Registration Process and Company Types

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TOPIC 2 Registration
Registration process
Process:
1.
A person may lodge an application with ASIC (s 117(1) Corporations Act 2001 (Cth));
s 117(2) outlines what the application must state (page Error: Reference source not found).
2.
ASIC may then register the company, give the company an ACN, and issue a certificate of
registration (s 118(1)).
Company names:
o
Must be stated on the application, unless the ACN is to be used (s 117(2)(b));
Requirements for a valid company name:
Name must be available (s 148(1)(a)).

A name is not available where it is identical to a name held or registered on the Business
Names Register (s 147(1)(b)) or it is unacceptable for registration under the regulations1 (s
147(1)(c)).
Name must contain Limited or Proprietary Limited, as appropriate (s 148(2) or the

abbreviation, s 149).
A company must set out its name and ACN on all public documents (s 153).
A person may reserve a company name for 2 months (with 2 months extensions) (s 152).
Effect of registration
The company has a separate legal personality once it is registered (s 119 and Salomon).
The shareholders and directors are distinct from the company and can therefore also be secured
creditors (eg Salomon) or employees (eg Lees Air Farming) with respect to the company.
Corporate groups
A corporate group is not a separate legal entity each company within the group has separate legal
personality, but not the group as a whole.
Consequences:
-
Duties are owed by directors to the company on whose board they sit. The question is what is in
the best interests of the individual company and not what is in the best interests of the corporate
group (Walker v Wimborne);
Profits of each company must be treated separately and a parent company cannot pay a dividend
based on the profits of the group as a whole (Industrial Equity);
A contractual promise made by a subsidiary does not bind the holding company to the contract
(Pioneer Concrete).
Corporate veil
The veil of incorporation recognises that a company is a separate legal entity distinct from its
shareholders. The liabilities of the company are not the liabilities of the shareholders. Therefore, a
shareholders liability for the companys debts is limited to paying the full purchase price of shares taken.
A name is unacceptable if, in the opinion of ASIC, it is undesirable or likely to be offensive to members of the public OR it contains a restricted word or phrase.
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However, the veil can be lifted in certain circumstances:

i.
Where company is being used as a sham so as to avoid an existing legal obligation.

o
ii.
Examples:
In Gilford Motor Co, Mr Horne attempted to avoid a restraint of trade contract that
applied to him as an individual by setting up the company. The Court granted an
injunction against Mr Horne and his company (even though the company was not a party
to the contractual restraint) because the company was formed as a device, a
strategem... to mask the effective carrying on of a business by Mr Horne... it was a cloak
or a sham.
In Creasey, a company was wound up and assets transferred to new company to avoid
legal claim by dismissed employee. Mr Creasey commenced legal proceedings for
wrongful dismissal as manager of Welwyn Ltd. Prior to the hearing, W became insolvent
and its business and other assets were transferred to Breachwood Motors Ltd. B paid off
all of the debts of W, but made no allowance for Cs claim. C sought to substitute W with
B in the proceeding. The court held that B was liable for Ws debt, because it would be
unfair for B to honour all debts and obligations of W except for Cs claim.
In Jones v Lipman, a landowner transferred land to a company in order to avoid an order

for specific performance of the sale contract concerning the land (ie L agreed to sell to J,
L changed his mind and then transferred land to a new company). The Court treated the
contractual obligation of the landowner as the obligation of the company, because the
company was a sham used to avoid a legal obligation.
Where company was formed to perpetrate a fraud.

o
Example:
iii.
In Re Darby, Darby and Gyde formed a company (C). C purchased a licence to work a
quarry and sold it, at a substantial overvalue, to another company they set up (W). W
issued shares to the public and that money was paid to C for the licence, which was then
divided between Darby and Gyde. W became insolvent and the liquidator sought to
recover the profits from Darby. Darby argued that the profit was made by C and not
Darby himself. This argument was rejected, because C was a dummy company formed
as a front for Darby to perpetrate a fraud.
Corporate groups.
a.
Where the subsidiary is treated as agent of the holding company.

o
Where the court finds that a subsidiary has acted as an agent for its holding company,
the holding company is liable for the acts of the subsidiary.
In Smith, Stone & Knight, Atkinson J held that six requirements must be established
before finding that an agency arrangement exists:
1.
the profits of the S must be treated as the profits of the HC;
2.
the persons conducting the Ss business must be appointed by the HC;
3.
the HC must be the head and brain of the S;
4.
the HC must govern the S and decide what should be done and what capital
should be embarked on it;
5.
the profits of the S must be made by the HCs skill and direction; and
6.
the HC must be in effectual and constant control.
On the facts, Birmingham Waste Co was a wholly owned subsidiary of SSK. Land was
owned by SSK on which BWC was run. The government wanted to compulsorily acquire
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the land. SSK could get compensation for dislocation of the business if it could show
that BWC was the agent of SSK. The Court held that they were.
b.
c.
iv.
Where the directors act for the benefit of the group as a whole.
o
According to Walker v Wimborne, directors must act in the best interests of the
individual company.
However, in some circumstances, a director will not breach their duty if they act for the
benefit of the corporate group as a whole, where it will indirectly benefit the individual
company on whose board they sit (Equiticorp Finance).
For example, in Equiticorp Finance, the Bank of NZ lent money to one company in the
Equiticorp group. The director of two other companies in the group agreed to provide
security for that loan. The majority of the NSWSC held that the transactions indirectly
benefited the two companies, because the Bank of NZ funded the entire group and
without that security the funding of every company in the group would be jeopardised.
Where the subsidiary commits a tort.

o
Different considerations apply in tort actions compared with other cases, because, as
Rogers AJA noted in Briggs v James Hardie, The victim of the negligent act has no
choice as to the corporation which will do him harm [cf. contracting parties].
A holding company may be liable to an employee of its subsidiary for negligence, on

the basis that the HC itself owed a duty of care to the employee. This DOC can arise
where the HC exercise a high degree of control over the day-to-day activities of its
subsidiary.
For example, in CSR v Wren, Wren developed mesothelioma after working for AP, a
subsidiary of CSR. The Court held that CSR owed Wren a DOC because CSR had
operational responsibility for the work conditions at AP (as the management staff at AP
were CSR staff). Similarly, in CSR v Young, the degree of control of CSR over the
activities of the subsidiary was so strong that CSR itself effectively conducted those
activities.
Where the veil is pierced by statute.

o
For example, ss 588V-588X (holding co liable for debts of subsidiary if holding co knew or
should have known subsidiary was trading whilst insolvent) and ss 588G-588H (director
personally liable to pay debts of the co if director knew or should have known co was trading
whilst insolvent).
See page Error: Reference source not found.
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TOPIC 3 Types of Companies
Classification (s 112)
First classification
Proprietary company
o
A proprietary company is a company that is registered as, or converts to, a proprietary company
under this Act (ss 9 and 45A(1));
Restrictions:
It must not have >50 non-employee shareholders (s 113(1)). Employee means an

employee of the company or of a subsidiary of the company (s 113(2)(b));
It must not engage in public fund raising (s 113(3)).
Can be either a small or large proprietary company:
Small proprietary company: A proprietary company is a SPC for a financial year if it satisfies
as least 2 of the following: consolidated revenue <$25 million, consolidated gross assets
value <$12.5 million, or <50 employees (s 45A(2)). A small proprietary company has
reduced financial reporting requirements.
Large proprietary company: All other proprietary companies (s 45A(3)).
Public company
A company other than a proprietary company (s 9).
It may be listed or unlisted.
Second classification
Public companies
Limited by shares:
The liability of members for the debts of the company is limited to

any amount that is unpaid on the shares that the member holds in
the company (ss 9 and 5162). Must have Ltd in name (s 148(2)).
Limited by guarantee:
The liability of members is limited to the amounts that they have

undertaken to contribute in the event of it being wound up (ss 9 and
5173). This type of company does not have shareholders. It does not
raise money from its members, nor does it return profits to its
members. Must have Ltd in name (s 148(2)).
Unlimited with share capital:

No liability company:
Members have no limit placed on their liability (s 9).
A company registered as, or converted to, a no liability company. It

must have solely mining purposes and have no contractual right to
recover unpaid calls (ss 9 and 112(2)). Must have No Liability or NL in
name (s 148(4)).
Proprietary companies
Limited by shares
Must have Pty Ltd in name (s 148(2)).
Unlimited with share capital
Must have Pty in name (s 148(3)).
s 516: If the company is a company limited by shares, a member need not contribute more than the amount (if any) unpaid on the shares in respect of which the member is liable as a present or
past member.
3
s 517: If the company is a company limited by guarantee, a member need not contribute more than the amount the member has undertaken to contribute to the company's property if the
company is wound up.
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Related companies
Definitions (s 9)
o
Holding company means a body corporate of which the first body corporate is a subsidiary;
Subsidiary means a body corporate that is a subsidiary of the first-mentioned body by virtue of
Division 6.
Test
Under s 46, a company (AB) is a subsidiary of another company (A) if one of four tests is satisfied:
1.
2.
A controls the composition of ABs board (s 46(a)(i));

o
Under s 47, A is deemed to have this control if it can appoint or remove all or the majority
of the directors of AB. A is deemed to have the power to appoint if a person cannot be
appointed as director of AB without the exercise by A of such a power, or a persons
appointment as director of AB follows necessarily from them being director or officer of A;
Control means a legal power to control practical or de facto control, in the absence of
any legally enforceable power, is not sufficient (Mount Edon). For example, it was not
enough in Mount Edon that the two companies thought they were holding and subsidiary
companies and one deferred to the other to determine board composition.
Where A holds >50% of the capital of AB, this gives A legal control (overlaps with (a)(iii)).
OR look for an enforceable and irrevocable agreement that ABs members will vote
according to As directions.
A can cast, or control the casting of, more than one-half of the votes that might be cast at a
general meeting of AB (s 46(a)(ii));
o
Control the casting requires an actual power (revocable or not, legally enforceable or
not) to cast >50% of the votes (Bluebird Investments). It is enough if A has an
unenforceable agreement with ABs shareholders to cast their vote (a proxy vote).
3.
A holds more than one-half of the issued share capital of AB (s 46(a)(iii)); or
4.
AB is a subsidiary of a subsidiary of A (s 46(b)).
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TOPIC 4 Company Constitution and Membership
Constitution
A company may use:

o
The replaceable rules in the Act (s 135(1));
Its own constitution (s 136(1)); or
A combination of the two.
A company can adopt a constitution:

o
On registration, by lodging a copy with the application (ss 136(1)(a) and 117(3)); or
After registration, if the company passes a special resolution 4 (s 136(1)(b)).
Objects clauses
The constitution may contain an objects clause that restricts the companys powers (see s 1255).
If the company breaches its objects clause, the exercise of power is not invalid (s 125). However, there
may be consequences against directors or agents who caused the clause to be breached (eg breach of
duty).
The constitution as a statutory contract
Per s 140(1), the constitution of the company has effect as a contract between:
(a)
the company and each member;
(b)
the company and each director and company secretary; and
(c)
the members.
Under this contract, each person agrees to observe and perform the constitution so far as it applies to
that person (s 140).
How can this contract be enforced?
The company can take action against its members to force them to comply with the constitution
(because of s 140(1)(a)). For example, in Hickman, the court stayed Mr Hickmans case on the
basis that he was obliged to follow the dispute resolution procedure in the constitution (which
prescribed arbitration and not judicial action);
A member can only enforce rights in the constitution that attach to them in their capacity as a
member of the company. For example, in Eley, the court would not enforce a provision in the
constitution that provided for him to be the companys solicitor for life, because the right he was
claiming (to act as solicitor) was not a right that attached to him as a member.
Examples of rights that attach to members in their capacity as members include: the right to
inspect the register, the right to receive a share certificate, to vote, to receive informative notice of
meetings, to receive payment of duly declared and payable dividends, and the like (Bailey per
McHugh and Gummow JJ).
Members may also have contracts with the company that bind them as individuals (special contracts)
(Bailey).
Special resolution means a resolution of which notice has been given and that has been passed by at least 75% of the votes cast by members entitled to vote on the resolution (s 9).
s 125(1): The constitution may contain an express restriction on, or a prohibition of, the company's exercise of any of its powers. The exercise of a power by the company is not invalid merely
because it is contrary to an objects clause.
s 125(2): The constitution may set out the company's objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company's constitution.
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Alteration of constitution
The company may modify or repeal its constitution by special resolution (s 136(2)).
Effect of alteration
Members are bound to changes even if they did not vote for them;
Alteration takes effect on the date on which the resolution is passed (s 137);
Special contracts
Generally, an alteration to the constitution will not alter a special contract unless the parties
intended to the contrary (Bailey);
Where a special contract refers to the constitution, an alteration of the provision in the
constitution will vary the special contract prospectively (into the future) and not
retrospectively (Bailey);
For example, in Bailey, Dr Bailey was a member of the NSW Medical Defence Union. Its
purpose was to provide its members with insurance against negligence claims. The Union
changed its constitution, giving the directors the discretion to terminate assistance to any
person who has ceased to be a member (eg through death). Dr Bailey died and a claim was
made against him. Was his estate entitled to be indemnified from the Union? The majority
found that the contract of insurance was a special contract and therefore changes to the
constitution could not have a retrospective effect to the contract.
Limits on changing the constitution

In addition to a special resolution
1.
The company must abide by any entrenching provisions in its constitution: s 136(3) (ie any
additional requirements must be complied with The companys constitution may provide that
the special resolution does not have any effect unless a further requirement specified in the
constitution relating to that modification or repeal has been complied with);
2.
Changes that increase the liability of current members require their written agreement: s 140(2)6.
3.
Majority shareholders cannot use their voting power to unfairly deprive minority shareholders of their
rights (also called oppression, or fraud on the minority).
o
Equitable restriction;
Where the alteration provides for the expropriation or compulsory disposal of a

members shares, a two-fold test must be satisfied (Gambotto and Bundaberg *use
Gambotto for acquisition of shares, and Bundaberg for cancellation/extinction of shares):
The expropriation must be:
1.
For a proper purpose; and
2.
Fair in all the circumstances.
1. Proper purpose
(2) Unless a member of a company agrees in writing to be bound, they are not bound by a modification of the constitution made after the date on which they became a member so far as the
modification:
(a) requires the member to take up additional shares; or
(b) increases the member's liability to contribute to the share capital of, or otherwise to pay money to, the company; or
(c) imposes or increases restrictions on the right to transfer the shares already held by the member.
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An expropriation will be for a proper purpose if it prevents the company from suffering
significant detriment or harm (eg to remove shareholders who are competing with the
company, as in Sidebottom).
In Gambotto, the majority held that an expropriation to secure taxation and

administration advantages was not a proper purpose (it does not protect the company
from harm; rather it results in a gain to the majority). McHugh J dissented because he
thought that the substantial tax savings were sufficient to make it a proper purpose.
However, in Bundaberg, the court held that an extinction of shares to prevent a loss of
valuable and existing long-term tax benefits was a proper purpose (how to reconcile
with Gambotto? To protect benefits is acceptable, but to gain them is not).
2. Fairness
Fairness has two elements: (1) the process must be fair (requires disclosure of all
relevant information to the shareholders, and valuation by an independent expert);
and (2) the price to be paid for the expropriated shares must be fair (if the price is <
market price, it is prima facie unfair however, other considerations are relevant).
In Bundaberg, the alteration was invalid because it was oppressive, as the directors
would not pay a market price for the shares.
Membership of companies
How does a person become a member?
Under s 231, a person is a member of a company if they:

(a) are a member of the company on its registration [a person becomes a member of a company on
registration if the person is specified in the application with their consent as a proposed member of
the company (s 120(1))]; or
(b) agree to become a member of the company after its registration and their name is entered on the
register of members.
There must be a register of members (s 169; see page Error: Reference source not found).
Refusal to register a transfer of shares
The proprietary company replaceable rule in s 1072G provides that directors of a proprietary company
have the power to refuse to register a transfer of shares for any reason. The replaceable rule in s
1072F(3) allows directors to refuse to register a transfer of shares if the shares are not fully paid up or
the company has a lien over the shares.
General principles:
Where the companys constitution gives directors a discretion to refuse to register a transfer, they
must exercise this power consistent with their fiduciary obligations that is, in good faith in the
best interests of the company (Re Smith and Fawcett);
The directors do not have to give reasons, unless the constitution provides otherwise. The
transferee must lead evidence showing bad faith or not in best interests (eg in Re Smith and
Fawcett the applicant failed as he could not prove this);
The power must be exercised in a reasonable time (16 months is unsatisfactory; Winmardun).
Note: under s 1072E(6), a Trustee in Bankruptcy automatically becomes the registered owner of the
shares of the bankrupt, without need for registration.
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TOPIC 5 Corporate Financing and Dividends
Share capital
Share capital vs loan capital
Flexibility for company: share capital is less flexible as it cannot be readily paid back (for non-listed
companies).
Rights of investor to have a say in company business: ordinary shareholders have a right to vote,
whereas lenders do not have any say (in most circumstances).
Tax advantages: loan and interest repayments are tax deductible, whereas dividends paid to
shareholders are not tax deductible. Shareholders get no automatic return on their investment as there
is no right to a dividend.
What is a share?
Per s 1070A(1), a share is:

(a) personal property;
(b) transferable or transmissible as provided by:
(i)
the companys constitution;
(c) capable of devolution by will or by operation of law.
Shareholders do not own the companys property, as the company is a separate legal entity.
Raising share capital
Under s 124(1)(a), a company has the power to issue shares in the company. The right to issue shares
belongs to the Board.
The power to issue shares includes the power to issue: bonus shares (shares for whose issue no
consideration is payable to the company), preference shares, and partly-paid shares (s 254A(1)).
A company may determine the terms on which its shares are issued, and the rights and restrictions
attaching to the shares (s 254B(1)).
A company must, within 28 days, lodge a notice of share issue with ASIC (s 254X(1)).
Consideration paid for share issue

o
A shareholder must pay the company the issue price of shares, which is consideration for share
issue;
Companies may issue shares for a non-cash consideration (eg in Salomon, a sole trader sold his
property to the newly formed company in exchange for shares; Re Wragg, where partnership
assets were transferred to a company in exchange for shares; and s 254X(1)(e), which requires
particulars of the non-cash consideration or the contract to be included in the notice of share
issue);
The value of the consideration must represent moneys worth for the allotment of shares (Re
White Star Line). That is, the consideration must not be merely colourable or illusory.
Classes of shares
The company can issue shares with different rights (see s 254B(1)).
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Shares can be divided into classes. A class of shares is a category of shares that differs sufficiently in
respect of the rights, benefits or disabilities or other incidents that attach to the shares so as to make
that class distinguishable from any other category of shares in the company (Crumpton). Shares belong
to the same class when there is commonality of interest between shareholders of a particular class.
There may be only one shareholder of a particular class of shares.
Common classes are ordinary shares and preference shares

o
Preference shareholders are like financiers of the company (lenders);
The rights that attach to preference shares must be set out in the company constitution or
approved by special resolution (s 254A(2)).
Common differences
Ordinary shares
Preference shares
No right to vote.
Right to vote on general business
(In many constitutions, preference

shareholders get a right to vote when
they have not been paid a dividend
that is, the dividend is in arrears)
Fixed dividend, paid first.
Right to dividend only if determined
This still depends on whether the

company is profitable, but the board
will ensure that pref shareholders are
paid dividends before ordinary
shareholders.
Priority return of investment.
Right to return of investment after pref

shareholders are paid
Share of surplus assets after company
has paid all debts and investments
If company is wound up, pref

shareholders get their investment (the
purchase price of shares) paid out first.
No share of surplus assets.
Variation of rights of class shareholders
Q1: Is there a variation or cancellation of rights attached to class shares?

o
Section 246C sets out actions that are deemed to vary class rights:
Company divides existing shares into further classes with different rights.
If shares in a class are divided into further classes and after the division the rights attached
to all of the shares are not the same, then this is action is taken to vary the rights attached
to every share (s 246C(1)). Where the rights attached to some of the shares are varied, the
variation is taken to vary the rights attached to every other share in the class (s 246C(2)).
Company with one class issues a new class with different rights.
If a company has only one class of shares and issues new shares, if the rights attaching to
the new shares are different to the rights attaching to the original shares then the rights of
holders of existing shares are varied (s 246C(5)).
Company issues new preference shares that rank equally with existing preference shares.
If a company issues new preference shares ranking equally with existing preference shares,
then the holders of existing preference shares are deemed to have had their rights altered
(unless authorised by the terms of issue of the existing preference shares or the companys
constitution) (s 246C(6) cf. White v Bristol Airplane).
The following actions are not variations at common law (except in the above circumstances):
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Dilution of voting power (eg the issue of new shares that dilutes the existing shareholders
voting power does not vary a legal right [eg they can still vote], rather it varies the
enjoyment of that right [their vote carries less weight] and this is not sufficient; White v
Bristol Airplane);
For example, in Greenhalgh v Arderne Cinemas, the company resolved to subdivide all 10
schilling shares into 2 schilling shares (giving the holders a five-fold increase in voting
power). The only shareholder with 2 schilling shares, G, argued this was a variation to his
class rights. The Court held there was no variation of a legal right. In addition, s 246C would
not apply because Gs shares were not being divided. [Could be oppressive conduct.]
Q2: Does the constitution specify a procedure?

If so, it must be followed (s 246B(1)7).
Q3: If the constitution does not set out a procedure:

Two requirements under s 246B(2):
i.
Special resolution of the company; and
ii.
Special resolution of members of the class whose rights are being varied (or the written
consent of at least 75% of the members of the class). Effectively, >90% vote is required, as
members with at least 10% of the votes in the class may apply to the Court to have the
variation set aside (s 246D8).
Maintenance of capital
General position
General rule: Limited liability companies must maintain their issued share capital (Trevor v Whitworth).
This is because a reduction in share capital would prejudice the rights of creditors.
A company may reduce its capital eg by purchasing shares from a shareholder.
A company might want to reduce share capital for various reasons:

-
Business changes (eg sale of part of business, reduced performance);
Buy out retiring shareholders;
Buy out retiring directors.
Permitted capital reductions

Share capital reductions
Part 2J permits some reductions. Under s 256A, the rules governing capital reductions are designed to
protect the interests of shareholders and creditors by:
(a)
addressing the risk of these transactions leading to the companys insolvency;
(b)
seeking to ensure fairness between the companys shareholders; and
(c)
requiring the company to disclose all material information.
Under s 256B(1), a company may reduce its share capital if the reduction:
(a)
is fair and reasonable to the companys shareholders as a whole; AND

o
Fair and reasonable is a composite requirement (EM);
Consider (EM):
If a company has a constitution that sets out the procedure for varying or cancelling rights attached to shares in a class of shares, those rights may be varied or cancelled only in accordance
with the procedure. The procedure may be changed only if the procedure itself is complied with.
8
The test under s 246D(5) is whether the variation would unfairly prejudice the applicant members.
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(b)
(c)
The adequacy of the consideration paid to shareholders;
Whether the reduction would have the practical effect of depriving some
shareholders of their rights (eg by stripping the company of funds that would
otherwise be available for distribution to preference shareholders); or
Whether the reduction was being used to effect a takeover and avoid the
takeover provisions.
The reduction must be fair and reasonable as a whole that is, the reduction need
not be fair and reasonable for every individual shareholder, but it cannot prejudice
significant groups of shareholders;
For example, a reduction in capital that gives payment to ordinary shareholders and
nothing to preference shareholders is not fair and reasonable, because the companys
constitution gave the preference shareholders a priority to a return of capital on
winding up (Fowlers Vacola).
does not materially prejudice the companys ability to pay its creditors; AND
o
The company must ensure that it will remain solvent after the reduction;
For example, a reduction of capital that involves cancellation of shares for no

consideration does not alter the companys financial position, so this requirement does
not apply.
is approved by shareholders under section 256C.

o
Depends on type of reduction:
Equal reduction: only relates to ordinary shares and applies equally and in
proportion to the # of ordinary shares the shareholder holds (s 256B(2)); or
Selective reduction: all other reductions (s 256B(2)).
If equal reduction, must be approved by an ordinary resolution9 (s 256C(1));
If selective reduction, must be approved by either: unanimous agreement of ordinary

shareholders, or special resolution of all shareholders (no voting by those who stand to
gain from the reduction) (s 256C(2));
BUT if the reduction involves the cancellation of shares, it must be approved by a

special resolution passed at a meeting of the shareholders whose shares are to be
cancelled: s 256C(2). This requires a class meeting (ie a meeting of just those
shareholders) (Winpar Holdings).
AND s 256C disclosure requirements are satisfied

o
Disclosure to shareholders (the company must include with the notice of the meeting a
statement setting out all information known to the company that is material to the
decision on how to vote on the resolution; s 256C(4));
Disclosure to ASIC (before the above notice, the company must lodge with ASIC a copy
of the notice of the meeting and the information statement; s 256C(5)).
Breach?
The company must not make the reduction unless it complies with the above requirements (s 256D(1)).
If the company does not comply with the requirements, the validity of the reduction is not affected and
the company is not guilty of an offence (s 256D(2)).
Ordinary resolution is a simple majority vote (MORE THAN 50%).
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However, any person who is involved10 in the contravention is liable for a civil penalty (s 256D(3)), or an
offence if their involvement is dishonest (s 256D(4)).
Financial assistance for purchase of shares
Financial assistance is not defined in the Act, but it includes lending money; guaranteeing repayment of
a loan; providing assets as security for a loan; releasing person from a debt or other obligation already
owed to the company; and acquiring assets at an inflated price.
The financial assistance must assist a person acquire shares in the company providing the assistance, or
its holding company11 (see s 260A(1)).
Under s 260A(1), a company may financially assist a person to acquire shares in the company (or a
holding company of the company) only if:
(a)
giving the assistance does not materially prejudice:

(i)
(ii)
the interests of the company or its shareholders; or

o
One assesses material prejudice by reference to the transaction with its

interlocking elements giving rise to the financial assistance, taking into account
its financial consequences for the interests of the company or its shareholders.
This is in order to determine where the net balance of financial advantage lies
from the giving of the financial assistance. If it lies against the company or its
shareholders, then there is material prejudice (Adler per Santow J);
For example, in Adler, the financial assistance was in the form of an unsecured
loan without any documentation and it was likely that only a small amount of the
$10 million could be recovered. Therefore, there was material prejudice.
the company's ability to pay its creditors; OR

o
(b)
See above.
the assistance is approved by shareholders under section 260B; OR

o
Even if there is material prejudice, financial assistance is allowed if approved by:
A special resolution of all shareholders (with no votes being cast by those who
stand to gain); or
Unanimous resolution of all ordinary shareholders.
(s 260B(1))
o
(c)
The disclosure requirements are the same as in s 256C (ss 260B(4),(5)).
the assistance is exempted under section 260C.
Breach?
The contravention does not affect the validity of the financial assistance and the company is not guilty of
an offence (s 260D(1)).
However, any person who is involved in the contravention is liable for a civil penalty (s 260D(2)), or an
offence if their involvement is dishonest (s 260D(3)).
10
s 79: A person is involved in a contravention if, and only if, the person:
(a)
has aided, abetted, counselled or procured the contravention; or
(b)
has induced, whether by threats or promises or otherwise, the contravention; or
(c)
has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d)
has conspired with others to effect the contravention.
11
Example: Independent Steels v Ryan. A company wanted to buy shares in Marlon and Marlons subsidiary, Independent Steels, paid part of the purchase price. Therefore, Independent Steels
provided financial assistance.
13/56
Dividends
Dividends are payments to shareholders and represent a return on the shareholders investment.
When can a dividend be paid?
A company limited by guarantee must not pay a dividend to its members (s 254SA);
Under s 254T(1), a company must not pay a dividend unless:

(a)
Assets exceed liabilities immediately before the dividend is declared and the excess is
sufficient for the payment of the dividend;
(b)
The payment of the dividend is fair and reasonable to the shareholders as a whole; and
(c)
The payment of the dividend does not materially prejudice the companys ability to pay
its creditors (eg if the company would become insolvent as a result of the payment).
How is a dividend paid?

o
The company constitution may state that a dividend is:

1.
Recommended by the board and declared by the members; or
2.
Determined by the board (eg RR s 254U).
This affects when a dividend payment becomes a debt due to members (in turn affecting whether
the directors may be liable for insolvent trading by paying a dividend). If:
1.
Recommended by the board and declared by the members: The declaration by the members
creates an enforceable debt by the company in favour of the shareholders (s 254V(2)).
2.
Determined by the board: The determining of a dividend does not create a debt. A debt is only
created when the time for payment of the dividend arrives. Any time before this, the directors
may revoke the decision to pay the dividend (s 254V(1)).
Loan capital and debentures
Under s 124(1), a company has the power to:

(b) issue debentures;
(e) grant a security interest in uncalled capital;
(f) grant a circulating security interest over the companys property;
A debenture is a loan arrangement. It is defined in s 9 as a chose in action that includes an undertaking

by the company to repay as a debt money deposited with or lent to the company. The chose in action
may (but need not) include a security interest over property of the body to secure repayment of the
money.
Security interest can be either:

o
Non-circulating (NCSI): where the charge is taken over fixed, valuable asset. The company
cannot exercise any rights over that asset; or
Circulating (CSI): where the lender takes security over a pool of assets owned by the company.
14/56
The company can use these assets without the prior consent of the lender, but only in the
ordinary course of ordinary business;
If a receiver is appointed or the loan agreement is breached (eg asset not dealt with in the
ordinary course of ordinary business), the charge agreement crystallises and the CSI turns
into a NCSI, therefore the assets cannot be dealt with freely;
Ordinary course of business?
The transactions must be made for the purpose of carrying on the business as a going
concern, even if exceptional in nature (Reynolds Bros).
15/56
TOPIC 6 Directors
Directors
Who are directors?
Directors include:
o
Persons appointed to the position of director (s 9(a)(i)); and
Persons not appointed as directors, but who act in the position of a director (de facto director) or
the other directors are accustomed to act in accordance with that persons instructions or wishes
(shadow director) (s 9(b)).
See page Error: Reference source not found for the provision.
Types of directors:
o
Executive director (managing director): officer and employee of the company;
Non-executive director: officer but not employee;
Nominee director: represents a major creditor or shareholder on the board;
Alternate director: temporary appointee12 (eg if another director has taken a holiday).
Appointment
Requirements of the Act:

1.
There is a minimum number of directors (1 for a proprietary company, 3 for a public company; s
201A(1),(2));
2.
A minimum number of the directors must ordinarily reside in Australia (1 for a proprietary company,
2 for a public company; s 201A(1),(2));
3.
Director must be at least 18 (s 201B(1)); and
4.
Person must give the company a signed consent before being appointed (s 201D).
Requirements of constitution:
o
Other requirements can be specified by company constitution;
For example, RR s 201G: a company may appoint a person as a director by resolution passed in
general meeting.
Functions
Functions include:
o
To manage the business of the company in the interests of its shareholders;
For example, RR s 198A: the business of a company is to be managed by or under the

direction of the directors.
This includes:
-
To set business goals;
To oversee the implementation of business strategies to achieve those goals;
To ensure there are systems in place to monitor compliance with business

strategies and legal requirements; and
12
Eg RR s 201K: a director may appoint an alternate for a specified period, with the other directors approval. Any power exercised by the alternate is just as effective as if exercised by the
director. The appointing director can terminate the alternates appointment at any time, in writing.
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To monitor the companys financial position, in particular to be aware of the
companys solvency.
Appoint a Managing Director/CEO;

Call and run board and company meetings;
Determine dividends;
Issue new shares (to raise capital); and
Refuse to register a share transfer (Pty Ltd company).
o
o
o
o
o
Division of power between directors and members

o
The company belongs to the members (and directors do not have to be shareholders);
The members can also appoint the directors (RR s 201G);
However, where the constitution gives the power to manage the company to the directors, then that
power cannot be controlled by the members. That is, the directors are not agents of the members
(Automatic Self-Cleansing Filter Co hence, the members could not resolve to direct the directors
to sell the company assets);
Each organ of the company is separate and sovereign (John Shaw & Sons).
Removal
A. Resignation
RR s 203A: A director of a company may resign as a director of the company by giving a written notice
of resignation to the company at its registered office.
B. Removal by members
For Pty Ltd company:

o
RR s 203C(a): Directors may be removed by ordinary resolution.
For public (Ltd) company:

o
s 203D (not a RR must be complied with): Director may be removed by ordinary

resolution, despite anything in the constitution or employment contract (s 203D(1));
However:
Notice of intention to move the resolution must be given to the company at least 2
months before the meeting (s 203D(2));
The director must receive a copy of the notice as soon as practicable (s 203D(3));
The director can put their case to members by giving a written statement or
speaking at the meeting (s 203D(4)). The written statement must be sent to all
members, or distributed to members attending the meeting and read out at meeting
(s 203D(5)) unless the statement is >1,000 words or defamatory (s 203D(6)).
C. Disqualification
Directors will be disqualified if:

o
Convicted of a serious offence (s 206B(1));
A serious offence is one either in contravention of the Act and punishable by imprisonment
for >12 months; involves dishonesty and punishable by imprisonment for 3 months (ss
17/56
206B(1)(b)(i),(ii)); or contravenes a law of a foreign country and punishable by imprisonment
for >12 months (s 206B(1)(c));
The disqualification is for 5 years starting on the day they are convicted (if no
imprisonment) or the day they are released (if imprisonment) (s 206B(2)).
An undischarged bankrupt, or fails to pay personal creditors (ss 206B(3),(4));
Contravened a civil penalty provision of the Act (s 206C);
Under s 206C(1), on application by ASIC the Court may disqualify a person from managing
corporations for an appropriate period if the person has breached a civil penalty provision
(eg directors duties) and the Court is satisfied that the disqualification is justified (looking at
their conduct in relation to the management, business or property of any corporation; s
206C(2));
The purpose of the provision is both protective, ie to protect individuals who deal with
companies (Adler per Santow J), and punitive, ie to punish the director (Rich per McHugh J);
For example, in Adler, Mr Adler was disqualified for 20 years. Santow J thought that the
longest periods should apply where:
-
Large financial losses;
High likelihood that the defendant will continue to engage in similar conduct;
Activities were undertaken in areas where there was potential to cause great harm;
Lack of contrition or remorse;
Disregard for the law;
Dishonesty and an intention to defraud; and
Previous contraventions.
Mismanaged corporations in the past (ss 206D, 206E);
Is disqualified by ASIC (s 206F).
Managing13 a company whilst disqualified is an offence (s 206A(1));
The court may grant permission to disqualified persons to manage a company (s 206G).
Remuneration
Proprietary companies:
o
Remuneration is determined by resolution (RR s 202A(1));
The company may also pay the directors travelling and other expenses that they properly incur in
attending directors meetings, attending general meetings or in connection with company business
(RR s 202A(2));
Generally, the remuneration of executive directors is set by contract. However, a company must
disclose the remuneration paid to each director if directed to disclose the information by 5% of
the votes of members at a general meeting (s 202B(1)(a)).
Listed public companies:

o
The directors report for a financial year must also include a remuneration report, stating the
remuneration policy of the board for key management personnel (s 300A);
13
Section 206A(1)
A person who is disqualified from managing corporations under this Part commits an offence if:
(a) they make, or participate in making, decisions that affect the business of the corporation; or
(b) they exercise the capacity to affect significantly the corporations financial standing; or
(c) they communicate instructions or wishes to the directors of the corporation:
(i) knowing that the directors are accustomed to act in accordance with their instructions or wishes; or
(ii) intending that the directors will act in accordance with those instructions or wishes.
18/56
o
There is a two-strikes and re-election process. That is, shareholders can vote on a non-binding
resolution as to whether they adopt the remuneration report. If the resolution receives a no vote
of 25%, two years in a row, then a resolution is put to the shareholders to determine whether the
directors should stand for re-election. If passed with 50% of the votes cast, a meeting to elect the
directors must be held within 90 days [see pages 328-9 of book].
19/56
TOPIC 7 Duties of directors
1: Duty of care, skill and diligence
About competent management of the company
Common law duty of care
Directors and senior employees are under a duty to exercise a reasonable degree of care and diligence;
The duty applies to directors (under the common law tort of negligence and the equitable duty of care)
and to senior employees (as an express or implied term of their contract of employment).
Corporations Act
Who are subject to the duties?
Directors (see s 9, page 16);
Officers: defined in s 9 to mean:

o
(a) Directors;
(a) Company secretary;
(c) Receivers;
(d) Administrators;
(f) Liquidators; or
A person who:
(b)(i)
Makes, or participates in making, decisions that affect the whole, or a substantial

part, of the business of the corporation; or
(ii)
Has the capacity to affect significantly the corporations financial standing; or
(iii)
Is a shadow director.
Section 180 care and diligence
The substance of the common law and statutory duties is the same (Vines v ASIC). The statutory duty
does not override the common law (s 185).
Test: Section 180(1) provides that 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 were in the position of that director or officer.14
ASK: What would an ordinary person, with the knowledge and experience of the Defendant, be expected
to have done in the circumstances if he or she was acting on their own behalf? (Adler)
Duties of the directors
14
(a)
(b)
Directors must become familiar with the companys business (Daniels v Anderson at 500);
Directors are under a continuing obligation to keep informed about the activities of the corporation
(Daniels at 503);
That is, the reasonable person:

were a director or officer of a corporation in the corporations circumstances; and
occupied the office held by, and had the same responsibilities as, the director or officer.
20/56
Directors must maintain familiarity with the financial status of the corporation by a regular review
of financial statements (Daniels at 504).
Directors must ensure that the board has available means to audit the management of the
company so that it can satisfy itself that the company is being properly run (Daniels at 500);
Directors are expected to attend all board meetings unless exceptional circumstances, such as
illness or they are not in the state. They should bring an informed and independent judgment to
bear on the various matters that come to the board for decision (CBA v Friedrich at 117);
Directors must institute inquiries, and raise issues with the board (Daniels at 504).
Directors must have a minimum degree of financial literacy (so that they can read and understand
financial statements) (ASIC v Healey per Middleton J at [124]). They must also actually read and
consider the companys financial statements (CBA v Friedrich per Tadgell J at 126). Although the
preparation can be delegated, the obligation to read them cannot (ASIC v Healey at [124]).
Directors occupying different positions

o
A relevant factor in assessing the degree of care and diligence which a reasonable person would
exercise is the office held by the director or officer (s 180(1)(b));
Board chairman
15
It is arguable that the chairman of directors has additional responsibilities that are more
than just procedural (Rich per Austin J at [70]15);
This is because the chairman of listed companies settles the agenda of the meetings of the
board, and has the primary responsibility of selecting matters and documents to be
brought to the boards attention (Rich at [61]). Therefore, the chairman may have to take
reasonable steps to ensure that the board is properly informed and takes appropriate
action.
Non-executive directors
Reasonable person is attributed the particular skills and experience of the non-executive
director (Daniels at 502);
But directors are subject to minimum standards, regardless of their background; Daniels.
The courts have rejected attempts by uneducated or inexperienced directors to lower the
standard, even if, when appointed, they were assured that they would not have to do
anything (DCT v Clark);
For example, a non-executive director who comes to the board with extensive lending
experience must give the company the benefit of that experience (in Gold Ribbon, Dunn
failed to ensure that the lending scheme complied with accepted practice, failed to ensure
that the company had appropriate procedures for making due diligence inquiries, and
failed to monitor the administration of the scheme).
In ASIC v Hellicar, the seven non-executive directors of JHILs board failed to take
reasonable care when they approved the ASX announcement that the foundation for
compensation was fully funded. The directors ought to have known that the statement was
misleading and they were well aware of the damage that this false statement would cause.
Executive directors and senior employees
The skills and experience of the director are irrelevant the director is held to the objective
standard of a person in their position (Vines);
Because executive directors are full-time employees of the company and have managerial
responsibilities, they are subject to higher standards than non-executive directors;
CEO and Managing Director
One might correspondingly expect that the standard for company chairmen has also been raised (at [71]).
21/56
They are under a continuing obligation to supervise management and seek satisfactory
explanations regarding any deficiencies (Daniels);
They must fully inform the board of all relevant facts within their knowledge (PBS v
Wheeler in this case, the MD withdrew from making a decision on a transaction
because of a conflict of interest, but he was in breach because he did not alert the
board to all information he knew about the transaction).
CFO
They must be proactive and take steps to ensure that the financial information is up to
date and accurate, and any assumptions or deficiencies are communicated to the
board (Vines16).
DEFENCE 1: Business judgment rule

o
Section 180(2) provides a defence to s 180(1) and the common law duties;
A director or other officer of a corporation who makes a business judgment is taken to meet the
requirements of subsection (1), and their equivalent duties at common law and in equity, in
respect of the judgment if they:
i.
(a) Make it in good faith for a proper purpose;
ii.
(b) Do not have a material personal interest in the subject matter of the judgment;
iii.
(c) Inform themselves about the subject matter of the judgment to the extent they
reasonably believe to be appropriate; and
iv.
(d) Rationally believe that the judgment is in the companys best interests. The belief is
rational unless it is one that no reasonable person in their position would hold (s 180(2)).
Business judgment?
Onus on party evoking the rule to establish (Adler);
Defined in s 180(3) to mean any decision to take or not take action in respect of a matter
relevant to the business operations of the corporation;
Two requirements:
i.
Must be a positive, conscious decision to take or not take action (thus failure to do
something is not sufficient; Adler); and
ii.
The action must be in respect of a matter relevant to the companys business operations.
This includes planning, budgeting and forecasting (Rich). It does not include monitoring the
affairs of the company, because there is no action in respect of business operations (Rich).
DEFENCE 2: Relying on information and advice from others
Under s 189, the directors reliance on the information or advice is prima facie reasonable, provided:
(a) a director relies on information, or professional or expert advice, given or prepared by:
(i)
(ii)
(iii)
(iv)
(b)
an employee whom the director believes on reasonable grounds to be reliable and

competent in relation to the matters concerned;
a professional adviser or expert in relation to matters that the director believes on
reasonable grounds to be within the persons professional or expert competence;
another director or officer in relation to matters within the directors or officers authority; or
a committee of directors on which the director did not serve in relation to matters within the
committees authority; AND
the reliance was made:
16
Note: Vines comment to the board that Management remained confident of the profit forecast was not a breach, because it was a statement a reasonable person could have made given it
reflected the majority opinion.
22/56
(i)
(ii)
in good faith; and

after making an independent assessment of the information or advice, having regard to the
directors knowledge of the corporation and the complexity of the structure and operations
of the corporation.
This applies to Part 2D.117 proceedings and equivalent general law proceedings (s 189(c));
Person alleging that reliance was unreasonable (eg ASIC) has the burden of proof.
HOWEVER, despite the statutory provision, the court may still impose a higher standard.
o
For example, in Healey, it was held that while directors are entitled to rely on others for
preparation of financial statements, they retain the responsibility to read, understand and question
the contents;
In ASIC v Macdonald, Gzell J found that s 189 did not apply because the non-exec directors were
not entitled to rely on the exec directors because this was a key statement in relation to a highly
significant restructure of the group.
Delegation of board powers
Under s 198D(1), unless the companys constitution provides otherwise, the directors of a company may
delegate any of their powers to:
(a) a committee of directors;
(b) a director;
(c) an employee of the company; or
(d) any other person.
The delegation must be recorded in the companys minute book.
The delegate must exercise the powers in accordance with any directions of the director (s 198D(2)).
The exercise of the power by the delegate is as effective as if the director had exercised it (s 198D(3)).
What if the delegate uses power negligently?

o
The director is prima facie responsible (s 190(1));
BUT s 190(2) provides that the director is not responsible if they believed:
(a)
On reasonable grounds at all times that the delegate would exercise the power in conformity
with the duties imposed on directors by this Act and the companys constitution (if any);
and
(b)
o
(i) On reasonable grounds and (ii) in good faith and (iii) after making proper inquiry if
needed, that the delegate was reliable and competent in relation to the power delegated.
In assessing reasonableness, the court will consider (Adler per Santow J at [372]):
- The relationship between the director and delegate (eg good friends vs virtually unknown);
- The steps taken by the director to ascertain relevant information about the delegate;
- The extent to which the director is, or should have been, put on inquiry;
- The delegated function is such that it may properly be left to such officers; and
17
Sections 179-198F.
23/56
- The risk involved in the transaction.
Consequences of breach
Section 180(1) is a civil penalty provision under s 1317E (but not an offence under s 184);
The Court may order:

o
A pecuniary penalty of up to $200,000 (under s 1317G);
Compensation to the corporation (under s 1317H); or
Disqualification (under s 206C, see page 18).
24/56
2: Acting bona fide in the companys interests and for proper purposes
companys interests
About protecting the
Common law
Duty 1: Acting bona fide in the companys interests (see s 181(1)(a))
Test:
o
Director must act honestly for the benefit of the company and not for some ulterior purpose;
This is subjective; however, the Court will look for objective evidence of the directors assertion
(Bell Group per Owen J). The court is not questioning the commercial justification for the decision
rather, the court is assessing whether the director actually held that assertion; 18
If no rational director would have considered the actions to be in the best interests of the
company, then the duty is breached (Adler). Otherwise a company could be run by a lunatic
(Hutton).
What does in the companys interests mean?

o
The duty is owed to the company (being the collective body of shareholders) and not to
individual members (Percival v Wright);19
Director must consider the interests of present and future shareholders and the company as a
commercial entity (Darvall v North Sydney per Hodgson J).
Exceptions to Percival: When are duties owed to individual shareholders?
Directors must act in the best interests of individual shareholders or groups of shareholders in some
circumstances:
1. Small family companies
o
A fiduciary relationship can arise in equity when a person in whom particular trust, confidence
and dependence has been reposed exploits this to achieve an improper benefit (Coleman v
Myers);
For example, where a director possesses special knowledge, they must disclose this to the
shareholders and not use it to the disadvantage of the shareholders:
In Coleman, the MD arranged for the company to be taken over by a company

controlled by him. The MD and the Chairman recommended that the shareholders
accept a price per share that was a substantial undervalue. A fiduciary relationship
was found to exist, because the directors had inside knowledge of the true value of the
shares, and they used this to the detriment of the shareholders; and
In Brunninghausen v Glavanics, G, a director and minority shareholder, agreed to sell

his shares to the other director, B. B then sold all the shares to a third party for a much
higher price. The Court held that B owed G a fiduciary duty, because B possessed
special knowledge about the third party offer (which G did not have, because he did
not participate in the management of the company).
2. Corporate groups
o
See page 2;
18
If a business decision is made in good faith and for proper purposes, it will not be reviewed by the courts (Harlowes Nominees). That is, the courts do not assess the merits of a decision, just
the legality.
19
Thus it is the company that brings proceedings for breach of duty, and damages are payable to the company.
25/56
o
A director will not breach their duty if they act for the benefit of the corporate group, where it
will benefit the company on whose board they sit (Equiticorp);
It is not necessary for the director to independently consider the interests of the company on
whose board he sits, provided the decision benefits the company as well as the corporate
group (Equiticorp, cf. dissent of Kirby P).
3. Employees
o
Directors cannot favour the interests of employees at the expense of the shareholders;
For example, gratuitous payments cannot be made to ex-employees (in Parke v Daily News,
DN closed down one branch of the company and gave the surplus from the sale to the
dismissed employees. Held: Breach, because it does not serve the interests of the company);
A payment to current employees may be in the interests of the company, because industrial
relations may be improved.
4. Creditors
o
Creditors interests must be taken into account when the comp is insolvent or near insolvency
(Kinsela). At this time, the shareholder value is almost nil and so the focus of the directors
must shift;
Can shareholders cure a breach? NO since the duty is owed to the creditors, the shareholders
cannot cure a breach by majority vote (eg in Kinsela, the directors caused the company
nearing insolvency to lease its premises to the directors, on less than commercial terms. Held:
Breach, because a reasonable person could not have believed that the lease transaction was
for the benefit of the company, having regard to the interests of creditors lease set aside);
How close to insolvency? The greater the degree of financial instability, the less risk the
directors can take with the assets (Kinsela);
*BUT this obligation does not give creditors an independent right to sue for breach (Spies v R).
It is up to the liquidator to ensure fair proportional distribution to creditors.
Nominee directors
Nominee director: represents the interests of a major creditor or shareholder on the board.
Prima facie they must they act bona fide and in the companys interests, and not in the interests of their
nominator. However, the company constitution may provide otherwise.
See s 187 for a nominee director from the holding company on the board of a subsidiary. 20
Duty 2: Acting for proper purposes (see s 181(1)(b))
Test:
Directors must use their powers for:
i.
The purposes for which the power was given; and
ii.
The benefit of the company as a whole.
20
A director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary if:
(a) the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company; and
(b) the director acts in good faith in the best interests of the holding company; and
(c) the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director's act.
26/56
Proper purpose
A director who exercises their powers to secure some private advantage is acting for an improper
purpose because such a purpose is outside the purpose of benefiting the company (Mills v Mills);
However, directors are not prohibited from acting in any way that benefits their interests as
shareholders.
In determining proper purpose, ask:
1.
As a matter of law, what are the purposes for which the power may be used (objective)?
2.
As a matter of fact, for what purposes was the power actually used (subjective)?
3.
Is the actual purpose in (2) within the legal purposes in (1)?
More than one purpose?

If the Directors act for more than one purpose, apply the but for test (Whitehouse v Carlton
Hotel):
If not for the improper purpose, would the directors still have acted that way?
If no, then breach of duty.
For example, in Howard Smith, the Millers board argued that the issue of shares to HS was
primarily motivated by the fact that their company was in urgent need of funds to finance tankers
(and the share issue indirectly blocked a takeover bid). The Court examined how real and pressing
the proper purpose was here, there was no pressing need for the tankers and the need had been
alleviated by the company raising loan capital, therefore primary purpose was to block takeover.
The power to issue shares
Directors can issue shares for the following proper purposes:

-
To raise capital for the company;
As part of an employee share scheme;
To foster business connections; or
As consideration for the purchase of assets.
Improper purposes include:

o
To dilute the voting power of another shareholder (eg in Whitehouse, the father, who was
the governing director with the sole power to issue shares, issued shares to his sons to dilute the
voting power of his ex-wife and this was an impermissible purpose. The primary purpose of share
issue is to raise capital). See also PAGE 62 FOR REMEDY (in addition to members remedies).
To create a new majority shareholder, to block takeover (eg in Howard Smith, the two majority
shareholders of Miller, Ampol and Bulkships, wanted to make a hostile takeover bid for the minority
(45%). A company friendly to Miller, HS, agreed to make its own higher takeover bid. To make this
bid successful, the Millers board issued sufficient shares to HS to reduce A and Bs majority to a
minority. This was improper);
BUT not all transactions that defeat a takeover bid will be improper (for example, where the
transaction both defeats the takeover offer and is in the best interests of the company, it will not
be improper; Darvall per Mahoney JA). In this case, the directors decided to sell land, and a term of
the agreement was that another party would make a higher takeover bid of the company. This was
not improper). See but for test.
27/56
Duty 3: Not to fetter discretions
Directors must exercise an independent judgment when making decisions and not promise to act in
accordance with the wishes of others. It is a breach if the director binds himself in advance to vote in
particular ways;
The relevant time to judge the exercise of discretion is when the agreement is entered into, rather than
when the terms of the agreement are to be performed (eg in Thorby v Goldberg, the directors entered
into a contract whereby they agreed to vote in favour of a particular course of action in the future. The
directors then sought to have the contract declared void, because it purported to fetter their discretion.
Held: No breach, because at the time the contract was entered into the directors exercised their
discretion).
Corporations Act s 181

(1)
A director or other officer must exercise their powers and discharge their duties:
(a)
in good faith in the best interests of the corporation; and
(b)
for a proper purpose.
Section 181(1) is a civil penalty provision under s 1317E (and is an offence under s 184, if the director is
reckless or intentionally dishonest higher BOP).
Additional examples:
o
In Adler, Mr Adler breached s 181 by using the loan from HIHC (where Mr A was a director) to
purchase bad investments from his own company;
In PBS v Wheeler, the MD was not in breach because he excused himself from the transaction
because of the conflict of interest.
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3: Fiduciary duties
Common law fiduciary duties
Directors and senior employees are fiduciaries;
This imposes a duty of absolute loyalty on the fiduciary:

1.
Conflicts rule; and

A director must not enter into engagements in which he has or can have a personal interest
conflicting with the interests of the company (Aberdeen Railway);
o
2.
Profits rule.
A director must not make an undisclosed personal profit from his position, or appropriate
corporate opportunities.
Conflicts rule
Multiple directorships
o
Prima facie, holding more than one directorship is not a breach;
Provided:
i.
No confidential information is divulged; and
ii.
If a transaction involves both companies, the director:
Discloses the conflict (R v Byrnes);
Refrains from negotiating the contract and voting (Fitzsimmons v R); and
May need to take positive steps to protect the company (for example, where the
director has power and influence over the board and should use it to prevent a
risky transaction going ahead, Adler; or where the director has special knowledge
about the transaction, Wheeler).
Disclosure of personal interests

o
Notice is required
Under s 191(1), a director of a company who has a material personal interest in a matter
that relates to the affairs of the company must give the other directors notice of the interest
(there are exceptions see page Error: Reference source not found);
Material personal interest means a substantial interest. The test is whether a reasonable
person would believe that the director might be influenced by the interest (McGellin). For
example, in McGellin, a director was regarded as having a material personal interest in board
discussions about whether the company should issue shares to him.
Requirements of notice
The notice must give details of the nature and extent of the interest and how it relates to the
affairs of the company (s 191(3)(a)). The disclosure must enable the board to understand the
scope of the benefit and potential profit that the director will receive (Camelot per Santow J).
Mere suggestions are insufficient (Camelot);
It must be given by the director (Camelot), and as soon as practicable after the director
becomes aware of their interest in the matter (s 191(3)(b));
The details must be recorded in the minutes of the meeting (s 191(3) and Camelot).
Standing notice can be given
Notice is not required under s 191(1) if standing notice has been given (s 191(2)(d));
29/56
Under s 192(1), a director of a company who has an interest in a matter may give the other
directors standing notice of the nature and extent of the interest in the matter. The notice
may be given at any time and whether or not the matter relates to the affairs of the
company at the time the notice is given;
Does not need to be a material personal interest;
The notice must be given to all directors at a meeting, or to all directors individually (s
192(2)). It must be recorded in the minutes of the meeting (s 192(4));
Further notice must be given if a new director is appointed (s 192(5)) or the interest
materially changes (s 192(6)).
Consequences of notice
Can the conflicted director vote on, and retain benefits from, the transaction if the directors
go ahead with it?
Pty Ltd company = depends on the constitution. BUT s 194 (RR) says that the director may
vote and retain any personal benefits;
Public company = the director must not vote or be present while the matter is being
considered (s 195(1)), unless the other directors pass a resolution to the contrary (2) 21, ASIC
makes a declaration or order (3), or there are not enough directors to form a quorum (4).
Civil penalty offence;
Breach of s 191(1) = 10 penalty units or imprisonment for 3 months, or both (Sch 3);
Breach of s 195(1) = 5 penalty units (Sch 3);
Contravention does not affect the validity of any act, transaction, agreement, instrument,
resolution or other thing (ss 191(4), 192(7)).
Profits rule
Prohibited activities
o
A director may not misappropriate business opportunities or confidential information belonging to

the company. For example, diversion of a contract from the company to the director is a breach
(Cook v Deeks);
A director may not profit personally from transacting the companys business. For example,
receiving a personal incentive payment by the buyer for selling a part of the business (Furs v
Tomkies).
It is irrelevant that the directors act in good faith and in the interests of the company (Regal (Hastings)).
In this case, the directors bought shares in a subsidiary so it could fund the lease of cinemas. These
shares were later sold at a profit. This was a breach, because the directors acted on knowledge that they
acquired as directors of the company and they made profit without the consent of the company.
Fiduciary duties survive resignation of the fiduciary (Canadian Aero Service). That is, a director or senior
employee cannot resign and then exploit a corporate opportunity if the resignation was for the purpose
of taking up that opportunity.
Permitting the director to benefit

o
Profit can be permitted or ratified by the shareholders by ordinary resolution;
Permission of the board?
21
s 195(2): The director may be present and vote if directors who do not have a material personal interest in the matter have passed a resolution that:
(a) identifies the director, the nature and extent of the director's interest in the matter and its relation to the affairs of the company; and
(b) states that those directors are satisfied that the interest should not disqualify the director from voting or being present.
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Generally insufficient (eg Regal (Hastings));
However, it may be enough if board represents all SH interests (in Queensland Mines, all
shareholders were represented on the board and therefore boards consent was sufficient).
*Approval must not be a fraud on the minority;
For example, in Cook v Deeks, the breaching directors were also majority shareholders.
They passed a resolution to forgive the breach. This resolution was found to be ineffective
to validate the transactions, because it was a fraud on the minority;
Such approval may also be oppressive under s 232.
If there is no shareholder approval
The director may still be able to take up the opportunity (eg in Peso Silver Mines, the company
rejected to buy a mining claim. The MD, Cropper, later purchased the claims. The court held there
was no breach of duty, because he had been approached in his capacity as a member of the public
he had no special information by virtue of his position as MD, he was approached independently,
and the company did not want to take up the offer).
Consider Related party benefit?
Only applies to public companies
Under Chapter 2E and s 208(1), for a public company (or an entity that the public company controls) to
give a financial benefit to a related party of the public company, the company must obtain the
majority vote of fully informed, disinterested shareholders (by ordinary resolution).
Financial benefit:
Is interpreted broadly (s 229(1)(a));
Includes any financial advantage, whether or not it involves payment of money;
Examples in s 229(3)(a)-(f) include:

-
Giving or providing finance or property;
Buying or selling an asset;
Leasing an asset;
Supplying or receiving services;
Issuing securities or granting an option; and
Taking up or releasing an obligation.
Related party:
o
The following are related parties of the public company:

-
A controlling22 entity23 (s 228(1));
Directors, directors of the controlling entity, and spouses (inc de facto partners, s 9) (s
228(2));
Parents and children of above (s 228(3));
An entity controlled by someone above (s 228(4));
22
Control is the capacity of a person or entity to determine the outcome of decisions about a second entitys financial and operating policies ( s 50AA).
23
Entity is a body corporate, partnership, unincorporated body, individual, trust, or trustee/s of the trust (s 9).
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Anyone who satisfied above within the previous 6 months (s 228(5)) or will satisfy above in
the future (if the person above believes or has reasonable grounds to believe this is likely, s
228(6)); and
An entity who acts in concert with a related party of the public company on the
understanding that the related party will receive a financial benefit if the public company
gives the entity a financial benefit (ie PCERP; s 228(7)).
Exceptions
Shareholder approval is not required if:
The financial benefit is on terms that would be reasonable if the parties were dealing at
arms length, or the terms are less favourable to the related party than arms length terms (s
210);
Reasonable remuneration, or reimbursement of expenses, to an officer or employee (s 211);
Amounts of money given to a director or spouse of less than $5,000 (s 213);
Financial benefits to or by a closely held subsidiary (s 214);
Financial benefits given to members of the company, without unfairly discriminating between
members (s 215).
If an exception applies, the directors control whether or not to give the financial benefit
otherwise, a majority vote is required.
Consequences for breach

o
A contravention of s 208 does not affect the validity of any contract or transaction (s 209(1));
However, a person who is involved in a contravention of s 208 is liable for a civil penalty (s
209(2) see footnote Error: Reference source not found for definition of involved in). See page
24 for remedies. A person commits an offence if the involvement is dishonest (s 209(3)).
Corporations Act
Misuse of position conflicts and profits rule
Under s 182(1), a director, secretary, other officer or employee must not improperly use their position to:
(a)
Gain an advantage for themselves or someone else; OR
(b)
Cause detriment to the corporation.
A person who is involved in a contravention is liable for a civil penalty (s 182(2)). Also, might be an
offence under s 184 if dishonest.
Objective test (R v Byrnes and Adler);
There is no requirement for proof of gain or detriment it is enough that this was the purpose (Chew v
R).
Misuse of information profits rule
Under s 183(1), a person who obtains information because they are, or have been, a director or other
officer or employee must not improperly use the information to:
(a)
Gain an advantage for themselves or someone else; OR
(b)
Cause detriment to the corporation.
*This duty continues after the person stops being an officer or employee (Note 1 of s 183(1)).
32/56
A person who is involved in a contravention is liable for a civil penalty (s 183(2)). Also, might be an
offence under s 184 if dishonest.
The information does not need to be confidential;
Example: in ASIC v Vizard, Mr Vizard was held to have breached his duty by making three share
transactions based on confidential information he gained as a non-executive director of Telstra.
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Insolvent trading by directors
The duty
Under ss 588G(1) and (2), a breach occurs if:

s 588G(1)
(a) A person is a director at the time when the company incurs a debt;
o
Debt?
A debt is an obligation by one person to pay a sum of money to another (Powell v Fryer);
Includes a contingent debt (Hawkins v Bank of China, eg a guarantee);
Includes non-voluntary debts (Powell v Fryer, eg statutory payments).
Incurred?
A debt is incurred when a company so acts to expose itself contractually to an

obligation to make a future payment of a sum of money as a debt (Hawkins v Bank of
China);
Section 588G(1A) deems when a company incurs a debt:
When debts are incurred

Action of company
When debt is incurred
paying a dividend
when the dividend is paid

OR, if the company has a constitution
that provides for the declaration of
dividends, when the dividend is
declared
making a reduction of share

capital to which Division 1 of
Part 2J.1 applies (other than a
reduction that consists only of
the cancellation of a share or
shares for no consideration)
when the reduction takes effect
buying back shares (even if the

consideration is not a sum
certain in money)
when the buy-back agreement is

entered into
redeeming redeemable
preference shares that are
redeemable at its option
when the company exercises the option
issuing redeemable preference

shares that are redeemable
otherwise than at its option
when the shares are issued
financially assisting a person to

acquire shares (or units of
shares) in itself or a holding
company
when the agreement to provide the

assistance is entered into
OR, if there is no agreement, when the
assistance is provided
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(b) The company is insolvent at that time, or becomes insolvent by incurring that debt; and
o
A company is insolvent if it is unable to pay all its debts, as and when they become due and
payable (s 95A);
The conclusion of insolvency must be derived from a proper consideration of the companys
financial position, in its entirety, based on commercial reality. A company is not insolvent
simply because it is suffering a temporary lack of liquidity. Insolvency is the inability of the
company to meet debts, utilising the resources available to the company (Powell v Fryer per
Olsson J);
Common indicators of insolvency include (ASIC v Plymin per Mandie J):

-
Continuing losses;
More liabilities than assets;
Overdue taxes;
Inability to borrow further funds from present bank;
No access to alternative finance;
Inability to raise further equity capital;
Suppliers requiring COD, or otherwise demanding special payments before supply;
Creditors unpaid outside trading terms;
Issuing of post-dated cheques;
Dishonoured cheques;
Special arrangements with selected creditors;
Impending court action for debts; and
Inability to produce timely and accurate financial information.
(c) At that time, there are reasonable grounds for suspecting that the company is insolvent,
or would so become insolvent.
o
Suspect means more than mere speculation, but less than actual belief or expectation it is
a positive feeling of apprehension or mistrust (Queensland Bacon);
Satisfied where a reasonably competent and diligent director would have grounds to suspect
insolvency, in all the circumstances of that company (ASIC v Plymin per Mandie J).
AND the director failed to prevent the company from incurring the debt (s 588G(2)).
o
Covers inactivity (ASIC v Plymin).
Defences
General points:
o
Director has burden of proof on BOP;
Director can rely on more than one defence;
The defences are designed to assist directors who have otherwise acted diligently.
There are four defences:

1. s 588H(2): Expectation of solvency;
o
It is a defence if it is proved that, at the time when the debt was incurred, the person had
reasonable grounds to expect, and did expect, that the company was solvent at that time and
would remain solvent even if it incurred that debt and any other debts that it incurred at that
time;
Expect means a higher degree of certainty than mere hope, possibility or optimism. It implies a
measure of confidence that the company is solvent (MFS v Miller). It must be certain or probable
(Hall v Poolman);
The expectation must be that the company can pay its debts at the present time (it is not
sufficient if the expectation is that the company can trade out of its difficulty; Hall v Poolman);
35/56
o
The director can consider assets that could be sold and, per Palmer J in Hall v Poolman, a
director would be justified in expecting solvency if an asset could be realised to pay accrued
and future creditors in full within about ninety days.
2. s 588H(3): Reliance on another;

o
It is a defence if it is proved that, at the time when the debt was incurred, the person:
i.
(a) Had reasonable grounds to believe, and did believe, that a competent and
reliable person was providing them adequate information; and
ii.
(b) Expected, on the basis of that information, that the company was solvent at that
time and would remain solvent even if it incurred that debt and any other debts that
it incurred at that time.
Passive reliance is not sufficient the directors must actually make inquiries about the
companys solvency from another (otherwise the expectation is not based on any information;
MFS v Miller). That is, it is not sufficient to sit back and say that another director was responsible
for the finances and not ask any questions of that director.
See the obligations to monitor the financial status of the company, and for min financial literacy.
3. s 588H(4): Non-participation in management; and

o
If the person was a director of the company at the time when the debt was incurred, it is a
defence if it is proved that, because of illness or for some other good reason, he or she did not
take part at that time in the management of the company;
Some other good reason does not include a total failure to participate in management, for
example, where one director defers to another (in DCT v Clark, it was not sufficient that the wife
simply deferred to her husband to make decisions).
4. s 588H(5): Reasonable steps to prevent the debt.

o
s 588H(5): It is a defence if it is proved that the person took all reasonable steps to prevent the
company from incurring the debt;
Under s 588H(6), the court must consider:

(a) Any action person took with a view to appointing an administrator [voluntary
administration];
(b) When that action was taken; and
(c) The results of that action.
Requires strong and unequivocal action. Simply telling the MD that you have reservations and do
not agree with the company acquiring further debts is not sufficient (Byron v Southern Star
Group). As Ormiston J suggested in Morley, if a director cannot prevent the debt being incurred,
they should seek to have the company wound up or they should resign.
A director who breaches s 588G(2) is liable for a civil penalty;
A director commits an offence if the failure to prevent the company incurring the debt was dishonest (s
588G(3));
The court may also make a compensation order against the director:
36/56
o
ASIC can seek recovery from the director under ss 588J or 588K (K for criminal proceedings) for the
amount of loss or damage suffered by all unsecured creditors (loss or damage is generally the
amount of the unpaid debt; Powell v Fryer);
The liquidator may recover from the director under s 588M(2) for the loss or damage of all
unsecured creditors; and
Individual creditors may recover from the director under s 588M(3) an amount equal to their loss
or damage.
37/56
TOPIC 8 corporate contracting

Flowchart
1. Was the document properly executed? s 127
a. If no, see s 128(3), s 129(5)/(6) and IMR (s 129(1))
2. Did the person acting for the company have authority? s 126
a. Express authority
b. Implied authority
i.
ii.
c.
Implied from position see s 129(2)

Implied from past behaviour
Ostensible authority see s 129(3)
3. Were they acting within their authority? s 129(4)
Q1:
Entering into a contract
A company enters a binding contract in two ways:

1.
The document is signed by an agent for and on behalf of the company; or
2.
The directors execute the document so that the document is recognised in law as having the
companys signature on it.
Q2:
AGENCY
Formalities
The contract may be signed by the 3rd party and the agent signs as follows:
Signed for and on behalf of ClayCo Pty Ltd
Angela Ashworth
Angela Ashworth, Managing Director, ClayCo Pty Ltd
A. Actual authority
An agent with the companys actual authority (express or implied) may make, vary, ratify or discharge a
contract on behalf of the company (s 126(1));
Actual authority is where the company is communicating to the individual that they have authority.
A I.
Express actual authority
Express authority can arise in a number of ways:

i.
A board resolution authorising the individual to contract on the companys behalf eg for a
particular contract (arising from s 198A);
ii.
Constitutional provision stating the scope of an officers authority to contract for the company;
iii.
Companys operational policies; or
iv.
The individuals employment contract.
38/56
A II.
Implied actual authority
Two types:
1. Implied from the position in the company held by the agent; or
o
Agent is presumed to have the usual authority that attaches to that position in that type of
co;
For example, the following usually have the authority to enter contracts: Managing director,
CEO, CFO, purchasing officer, and human resources manager;
BUT, the following do not usually have the authority: Individual non-executive directors, nonexecutive chairmen, or the company secretary (Northside Developments).
2. Implied by acquiescence (need past behaviour).

o
Authority is implied from the conduct of the parties and the circumstances;
Need communication by words or conduct silence is not enough (Freeman & Lockyer);
For example, the agent has previously entered into contracts on behalf of the company and
the company has treated those contracts as binding upon it, without sanctions (in Brayhead,
the chairman had no power to enter contracts, but he was held to have actual authority,
because over many months the Board had given the impression that he could act as a de
facto CEO and bind the company to transactions. Cf. Freeman, where the court said that
there was no acquiescence, because the Board never communicated to the director their
acceptance of his contracting);
Similarly, in Brick and Pipe Industries, a director was held to have implied actual authority
because he assumed the role of MD with the acquiescence of other directors and he had
entered into transactions without the prior approval of the Board.
B. Apparent or ostensible authority
The company is holding out the agent has having authority to contract it creates an agency by
estoppel.
Two requirements:
1. Representation; and
o
The company must make a representation to the 3 rd party that the agent has authority;
Who must make the representation?
The representation must be made by someone with the companys actual authority to
make the representation (eg the Board, or a person who has actual authority to
manage that part of the business to which the contract relates);
For example, in Crabtree-Vickers, Bruce McWilliam Junior could not hold out Peter
McWilliam (the agent) as having authority to enter into the transaction, because he
himself did not have actual authority to enter into the transaction (he was MD, but
needed his fathers approval to enter contracts). But see Paribas.
How is the representation made?
Where the company permits the agent to occupy a particular position, then the
company represents that the agent has the customary authority of a person in such
position (eg in Freeman & Lockyer, although there was no express communication by
the Board to amount to implied actual authority, the Board knew that Mr Kapoor was
acting as MD and they did nothing to prevent him);
Where the company arms an officer with a document and permits them to enter into
the contract without taking proper safeguards against misrepresentation (in Paribas,
the bank gave a junior employee all of the documents for the 3rd party to sign and
therefore held out that she had authority).
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2. Reliance.
o
The 3rd party must rely on the representation when entering into the contract.
See also ss 128, 129(3) assumptions.
40/56
Q3:
EXECUTED DOCUMENT
Formalities
The document must have:

1
A.
Signatures of 2 directors (s 127(1)*(a)) [or 1 director, if sole director and company secretary
of the Pty company; s 127(1)(c)]; OR
B.
Signatures of one director and company secretary (s 127(1)(b)); AND
If the company has a seal, the imprint of the company seal (note: use s 127(1) where no seal, and
(2) where there is a seal). Having a seal is optional (s 123(1)). If the company does have a seal, it
must set out the companys name and ACN (s 123(1)). It is a strict liability offence if it does not
comply (ss 123(3), (4)).
(The company constitution can provide additional requirements s 127(4)).
Indoor Management Rule (IMR)
The Indoor Management Rule allows a 3rd party to assume that internal matters have been satisfied,
even if this is not true (Turquands case). For example, if a shareholder meeting is required to authorise a
transaction, the 3rd party is not required to investigate whether this meeting occurred and therefore the
contract is binding even if the meeting was not held. 24
EXCEPTION
o
The 3rd party cannot rely on this assumption if a reasonable person would be put on inquiry that
the assumption was wrong (Northside);
Note: a 3rd party is not required to read the Constn or other ASIC documents (s 130);
Example:
Northside: The bank was put on inquiry by the nature of the transaction that is, it was a
mortgage over a valuable asset, and none of the funds lent by the bank went to the
company itself.
Statutory assumptions
General principles:
o
Under s 128(1), a person is entitled to make the assumptions in s 129 in relation to dealings
with a company25. The company is estopped from asserting that the assumptions are incorrect;
The assumptions apply even if an officer or agent acts fraudulently or forges a document (s
128(3)). The forged document is not a nullity and can still bind the company (Story);
EXCEPTION:
A person is not entitled to make an assumption if at the time of the dealings they knew or
suspected that the assumption was incorrect (s 128(4));
See meaning of suspect on page 35;
This is a subjective test (Soyfer v Earlmaze).
24
There are differing judicial views on the IMR. Mason CJ in Northside said that the IMR is a special rule of company law, which enables 3rd parties to assume that transactions evidenced by an
executed document are authorised by the company if the companys signature is on the document, unless they are put on inquiry (preferred approach, see eg Kirby J in Bank of NZ v Fiberi).
Dawson J said that where a 3rd party contracts with the company and has no reasonable grounds to suspect that the transaction is not properly authorised, an equitable estoppel arises. Thus
grounded in agency and estoppel.
25
Dealings with a company extends to purported dealings (Story v Advance Bank that is, it includes dealings with people who did not have actual authority from the company).
41/56
s 129 The assumptions are:

o
(1) 3rd party can assume the companys constitution is complied with;
The IMR;
For example, in Bank of NZ v Fiberi, the husband arranged a mortgage and guarantee over
the company (similar to Northside [son signed as sec] and Story [forged both sigs]). His son
signed as secretary, but he had not been appointed. The Constn required safe keeping of the
seal, it needed to be authorised by the directors, and attestation had to be signed by director
and secretary. HELD: Bank could rely on s 129(1) the Bank could assume that the relevant
provisions of the Constn had been complied with, and the bank had not been put on notice.
(2) 3rd party can assume that officers whose details appear in ASIC records are duly appointed
and have the usual authority;
There is no obligation to check ASIC documents (s 130);
Usual authority remember, non-executive directors and secretaries have narrow

authority.
(3) 3rd party can assume that a person held out as an officer or agent has been duly appointed
and has the usual authority of someone in that position;
Principle of apparent or ostensible authority;
Note: the sale of the whole business is something that only the whole Board can do, and so
is not within the usual authority of a MD, CEO or director;
For example, in Brick and Pipe Industries, Mr Furst signed a guarantee as secretary, but he
was never appointed as secretary and the 3rd party had searched the company records and
knew that he had not been appointed. However, the company had held Mr Furst out as
secretary it was stated in the presence of Mr Goldberg, who was effectively the MD, that Mr
Furst was secretary and Mr Goldberg remained silent. Therefore, company is bound by the
guarantee.
(4) 3rd parties can assume compliance with fiduciary or statutory duties;
That is, company cannot argue that the officer breached their duties to avoid the contract
(Pico Holdings).
(5)/(6) 3rd parties can assume company documents are properly executed;
Use (5) for documents executed without seal, and (6) for documents executed with seal;
A person may assume that a document has been duly executed by the company if the
document appears to have been signed in accordance with s 127;
What if the description of the signee is wrong?

In Story, the executed document described Mr Storys wife as secretary, when she was
actually a director. Mr Story forged her signature. The Court held that a misdescription of a
signatory does not prevent the assumption from being relied upon. See also Brick and Pipe
Industries, because Mr Furst was a director but signed as secretary.
42/56
TOPIC 9 Shareholders meetings
Types of meetings
Annual General Meeting (AGM)

o
s 250N(1): A public company must hold an AGM within 18 months after its registration. And it
must hold an AGM annually, within 5 months after the end of its financial year (s 250N(2)). Failure
to do so is a strict liability offence (s 250N(2A)). A public company with 1 member does not have to
hold an AGM (s 250N(4)).
s 250R(1): The business of an AGM may include any of the following, even if not referred to in the
notice of meeting:
The consideration of the annual financial report, directors' report and auditor's report;
(b)
The election of directors;
(c)
The appointment of the auditor; and
(d)
The fixing of the auditors remuneration.
Extraordinary general meetings

Anything other than an AGM.
(a)
Meetings of classes of members

See s 246B and page 11.
Convening meetings
Meetings may be convened by:

1. Directors; or
o
A director may call a meeting of the companys members (s 249C RR);
For a listed company, directors have the power to call meetings regardless of Constn (s 249CA);
BUT directors bear the cost of the meeting.
2. Members.
o
Members may requisition a meeting;

Under s 249D(1), the directors must hold a meeting on the request of members with at least
5% of the votes or at least 100 voting members. The request must be in writing, state any
resolution to be proposed, be signed by the members, and be given to company (s 249D(2)).
AND
Members with >50% of the votes may call a meeting if the directors do not do so within 21
days after the request is given (s 249E(1)). The company must pay the expenses of the
members (s 249E(4)).
OR members may arrange a meeting themselves.

Under s 249F(1), members with at least 5% of the votes may call and arrange to hold a
general meeting. The members calling the meeting must pay the expenses.
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A meeting must be for a proper purpose (s 249Q). Eg the meeting is not for a proper purpose if it is to
decide a matter that is not within the powers of members to decide such as directing the directors how
to exercise their exclusive powers (NRMA v Parker).
Meeting requirements
Basic requirements
Notice: At least 21 days notice must be given (s 249H(1)). Shorter notice may be allowed in some
circumstances (see extract). For listed companies, at least 28 days notice must be given (s 249HA(1)).
Quorum: A quorum is the minimum number of shareholders whose presence is necessary for a meeting
to be able to validly transact business. The quorum for a meeting is 2 members and the quorum must be
present at all times during the meeting (s 249T(1) RR).
Electing a chair: The directors must elect a chair to be present at every meeting (s 249U(1)-(3) RR).
The chair must adjourn a meeting if the members present with a majority of votes agree (s 249U(4) RR).
Technology: A meeting may be held at 2 or more venues using any technology that gives the members
as a whole the reasonable opportunity to participate (s 249S).
Member participation
How can members participate in the meeting?

1.
Members resolutions: Members with at least 5% of the votes, or at least 100 voting members,
may give notice of a resolution that they propose to move (s 249N(1)). The notice must be in writing,
set out the wording of the proposed resolution, and be signed by the members proposing to move
the resolution (s 249N(2)). If the company is given notice, resolution is to be considered at the next
general meeting that occurs >2 months after the notice is given (s 249O(1)). See extract of section
below.
2.
Members statements: Members with at least 5% of the votes, or at least 100 voting members,
may issue or make statements to be circulated to all members (s 249P). See extract of section below.
3.
Reasonable opportunity to ask questions at AGM: The chair of an AGM must allow a
reasonable opportunity for the members as a whole at the meeting to ask questions about or make
comments on the management of the company (s 250S(1)). Failure to do so is a strict liability offence
(s 250S(2)).
Duty to inform
General principles (Fraser v NRMA Holdings):

o
The directors have a fiduciary duty to ensure that members are fully informed about matters
that appear on the agenda;
The information must be sufficient for members to decide whether they will attend the meeting
and vote for or against the resolution;
The directors only need to provide information that is realistically useful (eg directors are not
required to explain the detailed legal requirements underlying the resolution, such as the
process of demutualisation);
The document must be intelligible to reasonable members (likely to assist rather than confuse);
The information that must be disclosed goes beyond what the Board knows, and in some
circumstances it must make further investigations; and
Directors must not ignore information that does not support their position on the resolution (
see the facts of the case).
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For example, in Fraser, the members were to vote on whether or not the company should undergo
demutualisation (co limited by guarantee co limited by shares). The company sent out a prospectus
that stated that the members would receive free shares in the new company. However, the prospectus
did not detail the benefits that the members were foregoing. Therefore, breach of the duty to inform,
because the prospectus failed to identify the disadvantages of demutualisation to members this left
members with the dominant impression that they were better off, when this was not necessarily true.
Duty not to mislead or deceive:

o
The information must, on an objective assessment, constitute full and fair disclosure of all the
facts that are material to enable members to make a properly-informed decision failure to do
so may also breach the misleading and deceptive conduct provision in the Act;
Under s 1041H(1), a person must not engage in conduct, in relation to a financial product or a
financial service26, that is misleading or deceptive or is likely to mislead or deceive. Failure to
comply with this section is not an offence but it is a civil penalty provision;
This was breached in Fraser, because they failed to provide information about disadvantages.
Decisions at a meeting
How are votes counted?

o
Voting by show of hands every shareholder has one vote, regardless of # of shares held; or
Voting on a poll weighted voting (shareholders votes are weighted depending on # of shares
held) and anonymous. Under s 250L, a poll may be demanded by at least 5 members entitled to
vote, or members with 5% of the votes, or the chair [(1)(a)-(c)]. Constn may provide for lesser
requirements [(2)]. The poll may be demanded before the vote, before the results, or immediately
after the results on a show of hands are declared [(3)(a)-(c)].
Proxy votes
o
Proxy voting allows member to vote without attending the meeting;
Summary of provisions:
Member can appoint a proxy (s 249X(1));
Member can specify the # of votes that proxy may exercise (s 249X(2));
Proxy has same rights as member, including to speak, vote and demand poll (s 249Y(1));
Proxy cannot exercise rights if member present, unless Constn says otherwise (s 249Y(3));
To appoint a proxy, the document must be signed by the member and contain the
members name and address, companys name, proxys name, and the meetings at which
the appointment may be used [may be a standing appointment] (s 250A(1)), unless the
Constn provides otherwise (s 250A(2)). Appointment must be received at least 48 hours
before the meeting (s 250B(1)), unless the Constn reduces this period (s 250B(5)).
Directed proxy where shareholder has directed the proxy how to vote. The proxy must vote
according to their instructions (eg s 250BB(1), the proxy need not vote on a show of hands or the
poll (unless chair, where they must vote on a poll), but if they do vote they must follow instructions
allows for cherry picking, because the proxy can decide if and when to vote);
Undirected (open) proxy where shareholder appointed proxy without specific voting
instructions.
26
Financial product is a facility through which, or through the acquisition of which, a person does one or more of the following: makes a financial investment, manages financial risk, or makes
non-cash payments (ss 763A(1), 761A, 9).
Financial service is provided if the person: provides financial product advice, deals in a financial product, makes a market for a financial product ( ss 766A(1), 761A, 9).
Conduct in relation to a financial product includes: (a) dealing in a financial product, (b)(i) issuing a financial product, (b)(ii) publishing a notice in relation to a financial product, (b)(iii) making,
or making an evaluation of, an offer under a takeover bid or a recommendation relating to such an offer s 1041H(2).
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Decisions without a meeting
Two ways:
1. Circulating resolution (Pty companies)
o
A Pty company may pass a resolution without a general meeting if all the members entitled
to vote on the resolution sign a document containing a statement that they are in favour of
the resolution set out in the document (s 249A(2));
The resolution is passed when the last member signs (s 249A(4)).
2. The Duomatic principle

o
Where there is complete assent by all members on a particular matter, then no meeting be
held (where every shareholder agrees to a particular resolution);
BUT this principle does not apply eg to deny a non-voting SH the right to attend meeting
and participate in debate. For example, in Re Compaction Systems, there was no meeting of
members because all voting shareholders assented to the resolution. However, one member
with a non-voting share objected (Mr McDonald). The Court refused to apply the Duomatic
principle, because the Constn entitled non-voting shareholders to receive notice of and
attend any general meetings of the company. The right to attend a meeting is not an
insubstantial right. The right to advance arguments and influence the course of discussion
may have a decisive effect on the decision reached.
Consequence of procedural irregularities?
May be invalidated, if substantial injustice caused

Under s 1322(2), a proceeding under this Act is not invalidated because of any procedural irregularity
unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that
cannot be remedied by any order of the Court and by order declares the proceeding to be invalid.
Procedural irregularity
Not exhaustively defined but defined to include the absence of a quorum, or a defect, irregularity or
deficiency of notice or time (s 1322(1)(b)(i)-(ii)). The procedure for a nomination of a person for election
as a director at a general meeting is not a proceeding.
Substantial injustice
o
The court must balance the real prejudice suffered by a member, against the prejudice to the
company and other members in invalidating the resolution. The injustice to the member must be
real and not theoretical or insubstantial ie you need the injustice to affect the outcome of the
resolution (Re Compaction Systems);
Bell Resources: the notice papers failed to state that the resolution was to reduce the number of
directors. The votes of members who did not attend would have affected the outcome. Thus,
substantial injustice (this was an important and fundamental resolution);
Chew Investment: the refusal to hold a poll when the Constn required it was held to be a
substantial injustice, because it deprived the members of the full exercise of their voting rights
and the outcome would have been different if a poll was held.
The court can excuse breaches of the Act
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Under s 1322(4)(a), an interested person may apply to the court for an order declaring that any act or
proceeding is not invalid because it contravened the Act [and an order relieving a person from civil
liability as a result of this contravention, (c)]. The Court must not make this order unless it is satisfied
that the act or proceeding is essentially of a procedural nature, that the person/s concerned in the
contravention acted honestly, that it is just and equitable that the order be made [s 1322(6)(a)(i)-(iii)],
and that no substantial injustice has been or is likely to be caused to any person [s 1322(6)(c)].
Also use the oppression remedy in s 232.
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TOPIC 10 Members remedies
Other remedies for members
To have constitution observed: s 140 (page 6);
To prevent unlawful variations of class rights: s 246B (page 11);
Where duties are owed to individual shareholders: case law (page 25);
To prevent misleading and deceptive conduct: s 1041H (page 45); and
To prevent procedural irregularities occasioning substantial injustice: s 1322 (page 46).
Section 232 Oppressive conduct
Q1: Who can make an application for an order?

s 234: An application may be made by:
(a)
a member of the company (in their capacity as a member, (i) in another capacity eg as a
director, or (ii) on behalf of another member);
(b)
a former member, removed from the register of members because of a selective reduction [a
selective reduction is where the reduction in share capital either: did not relate to ordinary
shares, did not apply to each holder of ordinary shares in proportion to the # of shares they
hold, or the terms of the reduction are not the same for all ordinary shareholders: s
256B(2)];
(c)
a former member, if the application relates to them ceasing to be a member.
Member need not be aggrieved (Jenkins).
Q2: Can the court make an order?

s 232: The Court may make an order under s 233 if:
(a)
the conduct of a companys affairs27;
(b)
an actual or proposed act or omission by or on behalf of a company; or
(c)
a resolution, or a proposed resolution, of members or a class of members of a company;
is either
(d)
contrary to the interests of the members as a whole; or
(e)
oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or

members whether in that capacity or in any other capacity.
Is conduct oppressive to, unfairly prejudicial to or unfairly discriminatory against a

member?
Determined objectively Would a reasonable board have acted in that way? If no, then there is
a breach. It is irrelevant that the board acted honestly and in good faith (Wayde);
Subjective motivations are relevant (Re Dalkieth);
27
Defined very broadly in s 53, and includes: (a) formation, membership, control and transactions of the body; (c) internal management and proceedings; (e) ownership of shares in the body; (f)
power to exercise the rights to vote attached to shares and to dispose of such shares; (h) circumstances under which a person acquired or disposed of shares.
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Balance the disadvantage or burden to the member, against the objective of the Board
(Wayde);
Examine the companys background and the reasonable expectations of its members (Re HW
Thomas and Re G Jeffrey Mens Store).
Oppressive
Conduct is oppressive if it is burdensome, harsh and wrongful (Scottish Co-operative
Wholesale Soc). Oppression involves some overbearing act or attitude on the part of the
oppressor (Re Jermyn Street Turkish Bath Ltd).
Unfairly prejudicial
Conduct must be unfairly prejudicial (eg in Wayde v NSW Rugby League, Wests was prejudiced
because they were excluded from the League. However, the prejudice was not unfair, therefore
there was no breach).
Examples breach?
Where objective is reasonable (eg in Wayde, the decision was taken by the Board with
the object of fostering the game of rugby league and serving its best interests);
Where member is dissatisfied with management of co (eg in Re G Jeffrey Mens Store,

the company was managed conservatively, paying only small profits to the members,
according to the Constn. The company refused to buy out the shares of a minority
member, who wanted out. It is not oppressive or unfairly prejudicial just because the co
is being managed in a way that the minority members do not agree).
(See also Re HW Thomas, where all the members of a family company, except for the
applicant, agreed that it should continue to operate in a financially conservative way. It
was understood that the company would be a source of employment, and not merely a
source of revenue. Here, the focus was on capital profits, and this was not oppressive or
unfair);
Unfair exclusion from management of a family company (family members have a

reasonable expectation of participating in management. Eg in Fexuto, the company was
a family partnership, it was established to provide for the economic wellbeing of the
family, and all members were expected to be equally involved in management.
Therefore, it was oppressive and unfairly prejudicial to exclude one member Bob.
Remedy: Bob can sell his shares to co);
Improper share issue to dilute minority shareholding (see page 27). In Re Dalkieth, it was
the subjective intentions of the majority to issue new shares for the purpose of diluting
the shareholding of Mr Smith. This was oppressive. Note: the objective here was not
proper (the money from share issue was not needed). Remedy: Co to buy Mr Smiths
shares; and
A refusal to pay dividends, where excessive benefits to directors (eg in Sanford, the
majority shareholders diverted business away from the company to another company
they controlled and paid themselves high salaries and other benefits. Their refusal to pay
dividends was oppressive, because it excluded the minority shareholder from a share of
the profits of the company. Remedy: Co to buy minoritys shares).
Breach of directors duties (can amount to oppressive conduct; Jenkins).
Q3: What remedies are available?

o
Under s 233(1), the Court can make the following orders:

(a)
Company be wound up;
(b)
Companys Constn be modified or repealed;
(c)
Regulate the conduct of companys affairs in the future;
(d)
Purchase the shares of any member [most common] (if the oppressive conduct has
decreased the value of the shares, the order may specify that the shares are to be
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purchased at the price that the shares would have been had the conduct not taken
place; Scottish Co-operative Wholesale);
(e)
Purchase shares with a reduction of companys share capital;
(f)
Company to institute, prosecute, defend or discontinue proceedings;
(g)
Member to institute, prosecute, defend or discontinue proceedings on behalf of co;
(h)
Appoint a receiver;
(i)
Injunction to stop a person from engaging in specified conduct; or
(j)
Injunction to require a person to do a specified act.
Purpose: to redress the effects of the oppressive or unfair conduct (Re Hollen);
For example, in Jenkins, the directors breached their duty to act in the best interests of the
company. The Court appointed a receiver (s 233(1)(h)) to investigate the impugned transactions
and to institute proceedings against the directors, if necessary (s 233(1)(f)). An intrusive remedy,
but needed to redress the conduct.
Q4: Can the majority ratify the conduct?

o
NO (a fraud on the minority Jenkins).
Section 236 Statutory derivative action
It allows a member to take legal action in the name of the company for a wrong done to the company (cf
s 232, it is not a personal action). The purpose is to enable an individual member to take action on behalf
of the company, where the majority is unwilling (eg breach of directors duties).
Q1: What does the member want to sue on behalf of the company for?
o
Eg breach of directors duties.
Q2: Who has standing to sue?

o
The person must be a member or former member of the company, or an officer or former officer of
the company AND the person is acting with leave of the Court (s 236(1));
Under s 237(2), the Court will grant leave if it is satisfied that:

(a)
The company itself will probably not bring the proceedings;
(b)
Applicant is acting in good faith;
Good faith requires that:

i. The applicant honestly believes that a good cause of action exists
and the company has a reasonable prospect of winning; and
ii. The applicant does not have any collateral purpose.
(Swansson)
(c)
For example, in Swansson, the applicant may have benefitted from the
breach and hence she would not be acting in good faith if her purpose
was to seek a double recovery.
It is in the best interests28 of the company;
28
Under s 237(3), a rebuttable presumption that leave is not in the best interests of the company arises if the proceedings are against a 3 rd party (not related to the company; s 237(4)), AND the
company has decided not to bring the proceedings, AND all directors who participated in that decision acted in good faith for a proper purpose, without a material personal interest, were
50/56
See s 237(3);
Consider the companys separate and independent welfare (Jeans);
It must be in the companys best interests (not may be, or likely to be;
Swansson per Palmer J);
Consider: The character of the company (private or public; if family,

look at the purpose for which it was established), the business of the
company, whether the applicant can sue in their own name, and it
must be worth suing the defendant (they must have enough money
and there must have been a loss to co) (Swansson);
Where the company in question is a joint-venture vehicle and one of

the venturers alleges that the other has acted unlawfully, it will usually
be appropriate to allow the complaining venturer to bring proceedings
in the companys name against the other venturer (Morningstar
Research).
(d)
There is a serious question to be tried; and
(e)
Either the applicant gave the company written notice of their intention to
apply for leave and the reasons why (at least 14 days before making
application), or it is nevertheless appropriate to grant leave.
An application for leave cannot be made if the company is in liquidation (Chahwan);
Leave can be granted even if the company has ratified the breach (s 239(1)). BUT
the Court may take this into account in deciding what order or judgment to make
the Court must have regard to whether the members were fully informed and acting
for proper purposes (s 239(2)).
Proceedings are brought in the companys name (s 236(2)).
Q3: What order can the Court make?

o
Under s 241(1), the Court may make:

(a)
Interim orders;
(b)
Directions about the conduct of the proceedings, including requiring mediation;
(c)
An order directing the company, or an officer of the company, to do or not do any act;
(d)
An order appointing an independent person to investigate and report to the Court. This
person can inspect the books of the company (s 241(2)).
The Court may make any orders about costs, including requiring the company to pay the
applicants cost (s 242). This should be done to protect a bona fide shareholder where the
company stands to gain if the action is successful.
Section 1324 Statutory injunctions
The Court has a discretion to grant an injunction restraining a person from engaging in conduct that
contravenes the Act.
Q1: What conduct does it cover?

o
Two types of conduct:
reasonably informed, and rationally believed it was in the best interests of the company (ie a business judgment rule).
51/56
i.
Where a person has engaged, is engaging or is proposing to engage in conduct that

constitutes a contravention of the Act (civil penalty or offence); attempting to contravene;
aiding, abetting, counselling or procuring a contravention; inducing or attempting to induce
another to contravene; being knowingly concerned in or party to the contravention by
another; or conspiring with others to contravene (s 1324(1)). Penalty provisions include:
Directors duties (s 180-183);
Related party transactions (s 208);
Insolvent trading (s 588G); and
Reductions in share capital (s 256D) or financial assistance (s 260D).
For contraventions of s 588G (insolvent trading, where insolvency was caused by ss 256B or
260A) or ss 256B or 260A (share capital reduction and financial assistance for share
acquisition), the onus is on the company or person to prove that no contravention occurred
(s 1324(1B)).
ii.
Where a person has refused or failed, is refusing or failing, or is proposing to refuse or fail,
to do an act or thing that the person is required by this Act to do (s 1324(2)).
Q2: Who has standing?

o
An application can be made by ASIC, or a person whose interests have been, are or would be
affected by the conduct (ss 1324(1), (2));
The persons interests must go beyond the mere interests of members of the public (but no need
to show that personal rights were affected, or that they suffered any injury; Bell Resources);
Examples:
Do members have standing to restrain breaches of duty by directors? Unclear in

Mesenberg, the NSW SC expressed strong doubts and thought that only ASIC could apply.
However, in Airpeak, the FCA held that shareholders and creditors do have standing.
Presumption: A contravention is deemed to affect the interests of a member or creditor

where it concerns the contraventions in s 1324(1B) (see above) (s 1324(1A)).
Q3: What remedy will be granted?

o
The Court may grant an injunction to restrain the conduct or require the person to do any act (ss
1324(1), (2));
The Court may grant an interim injunction pending determination, if desirable (s 1324(4));
The Court may grant an injunction, whether or not the person would engage in the conduct again,
has previously engaged in the conduct, or there is an imminent danger of damage to any person
(ss 1324(6), (7));
The Court may award damages, in lieu of or in addition to an injunction (s 1324(10)). BUT damages
must be a substitute for or supplementary to the injunction it does not give creditors a general
right to claim damages for breach (Phoenix Constructions).
Section 461 Winding up
Q1: What can the Court order?

o
Under s 461(1), the Court may order the winding up of a company if:
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(e)
Directors have acted in their own interests rather than in the interests of the members as a
whole, or in any other manner whatsoever that appears to be unfair or unjust to other
members; or
(f)
Affairs of the company are being conducted in a manner that is oppressive or unfairly
prejudicial to, or unfairly discriminatory against, a member or members or in a manner that
is contrary to the interests of the members as a whole; or [s 232 remedy]
(k)
The Court is of opinion that it is just and equitable that the company be wound up.
Examples:
Breakdown in mutual trust and confidence (Ebrahimi a company can be wound up
if: 1) company formed on the basis of mutual confidence from a personal relationship
(ie a small company), 2) agreement that all members should participate, and 3)
restriction on share transfer. If mutual confidence is broken, eg by excluding one
member, then the company can be wound up);
Deadlock in decision-making (Re Yenidje Tobacco where the company Constn does
not provide a casting vote to resolve deadlocks, and there is a continuing and
irresolvable deadlock, the company can be wound up); and
Failure of substratum (ie the purpose for which co was established) (Re Tivoli
Freeholds in this case, the company had been set up to provide entertainment.
However, it was taken over, and 70% of its assets were used for corporate raiding.
Thus it was wound up. In order to ascertain the commonly understood purpose of a
company, it is permissible to look beyond the objects clause to things such as a
prospectus, the companys course of conduct and even its name).
The Court will not make an order to wind up if another remedy is available (s 467(4)). An order
under s 233 is usually preferable because the courts have a wider discretion.
Q2: Who has standing?

o
The following may apply for an order to wind up a company: the company, a creditor, a
contributory (member), the liquidator, or ASIC (s 462(2));
Anyone else is not entitled to apply (s 462(5)).
Common law remedies
Four types:
1. Special fiduciary relationship (see page 25);
2. Fraud on the minority, by ratifying breaches by the majority (see page 31);
3. Unfair alteration of the constitution to expropriate shares (see page 7); and
4. Improper allotment of shares that dilute voting power:
o
Also see page 27 an improper purpose of the power to issue shares is to dilute the voting
power of a member;
A shareholder may have a personal right to bring an action where it is alleged that an issue of
shares was made for an improper purpose (uncertain, but this position is favoured by Residues
Treatment and Ngurli). The shareholder can seek an injunction to prevent the share issue.
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TOPIC 11 Corporate insolvency

1. Receivership
What is a receiver?
o
A receiver is appointed by a secured creditor of a company, to take possession of the property

secured by the creditors loan, sell it and repay the secured debt owed by the company out of the
sale proceeds;
Where the security is over the whole undertaking, the receiver may also have the power to
manage.
When can a receiver be appointed?

o
As specified in the loan agreement between the creditor and company. A receiver can generally
only be appointed if the loan agreement has been breached (eg default in payment, creditors
petition, failure to maintain secured property);
Receivers can be appointed by the Court (eg a remedy under s 233(1)(h) for oppressive conduct).
Receivers powers
o
Contained in the loan agreement;
AND s 420(1): a receiver has the power to do all things necessary or convenient to be done to
achieve the objective for which the receiver was appointed (eg, per s 420(2), enter into possession
and take control of property, and sell property);
Receivership terminates when the receiver achieves the object of the appointment.
Receivers duties
o
A receiver must take all reasonable care to sell property for not less than market value, or the best
price that is reasonably obtainable having regard to the circumstances existing when the property
was sold (s 420A(1));
A receiver is an officer (s 9(c)) hence subject to the duties in ss 180-183.
2. Voluntary administration
What is voluntary administration?

o
The object of voluntary administration is to maximise the chances of the company continuing in
existence, or if that is not possible, to result in a better return for the companys creditors and
members (s 435A);
The voluntary administrator quickly assesses the financial situation of the company, and a
creditors meeting then decides the future of the company.
How does it commence?

o
Most common: The directors resolve in writing that the company is insolvent and that an
administrator should be appointed (s 436A(1));
This protects the directors from liability for insolvent trading (under s 588H(5); see page 36).
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What is the role of the administrator?

o
The role of the administrator is to investigate the affairs of the company and to report to creditors;
Administration should run for 21-28 days;
During administration:
The administrator controls the company (s 437A(1));
The administrator is the only person who can deal with the companys property (s 437D(1));
The administrator has the power to remove a director from office, appoint a director, execute
a document or bring proceedings, or whatever else is necessary (s 442A).
Administrators duties
o
An administrator is an officer (s 9(d)) hence subject to the duties in ss 180-183.
What is the position of creditors?

o
There is a stay or moratorium on all claims against the company (secured creditors cannot enforce
security interest: s 440B; unsecured creditors cannot commence proceedings: s 440D);
Creditors can enforce their rights if:
They get the courts consent or the administrators permission;
They began enforcement before voluntary administration commenced (commences the

day an administrator is appointed; s 435C(1));
They have a security interest over most or all of the property (s 441A); or
The secured interest is over perishable property (s 441C).
The administrator must convene a meeting of the companys creditors (s 439A(1)). The
administrator must give written notice to as many of the creditors as reasonably practicable and
publish such a notice, and the administrator must fully inform the creditors. At the meeting, the
creditors may resolve (s 439C):
1.
That the company executes a deed of company arrangement29 (eg the creditors agree to
accept payment of a lesser amount in final settlement of their debts this may be beneficial
if it results in the company continuing as a customer of the creditor);
2.
That the administration should end (eg where they believe that the company can trade out
of its difficulties); or
3.
That the company be wound up (if the creditors cannot reach a compromise).
This resolution ends the administration (s 435C(2)).
3. Liquidation
What is liquidation?
o
The purpose of liquidation is to wind the company up and deregister it.
When can an insolvent company be wound up?
29
The deed of company arrangement binds all unsecured creditors (whether they voted in favour or not); secured creditors who voted in favour (those who did not are free to enforce their
securities); and secured creditors under court order.
Under s 444A(4), the instrument must specify the administrator of the deed, the property of the company that is available to pay creditors, the nature and duration of any moratorium period, to
what extent the company is to be released from its debts, the conditions if any for the deed to come into operation and continue, the circumstances in which it terminates, the priority order for
distributing proceeds, and the day on or before which claims must have arisen if they are to be admissible under the deed.
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By the members (special resolution; s 491);
By the companys creditors (s 497); or
By order of the Court (s 459A winding up commences when order made; s 513A). The
following can apply under s 459P for an order: company, creditor even if secured, member,
director, liquidator, or ASIC.
The company must be insolvent;
Insolvency will be presumed in certain circumstances: for example, there was a statutory demand
for payment by a creditor of at least $2,000 and the company fails to pay it (s 459C(2)(a)). The
statutory demand must require the company to pay the amount within 21 days after service (s
459E) and if the company fails to comply, it is presumed to be insolvent.
Appointment of a liquidator
o
The liquidator takes complete control of the company (ss 477, 506). Directors lose their power to
manage the companys affairs (s 471A);
A liquidator is an officer (s 9(f)) hence subject to the duties in ss 180-183;
The liquidator sells the unsecured assets of the company, maximises the pool of funds available
for distribution (by enforcing any debts owed by others to the company, challenging transactions
that occurred when the company was insolvent, and pursuing directors who have breached the
Act) and distributes the funds according to the rules.
How are the funds to be distributed to the companys creditors?

o
Unsecured creditors cannot pursue their own legal action once liquidation commences (s 471B);
Secured creditors are free to take possession of and sell secured property (s 471C);
Process for distribution to unsecured creditors:
Creditors must prove their debts (s 553);
Unsecured creditors are paid proportionately according to the funds available (the pari
passu rule: s 555) eg if the funds are not sufficient, the creditors may all receive x
cents for every dollar owed by the company;
FIRST some creditors receive priority payment.

Under s 556:
-
Liquidators and administrators get paid in full first; and
THEN, if there is money left over, wages and superannuation contributions of

employees (if the funds are insufficient to pay everyone in this rank, they are repaid
an equal proportionate amount).
ONLY THEN can liquidator pay off all other creditors according to s 555;
NEXT dividends are paid to members (s 563A);
FINALLY return of members capital (Sons of Gwalia).
Within 3 months, the liquidator must apply to ASIC to deregister the company.
56/56

Registration Process and Company Types

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Must be stated on the application, unless the ACN is to be used (s 117(2)(b));

Requirements for a valid company name:

Name must be available (s 148(1)(a)).

Name must contain Limited or Proprietary Limited, as appropriate (s 148(2) or the

However, the veil can be lifted in certain circumstances:

Where company is being used as a sham so as to avoid an existing legal obligation.

In Jones v Lipman, a landowner transferred land to a company in order to avoid an order

Where company was formed to perpetrate a fraud.

Where the subsidiary is treated as agent of the holding company.

the profits of the S must be treated as the profits of the HC;

the persons conducting the Ss business must be appointed by the HC;

the HC must be the head and brain of the S;

the HC must be in effectual and constant control.

Where the subsidiary commits a tort.

A holding company may be liable to an employee of its subsidiary for negligence, on

Where the veil is pierced by statute.

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TOPIC 3 Types of Companies

It must not have >50 non-employee shareholders (s 113(1)). Employee means an

It must not engage in public fund raising (s 113(3)).

Can be either a small or large proprietary company:

Large proprietary company: All other proprietary companies (s 45A(3)).

A company other than a proprietary company (s 9).

It may be listed or unlisted.

The liability of members for the debts of the company is limited to

The liability of members is limited to the amounts that they have

Unlimited with share capital:

Members have no limit placed on their liability (s 9).

A company registered as, or converted to, a no liability company. It

Must have Pty Ltd in name (s 148(2)).

Unlimited with share capital

Must have Pty in name (s 148(3)).

A controls the composition of ABs board (s 46(a)(i));

A holds more than one-half of the issued share capital of AB (s 46(a)(iii)); or

AB is a subsidiary of a subsidiary of A (s 46(b)).

TOPIC 4 Company Constitution and Membership

A company may use:

The replaceable rules in the Act (s 135(1));

Its own constitution (s 136(1)); or

A combination of the two.

A company can adopt a constitution:

After registration, if the company passes a special resolution 4 (s 136(1)(b)).

The constitution as a statutory contract

the company and each member;

the company and each director and company secretary; and

How can this contract be enforced?

Limits on changing the constitution

Where the alteration provides for the expropriation or compulsory disposal of a

For a proper purpose; and

Fair in all the circumstances.

In Gambotto, the majority held that an expropriation to secure taxation and

Under s 231, a person is a member of a company if they:

Refusal to register a transfer of shares

TOPIC 5 Corporate Financing and Dividends

Per s 1070A(1), a share is:

the companys constitution;

(c) capable of devolution by will or by operation of law.

Raising share capital

Consideration paid for share issue

Common classes are ordinary shares and preference shares

Preference shareholders are like financiers of the company (lenders);

Right to vote on general business