (resolution of creditors passed) OR
> Compulsory insolvent winding up (court order)
Establishing insolvency Grounds

ASK: Is the company insolvent at that time or becoming insolvent as a result of
incurring a debt?
o s 95 A statutory definition of solvency
Establish whether the co pay its debts when they come due and payable
(1) a person is solvent if, and only if, the person is able to pay all the persons
debts, as and when they become due and payable
(2) a person who is not solvent is insolvent
1. What is a debt?
Company incurs a debt when:
Deemed debts (s 588G(1A)):
paying a dividend
reduction of share capital
share buy-back
redeeming redeemable preference shares that are redeemable at its option
issuing redeemable preference shares that are redeemable otherwise than at
its option
financial acquisition to acquire shares
entering into uncommercial transaction (s 588FB)
74
Need to be a Voluntary action to incur the debt

2. when is the debt due and payable?
3. Does the co have sufficient funds to pay the debt at this time?
ASK: Has the dividend become a debt?
-
254V(1) c does not incur a debt by fixing the amount or time of payment
of a dividend only arises where the time arrives fixed for the payment
(decision to pay may be revoked any time before this) (Ammonia Soda v
254V(2) if c has const that provides for the declaration of dividends,
company incurs a debt when dividend is payable
ASK: Are the Ds paying out of the share capital?

Share capital cannot be used to:
-
Pay-out dividends (must be from profits only)

Buy-back company shares (Trevor v Whitworth unlawful for a company
to purchase own share)
Give bonuses to members
Share capital may be reduced if:

-
Fair and reasonable to companys shareholders as a whole - s256B(1)(a)

Does not materially prejudice companys ability to pay creditors - s256B(1)
(b)
Approved by the shareholders under s 256C
IF dividends paid out of share capital
256D(1) the company must NOT reduce the capital if in breach of 256B(1)
256D(3)
1317E
a person involved in a companys contravention of (1) breaches this

section (civil penalty will apply)
Remedies
(256D(3), it must make a declaration
order
contravention:
members OR
creditors OR
75
s 206C
1324(1)
- Is serious
OR disqualification - court may disqualify person from managing
section met
Definition of insolvency
Bank of Australasia v Hall (1907) 4 CLR 1514, 1527:
look to the immediate future for debts when deciding whether debts
are due and payable
Only debts then actually payable and amounts then actually ascertained? NO:
the matter for determination is the ability of the debtor, which is a state or
condition that cannot be determined without having regard to all the facts
debts referred to are not his debts then payable, but his debts as they
become due a phrase which looks to the future. No doubt, only the
reasonably immediate future is to be looked to, but the anticipated verdict was
not beyond this limit.
Lewis v Doran (2004) 208 ALR 385, 410:
can borrow to pay debts
s 95A requires the court to decide whether the company is able, as at the
alleged date of insolvency, to pay all its debts as they become payable by reference
to the commercial realities. If the court is satisfied that as a matter of commercial
reality the company has a resource available to pay all its debts as they
become payable then it will not matter that the resource is an unsecured
borrowing or a voluntary extension of credit by another party.
*hard for a creditor to get this information so better to use presumptions of
insolvency
Presumptions of insolvency
ASK: At the present, is the co able to pay debts when due and payable?
If cant pay now: current insolvency (grounds for winding up)
s 459C allows for creditors to apply for winding up of co on insolvency
basis if a situation in this section can be made out
if s 459C satisfied then dont have to satisfy s 95A
OR
76
ASK: In the past was the co insolvent when Ds incurred

more debt/exposed of assets so creditors cant get it?
If so: can recover voidable transactions (use presumptions)
STEP ONE:
ASK: Can statutory definition of solvency be satisfied?
IF NOT: Can a presumption of insolvency be established?
Presumption that co currently insolvent S 459C(2)
Court may presume co is insolvent if:
1. Co failed to comply with a statutory demand
2. Execution in favour of company creditor returned wholly or partly unsatisfied
3. Receiver appointed under power contained in an instrument relating to a floating
charge
4. Order for appointment of receiver to enforce floating charge
5. Person entered into possession of such property
6. Person was appointed to enter into possession of such property
1. Co failed to comply with a statutory demand
*statutory demand for money that was defaulted. If failure to pay within 21
days after demand, creditor can apply to court for winding up as failure to
comply with stat demand is a presumption of insolvency
*Debt has to be for more than $2000 (s 9)
21 days?
a. David Grant & Co Ltd Pty Ltd v Westpac Banking Corp could it be set
aside for error even though 21 days was up?
b. S 1322 court has discretion to hear it or not
Mere error not enough to set aside stat demand
c. Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd
circumstances where court willing to set aside demand. Mere error not
enough, it must be where severe injustice will follow if demand is
not set aside has to be serious enough
77
More than one debt?
First Line Distribution creditor can include more than one debt but not
debts of other creditors
Form of statutory demand
Must be in prescribed form and signed by the creditor so co can comply

Must be served to co (s 109X, 109Y)
ASK: Has there been an error in the statutory demand?

Challenge statutory demand s 459G
Co can apply to court to have statutory demand set aside

459G(2) an application may only be made within 21 days of it being
served
If co feels stat demand was incorrectly served, co has 21 days to apply to
have it set aside
S 459J court may order it to be set aside if the defect in the demand will
cause substantial injustice unless set aside or there is some other reason
why it should be set aside
Error in amount?
S 459H act sets out a formula which the court must calculate the
substantiated amount if there is genuine dispute about the amount of the
debt
Defect or irregularity in application?
- S 467A and 1322 not enough unless court satisfied that it has caused
substantial injustice that cannot otherwise be remedied
ARE ANY CIRCUMSTANCES ESTABLISHED?
If yes: Creditor can apply to court for compulsory winding up of the company
Consequences
*co remains a legal entity up until deregistration s 493(1)
*co must cease carrying on business except where liquidator considers necessary
for the purposes of disposing the business or otherwise winding up s 493(1)
> General control taken from Ds and given to liquidator
> Ownership of property liquidator not the owner of assets but has custody,
co still owns
> Effect on officers still hold office s 471A but powers are suspended. Ds
duties still apply.
-
S 530A officers are to deliver books to the liquidator and to assist

generally in performance of liquidator duties
78
S 530A(3) officers required to do whatever the liquidator reasonably

requires
> Effect on creditors

-
Unsecured creditors - lose their right to pursue it cause of action against

the co once in liquidation right is replaced by a collective right s 471(1)
as the winding up order is made in favour of ALL creditors
Secured creditors remain entitled to realise their security despite the co
being wound up s 471C
> Effect on members no change in membership unless leave from court

although:
-
No decision making
No dividends
Have to pay up on unpaid share capital
Trf of shares after commencement of liquidation is void, unless approved
by liquidator (s 468A) or court (s 493A)
> Effect on employees

- wage in arrears
- repudiation of employment contract and
- May entitle employee to claim for compo
Property available for distribution

ASK: Does the co have property available for distribution?
1. How many assets are available in this co for distribution among the creditors?
How much money does the co have?
2. How can we increase the pool of assets available for distribution?
E.g. sue the Ds for insolvent trading and use the voidable transaction mechanism to give
asset back to co
Property available:
> Property held by company at commencement of winding up
> Property acquired by company after commencement of winding up also
available for distribution e.g. crops
> transferred by company prior to winding up, but which is recoverable by
liquidator (voidable transactions) see pg X
> recovered by liquidator from certain execution creditors (special preference to
creditors) (ss 569 570) see pg X
79
Winding up will commence when:

> compulsory winding up = s 513A
- when the order made
> voluntary winding-up = s 513B
- when special resolution passed by either members or creditors that co is to
be wound up voluntarily
Voidable Transactions
retrieved and go back to co into distribution pool for creditors
*if presumed insolvent in other proceedings,
can be presumably insolvent for these
proceedings
If this established a 12 month period before
winding up, insolvency can be presumed for the
whole 12 month period
Insolvent transactions S588FC

- liquidator will need to demonstrate that co was insolvent at time of
transaction
> UNFAIR PREFERENCES - S 588FA
*if the co was at the time the creditor received the preference
*presumption of insolvency because of failure to keep proper financial records
unfair preference not available
Air Services Australia v Ferrier
> UNCOMMERCIAL TRANSACTIONS

S 588FB
> TRANSACTIONS OBSTRUCTING
CREDITORS RIGHTS
S 588FE(5)
Solvent transactions
> UNREASONABLE DIRECTOR RELATED TRANSACTIONS
S 588FDA
> FLOATING CHARGES
S 588FJ
80
Definitions
> Relation back day date entering external administration where you can
look back to
> Related entity
- Liquidator can look back longer if it is a related entity
Is it:
A promoter or relative of a promoter, relative of a spouse of promoter

Ds and members
Beneficiaries of a trust
> Transaction
Insolvent transactions
*if insolvency found, Ds can be liable for insolvent trading
ASK: Was the transaction entered into while the co was under V.A. or subject to a
deed of co arrangement and where co subsequently went into liquidation?
S 588FE
(2A) voidable transactions when under administration before being wound up
(2B) voidable transactions when company under voluntary administration
Unfair preferences: S 588FA
*policy of insolvency law that creditors share equally (parri passu) in the debtors
property
*Can have class of creditors who have priority
S 559 each class of creditor to be paid in full, or if there is insufficient funds to do
so that members of that class share equally, before funds are distributed to the next
class
Establish s 588FA:
1. Transaction with co creditor
2. Insolvent transaction when co received money/asset was the co
insolvent?
*presumptions of insolvency can be used
3. Time period how far back was it?
* unrelated entity transaction 6 months back
81
*related entity transaction 4 yrs back

4. Creditor was preferred the creditor enjoyed a preference over creditors
*compare position of this specific creditor with other creditors
ASK:
Are they better off than other unsecured creditors?
Not based on intention, just looking at the effect of the transaction
Is the creditor better off now than it would have been from the final
distribution?
If a preference is found
- S 588FE if a company is being wound up, transaction voidable
- creditor has to return the amount of the transaction to the co where it then
becomes available for distribution to all creditors
- the creditor can still claim but will get the same dividend as everyone else
Running accounts
- where co has a continuing business interest with the creditor creditor has
some protection against preference
ASK:
o Is there a running account with the creditor?
o Does the co depend on the business for trade?
o Was the payment made to maintain business relationship?
Air Services Australia v Ferrier
Can the creditor demonstrate that the payment was NOT only to satisfy the claim
against the co (paying the debt) but payment was made to maintain the business
relationship with creditors?
- That the co depends on it for trade: e.g. supplier of goods
In this situation liquidator wont be able to get all the money back
*see below table
Peak indebtness: $20 000 - what was the highest amount the co was in debt for?
End indebtness: $ 5 000 How much is now owed?
*the difference is what the liquidator can recover because the co had a running
account with the creditor
82
Uncommercial transactions: S 588FB

*selling an asset drastically undervalue to avoid creditors having access to them
*where it doesnt make commercial sense to enter into transaction
*hard to establish market value
Requirements:
1. Provision applies
Demondrille Nominees Pty Ltd v Shirlaw
- Address the likelihood that the other party to the transaction will be related
to the debtor co
McDonald v Hanselmann
Conditions
- Financial difficulties
- Specialized business does it have value on open market?
- Is the co required to vacate business premises?
-
It was accepted that the circumstances allowed a slight discount
Had the difference between what was paid and the value of the property
been less than 15% (guideline only) it would have been justified
Family relationship caused further scrutiny over the price
Held that the sale constituted an uncommercial transaction and purchaser

ordered to pay the amount of benefit to the company
2. Objective standard
- Would a reasonable person in that co have entered into the transaction?
- What were the benefits/detriments of the transaction? Did other cos
receive benefits?
3. Insolvent transaction
- When asset sold was the co insolvent at that time if not liquidator cant
recover
- S 588FC
4. Time period whether related (2 yrs) or unrelated entity (6 months)
5. Transaction must be of the company
If uncommercial transaction found transaction set aside and asset recovered
S 588FC
83
An uncommerical transaction entered into by the co is an insolvent transaction if the

co becomes insolvent because of, or because of matters including:
entering into the transaction OR
a person doing an act, or making an omission, for the purpose of giving effect to the
transaction
S 588FE if a company is being wound up, transaction voidable
Obstructing creditors rights: S 588FE(5)
ASK: Is the transaction after 4 yrs with a related entity?
If so: use this section as it has a 10 yrs time period
Requirements:
1. Company intended to defeat, delay or interfere with rights of creditors
*intention hard to prove
2. Insolvent transaction
*may be difficult to establish insolvency so far back
3. Time period 10 yrs ending on the relation back date
Solvent Transactions
Unfair loans: S 588FD
*not often used as court takes commercial approach
Does the loan:
-
Provide for interest which is extortionate? OR

The charges relating to the loan extortionate?
Whether interest or charges are extortionate will depend on:

> risk assumed by co lending
- look at all circumstances
- terms of a loan, security, business line approach
- e.g. where an interest rate is much higher than others the co may be
vulnerable where the lender has a higher risk in lending, thus can charge
more
> value of any security in respect of loan
84
> term of loan

> schedule for payments of interest + charges + repayment
> any other relevant matter
> s 588FG defence of transaction not voidable against certain persons does
not apply
Unreasonable director-related transactions: S 588FDA
Purpose: to enable liquidators to access money or assets given to the Ds as
bonuses where it could be regarded as unreasonable
> Transaction for benefit of director OR close associate (someone other
benefiting s 9) of director
> NOT insolvent transaction
> Reasonableness
- If reasonable, cant be recovered D entitled to it
Test of reasonableness:
Look at the benefit the co received from paying the money to the D and
The detriment to the co as a result
E.g. if the D is sole SH + D of pty co and the money was given to the co, then
it is money for the benefit of D
> Defence under s 588FG(2) not available

> If unreasonable, transaction voidable under s 588FE(6A
Floating charges
Void floating charges: S 588FJ
> Purpose
- a debt that already exists although all of a sudden security is given by a
floating charge
> Effect - a floating charge to secure a previous unsecured debt is void means
creditor not protected and remains unsecured
> Exceptions if in exchange for something (consideration), charge is not void
Protective Provisions s 588FG

*person can resist liquidator claims if they can establish requirements
85
Person resisting claim NOT involved in voidable transaction: s 588FG(1)

> did not receive benefit, OR
> received benefit, but:
good faith and
at time of receipt
no reasonable grounds for suspecting that co was insolvent
AND reasonable person in same circumstances would have had
no such grounds for so suspecting
Example:
D of a co used co funds to buy an engagement ring
Liquidator tried to get ring off her on basis of uncommercial transaction no
benefit to the co
She was not a party to the transaction the D took the money
She had to demonstrate acting in good faith and did not know co was
insolvent
She kept engagement ring
Liquidator had to go after D for liability
Person resisting claim IS PARTY to voidable transaction: s 588FG(2)
Usually protects:
creditors (unfair preference)
can protect running accounts with unsecured creditors where they can keep
all their money however if suspicion of insolvency cant use the provision
1. Person became party to transaction in good faith AND
2. had no reasonable grounds for suspecting:
that co was insolvent
and reasonable person in same circumstances would have had no
such grounds for so suspecting
3. provided valuable consideration OR changed their position in reliance on
transaction
*at least market value (uncommerical transaction wouldnt satisfy)
Qld Bacon v Rees suspicion of insolvency
- just wondering about co isnt suspicion but positive feeling of apprehension
(subjective and objective test)
NOT available:
Unfair loan
Unreasonable director-related transaction
86
Distribution of property
Pari passu principle:
> all provable debts rank equally
- s 555 all unsecured creditors should share equally in distribution of
assets and if the co cant pay it should be distributed proportionally
Exceptions to Pari Passu principle
Distribution where some will get more than others
> Set-off (s 553C) - where co both a creditor and a debtor
Creditor owes debtor $100 BUT
Debtor owes Creditor $80
= the sum due from the one party is to be set off against any sum due from the other
party claim of $20 against the insolvent co
*creditor than shares equally with other creditors for the $20
> Priority creditors (s 556; 561 563AA)
- S 555 priority in classes
- S 556 debts to be paid first over all other unsecured debts and claims
- S 561 priority of employees claims over floating charges
- S 562 application of proceeds of contracts of insurance
- S 562A application of proceeds of contracts of reinsurance
- S 563 payment of ongoing injury compensation
- S 563AA selling SHs buy-back agreement postponed until all other
debts satisfied
> Deferred claims (s 563A)
- Postponed until all other debts are paid
City of Glasgow Bank v Holdsworth (1880) 5 App Cas 317
Sons of Gwalia Ltd v Margaretic [2007] HCA 1
- Person invested by co did not comply with continuous disclosure
obligations
- Claimed against the co but not in capacity as a SH, claiming for loss
suffered because of failure to comply with duty so not repayment of
capital
- The claim was for payment for a loss suffered because of co therefore
claim was rated the same as an unsecured creditor
Corporations Amendment (Sons of Gwalia) Bill 2010
(substitute s 563A):
87
(1) The payment of a subordinate claim made against a company is to be

postponed until all other claims made against the company are
satisfied.
(2) In this section, subordinate claim means:
(a) a claim for a debt owed by the company to a person in the
persons capacity as a member of the company (whether by way
of dividend,s profits or otherwise); or
(b) any other claim that arises from a person buying, holding,
selling or otherwise dealing in shares in the company.
*basically if you have a claim against the co in your capacity as a member (e.g.
dividend declared but not paid) you are at the back of the line for payment
Deregistration
ASK:
Are there any assets left?

Are there any liabilities left?
Is the process of liquidation complete?
If nothing left and process complete:

MUST deregister to terminate legal existence - s
493(1)
Grounds
> S 601AA - Voluntary application to ASIC by company, director, member or
liquidator
> S 601AB - ASIC may deregister company where: e.g. doesnt submit returns
etc
> S 601AC - ASIC must deregister company where:
o Voluntary if under V.A. will deregister automatically after 3 months of
liquidator submitting reports to ASIC
88
o Compulsory if court order winding up, application has to be made to

ASIC and investigation to take placed (investigate Ds liabilities)
Effects
> S 601AD(1) - Company ceases to exist.
> Company can no longer be party to liquidation.
> S 601AD(1) - Liquidator and directors remain liable for breaches of duty.
> S 601AD(2) -Company property vests in ASIC.
> Can deregistered company be liquidated?
- If co found to have assets, co has to be reinstated for liquidation to occur
Directors duty to prevent insolvent trading

ASK: Has a presumption of insolvency been established?
If so go to step four an see if there are defences
Purpose: to prevent Ds from taking action/making decisions that is to incur further
debts when the company is insolvent/or is to become insolvent by incurring that debt
Section 588G(1):
This section applies if:
(a) a person is a director of a company at the time when the company incurs a
debt; and
(b) the company is insolvent at that time, or becomes insolvent by incurring
that debt, or by incurring at that time debts including that debt; and
(c) at that time, there are reasonable grounds for suspecting that the
company is insolvent, or would so become insolvent, as the case may be;
and
(d) that time is at or after the commencement of this Act
STEP ONE
ASK: Was the person a D at the time the debt was incurred?
-
S 9 statutory definition (appointed to the position)

De facto Director OR
Shadow Director
STEP TWO
89
ASK: Is the company insolvent at that time or becoming insolvent as a result of

incurring a debt?
o s 95 A statutory definition of solvency
Establish whether the co pay its debts when they come due and payable
(3) a person is solvent if, and only if, the person is able to pay all the persons
debts, as and when they become due and payable
(4) a person who is not solvent is insolvent
NOTE: Hard to prove use the presumptions of insolvency s 588E refer to pg X
o if the presumption can be established the company will be considered insolvent
o e.g. if financial records arent up to date, the company may be considered
insolvent 588E(3)
STEP THREE
ASK:
o Is the payment a debt?
o Has it become due and payable?
o If so, can the co pay this?
If yes solvent
If not insolvent
What is a debt?
Company incurs a debt when:
Deemed debts (s 588G(1A)):
paying a dividend
reduction of share capital
share buy-back
redeeming redeemable preference shares that are redeemable at its option
issuing redeemable preference shares that are redeemable otherwise than at
its option
financial acquisition to acquire shares
entering into uncommercial transaction (s 588FB)
Need to be a Voluntary action to incur the debt
4. when is the debt due and payable?
5. Does the co have sufficient funds to pay the debt at this time?
IF NOT
90
STEP FOUR
ASK: Did the D suspect insolvency? (if did, then liable for breach of duty to prevent
insolvent trading)
Reasonable grounds for suspecting insolvency
Did the D have a positive feeling of actual apprehension or mistrust?
Queensland Bacon v Rees (1966) 115 CLR 266, 303:
To suspect insolvency requires more than a mere idle wondering whether it exists or
not; it is a positive feeling of actual apprehension or mistrust, amounting to a slight
opinion, but without sufficient evidence.
o Ignorance of financial affairs is no defence
ASIC v Plymin [2003] VSC 123
o continuing losses
o overdue taxes
o no access to alternative finances
= are all indicators of insolvency in these circumstances it is reasonable to
suspect company is insolvent
DEFENCES TO INSOLVENT TRADING

If a breach of duty to prevent insolvent trading: 4 defences available
Defences to insolvent trading s 588H
FOUR DEFENCES
reasonable grounds to expect solvency not commonly used
reliance upon a competent and reliable person by the director had a

reasonable belief that the co was solvent
director prevented to influence financial affairs of company because of illness

or some other good reason the D did not participate in the decision e.g.
because of medical or rec leave
director took all reasonable steps to prevent the company from incurring the
debt e.g. where the company was under voluntary administration
CONSEQUENCES OF BREACH
Breach of insolvency section general law duty to creditors
91
Section 588P:
Sections 588J, 588K and 588M:
(a) have effect in addition to, and not in derogation of, any rule of law about the
duty or liability of a person because of the persons office or employment in
relation to a company; and
(b) do not prevent proceedings from being instituted in respect of a breach of
such a duty or in respect of such a liability.
Director liable to compensate for loss or damage caused by the breach

s 588J
s 588K
s 588M (proceedings by creditor: ss 588R 588U)
Director may be guilty of an offence: s 588G(3)
Civil penalty order S 1317E have to demonstrate on the balance of

probabilities
pecuniary penalty
other orders
may also result in director being disqualified: s 206C
92

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Directors Duties

Cases before 2001 establish com law

Is the D managing the affairs of the co?

Executive D managing the affairs of the co on daily basis full time

Was the person nominated by a creditor?

Nominee D creditor will loan money if someone can be appointed to look

s 181: duty of good faith

Good faith in the best interests of

Duty to act in good faith in the best interests of the corporation

Bell Group Ltd (in liq) v West Pac Banking Group

Nguril v McCann (1953) 90 CLR 425

Walker v Wimborne (1976)

about insolvency, Ds have a duty to consider creditor

Parke v Daily news Ltd [1962]

Charterbidge Corp Ltd v Lloyds bank [1970]

o BREACH OF FIDICUARY DUTY equitable compensation

Duty to act for a proper purpose

Consequences for breach of statute

Duty to maintain an unfettered discretion

*an obligation to give active consideration to each X exercise of their discretionary

Duty to avoid a conflict of interest

The conflict rule

Ds must avoid putting themselves in a

Is there a real sensible possibility of

Must give notice

A director cant enter into engagements

Can be interested if not his own

No conflict - Removal of opportunity

Has it been ratified by GM or is it in the

The profit rule

Fiduciary duty arises from the fact that

Even if co cannot use the opportunity, the

profit has been made by reason and in

to be made, and was therefore

Keech v Sandford arise from the fact

The misappropriation rule

Misappropriation of co property Misappropriation of property cannot be

Remedy: equitable compensation

Profit made from being a D

Example of breach of conflict but not breach of profit rule

Green v Bestobell Industries Pty Ltd [1982] WAR 1

Has the D (as an outsider with an interest) contracted with the

D entered into a consultancy agreement involved excessive payments to

ASIC v Adler [2002] breach of s 182

Non-executive D who was involved in a scheme to use co funds to acquire shares in

Consequences for breach of statute

*fiduciary obligation codifies s 183

Vizard obtained confidential info in his capacity as a D of Telstra about cos

ASIC v Adler [2002] breach of s 183

Consequences for breach of statute

Directors personal interests in matters of the corporation

McGellin v Mount King material interest - something have the capacity to

Extent of interest whether the interest is such that a reasonable person

if a D has shares in another co would not amount however;

in certain circumstances mere disclosure of a conflict between interest and duty

S 193: - general law and co constitution apply in addition to statute

If D has a material personal interest and discloses

If the D discloses or does not need to:

ASK: Has a public company given a financial benefit?

Breach of s 209(2) by those involved in transaction - Civil: fine up to $200,000 (s

Care, Skill and diligence

what is expected from Ds in terms of duty of care

What constitutes reasonable care?

Reliance on others (defence to breach of duty)