Read case and know their facts will allow you to draw similarities, and hence answer exam

question more
easily, as the biggest issue in exam, is being able to identify issue clearly and then relevant Corp Act
Section and case and also REMEDY. Other issue in exam will be time management, as must make sure
you answer each question in exam and do not spend 20 mins answering a 5 mark question, leaving only
5 min to answer a 12 mark question. If exam 3 hours, and has 80 marks, then divide 180 min by 80
marks, means you have 2.25 min per mark, so 10 mark question has 22.5 min time allocated.

When answering state - issue of law, Rules and Legislation, Apply rules give Tentative conclusion
Do revision exercises in book, find website and any possible answers?
Incorporate all tutorial answers
Read and review all chapters, in 3 books, use course text to highlight key points need to cover
Use other books to explain things clearly
Must have case with each statute

Look in other books for cases with answers – test my understanding

Chap 5 - What is effect of registration

Cross-Vesting page 8 – federalisation of the applications of corporate law. Allowed federal matters to be
heard in state courts and vice versa. Allowed state and federal agencies to enforce each others laws. Sun
Set clause – means we can review contractual agreement every n years.

S117 – apply for registration – lists data required, form 201

S118 – ASIC issues a certificate of registration, ACN
S119 – company comes into existence as a body corporate at the beginning of the day on which it is
registered with the name specified in its certificate of registration. Effect of registration: new legal entity: s
124
S 124 – has rights of separate legal person, capacity to contract etc

Salomon v Salomon & Co Ltd [1897] page 154 - Separate Legal Entity, established in this case.
Separate legal nature of a company, that company attains maturity at birth, and that members need not
be independent.
Separate Legal Entity concept
1. distinction between private and company assets – company can own property under s124 and does
separate to the company owners or directors.
2. distinction between private and company debts – unless s588G or s197 applicable, as they removed
limited liability protection.
3. Company can contract with its members – meaning a person can be shareholder, director and
employee
Lee v Lee’s Air Farming Ltd [1961] pg 159– Person can be both Employee and director and member.
Workers compensation claim to be honoured.
4. Company liable in tort to a member – injured employee was able to sue company for failure to
provide a safe system of work, even though employee was also one of 3 directors. Nicol v Allyacht
Spars Pty Ltd 91987) pg 160

Object Clause –contained in, memorandum and articles of association – must be repealed to remove an
object clause that is very limiting, as every possible business activity must be listed, in which the company
might engage. Ashbury Railway Carriage & Iron Co v Riche (1875) entered into a contract
outside of its object clause and contract was therefore deemed not binding on company. New legislation
from July 1998, allows under s 124, that allows business to undertake any business lawful activity.
Before July 1998, and for un-repealed object clauses, the rule of ultra vires (exceeds the power of the
entity) operates, and if business is outside scope, then contract was void.
S 125 – still allows an object clause to be set out, but it only has the effect that company officer has
breached duty, by not complying with company constitution, contract made with outsider will still be valid.

Macaura v Northern Assurance Co Ltd page 159 – Macaura was unable to claim on an insurance
policy held over company assets, because as a shareholder he did not own those assets, the company
did. Principle – company owns assets not shareholder.

Public Company vs Proprietary Company –

S 113 – Proprietary Company – (1) pty can have 1-50 members (shareholders) (3) Prohibited Activity –
cannot raise funds from public that would required a disclosure to investors.
S 114 – company can have minimum 1 member, maximum is unlimited
S199 – 200 – Restrictions on indemnities, insurance and termination payments
S200B – MEMBERS APPROVAL required for Retirement benefits generally required.
S 201 A (2) LTd must have 3 or more directors for public (2 must be australian residents)
S 201 A (1) Pty can have 1 director only – revised since 1995
S201B – who can be a director – must be (1) 18 and (2) not be disqualified under s206
S201G – RR – company may appoint a director
S201H – RR – director may appoint other directors
S201J – RR appointment of managing directors
S201K - RR – alternate director – appointment of
S201M – acts of director remain valid even if their appointment is invalid because did not comply with
constitution or act
S202A RR – remuneration of directors - payments to directors to be determined by COMPANY
RESOLUTION – WHICH MEANS DIRECTORS vote on it – NOT members, as the term by ‘Company
Resolution’ means the directors, not by shareholders in a general meeting.
S202B – Members may obtain information about directors’ remuneration
S250R – Business of AGM – if company listed on ASX, then members can vote on Remuneration report,
but it is non-binding vote.
S203A – company director can resign
S203C – removal of director by members – PTY

S203D – removal of director by members – PUBLIC company – In reality this means that another director
will call a meeting and circulate intention to remove director and in that way remove another director.
Scottish & Colonial Ltd v Australian Power & Gas Co Ltd (2007) pg 426 - procedures must be
followed for removal to be valid.

S203E – director cannot be removed by other directors – PUBLIC company

S206 – director can be disqualified from acting as director, by court, for being convicted/bankrupt, for
contravention of Corp Act . ASIC v Adler (2002) pg 428, Adler breached s180-4 and received civil
penalty s1317E and was disqualified as director under s206C
S211 – is an exception to s208/9, when a Financial Benefit (FB) is given to a related party (director in this
case), as reimbursement for expenses does not require member approval.
s 142 PTY Company must have office, but under s 145, public company must have office and be open to
public.

Advantage / difference of Ltd Company

• Fiduciary duties owed – in partnership to each other, not in joint venture
• Life – perpetuity – company existence not reliant on members who may die.
• Taxation – income split, tax free threshold, company tax rate, flow through of profit and loss
• Cost to setup and maintain – complexity is greater and so is cost
• Privacy – none in a public company
• Ability to Raise capital is greater through debentures, shares, where as Pty can only raise money
from a maximum of 50 members
• Separate legal entity rule – protects assets of directors and members, not liable for company debts
• Limited liability – shareholders are limited to pay any unpaid portion of share and current
shareholding, cannot make claim on personal assets. (promotes investment, market efficiency,
reduce cost of capital)
• Public listed company can raise capital from public on stock market, if listed on ASX or through
prospectus
• Easier to sell shares in public company then in PTY, especially as Pty can have rules limiting sale

S45A PTY Small vs PTY Large – Small if 2 of the following criteria are present:
• The consolidated gross operating revenue for the financial year of the company and the entities it
controls is less then $25 M.
• The value of the consolidates gross assets at the end of the financial year of the company and
the entities it controls is less than $12.5 M.
• The company and the entities it controls have fewer then 50 employees at the end of the financial
year

What is veil of incorporation – Under what circumstances is Corporate Veil lifted, under
corporate law and common law
Pierce – are the rights and liabilities of the company those also of the shareholder?
Lift – what is knowledge and intention of directors and members to be attributed to the company
When is court likely to lift corporate veil - look beyond to see who is in charge and why company was
formed.
Examples under common law where court is likely to lift corporate veil
• Gildford Motor Co Lt v Horne p 167– past director trying to avoid contractual obligation to not
take existing customers, try to hide behind a newly formed company and avoid contractual legal
obligation.
• Creasey v Breachwood Motors Ltd [1993], employee sued for wrongful dismissal, and
company moved assets to another company they controlled, and when time came for damages to
be awarded, there were no assets available. Corporate Veil lifted and company that received
assets was liable for debt. Avoid contractual legal obligaton.
• As a vehicle for Fraud- Re Darby; Ex parte Brougham p170 – a dummy company was used to
conduct fraudulent activities, so they could act in breach of their duties of disclosure as promoters
of the company that the public subscribed to. Ordered to surrender secret profits.
• Breach of Fiduciary Duties – Green & Clara v Bestobell p171– director created company,
competed for contract, won it, made private profit, breach fiduciary duties. Corp Veil lifted, made
to account for and hand over profit.
Does the principle of separate legal entity apply to corporate group?
• Walker v Wimborne p173 – assets of a corporate group cannot be pooled to pay debts for
corporate group. The debts incurred by each company belonged to that company, not to the
corporate group collectively.
• To Act an agent in a corporate group - Smith Stone & Knight Ltd v Birmingham Corp p 175
– subsidiary company was considered to be an agent of parent and therefore single entity rule
applied, and therefore parent could sue on behalf of subsidiary, but they had to meet the 6 criteria
for agency relationship between parent and subsidiary.
• Subsidiary created to avoid legal obligation, and therefore should be able to lift corp veil
and enforce contract on parent. In Australian courts this matter is not applied rigidly and is a
new and emerging area, as the realities of business and how they operate are incorporated into
the law. James Hardie – p 182 tried to separate liability for asbestos health related damage to a
separate company and give it insufficient funds to compensate all claims, Isolate main company
from future liabilities. Water Front Dispute – Patrick Stevedores Operation no 2 Pty Ltd v
Maritime Union of Australia (1998) – corporate group company’s restructured, so all assets
held by one company and another employed people with new clause that in event of industrial
 dispute, they could be fired. Claims by employees against non-existent assets resulted. Corp Act
s 596AB was introduced to protect employee entitlements.
• ACN 007 528 207 Pty Ltd v Bird Cameron pg 177 this case provides criticism of the 6 criteria
as per Smith Stone to define agency, as judge gave more weight to first criteria – profit, rather
than last 5 - control.
• Ascot Investments Pty Ltd v Harper– investment sham

How AGENCY relationship established between parent and subsidiary company

Smith Stone & Knight Ltd v Birmingham Corp p 176 6 points
• Were the profits treated as the profits of the parent? If they receive profits as franked dividends
then the parent is not treating the subsidiary’s profits as it’s own, as it must wait to received
dividends at the same time and in same ratio as all other shareholders.
• Were the persons conducting the business appointed by the parent?
• Was the parent the head and the brain of the trading venture?
• Did parent govern the adventure, decide what should be done, what capital should be embarked
on the venture?
• Did the parent make the profits by its skill and direction?
• Was the parent in effectual and constant control?
S 46 When is it a subsidiary ?
1) control board composition 2) can cast more than 50% of maximum votes in general
meeting
3) holds more than 50% of issued share capital that has voting rights
S50AA – defines what is control

When is CORPORATE VEIL lifted under STATUTE

S 197 - Director Liable for debts and other obligations incurred by corporation as trustee - trustee acts
outside of scope of duties or terms of trust deed and is therefore liable.
S 267 – company officer cannot raise charge on assets to avoid company creditors when they are
insolvent
Charge – grant security in form of a charge over company assets, and become secured creditor.
S 588 G – trading while insolvent, means directors are therefore liable for company debt. Aimed at
stopping risky behaviour of directors. Has effect of overturning s124, as directors can be made liable for
company debt.
S 588 V – Holding company knows that company is insolvent and still trades, the corporate veil is then
lifted.
S13 ASIC ACT - ASIC is authorised to initiate investigation – need suspicion?
S 294 - ASIC is authorised to force company to lodge financial statements and have them audited
ASIC main powers: Power to exempt compliance, Power to investigate and gather information, Power to
take action in case of breach of the law, Enforcement powers: Criminal, Civil, and Administrative

Chapter 6 Pg 195 -203 Constitution and replaceable rules

INTERNAL MANAGEMENT RULES
Corp Act has set of rules, called replaceable rules that govern the internal admin and management of
company. Company may be formed with a constitution that replaces or modifies any of the replaceable
rule.s

S 140 Effect of constitution and replaceable Rules.

(1) – effect is that they are a STATUTORY contract
a) between company and each member
b) between company and each director and company secretary (can become employment
contract)
 c) between member and each other member
NOT BETWEEN MEMBER AND DIRECTOR
S 141 – Table of replaceable rules in a table that are in Corp Act page 196-7.
S 134 – internal management of company can be by replaceable rules and or constitution
S 135 – (1)Replaceable Rules APPPLY to which companies,
(2) company’s constitution can displace or modify replaceable rules.
(3) failure to comply is not a contravention of the Corp Act, so criminal/civil liability and injunctions
do not apply, but the effect of contravening a contract do apply. Remedy – If s140(a) or (c) are breached,
then remedyis injunction or specific performance as per a breach of a contract, in order to have the effect
of having the replaceable rule (RR) observed , rather than it being a contravention of the Corp Act which
has a the remedy of damages etc

S 136(2) – Company constitution can be modified by a SPECIAL RESOLUTION, which requires 75% of
eligible voters to agree.
Remedy if constitution is breached as per s135(3)
SH can sue company, but not be awarded damages directly. Court will issue injunction and if company
breaches injunction, then court will and can claim damages.
Director can sue company and be awarded damages.
Hickman v Kent or Romney Marsh Sheep-Breeders’ Assoc [1915] – members may enforce only those
provisions in constitution and RR, in order to protect a member against conduct that impacts on their
rights as a members in their capacity as members s140(1). Minority oppression rules are not so
limited.

Exceptions exist to an amendment of constitution are when the issue of Protection of

minority Shareholder from majority shareholder
S 140(2) – effect of modification of constitution after member became a member. Member is not
bound by acts such as requirement to buy additional shares, unless they agree. You cannot force a
member to undertake certain steps, simply by modifying constitution.

Allen’s test ‘Bona fide and in the interest of the company as a whole’ when assessing the
validity of alterations to the constitution - Peter’s American Delicacy Ltd v Heath (1939) page 202
resolution, to alter constitution, to pay dividend with shares rather than cash, and assigned based on
proportion of paid up capital, rather than share value held by member. Court upheld this as being bona
fide, as it did benefit company as a whole.

Gambotto v WCP LTd (1995) Page 203, pg 562 protection of minority, as Company could not
amend constitution to purchase (expropriate – take away property rights) (by conferring a new power), Mr
Gambotts’s shares, unless it is for a proper purpose and fair ,(rather than the old ‘Bona Fide’
test), which it was not in this case. Fair means that money offered for the shares must be equal at least to
value of shares. There must be procedural fairness, in that no undue influence allowed, must make offer,
then hold meeting, all relevant facts dislcosed ....
Reasons that are NOT taken as being a proper purpose are
– substantial savings in administrative costs and tax. NO
A proper purpose is when
• SH is competing with the company - YES
• SH’s membership would result in loss of its business (must now be owned by Australian citizens
only.YES)
Gambotto case applied in Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd [2007] p 562
Most courts however do not apply Gambotto, but rather use s661 to compulsorily acquire shares.
However onus of proof is reversed and the majority must prove that they undertook the amendment for
a proper purpose and fair. Pg 563
S250E(1) each member has one vote when show of hands called and when polled, on vote per
share held.

Shares can forcibly bought from share holders now. Pg 667. Proper purpose is defined based on the
benefits to the corporation as a whole page 667
s661A – compulsory acquisitions and buy-outs following takeover bid – 75%
s661E – object if value is not fair
S664A – Threshold for General Compulsory Acquisition Power – 90% holder,
S664E – Holder’s right to object to the acquisition
S664F – Court’s power to approve acquisition – (3) must be fair value. Proper Purpose rule??

SH’s do not manage company

S198A Corp constitution importantly sets out he power distribution between members and directors. If
s198A is adopted, then members are not permitted to tell directors how to manage the company.
Members can only direct the board is to alter constitution to change distribution of authority. This would
required special resolution s136(2), and modification to replaceable rule 198A. Case Automatic Self-
Cleansing Filter Syndicate Co LTd V Cuninghame (1906) where a majority SH passed resolution to
direct board to sell assets to another company, was deemed invalid by court, as the allocation of power to
manage the company remained with the board. The SH would have to alter distribution of power in
constitution first.

Between company and each member: In their capacity as members only and not in their capacity as
outsiders. Hickman v Kent or Romney Marsh Sheep- Breeders’ Association – articles of association
required arbitration if dispute arose and court agreed and halted court proceedings in favour of arbitration.
Eley v Positive Government Security Life Assurance Co (1875) pg 199 – Constitution stated E was to
be solicitor, but that can only be enforceable if it is an employment contract. Corporate Constitution can
only be enforced by a member, if their membership status is affected. E the solicitor was not a member.
S198 – Powers of Directors – Replacable Rule
s198A ; Note : directors manage company to keep it running and provide skilled knowledge and
expertise, and the shareholders (SH) do not. The SH can ask questions and vote at the AGM. The
Constitution is drafted to give the SH some rights over the company, such as cannot make investment
over $10million without approval s198A (2)

S124 is a separate entity and can only undertake contracts through directors actions, who are given
authority.
Ability of board of directors and members in general meeting, to act as company, depends on how power
divided, based on the authority bestowed on them by replaceable rules, company constitution,
Corp Act.
S198A – Powers of directors
(1) business is to be managed by direction of directors.
(2) Limitation on powers of directors – directors may exercise all powers of the company, except
those that the Act or Constitution require to be exercised in general meeting.
S198C Managing Director –
• Power given to Managing director to manage day to day affairs, but MD is accountable to the
board. Must ratify contracts at next board meeting and provide strategic direction.
• directors may revoke powers.
S198D – Delegation - powers of a director maybe be delegated to any other person or committee...etc,
unless constitution provides otherwise.
S198E – Single director/shareholder PROPRIETARY COMPANY
S198F – Right of access to company books – (1) rights while director – access too books, but not
financial records?! And only for purposes of a legal proceeding

Chapter 7 – p 234-242 Corporate liability in contract, Indoor

management Rule
S124 Corporation as a separate legal entity, can enter contracts as such and may be sued and found
liable for breaching a contract Ferguson v Wilson (1866).
But who enters a company into a contract? It will always be a person who has been given authority such
as under s198A, and therefore corporate liability will always be derivative.

Lennard’s Carrying v Asiatic Petroleum [1915] page 213 – organic approach to attribution states
that people entrusted with a higher degree of responsibility for management of company will be said to
represent company’s directing mind and will. Facts of case were that Mr Lennard was director to both
companies and his knowledge of faulty boat engines was the knowledge of the company who contracted
for use of the boat. Then defence that they had no knowledge of problems could not be used.

The test in HL Bolton Engineering Co Ltd v T J Graham & Sons Ltd [1957] p 213 Primary
liability (directing will and mind), or Secondary Vicarious liability( servants or agents who are the
hands that do the work, and corporation is responsible for the acts or omissions committed by a person
with whom the corporation has a special relationship.)

Corporate liability in Tort – negligence p 214 – person who suffers loss as a result of company
negligence may sue a company. Primary. Secondary – employee must be acting within scope of his or
her employment. ALSO when a company commits tort in course of business, it is vicariously liable, rather
than primary or secondary.
Lennard’s Carrying v Asiatic Petroleum [1915] page 215. Primary liability .
Lloyd v Grace Smith & Co [1912] pg 217, Mrs Lloyd transferred ownership of cottage to lawyer
employed by Grace, in course of employment and within scope of authority within firm. The employers did
not authorise or condone these actions, but as employee was in scope of his duties, they were vicarious
liable.
Hollis v Vabu Pty Ltd (2001) page 219. Independent contractors that provided bicycle courier services,
that were not employees but represented the company by wearing the uniform, were deemed to have the
same vicarious liability as employees, for the company.

Criminal liability – a guilty act (actus reus) only becomes criminal when it is committed with guilty intent
(mens rea)
Corporate liability can be
• Primary (S & Y Investments (No 2) Pty Ltd v Commercial Union Assurance Co of Australia
Ltd (1986) page 222 – death caused by accident by manager with guilty intent in course of
employment)
• Failure to perform a non-delegable statutory duty.
• Secondary – only possible under statutory criminal law. Either ASIC or Director of Public
Prosecutions (DPP) under s1315 will prosecute, and must commence with 5 years of offence. –
ABC Development Learning Centres Pty LTd v Wallace [2006] p 223– ABC was guilty of the
offences by reason of the failure of junior low-level staff as the company breached Children’s
Services Act 1996 . This goes against the previous organic theory that would only allow
prosecute the manager, allowing company to be liable.
• Accessorial Liability pg 224 – director commits crime against company, those crimes do
not therefore become the liability of the company. R v Goodall (1975) pg 225 consequence of
Salomon’s case.

CORPORATE LIABILITY IN CONTRACT Page 234

AUTHORITY – ACTUAL (EXPRESS / IMPLIED) OR APPARENT

Need to first establish that contract was entered under authority.
s127 Companies entering contracts directly with a 3rd party by ‘executing contract’.
(1) requires no seal, but signature of 2 directors or 1 director and secretary, as if they were the
company.
(1) (c) PTY - requires that director to sign
(2) requires company seal s123, to be affixed and witnessed by 2 directors or 1 director and secretary.
(2) (c) PTY - requires company seal s123 and that director to witness.

Contractual liability is based on whether that person had authority to enter contract on
company’s behalf.
Principal – is Board of directors.
Agent – person who enters contract on behalf of principal.
3rd Party – contractor – other person who agent signs contract with.

s126 - Contract entered through agent - Authority is ACTUAL and is either Express or Implied from
statements or from the principal’s conduct. Freeman & Lockyer v Backhurst Park Properties (Mangal)
Ltd pg 235 - Implied authority of an individual director, Kapoor acted as MD, but was never appointed
and by the board’s conduct, Kapoor had authority to enter into contracts of a kind. Contract was upheld
as being binding.

Problem – not duly elected, but he is a defacto director. Is the contract binding when made by a defacto director?
Yes

APPARENT or OSTENSIBLE authority, which arises when principal is absent, and person has
appearance of authority. This arises when you have DEFACTO directors, who have not been properly
elected, but act in position. They do have apparent authority. Under ESTOPPEL, a principal may not
avoid a contractual obligation by claiming an agent did not have actual authority, when they had apparent
authority, as contractor has relied on the authority provided.

Apparent authority page 236 as per lord Diplock in Freeman & Lockyer v Backhurst Park Properties
(M

CONDITIONS THAT MUST BE MET FOR APPARENT AUTHORITY

1. Person made representation that the agent had authority to enter into contracts of a kind on behalf of
company. This representation can be by explicit word, or by conduct, where a board had previously
acquiesced to agent acting as MD.
2. The person who made that representation was a person with actual authority, legitimately appointed
by Principal.
3. Contractor was induced and relied upon the representation made.
4. Constitution did not deny capacity to enter contract of this kind, or delegate authority.

If not the above, then not binding, except if company ratifies contract
Crabtree-Vickers Pty Ltde v Australian Direct Mail Advertising& addressing Co Pty Ltd (1975) pg
236 – high court of Australia has accepted the principles of apparent authority.
Panorama Developments (Guildford) Ltd v Fidelis Furnishings Ltd [1971] – pg 237/418 – company
secretary has implied authority to manage the administrative affairs of the company, but not to manage
the company.

INDOOR MANAGEMENT RULE pg 237

First must establish that contract was signed with authority as above, s127 directly with company, or
delegated authority 198D to name two. Outsiders must be able to assume that internal process has been
followed, and director did not fraudulently sign contract.
S128 - Entitlement to make assumptions S128 (1) Outsider who is an innocent party has right
to assume that all internal procedures as listed in s129 have been followed by a
company unless they know otherwise. Case Royal British Bank v Turquand (1856) pg 238
loans to be undertaken required SH approval, which was not sought. Company then refused to repay loan
that directors had fraudulently undertaken, as it contravened the constitution. Bank was an innocent party
and had no knowledge that internal procedures had not been fulfilled. Loan was payable. Company did
try to claim that constructive notice s130 had been given, and that therefore the bank was at fault in not
checking for SH approval.
S130 – information available to the public from ASIC does not constitute constructive notice.
S128(3) Effect of fraud by officer or agent – outsider can still make assumptions, even if officer
acts fraudulently or forges document.
S128(4) Effect of knowledge or suspicion that assumption is incorrect - Parent company knew that a
director did not have full authority, as he had not been elected formally, and had only assumed role, and
also that the nature of the transaction where a loan was given with no security, should have raised
suspicions as the subsidiary company would gain no advantage by entering into the contract. Therefore
parent company could not enforce contract and rely on assumptions as per s129. Northside Developers
v Registrar General (1990) page 239 – provides an exception to Turquand’s rule, as suspicion should
have been raised, and put Barclay’s bank on inquiry, as there was no commercial advantage for
Northside by entering into contract, it was just extracting money from land it held, and loan was unrelated
to the business. Therefore futher inquiry must be made before document will be assumed to be valid. IN
A SENSE THE REMEDY IS THAT THE DOCUMENT BECOMES INVALID. Company cannot avoid a
contract entered into on its behalf by an officer who has breached their fiduciary duty, where the outsider acts in
good faith without notice of the breach of duty. If a past director knew that the object clause was not being
met, then they cannot hide behind this assumption as per s 129.

ASSUMPTIONS THAT CAN BE MADE UNDER S128

S129 – entitled to make assumption that the contract or business activity being commenced, is in
compliance with the companies object clause, even thought this information is freely available as per s
130 constructive notice.
129(1) corporate constitution complied with
129(2) director or company secretary properly appointed AND has authority- Person named as
director or secretary in lodged documents, has authority and was duly appointed Bank of New Zealand v
Fiberi Pty LTd (1993) page 242 – bank had inside knowledge of company and therefore should have
asked for validation that company secretary was duly appointed. Forms exception to Turquand Rule.
129(3) officers or agent held out by company has authority and was duly appointed
129(4) Proper performance of duties by officers and agents
129(5) document duly executed without seal as per 127(1)
129(6) document duly executed with seal as per 127(2)
129(7) Authority to warrant documents genuine
S130 – information available to the public from ASIC does not constitute constructive notice.

Remedies for Corporate Misconduct page 230

When is director made liable for contract, rather than just compensation or damages or a fine?

Strict Liability - A rule specifying strict liability makes a person legally responsible their acts and
omissions regardless of ie product liability.
Jointly and severally liable – 2 or more parties will be held responsible to repay a debt, and if one has
less resources then the others will pay more.
Contravene – seems to imply that person who contravenes has liability for contract, not just damages

S1318-1327
S1308A – Application of criminal code applies to all provisions of Act unless provision states otherwise.
S1311 – General Penalty Provisions – minimum $550, maximum individual penalty is $220,000 and/or 5
years imprisonment. (1) Offence - a person who contravenes the Act.
S1312 – Corporations face maximum penalty 5 times individual, $1.1 million
S1318 Power to grant Relief (1) discretion to relief person from liability if they have acted honestly, and if
the court deems it appropriate to excuse the person.
S1322 – Irregularities – (2) court can forgive procedural irregularities, which contravene ACT, if no
substantial injustice to any person has occurred.
S1322(3) Effect of irregularity on meeting/meeting notice – meeting is to be void. Ie. Director not invited
S1324 – Injunctions – (2) grant injunction to force action and hence compliant with Act.
(6)Grant injunction to restrain a person that would contravene the Act.
S769 – PROVIDES FOR BOTH CIVIL AND CRIMINAL LIABILITY IN RELATIONS to offences against
those found in chap 7 of corp act – financial services s760 – s1110

Civil Penalties under corporation ACT

Pecuniary Penalty – fine maximum $200,000 and/or
Compensation orders and/or
S206C Disqualification order as a director – ASIC v Adler (2002) page 233 – Adler, Williams were both
disqualified, fined, ordered to compensate and made jointly/severally liable for debts. Shows that person
can be fined under several different breaches of Act at same time and that this is valid.

Chapter 8, Pg 250 – 256, Promoter – s131-133, s711, s728-9

PROMOTER - Definition – not in Corp Act, but is in Twycross v Grant (1877) page 250, person
involved in formation of a company and has some duty towards the company.
ACTIVE promoter – negotiate preliminary contracts, prepare constitution, fundraising documents,
payment of registration fees.
A lawyer, accountant or banker who is contracted to provide professional services is not a PROMOTOR,
if they act purely in their professional capacity Jubilee Cotton Mills Ltd v Lewis [1924].,

PASSIVE/INACTIVE Promoter is defined as someone who plays passive role in role in forming company,
and are not directly responsible for incorporation. But but who stood to profit and raised capital to enabled
company to carry on business but not participating, Tracy v Mandalay – p 251

DUTIES of a promoter – promoter automatically owes fiduciary duties to the company Aequitas v AEFC
(2001) pg 251. If in a small PTY company, an independent board is not possible, then full disclosure to be
made to existing or potential shareholders,
How long does the duty last? Duty owed for the entire period during which a person is a promoter
Duty to make DISCLOSURE, avoid conflict of interest, act honestly and in best interest of company.

Erlanger v New Sombrero Phosphate Co (1878) pg 252 – Erlanger made private profit by selling island
at an inflated price to company, which was approved by board that had puppet (nominee) directors of
Erlanger. Promoter breached fiduciary duties and contract was rescinded and island returned to Erlanger
with purchase price recovered.

Gluckstein v Barnes [1900] pg 254 Full disclosure of all private profits made is required to an
independent board. Normally promoter’s secret profit can only be recovered by rescinding contract, but
here an exception arose, as secret profit was separate from contract price. Liability is joint and several
for promoters

REMEDIES for breach of PROMOTER DUTIES–Company must sue for breach, as duty owed to
company.
• RESCISSION of contract – use when promoter makes private profit and does not disclose to
company. Rescission restores parties to their pre-contractual position – Erlanger (case Tracy
was awarded costs also in order to restore to previous position), unless right to rescission can be
lost when parties cannot be restored to their original positions, due delay, contract has been
affirmed, innocent 3rd parties have acquired an interest in the property. Under Gluckstein v
 Barnes, exception arises, allowing contract to not be rescinded, when secret profit can be
treated as separate.
• RESCISSION OF CONTRACT + DAMAGES – Damages can be awarded if promoter’s
misrepresentation is fraudulent. Re Leeds and Hanley Theatres of Varieties Ltd [1902] where
promoter fraudulently omitted to disclose secret profit, and company was awarded the secret
profit as damages.
• Constructive trust as a remedy – Can use this remedy when promoter has acquired property
for the company, but retained it for personal use. Company then acquires constructive trust order
from court, to requre promoter to hand over the property.
• Statutory provisions when corporate fundraising undertaken by promoter –
S711 – must disclose any conflict of interest that promoter has, and if not complied with then s728(1)
S728 – impose civil and criminal liability for false/misleading/omission statement in fundraising docs.
S729 – investor can seek compensation who suffers loss or damage through reliance on defective
disclosure doc

Pre-registration contract – contract entered into on behalf of the company before formally
registered with ASIC. Undertaken by promoter, to take advantage or market conditions. Issues is the
contract is not valid as there is no Separate Legal Entity to form contract with. Avoid this problem by
buying shelf company.
When is company bound before incorporation? S 131 – 133 attempts to ensure they are liable.

S 131 CONTRACTS BEFORE REGISTRATION

S 131 (1) – RATIFICATION AFTER REGISTRATION – When is the company bound? What are the
conditions
a) Company must be registered
b) Must ratify contract in reasonable time
S 131(2) – Liability if contract is not ratified, or enter into a substitute for it (terms must be same for
novation) or company is not registered. Person who entered contract is liable for damages. The amount
recoverable is the same as that which would have been awarded as damages if the contract had been
ratified, but was breached by the company.
Bay v Illawara Stationery Supplies Pty Ltd (1986) – an accountant signed a pre-reg contract for office
supplies and was held to be liable, as the contract was not ratified. Only he was liable on his own, but he
could sue the other promoters. NOTE – employee can sign a contract, and bind company, not just a
promoter
S 131 (3) Power of the Court – if the company completes registration, but does not ratify pre-registration
contracts, the Court can intervene and take any action it deems appropriate, such as order company to
pay damages to person, transfer property or pay a party in contract. However, this does give person who
entered into contract the right to be indemnified against the company under s131(2)
S131(4) – promoter can still be liable for damages awarded to innocent party to pre-reg contract, if the
company once it has ratified the contract, still fails to fulfil the contract. This section is aimed at promoters
who are major shareholders of company and acts as promoter, and leaves a company with no assets,
or undercapitalised.
S 132 (1) – a party to the pre-registration contract, may release the person from all or part of their liability
under section 131, by signing a release.
132(2) – Normally under the rules of equity, where an injustice must not occur, a person would have
rights to be indemnified by the company for damages under 131(2), but this section 132(2) specifically
removes that right of indemnification.

S 133 – this part replaces other rights and liabilities

• When is the company bound? S131(1)

• where a non existing company enters into a contract and the company is formed in, company is
bound by the contract if it ratifies the contract in a reasonable amount of time.
• When is the company not bound? S131(2)
• Who is liable for non-performance?s131(2) &(4)
 • Recovering against pre-registration company s131(3)

Fact: Libo entered into a pre-registration contract on behalf of ‘Glory’, as authorised by his co-promoters.
The company failed to ratify the contract under s131(1) and Libo would be personally liable under s131(2)
for the cost of breaching the contract.

Fact: Shang and Deepa made a profit of $50,000 from the creation of the company. As Shang and Deepa
are both promoters of the company, as per Erlanger v New Sombrero Phosphate Co (1878), they
automatically owe a fiduciary duty to the company, which state they must act in good faith and in best
interest of the company, not have a conflict of interest, no secret profits Gluckstein v Barnes and have a
duty of full disclosure. Remedy for the breach of fiduciary duty will be that the company sues the
promoters, and recovers the secret profit or creates a constructive trust over the property at issue.

Fact: Joseph is not a member of the company and can therefore not seek to enforce any aspect of the
company’s constitution, as under s140, the corporate constitution is a statutory contract: case Eley v
Positive Government Security Life Assurance Co (1875)
• between the company and it’s members
• between members
• between company and officers of the company.
Joseph’s only path is to sue the company as an employee.

Chapter 9 – Corporate FUNDRAISING

s113, s700, s704-6, s708 – 19, s723-29, s736, s761A
Disclosure documents required, when investors invited to provide capital as investor equity, shares,
debentures (debt), and aim of disc docs are to promote disclosure of info, that investors reasonably
require in order to make informed investment decisions, and protect investors from exploitation. The
availability of reliable info is at the heart of an efficient capital market. Promotes cost-effective access to
info. Consumer protection. Disclosure docs can also protect company, by identifying risks involved in the
investment opportunity offered. Disclosure docs create legal rights and obligations between investor and
person making offer, and if misleading statement or omission of info occurs, s728,s729

Raising capital: Pty co: s 113 S113 – Proprietary Company – (1) pty can have 1-50 members
(shareholders) (3) Prohibited Activity – cannot raise funds from public that would required a
disclosure to investors.
S705, S709 – 4 different types of discl docs can be offered, and if money to be raised is < $10million
or they are meet an exception as per s708 (Offers that do not need disclosure), then full prospectus does
not have to be offered under s709(4).
• A prospectus for the offer (s 710, 711); or (only if raising >$10mill or s708 no apply)
• Short form prospectus (s 712)
• A profile statement for the offer (s 709, 721) – can be sent with offers instead of prospectus, if
ASIC approves under s721.
• An offer information statement for the offer (s 709, s 715). To be used instead of full prospectus
when raising <$10mill.

Raising capital: Pub co s 706, s 727.

S706 – issue offers that need disclosure – when an offer of securities (shares, debentures s761A defn)
for issue, is made, then disclosure to investors is required under s706, unless exempted under s708,
708AA
S708 Offers that do not need disclosure –
• – personal offer made to max 20 people, in any 12 month period, with no more than $2mill
being raised
(8) – sophisticated investor – mini amount is >$500,000 or person has net assets of $2.5 mill or
gorss income > $250,000, or offer made to company or trust controlled by person, and person
has income or assets as above
 (10) – offer made through license dealer, who believes on reasonable grounds, that person has
previous experience in investing, which allows them to assess the merits of investment. ASIC v
Maxwell (2006) – offer made to investors and Mr Coakley made no investigations into financial
circumstance and therefore had no reasonable basis to apply s708(10) exemption. Remedy –
s1041h(1) misleading conduct, s1324 – injunction restraining him from making offers.
(11)- professional investors, as per s9 defn – have financial services license, trust of
superannuation + assets >$10mill, or person who controls investment assets for securities
>$10mill
(12) – offer made to senior manager of company
(13) existing security holders. Or debenture (14) Offers under dividend reinvestment plans and
bonus share plans
(15) offer for no consideration – other than options!
(17) (17A (18) offer made in scheme of arrangement, takeover, or deed of company arrangement
An Australian authorised deposit –taking institution as per s9 Australian ADI – means a BANK
Rights issue – when existing members are given opportunity to purchase in proportion to their
shares. No disclosure doc required under s798AA(2) if made by a company that has continuous
disclosure requirements, as the information will be available already.

S718 – must lodge document with ASIC prior to distribution. Rule abolished, to avoid investors
assuming ASIC take responsibility for contents of prospectus as per s711(7)(b). If offer is of unlisted
securities, then must wait 7-14 days after lodgment s727(3), known as exposure period, as this allows
ASIC to selectively check discl docs for compliance with s700 – s742.
S727 – offering securities without a current disclosure document
• Offer of securities needs lodged disclosure document – to be lodged with ASIC
• disclosure doc, must accompany application form for an offer for a security.
Problem with the disclosure document
S728 – misstatement in or omission from disclosure document
S729 – right to recover for loss or damage resulting from contravention – people listed
who are liable i.e person who made offer, each director of body making offer, person named in disclosure
doc who gave consent for their statement to be included, a person who is involved in contravention of
s728(1)

S739 – if ASIC finds a doc to be defective, misleading /deceptive, omission of info, can issue stop order.
Company restrained from continuing fundraising, until defects rectified. Will do so if contravention of s728,
715A, or s734 occurs. Defective as per s739(7), refers to any misleading statements that a person makes
and does not have REASONABLE grounds to support.
S741 – ASIC can issue exemptions or modifications to requirements in fundraising ile. Offer made
on internet not directed at people of Australia.

STANDARDS OF DISCLOSURE DOC – what is in it?

S710 – offeror is responsible to decide what info is to be included, and requires prospectus to provide all
the info investors reasonably require. If investor thinks reasonableness was not fulfilled, then defence of
s731, due diligence can be used, but officer, must be able to show they took reasonable steps.
S711 – compulsory info to be included, fees of promoters, directors, underwriters, advisors. If a personal
interest not disclosed, then a side deal will not be enforced under Kent v Aspermont LTd [2003]
S713 – if company has already undertaken enhanced continuous disclosure and therefore this
information can be obtained from ASIC s713(3), then the prospectus does not need to repeat this
information, but only add relevant information required for this offer.
S715A – worded clearly and not be included every conceivable risk, merely as a tool to limit liability,
otherwise asic will issue stop order un s739.
S722 - $$$application money to be held in trust and refund investors if IPO fails. If not followed, then
breach director duties, especially where funds are used for personal use by a director as per ASIC v
Warrenmang Ltd [2007]
MINIMUM SUBSCRIPTIONS – S723 S724 and Anemtech Ltd V Eyres Reed McIntosh Ltd (1986) –
cost not to be born by subscribers, if mini subscriptions not met. Contract voidable – Spangaro v Corp
invest aus funds mag (2003)
S723 (3) renders void any securities issued or transferred, if disclosure doc stated they would be listed
by ASX and this failed.
S724 – same as s723 – but in relation to securities that have not yet been transferred.
S1322(4)(d) Extension of time can be given to comply with s723/4, but only if shown to be honest
unintended failure to observe procedural fundraising requirements, as occurred by secretary in Re Wave
Capital Ltd (2003), but secretary was required to pay court costs from personal funds.

Pg 283 – 290 Prohibitions, Liabilities and defences

RESTITITUION - If a disclosure doc is required, as no exemption under s708/708AA, and it was not
lodged ASIC as per s727(1), then as per ASIC v Karl Suleman Enterprizes Pty Ltd (in liq) {2003},
when an offer is made with no disclosure doc, then the remedy is under civil law remedy, where persons
enticed to purchases securities by illegal offers, may obtain RESTITUTION according to equitable
principles.
S728 / s1041H – litigation based on defective disclosure document that is misleading or deceptive
conduct under s728, s729, s710-715 or ‘tricky’ s715A. Fraser v NRMA Holdings LTd (1995) – gives
definition of misleading and deceptive – NRMA was to be demutualised, and prospectus failed to
adequately explain why members would be ‘better off’ and did not include dissenting directors reasons,
and did not list the disadvantages. Prospectus stated ‘free shares’, but they were not in fact free. Meeting
to present prospectus was prevented by court injunction as prospectus was misleading and deceptive
under s728.
PROFIT forecast must be on a reasonable basis GIO Australia Holdings Ltd v AMP Insurance
Investment Holdings Pty Ltd (1998)
ASSUMPTIONS – information can be misleading if it is presented in isolation from assumptions and a
descriptions of the methodologies used to develop the info. Westfi Ltd v Blend Investments Pty Ltd
(1999)
S719 – supplementary and replacement disclosure documents can be lodged with ASIC and present
an opportunity to cure defects, when wording was not clear, or offeror becomes aware that info is
missing, deceptive or new circumstances have arisen. After docs lodged, they must accompany offer or
supersede original docu.
S729 – breach of s728, gives rise to civil liability under s729, where a person has suffered loss or
damage, because of defective disclosure, from any person identified under s729(1). Cadence Asset
Management Pty Ltd v Concept Sports Ltd (2005) – Concept sports made misleading and deceptive
forecast for sales revenue in prospectus, and plaintiff purchased shares and onsold, but later sued for
defective prospectus under s728 and s710 non compliance with disclosure provisions. As shares were
sold, under Houldsworth’s 1880 case the only remedy was by first rescinding their original share
purchase, but this was not possible, as shares sold on already. New precedent was set allowing loss to
be recovered from company due to defective prospectus. The Corp Act 2001 was not to be read down
as being limited by judicial precedent, such as Houldsworth’s case to provide powerful remedy.
Section 729 deals with the right to recover compensation for loss or damage resulting from a
contravention of s 728(1).
CRIMINAL - Contravention of s 728(1) is a criminal offence only if the misleading or deceptive statement
or omission is materially adverse from the point of view of an investor: s 728(3).
Who are the people that will be liable?

DEFENCES
S 731: Due diligence for prospectus – must show they made all enquiries, that were reasonable in the
circumstances, and after doing so believed statements were not misleading or deceptive, and no
omissions from prospectus. Helps to have due diligence committee with paper trail of records.
S 732: Lack of knowledge defence for offer info statements and profile statements – this gives a less
stringent version of the due diligence test, and they must only proof ‘they did not know’., but in
application, this is no always an effective defence, as by time of trial the defect and its consequences will
be manifest.
S 733(1): - Reasonable Reliance –for all 4 types of disclosure docs – allows you to raise defence that
you relied on someone unconnected who performed a specific advisory or professional function. So, if I
am the company, I cannot rely on the director, employee or agent. If I am an individual, I cannot rely on
employee or agent of my mine.
S733(3) Withdraw of consent – if any person who is listed under s729(1), makes a public statement that
they withdraw their consent to be being name in the document.
S733(4) Unawareness of new circumstances – the person was simply not aware of new circumstance,
and if they do become aware they must lodge supp or replacement doc with ASIC under s719

REGULATED CONDUCT DURING FUNDRAISING – ‘PROHOBITIONS’

S734 – restrictions on advertising and publicity – goal is to ensure disclosure docs remain main
source of investment info, rather than information being advertised. Advertisements under s734(6) are
only to be made after the docs have been lodged with ASIC, and then only identify the securities and
refer to the disclosure docs and state that ‘anyone wishing to acquired securities will need to complete an
applications form’. Advertising must not induce people, only inform. Exceptions to additional information
being made available, when
• s734(7) a news report, or genuine comment made about the disclosure doc or information contained
in discl doc.
• s734(7) independent report, made by someone without any interest in the success of the issue or
sale, and that person did not receive any payment or benefits from the company.

Remedy - S1041H (2)(b)(ii), is based on s52 of TPA 1974 (Cth), and prohibits person from engaging in
deceptive conduct in connection with a notice published in relation to a financial product, and a security is
a type of financial product s764A(1). Civil offence 1041H(3). S1324 ASIC can issue injunction to halt
misleading or deceptive advertising in relation to securities.

S736 – Securities hawking is prohibited – UNSOLICITED PHONE CALLS – where someone rings
you up and badgers you to buy the shares, and you did not submit your phone number for such contact.
This also includes unsolicited meetings. Exemptions under s736(2), relax this prohibition, if the persons
S708(8) – sophisticated investor
S708(11) professional investor
Of Listed securities made by telephone by a licensed securities dealer, or to an existing client
who has bought or sold securities within last 12 months.
Under eligible employee share scheme as per s9
S736 – remedy – if securities are issued to an investor in breach of s736, the investor may return the
securities within one month and are entitled to be repaid the amount they paid for the securities.
Debentures
A company may borrow funds from a bank or money lender with or without securities.
Convertible debentures
Disclosure requirement.
Trust deed, appointment of a trustee, keep a register of debenture holders.

Chapter 12 – Membership RIGHTS and MEETINGS

s177, s231, s249D/H, s250A/J s516
P 358 – 363, Company meetings, Board meetings, Agm, extraordinary meeting

12.1 Becoming a member Membership

The relationship between a company and its members is based on contract law. Members must
agree to become members and have their name entered on the register of members.
All companies are required to have at least one member. Members are people who have invested
money in the company in the expectation that they will receive a return on their funds if the
company is successful, either in the form of distribution of profit or in the form of a growth in value
of their investment in the company over time.
 Who can be a member of a company?
S 231 says that a person is a member of the company if:
By subscription for shares pursuant to prospectus
Any person who can hold property in their own name can be a member of a company. This
includes humans and artificial persons such as companies or individuals.
By voluntary sale or transfer
By operation of the law
12.2 Register of members
S169(1) Requirement of registration: requires companies to keep a register of members.
Maddocks v DJE Construction Pty LTd (1982) legal status as member only derived once name
on register of members
S274 – if shares not registered and purchaser has rights against seller for misleading deceptive
conduct pg 347

12.5 directors’ right to refuse registration – relates to transfer of shares Refusal to register shares
possible
S1071D – transferee applys to have name registered for the shares they purchased.
S1072F(2) If constitution or other requirements are not met, than company can refuse
registration. RR
S 1072G sets out a replaceable rule that empowers directors of pty co to refuse to register a
transfer of shares for any reason. These two RR allow constitution to control how shares sold,
used in Coopers Brewery, to stop takeover bid, as shares must be first offered to existing SH,
then Supper fund etc
For public co, s1072F(3) contains a replaceable rules that allows directors to register shares if the
shares are not fully paid up.
S1071F transferee can apply to court for an order to have shares registered, as company refused
without just cause. Roberts v Coussens (1991) refusal to register was made for a proper
purpose and in best interest of co
If a co refuses to register shares notification within 2 months: s 1071E
S 1071F provides that were the directors refuse to register a transfer of shares the transferee
may apply to court. If court satisfied that the refusal is without just cause the court may order that
the transfer be registered.
If the co’s constitution does not require the directors to disclose grounds or reasons for a refusal
to register a transfer, it is extremely difficult to challenge it: person has to prove that the directors
acted in bad faith or improper purpose.
Members right to inspect books
Directors: s 247D
Members: s 247D
By court order: Expansion of the common law right: s 247A
The court will make such an order if it is satisfied that the member is acting in good faith and the
inspection is for proper purpose.
If a person is checking book on behalf of member than disclose to only member and ASIC.
Exercise
John made application for shares and forwarded the deposit to the company. His name was
entered in the register of members but no notice of allotment or acceptance was sent to him. He
did not receive any communication from the company (annual report…). The company went
under liquidation and the liquidator included John on a list of contributories as a holder of partly
paid shares even though there were no minutes recording an allotment of shares to him.
Is John a member of the company or can he oppose such payment?

12.8 right to inspect registers and obtain copies

IMF (Australia) v Sons of Gwalia Ltd (2005) – a non-member can only inspect register under
s177(1A) if for purpose relevant to the holding of the interest recorded in the register or exercise
of rights attaching to them, or company gives approval, but not for s177(1)(a) so person obtaining
member address can send material. IMF attempted to obtain member contact info, to start class
action, but could as it was not related to s177(1A). Unsolicited offers to purchase
 shares – share holders can be contacted by outsider with offers to purchase their shares –
National Exchange Pty Ltd v ASIC (2004)
S173 Inspection: until company goes into liquidation, a member is entitled to inspect and copy
the register free of charge.
Any other person may do so on the payment of a fee
Generally a company will be required to provide a list of members with the annual return lodged
with ASIC.
Significance of register
S 176: Evidentiary value of registers - Prima facie evidence of those matters contained within it.
Prima facie evidence of those matters contained within it. Re Clifford Springs Hotel Ltd, Re
independent quarries Pty Ltd.
However if the register is altered in contravention of the constitution, the entry in the register is
void and the transferor remains the legal owner of the shares.
Rectification of the register by the court: discretion of the court

12.6 termination of membership

Occurs when shares sold in secondary market (transferred), person dies (shares transferred), shares
forfeited by company, member becomes bankrupt, shares trf to trustee, company deregistered by ASIC
12.7 Membership rights
Member has rights under Corp Act and the RR and Corporate Constitution, which forms a contract s140,
which can be enforced if a member or company breaches. Such as preference share holder has not
voting, but higher dividend rate.
S246F Public company must lodge doc that give rights to shares
Member is part owner of company, but does not mean they own the same part of the assets of company.
Macaura v Northern Assurance Co [1925], under separate legal entity rule, Macaura as a Shareholder
could not claim on an insurance policy held over company assets, as he did not own assets. Insurance
policy needed to be transferred into company name.
RIGHTS

• s140 - RIGHT TO enforce statutory contract chap 6

• S254W - Right to dividend out of profits chap 13 – which will be share equally
• Right to attend and vote members’ meetings -
S 1070A: personal property
S250E How many votes per share and how vote can be done – show of hands or poll, one vote per
share
S250N(2) public company must hold AGM within 5 months after end of Financial reporting year
S250R – business of AGM – (2) members vote to adopt remuneration report, but vote is non binding
(3)
• S200B – right to approve executive remunerations due at RETIREMENT
• Right to receive company information – related to meetings
• Statutory rights under Corp Law
• S461 Right to wind up company
• S1324 – right to enforce compliance with corp act
• S249D right to call a members’ meeting
• S314 – right to receive a copy of the company’s annual financial report
• S173 (2) – right to inspect the company’s registers free of charge
Decision reserved to members Examples of members powers: page 366
• S200E – Approval by Members S228 229?? right to approve related party benefits, TO
RATIFY DIRECTORS ACTS
• S136(2) rights to alter constitution - adopt or modify a constitution,
• s256C veto or approve certain reduction of capital
• s203D – remove directors
• s201G - Right to appoint directors chap 15
• s232 – right to bring an oppression action (PERSONAL ACTION)
• s236/7 statutory derivative action – BROUGHT ON BEHALF OF COMPANY
• s253N – members’ access to minutes (s251A minutes to be signed by chair at next meeting
once ratified)
Chair director: exercise procedural control over members and directors meetings (s 248, 249U)
and signs minutes (s 251A(2))
• s247D members to rights to inspect books (directors also!)
s247D states that directors may allow a member to inspect the books
- s247D states that a member may be allowed to inspect the books by an ordinary resolution
- s247A sets out that the court may allow a member acting in good faith to inspect the books if the
inspection is for proper purpose
s247A by court order as expansion on common law
• s198A RR Members can’t override the decisions of the board. Automatic Self-Cleansing Filter
Syndicate Co Ltd v Cunninghame. The SH can influence board by attempting to have a director
removed Howard Smith Ltd v Ampol Petroleum Ltd [1974]
• s246B/D Variation of class rights s
• Change of company name s 157 and type s 162(1)(a)
• S239 EFFECT OF RATIFICATION BY MEMBERS To ratify directors acts
• Where the board is unable to act. Ex: Deadlock, lack of quorum

-
The right to be repaid their capital on winding up after all other claimants have been repaid
The right to share pro rata in any surplus of assets on a winding up
The right to receive a fixed dividend provided there is profit
The right to be repaid the principal on winding up in priority to ordinary shareholders
s 254A(2) - Preference shares: set out in the constitution:
No voting rights unless dividends are in arrears with some exceptions
No right to share in surplus assets on a winding up
s254M Membership liabilities –– member is only obliged to pay any unpaid value of their shares, by a call
being made, usually by liquidator, in a limited liability company. S515 says though all members past and
present, liable for company debts, but limited by s516 – to unpaid value of shares – Deceased SH estate
or trustee in bankruptcy can be liable under s528, s529
12.15 Company meetings page 358
s250N – public company must hold AGM
s299A – Pty company can pass resolution by circulating proposed resolution
s249L(1)(c) – Contents of notice of meetings of members – must contain special resolutions that required
75%vote. Jenashare Pty LTd v Lemrib Pty Ltd (1993) – language must be clear, so members can
decide if matter is important and if they will attend.
s249H – Amount of notice of meetings – 21 days required, can only shorten under (2) certain conditions
s249J – Notice of meetings of members to members and directors – must give notice of meeting
s249D – members can request director to hold meeting, and director must do so if, members with at least
5% of votes or 100 members make request, and they make call for meeting within 21 days, and hold
within 2 months of request. NRMA v Parker (1986) –directors are not required to hold a meeting if the
resolutions contained in the written request are fundamentally invalid. NRMA Ltd v Scandrett (2002)
meeting must be held for a proper purpose and in this case, the meeting was actually being held for a
purpose other than for the members to consider resolution and vote.
S249E – if directors fail to call meeting upon request, then members can hold meeting and company is
liable for reasonable expenses of members.
s249F – member can call meeting at their own expense, if they have at lest 5% votes
s249G – Court may call meeting
S249N – members resolutions can be forwarded for inclusion, must 5% S or 100 members
S250J – members can required that formal poll, is taken instead of show of hands when voting on
resolutions, as then the appropriate 1 vote per share can be allotted.

BOARD MEETINGS
s248A – board meetings are held and resolutions voted on, 1 vote per director. Directors can however
pass resolution without meeting, provided the motion is circulated to all directors to sign.
S248F – quorum is 2 directors, but it is a replaceable rule
S248C – director meeting may be called by a director giving reasonable notice individually to each
director
Relationship between the board and the members’ meeting
The board and the members are two separate organ of the same company
Each organ has power to make particular decisions. Each is independent and neither has to follow the
instruction of the other; and neither can usurp the decision making power of the other.
Powers of each organ is by the law and the internal governance rule.
Members who disagree with the management decisions made by the board may be able to remove the
directors or perhaps amend the internal governance rules to limit the directors’ discretion

PROXY S249X – 250D

S249X – rights of proxies are mandatory for public company
Whitlam v ASIC (2003) – Chair was assigned proxy votes, but failed to sign proxy votes. Votes were not
accepted. Chair was sue for breach of duties owed to company, but court found he owed duty to
individual members, so case was not valid.

REMEDY – Challenging results of meetings – look at minutes too page 12.27 (signed resolutions
are be sent to ASIC within 14 days.)
s1322(2) if a procedural irregularity has arisen in minutes then take action, such as no quorum s299T.
a defect in the procedure of the meeting may invalidate some of the results and resolutions of the
meeting. However under s1322(2)the meeting will not be immediately invalid, because of a simple
procedural error, there must be SUBSTANTIAL INJUSTICE, which cannot be remedied in any other way
by the court.
S1322(6)( c ) No order will be made to cure defect in meeting if it causes substantial injustice as per
Elderslie Finance Corp Ltd v ASC (1993)
S1322 DEFECT IN MEETING CAN BE CURED

Tutorial 8
Fact: Kushmani is a 6% shareholder in the company and wants to hold a members meeting, proposing 2
resolutions. The board is not sure if they must hold the meeting. Under s249D, the directors must call a
members meeting, as the request is being made by a member who holds over 5% of the votes that could
be cast at the meeting. The meeting will be held at company expense. Kushmani must comply with the
Corporation Act and under s249D, must state the resolutions to be proposed.

Fact: Kushmani’s first proposal is to remove the director Nathan, due to his perceived poor financial
performance. Under s203D, a director can be removed at a general meeting, if an ordinary resolution is
passed, which requires only 50% of share holder votes. However the director can only be successfully
removed if all the conditions of s203D are fulfilled, such as the notice of the meeting must be 2 months
and the notice of the meeting must include the Kushmani’s proposal and a statement from the director so
that they have an opportunity to defend themselves.

Fact: Kushmani’s second proposal is to force the sale of land that is not profitable. Under s124 the
company is a separate entity and the corporate constitution sets out the distribution of powers. Under the
replaceable rule s198A, managerial authority is conferred onto the board of directors of the company.
Shareholders can only act within the constraints of the constitution. Shareholders have rights to direct
board members, if the corporate constitution has been modified, through s136, to modify a replaceable
rule, such as requiring member approval for certain transactions, such as contracts in excess of $50,000,
as per s198A (2), which can limit the power of directors. However the ability to force a director of the
company to undertake an act such as sale of company assets, is not possible as per the case of
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906]. For the forced sale of land, as
initiated by a shareholder, this would require the constitution to be modified to change the allocation of
power between director and shareholder, which would required special resolution, passed only with 75%
of the votes. Kushmani would need to rewrite the proposal to be a special resolution that would shift the
power between director and shareholders, as defined in the corporation constitution, as per the
replaceable rule s198A.
Chapter 13 – Dividends - pg 373 -387, s254S/T/U/V/W
A company’s profit may be distributed to shareholders= dividend
The payment of dividends is regulated by the IMR of the company.
Constitution generally sets out the process for, and any limitations on the payment of dividend.

S254U – board of directors has power to determine dividend payable, amount and how paid (cash,
shares, options, dividend reinvestment plan BTR Nylex Ltd v Churchill International Inc (1992) ). This
is a replaceable rule and could in effect be modified by special resolution under s136(2). Dividends
cannot be paid inconsistently with company constitution BTR Nylex Ltd v Churchill International Inc
(1992)

Can members force the payment of dividend? No except: if constitution allows them or if oppression.
S246 assigns class rights to shares and here are the dividend rights for each class given, must comply by
these
Form of dividend? Cash or bonus shares.
S254w (2) pty DIRECTORS can pay dividends as they see fit.
s254T A dividend may only be paid out of profit of the company. Directors are not bound to
use the company profit to pay dividend. QBE Insurance Group Ltd v ASC (1992)

Dividends
Time of dividend payment is generally fixed by the constitution: s254V

INCURRING A DEBT
s254V(2). If time is fixed then a debt will be incurred on the day dividend is declared: called Final
Dividend, when based on finalized profits, and creates debt immediately due Potel v IRC [1971]
s254V(1). If time is not fixed in the constitution then debt is incurred when the time of payment arises:
Interim Dividend is declared on anticipated profit, that is yet to be finalised Marra Developments Ltd v
BW Rofe Pty Ltd (1977) and does not create a debt owing by the company to members Industrial
Equity Ltd v Blackburn (1977) and as a result members cannot force payment of dividend.
s 254V Directors may withdraw an interim dividend (based on anticipated profit) at any time before
payment is due: Brookton Co-operative Society Ltd v FCT , once
dividend payment date
has been reached, the company is liable to pay it.
No legal definition of profit. – when must the profit exist?
• Re Spanish Prospecting Co Ltd: “Profits implies a comparison between the state of a business
at two specific dates usually separated by an interval of one year. The fundamental meaning is
the amount of gain made by the business during the year. If the total assets of the business at
the two dates be compared, the increase which the show at the later date as compared with the
earlier date represent in strictness the profits of the business…”
• Dividend may be paid out of the current year revenue profits even if the company had losses in
prior years. Ammonia Soda Co Ltd v Chamberlain. Isolation of each period.
• Prior year revenue losses do not need to be made good in order to pay a dividend from current
year’s profit: Marra Developments v BW Rofe Pty Ltd.
• If a company makes a profit after the sale of capital assets, the profit may be used as dividend:
North Sydney Brick & Tile Co Ltd v Darvall.
• If a company has outstanding current year trading losses, these must be made good before a
dividend can be legitimately be paid Lee v Neuchatel Asphalte Co (1889). However in this case,
it did not make up for losses in fixed capital. This means, only pay dividend out of profit.
 • Cannot access capitalized profits from a previous year FCT v Miller Anderson Ltd (1946),
capitalized profits are are not available, as they are reserved for another purpose.
Accounting standards are used as guide, but not binding but under QBE, profits are more and
more being taken as those disclosed by financial statements formally draw up and adopted.
Accounting standards required previous year losses to be made good. If a company wishes to
access profit of $100 in year 1, but had loss of $120 in year 2 and made profit in current year of
$80, if they ‘make good’ any losses, then they only have $60 available for distribution. What are
the consequences of paying dividends when there is no profit? p384
Exercise
Angel Ltd made a $100,000 profit in year 2006. This amount did not form part of the
capital.
In 2007, Angel Ltd made a loss of $120,000
In 2008, Angel Ltd made a profit of $80,000.
How much profit is available for distribution as a dividend in 2008?
Court says $80, but prudent accountants way would realize previous year losses first and
use only $60
• Losses relating to circulating or fixed capital – A company must take into account depreciation in
regard to circulating capital, before paying a dividend Verner v General & Commercial
Investment Trust [1894]
• REALISED CPAITAL GAINS – When company makes profit after sale of capital assets,
profit may be used to pay dividend North Sydney Brick and Tile Co Ltd v Darvall (1989)
UNREALISED CPAITAL GAINS – A company can declare dividend based on unrealised
capital gains if three elements are satisfied as per Dimbulla Valley (Ceylon) Tea Co Ltd v Laurie
[1961] (p382-text book)
• Unrealised gain is calculated in good faith by competent (professional) valuers;
• The nature of the capital asset is not prone to short-term fluctuations (e.g. not be based on
foreign currency funds or shares, real estate is acceptable) in value; and
• The use of unrealised gain is not inconsistent with the company’s constitution:
• Implied ----- s588G – after paying dividend, or incurring company must not become insolvent
BORROWINGS – company may borrow funds in order to finance dividend payment, but all company
liabilities must be remain payable as a result, you cannot bankrupt yourself to pay dividends - QBE
Insurance Group Ltd v ASC (1992)
CORPORATE GROUPS - parent company must wait for subsidiary to distribute profits, and therefore the
parent cannot automatically include profits of subsidiary for purposes of dividends paid by parent.
members Industrial Equity Ltd v Blackburn (1977)

13.19 Invalid Dividend Payments

If board of directors in declaring dividend without conforming to CORP ACT, then…
• Director may have breached statutory and common law duties of care owed to company
• S256B (1)(b) – the company will be in breach of authorised capital reduction provisions, as it
must not materially prejudice ability to pay creditors. Contravention of CORP Act does not
invalidate dividend payment, but any director will be liable for a civil penalty order s256D(2)
• The directors maybe be forced to pay the dividend themselves – Bluebottle UK Ltd v DCT
(2007)
• Insolvent trading – A director contravenes s588G when they prevent their company from
incurring debt when there are reasonable ground to suspecting the company is insolvent.
s588G(1A) – a company is regarded as having incurred a debt when a dividend is paid, or when
dividend is declared and debt due immediately. Director is then liable for debts and damange/loss
s588M. Director can also have civil penalty under s1317E
• Party whose interests are affected by improper dividend may seek to have payment prevented by
seeking statutory injunction s1324
NOTE – member who receives dividend when they knew or ought to have known that the directors were
not lawfully able to distribute the payment will be liable to return the money to the company!!! Moxham v
Grant [1900]

Auditors NOTE - Segenhoe Ltd v Akins (1990): Company sue auditors for overstatement of profits due
to an under provision for tax. Dividends were paid as a result out of capital. The auditors were successful
sue for being liable to the company for the payment made as dividend.

Dividends must be paid out of company profits as per s254T. When the company’s board approved the
dividend payment, they affectively had no profits to pay them from, and therefore would have had to pay
them from share capital. Such a reduction in capital to pay dividends is not normally authorised, and
therefore contravenes s256 (1) b, as the company’s ability to pay its creditors would be unfairly
prejudiced. The payment of dividends that would render the company insolvent, would further prejudice
the interests of the company’s creditors and breach the directors fiduciary duty owed by the director to his
creditors

Chapter 14 – Corporate Governance, s 180-4, s191, s588G,

RELATED PARTY txn, auditor independence

14.9 Directors Duties

14.10 Members’ remedies
14.11 members’ rights
14.12 Internal Corporate organs
14.13 Internal Management Rules – Constitution
14.14 Market Disclosure Rules
14.15 Audit
14.16 – Summary Remedies
14.17 Risk management procedures and due diligence and compalina system may not stop contravention
of law, but it may help court when deciding what level of civil penalty that will be awarded . ASIC v
Chemeq Ltd (2006) – Is there si duty ot implement a corporate compliance system in Australian Law?
14.18 – ASX Listing Rules – non-legal regulation – quasi-legal regulation – you either follow rules of ASX,
or you will not be listed on market
GOVERNANCE – ASX – Principles of Good Corporate Governance and Best Practice Recommendations
2003, updated 2007. Obligation to explain to investors why company has not adopted recommended
approach, “if not, why no”, so is not a strict compliance system, but puts emphasis on disclosure.
• lay solid foundations for management and oversight – job description that lists scope and
fiduciary obligations, how performance will be evaluated, how activities will be monitored and
overseen by board.
• structure the board to add value – suggests to have non-executive independent directors, who
are not biased by being a major shareholder, customer, employee or professional adviser. Have a
chairperson who is independent to CEO, who will lead board and ensure company is solvent and
managed well, which could involve disclosing information to public and remove CEO.
Chairperson can vote on behalf of proxies, which gives them power. Nomination to the board
procedures.
• Promote ethical and responsible decision-making - Conduct in trading shares to maintain
company integrity.
• safeguard integrity in financial reporting - Audit committee. promote ethical and responsible
decision-making
• make timely and balance disclosure. Put in place policy to ensure continuous disclosure
(financial position, performance, ownership, governance).
• respect the rights of shareholders
 • recognise and manage risk – s295A – must have system of internal control and risk management
policy and that it is operation effectively in relation to financial reporting risks. Makes
management accountable and they cannot claim they did not know, they are obligated to make
sure it is in place.
• remunerate fairly and responsibly – recipients of remuneration are not be part of approval
process. Share options to be offered, in conjunction with specific performance goals which
encourage short term and long term growth /stability of company, ensuring no short term share
price inflation by falsely stating financial profits is encouraged. Share options, made as share
based payments under AASB2 are to be valued and expensed.
14.19 – Board structure

14.15 Law Reform CLERP 9page 407

Defence – Business judgment rule

Chap 15 – DIRECTORS AND OFFICERS

s 188, s198A, s201A, 203C-D, s206A-F, 240A
s188 – responsibility of secretaries and directors for certain contraventions
(1)Secretary’s functions - lists all the sections of the Corp Act that secretary must
complete such as must have an office s142
(2) consequence if director of PTY, without secretary does not fulfil secretary’s functions

15.1 – what or who is an Officer? S9 ‘officer’

Defn officer – who makes or participates in decisions that affect whole or substantial part of company
business, has capacity to affect company financial standing, or acts as shadow officer. i.e senior exec
that reports to board.

15.4 Employees = senior managers

refers to not all employee’s, but to senior managers under a contract of employment, which carrys
traditional common law duty of fidelity (faithfulness)
Principle establish in Timber Engineering v Anderson [1980], where defendant setup competing
company to his employer and pass business from his employer to new company.

15.5 Executive Officers = CEO Chief Executive Officer, MD Managing Director, CFO Chief Financial
Officer, CIO
These people have a higher degree of participation in management, to be involved in decision-making
processes under Commission for Corporate Affairs v Bracht [1989] – merely doing administrative work,
as performed by company secretary or accountant would not constitute management, nor when an agent
is simply obeying instructions.

15.6 Company Secretaries

240A every company is required to have a company secretary, except PTY post 1998.
Panorama Developments (Guildford) Ltd v Fidelis Furnishings Ltd [1971] – page 237 – company
secretary has implied authority to manage the administrative affairs of the company, but not to manage
the company. Page 418. Can bind company in administrative but not commercial contracts.
s188(1) Duties of company secretary are listed under

15.7 – What or who is a director?

s 201A - All companies must have a director: , PTY 1 mini, and Ltd must have 3 mini, 2 must reside in
Australia.
s9 – director defn
1. officially appointed
2. defacto
3. shadow
4. alternate director
If person falls within defn of director by their conduct ASIC v Murdaca (2008)

15.8 How are Director Officially Appointed?

S205B(1) – director is registered with ASIC as being appointed within 28 days - Lodgement of director’s
names and details
QUALIFICATIONS
S201B(2) – must not be disqualified from being a director
S201B(1) – must be 18 YEARS OLD
S201B(1) – must be an individual, not a company
S201D – must Consent and agree to be appointed.
Ex-auditor, can only be director after 2 years have passed.
Current and active auditor cannot be a director of a company they are autiding
s 201G Appointment by general meeting: Directors are nominated by the chairperson usually and the
shareholders then take a vote to accept or reject.
S201H director may appoint another director, but it will be need to be confirmed at the next AGM by
members.

15.10 Managing Director - S198C - Directors may appoint any of their number as managing director to
control running of day-to-day business of the company, and they can be given all or some of the powers
of the director. MD is accountable to the board, and his actions will be endorsed and monitored.
Appointed under s201J

15.11 Executive Directors Responsible for every day management and involved and aware of internal
workings.

15.12 Non-Executive Directors Independent non-exec directors - - to provide external independent view
to management of the company. Brings balance to composition and priorities of board.
15.13 Nominee Directors Appointed to represent needs and interest of a particular stakeholder group,
such as major shareholder, large creditor, or joint venture representative. A nominee director may not put
the needs of the group they represent ahead of the company best interests. As per WALKER v
WIMBORNE (1976) sets out that directors in a corporate group owe a fiduciary duty to the subsidiary and
not merely to the group.
s187 – directors of wholly owned subsidiary - states that a director of a wholly-owned subsidiary acts
in the best interest of the subsidiary if the (a) constitution allows him to act in (b) best interest of the
holding company and he acts in good faith while the (c) subsidiary is not insolvent. This can become a
defense, when a claim is made that they acted in the parent companies interests only, which occurred in
Re Broadcasting Station 2GB Pty Ltd – the s187 was successful as the actions did not harm the
interest of the subsidiary.
15.14 Alternate directors - S201K(1) – director can appoint an alternate director to utilise any of the
director’s power, when the other director is unable to be present at a meeting. Alternate director is only
liable for actions made while in that role.
15.15 – what is a de facto director - act in position of a director, without proper authority, but they will be
treated as a full director in law, and owed duties, especially s588G Case Corporate Affairs Commission v
Drysdale (1978) pg 422 Director was appointed, but not re-elected at next AGM, but continued in the role and by
the company’s conduct, they endorsed his role.
15.16 – What is a shadow director ASC v AS Nominees Ltd (1995) - Shadow director role is not
defined by the fact that they give instructions and directions on all matters, involving the board, but that
directors are accustomed to act in accordance with the person’s instructions or wishes.
15.17 – Is it possible for a creditor to be a shadow director of its debtor company?
Emanuel Management Pty Ltd v Foster’s Brewing Group Ltd (2003) – no, creditors are not held to be
shadow directors, as they are acting merely to protect their own interests in ensuring the repayments of
the debt.
15.20 How can a director be removed form office
Corp constitution – must comply with removal procedure contained in…cc
S 203C – RR - Removal by members in PTY company – ordinary resolution 50% vote
S 203D – not a RR - Removal by members – public company, in meeting as per resolution, but must
follow the correct procedures, which allow director being removed to put their case to members (called
Statutory entitlement to defend themselves) , and director must be notified before and meeting notice
clearly state the resolution to remove director. Scottish & Colonial LTd v Australian Power & Gas Co
Ltd (2007) – must follow procedures under s203D, even if constitution has process to remove director.
S 203A – resignation or retiring. Must give notice to registered address of the company.
S 2036A – director is becomes disqualified and therefore is removed.
S 2036B(1) Disqualification occurs when a director is convicted for contravention of corp act, that has
punishment by imprisonment for >12 months, or the offence involved dishonest with 3 month prison,
S 2036B1) or they are convicted and that conviction has the capacity to affect the financial standing of the
company
S 2036B(3) discharged bankrupt automatically disqualified.
S 2036C disqualified by court order ASIC v Adler (2002) –Adler breached s180(1) – 182 and received
civil penalty under s1317E and court disqualified Adler from being a director for 20 years.
ASIC v Vizard (2005) Vizard, director of Telstra, used confidential information to conduct share trading
through a family trust. His actions were deliberate and he attempt to conceal the illegality of his actions.
He made no profit but a loss and incurred no loss to Telstra where he was a director. Disqualified as
director for 10 years.

OVERVIEW OF DUTIES What is distinction between statutory & general law duties. Who
enforces the duties and what are the different remedies? GENERAL LAW duties based on common law
(precedent as per case law) and equitable fiduciary duties are REINFORCED in the corp act. s182-3
reinforce the duty to avoid conflict of interest and s191 – duty to disclose conflict of interest. S180
reinforces the duty of care. S181 reinforces duty to act in good faith and for proper purpose. S588G(2)
– enhances the common law duty to consider creditors in times of financial trouble as per Spies v R
(2000). ENFORCER - The company as plaintiff enforces the duties owed at common law (s180)
(s588G(2)) as the duty is owed to the company. If company is not willing to take action, as SH can via a
derivative action. ASIC enforces the statutory duties arising under Corp Act.
REMEDY – The general law duties have civil actions that can be brought under common law, (such as
breach of contract or tort of negligence) or under equitable fiduciary duty (such as conflict of interest), by
virtue of
s1317E. s184 and s1043A which are only statutory duties and can have criminal penalties as well as civil.
s1317E – Civil Penalty Provision – lists sections it can be applied to
s1317G – Pecuniary Penalty Provision - civil penalty provisions – fines that can be order, max $200,000
for an individual, $1mill for company, payable to ASIC

General law –
s180 – CARE AND DILIGENCE (ARISES FROM COMMON LAW)
(1) duty to act of Officers and directors, to discharge their duties with Care and due Diligence, as
what a REASONABLE person would exercise, in a similar circumstance in a corporation of similar
size/complexity, and position of similar responsibilities, role and experience.
(2) Business Judgment Rule as defence.
Is there a business decision made AS DEFINED UNDER 180(3)? AND THEN was the judgment made in
(a) in good faith (honest) and for proper purpose and
(b) without material personal interest and
(c) inform themselves about the subject matter of the judgment to the extend they reasonably
believe to be appropriate and
(d) rationally believe that the judgment is in the best interest of the company?

s181 (1) – GOOD FAITH duty of officer and director (ARISES FROM EQUITABLE FIDUCIARY
DUTIES)
(a) in Good Faith (honest) in best interests of the corporation and
 (b) for a proper purpose

s182 (1)– USE OF POSITION duty of employees, officer and director must not IMPROPERLY use
their position to
(a) gain an advantage for themselves or someone else or
(b) cause detriment to the corporation (ARISES FROM EQUITABLE FIDUCIARY DUTIES)

s183 (1) – USE OF INFORMATION duty of employees, officer, director must not IMPROPERLY use
information to
(a) gain an advantage for themselves or someone else or
(b) cause detriment to the corporation (ARISES FROM EQUITABLE FIDUCIARY DUTIES)

s185 – Interactions of sections 180-184 with other laws – does not prevent civil proceedings, can
sue officer for breaches under each area of common law, equity and Statutory Corp Act – so 3
times! As per South Australia State Bank v Clark (1996)
s588G(2) – CONTRAVENTION - Director’s duty to prevent insolvent trading by company

Common Law - Negligence – directors must act with care, skill and diligence in performance of their
duties, which is similar to the common law duty of avoid negligence that results in REASONABLY
FORSEEABLE HARM as per: Donoghue v Stevenson [1932]. S180 in the Corp Act is the statutory
version.
Statutory duties
S184 – Criminal OFFENCES – gives effect of criminal offence when done with criminal mind
(1) GOOD FAITH duty of officer and director commits an offence if they
(a) are reckless or (b) intentionally dishonest
And failed to exercise their powers and discharge their duties
(c) in Good Faith in best interests of the corporation or (d) for a proper purpose

(2) USE OF POSITION duty of employees, officer and director if they use their position
dishonesty
(a) with the intention to gain an advantage for themselves or someone else or
cause detriment to the corporation
(b) recklessly to gain an advantage for themselves or someone else or cause
detriment to the corporation

(3) USE OF INFORMATION duty of employees, officer, director must not use information
dishonestly
(a) with the intention to gain an advantage for themselves or someone else or
cause detriment to the corporation
(b) recklessly to gain an advantage for themselves or someone else or cause
detriment to the corporation
s191 – disclose material personal interest – director’s duty to disclose
(4) effect of Contravention by director – just because director was in contravention of section
does not
s194 – disclose material personal interest – director’s duty to disclose in PTY COMPANY
(4) effect of Contravention by director – just because director was in contravention of section
does not
S195 (1) a director that has a material personal interest in a matter, must not vote or be present at the
meeting
s588G(3) – OFFENCE - Director’s duty to prevent insolvent trading by company
s1043A Insider trading –prohibited conduct by person in possession of inside information
Chapter 16 – p439, 453, 455-6, p465 Duty to Avoid Conflict of Interest
– s181, s184, s1317, s1318
s181 (1) – GOOD FAITH duty of officer and director
(a) in Good Faith (honest) in best interests of the corporation and
(b) for a proper purpose

S184 – Criminal OFFENCES – gives effect of criminal offence when done with criminal mind
(1) GOOD FAITH duty of officer and director commits an offence if they
(a) are reckless or (b) intentionally dishonest
And failed to exercise their powers and discharge their duties
(c) in Good Faith in best interests of the corporation or (d) for a proper purpose

(2) USE OF POSITION duty of employees, officer and director if they use their position
dishonesty
(a) with the intention to gain an advantage for themselves or someone else or
cause detriment to the corporation
(b) recklessly to gain an advantage for themselves or someone else or cause
detriment to the corporation

(3) USE OF INFORMATION duty of employees, officer, director must not use information
dishonestly
(a) with the intention to gain an advantage for themselves or someone else or
cause detriment to the corporation
(b) recklessly to gain an advantage for themselves or someone else or cause
detriment to the corporation

16.2 Directors’ Duties – To Whom are directors’ duties owed Duty of directors is owned to company
as a whole, rather than just the shareholders, however the interests of the shareholders and company
intersect,
Bell Group Ltd (in liq) v Westpac Banking Corp (2008)

16.3 Individual shareholders - NO Duties are owed to collective body of shareholders and not to any
individual shareholder – Percival v Wright [1902] ; exception Brunninghausen v Glavanics (1999)
Fiduciary duty is owed when another party is vulnerable and under that person’s control, where trust and
reliance are elements in their relationship. B & G were shareholders in family company and G agreed to
sell shares to B, but G was not aware that B was negotiating to sell company at a higher price per share
than what was being offered G. B made a substantial profit, to the detriment of G. B and owed G a
fiduciary relationship, as G was locked out of company management and had no way to know true
value of shares, and therefore B was required to make full disclosure to G, which did not occur. G relied
on B. There was a special relationship between B and G and therefore their was a great duty owed to the
shareholder, rather than just the company as a whole.

16.4 Employees – NO – company’s do not owe a duty to employee’s ahead of shareholders. Parke v
Daily News Ltd [1962] – company funds were used to pay employees compensation for their dismissal
following sale of the business, and it was decided by court that this was not a proper purpose use of
company funds, as the duty was owed to SH, not employees. However employee entitlements are
protected now by s596AB, as per Patrick waterfront dispute, where the company was stripped of assets
to prevent employee compensation claims.

16.5 Nominee Directors and Corporate Groups – represents major shareholder or special interest
group – the nominee director must act in the best interest of the company. Appointed to represent needs
and interest of a particular stakeholder group, such as major shareholder, large creditor, or joint venture
representative. A nominee director may not put the needs of the group they represent ahead of the
company best interests.
s187 – directors of wholly owned subsidiary - states that a director of a wholly-owned subsidiary acts
in the best interest of the subsidiary if the (a) constitution allows him to act in (b) best interest of the
holding company and he acts in good faith while the (c) subsidiary is not insolvent. This can become a
defense, when a claim is made that they acted in the parent companies interests only, which occurred in
Re Broadcasting Station 2GB Pty Ltd – the s187 was successful as the actions did not harm the
interest of the subsidiary.
WALKER v WIMBORNE (1976) sets out that directors in a corporate group owe a fiduciary duty to the
subsidiary and not merely to the group.
Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) –in Wholly owned subsidiary, However if
there is a benefit to the corporate group that flows onto the subsidiary, indirect benefit, than it is accepted.
Funds of subsidiary were used to pay debts owed by other companies within the group, were not
held to be in breach of directors’ duties, as the financial stability of the group provided a benefit to the
subsidiary.
16.7 Creditors – as per Salomon’s case and s124, a debtor cannot seek payment of debts from a
director. A duty is owed to the company as a whole, and this includes the interests of creditors in specific
circumstances, namely insolvency. The duty of directors shifts to the creditors when the company is
approaching or is insolvent as per
Kinsela v Russell Kinsela Pty LTd (in liq) (1986) – The Kinsela family prejudiced the interests of the
creditors, when they transferred a lease to themselves as undervalue, as they approached insolvency.
The transfer was ratified by them as the shareholders, but as the company approaches insolvency.
However the duty shifts from being owed to SH, onto too creditors and therefore SH cannot ratify an
action that prejudices the interests of creditors.
ASIC V Sydney Investment House Equities Pty Ltd (2008) – where a company was found to be in
breach of his duties under s181, s180, for allowing the company to loan money to another company in the
grup when he should have known that both companies were insolvent and the insolvent and the interests
of the company’s creditor’s would be prejudiced.
16.8 Corporate Social Responsibility James Hardie Ltd Directors were in breach of duties s180(1),
for allowing the company to issue an ASX release that was misleading as it suggested the compensation
fund was ‘fully funded’. James Hardie had restructured its assets in order to avoid full liability for
compensation claims related to asbestos related deaths and illness. The Directors said they were acting
in the interests of SH, but the community demanded they consider the wider group of corporate
stakeholders, such as employees and creditor and individual SH, in light of social corporate
responsibility. Law still has to obligate such wider social conscience.
16.9 Fiduciary duties – Relationship between directors and their company is classified by the law as a
fiduciary relationship, derived from equitable principles, and based on exercising restrictions on the
person in power, over vulnerable recipients., Hospital Products Ltd v United States Surgical
Corporation (1984) – in this case the aspects of fiduciary relationship were described…..reliance upon
the other….position of disadvantage or vulnerability……person under fiduc obligation, put interest of other
ahead of their own, if conflict arises……
ASIC v Adler (2002) – example is where Adler acted in his own interests, against those of company and
made secret profits, acting for an improper purpose.
16.10 Duty to act in good faith and in the company’s best interests
Duty is owed to company and that generally refers to shareholders as a whole – known as ‘Shareholder
Primacy Rule’ – as in acting for best interests of the company, the SH will benefit through increased
dividends from greater profitability.
‘Good Faith’ – must act with honesty,
S181(1)(a) - Hutton v West Cork Railway Co (1883) – the director that acts honestly, and with good
intention, can still breach the duty to act with ‘best interest of company’, as a lack of skill or a misguided
belief in lifting curses, will not be stand up to the test, whether a reasonable person could view the act as
benefiting the company.
16.11 the Proper Purpose Rule
Just because a director has power given to them under s198A, they must exercise it for a proper purpose.
As per Mills v Millls (1938) – the power that a director has must be exercised for a proper purpose
and that is only measure by whether it undertaken to benefit the company. Director of Mills
increased voting power of MD by issuing dividends as bonus shares to ordinary SH, which was
primarily the MD. A minority SH, with preference shares, would not receive the bonus shares and
challenged the use of the Directors power to issue shares, on the basis that it was not in company’s best
interest. This challenge failed, as the mere fact that the Director and MD also received a benefit, did not
render the use of that power as improper. NOTE – often directors are SH in a company, and as they
promote the interests of the company, a director will also promote his own interests.
Mixed purpose for the use of the power – in this case it could be said that the power was used for a
mixed purpose. In order to make sure the power was not used improperly, a ‘BUT FOR’ test can be
used, where you must ask yourself, would the same action be taken, if the other benefit to the directors
was not there? If the answer is yes, then the purpose is proper. As the issue of bonus shares for
dividends is a commonly accepted approach. Whitehouse v Carlton Hotel Pty Ltd (1987) leading case
in using ‘but for’ test.

2 step – Proper Purpose test – court will use 2 step rule to decide if power was used for improper
purpose.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] (takeover contest. Shares issued to one bidder as
they would bid higher if they had more shares then the other takeover contender. Other takeover party
sought successfully to have the use of power to issue shares, deemed as being for an improper purpose,
as it was done solely to dilute the majority shareholdings they had held. Share issue must not be done to
manipulate or control company voting rights.
1. Why does the power exist? Determine what the purpose of the power is, and therefore
what it may not be used for. What is the scope of the power.
2. What purpose the director had for exercising the power and whether that purpose was
within the range of permissible purposes? This decision made as a matter of fact.

16.13 Share issues – biggest area where proper purpose must be looked at. Company can issue
shares under s124, and directors have power to manage the company under s198A.
PROPER PURPOSE TO ISSUE SHARES (ALLOTMENT)

•to raise capital for the benefit of the company as a whole Ngurli Ltd v McCann (1953) – not
to be used to control company, by creating a new majority that takes control away from existing
SH,
• to foster business connections (Harlowe’s Nominees Pty Ltd v Woodside (Lake Entrance)
Oil Co (1968) – a substantial SH, unsuccessfully claimed that the issue of shares to joint venturer
to consolidate the business relationship was improper. It was taken to be proper, as it would
benefit the company as a whole, by creating financial stability, by ensuring that the ongoing joint
venture would be more likely to continue as a result of the share issue.
• For an employee share scheme – helps to have interests of employee aligned with those of
company, by them being part owners.
• As consideration for the purchase of an asset (Winthrop Investments Ltd v Winns Ltd (no
2) (1979) –
IMPROPER PURPOSE TO ISSUE SHARES (ALLOTMENT)
• Entrench existing board of directors Whitehouse v Carlton Hotel Pty Ltd (1987) page 455–
Mr Whitehouse issued shares of the same class B as his ex-wife, to his sons after he divorced
from his wife. This was done solely to maintain control over the company. Once his sons sided
with his ex-wife, Mr Whitehouse challenged the share issue as being improper and was
successful.
• To fight off a hostile takeover bidder (Howard Smith Ltd v Ampol Petroleum Ltd [1974]
(takeover contest. Shares issued to one bidder as they would bid higher if they had more shares
then the other takeover contender. Other takeover party sought successfully to have the use of
power to issue shares, deemed as being for an improper purpose, as it was done solely to dilute
the majority shareholdings they had held. Share issue must not be done to manipulate or control
company voting rights.
• To discriminate against particular shareholders or classes of shareholders Mills v Millls
(1938) –as there were different classes of securities, there is the potential for actions of
directors to create conflict between different classes, as boards actions may cause
detriment to one class. Duty of director is to not unreasonably discriminate against one
particular class of securities. Director of Mills increased voting power of MD by issuing
 dividends as bonus shares to ordinary SH, which was primarily the MD. A minority SH, with
preference shares, would not receive the bonus shares and challenged the use of the Directors
power to issue shares, on the basis that it was not in company’s best interest. This challenge
failed, as the mere fact that the Director and MD also received a benefit, did not render the use of
that power as improper. NOTE – often directors are SH in a company, and as they promote
the interests of the company, a director will also promote his own interests.
• To reconfigure the majority shareholdings in the company Howard Smith Ltd v Ampol
Petroleum Ltd [1974

(s181) Statutory duty of good faith and proper

purposes
It is possible to breach s181(1) in either one or both limbs, expressed as (a) and (b)
The company or ASIC enforce s181. Commonly referred to as the fiduciary duties in equity.
A Director must actively contravene s181 himself by his actions, as per ASIC v Maxwell (2006), rather
than just be a director of the company, at the time when the company contravenes the law.
Merely acting negligently by failing to protect company’s interests, is not proof of acting in bad faith or
improperly.
REMEDIES, PENALTIES s181 and CRIMINAL s184
16.15 Civil remedies at General Law - Equitable Remedies under the Statute: The company can
claim,
• equitable compensation, 4. accounting for profit,
• rescission of contract, 5. constructive trust (return of property)
• or an injunction.

16.16 Statutory remedies s181 : compensation (s1317H), declaration (s1317E) in combination with
pecuniary penalty (s1317G) and disqualification (s206C(2)). These are civil penalties and therefore only
required proof, on the balance of probabilities, which is a lower standard of proof than criminal, which
must be beyond reasonable doubt.
REMEDY – The general law duties have civil actions that can be brought under common law, (such as
breach of contract or tort of negligence) or under equitable fiduciary duty (such as conflict of interest), by
virtue of
s1317E. s184 and s1043A which are only statutory duties and can have criminal penalties as well as civil.
s1317E – Civil Penalty Provision – lists sections it can be applied to
s1317G – Pecuniary Penalty Provision - civil penalty provisions – fines that can be order, max $200,000
for an individual, $1mill for company, payable to ASIC
s1317H – Compensation orders - civil penalty provisions – order to compensate for damage suffered,
profits lost, fines that can be order, max $200,000 for an individual, $1mill for company, payable to ASIC
under what section is the criminal penalty made?
(s206C(2)) disqualification
The transaction is valid but the directors involved commit a strict liability offence that attracts civil
penalties:
The transaction is valid but the directors involved commit a strict liability
( MEANS NO GUILTY
MIND REQUIRED, CONTRAVENTION ALONE IS SUFFICIENT EVIDENCE ALONE)

Criminal action: in case of dishonesty.

S184(1) A serious Breach of s181 will have a will give rise to criminal liability, where the act was done
with intentional dishonest, recklessness or a guilty mind and must be undertaken by ASIC or DPP. See
below 16.20 for specifics.

16.17 – Defences : DISCLOSURE The director may avoid liability at general law for acting improperly, by
giving full disclosure to their principal, the company and the company consents, to the fiduciary acting
under the conflict. Discussed more in regards to conflict of interests.
16.18 Relief from liability
S1317S /s1318 – Hall v Poolman (2007) – court granted partial relief from liability for directors, in
respect to insolvent trading on the basis that up until a certain point of time, they had acted reasonably in
allowing the business to continue trading despite financial difficulties.

16.19 Indemnification and insurance

S199A(1) – prohibits a company from granting blanket indemnification to officers and directors for
breaches of duty, and therefore constitution cannot grant such a waiver. An officer can only be
indemnified in the proper performance of their duties. S199A(2). S199A(3) prohibits indemnification for
legal costs related to certain actions page 461.

16.20 Criminal REMEDIES against directors

S184(1) A Breach of s181 duty will have a will give rise to civil penalty, unless there is a criminal element,
where the act was done with intentional dishonest, recklessness or a guilty mind.
R v Wilkie (2008) – there is no requirement that the prosecution proof the defendant derived any benefit
from their breach.
S1315 – Criminal prosecutions may be commenced by ASIC or DPP. ASIC will conduct the actual
prosecution for minor criminal offences, but will refer more serious cases to the Commonwealth Director
of Public Prosecution (DPP ).
S1311 – criminal sanctions – applies to all contraventions of the Corp Act, unless that section states
otherwise.
Individuals - Fine is $550 - $220,000 and/or 5 years imprisonment.
S1312 Corporation – max fine $1.1 million
S1316 – TIME LIMIT – prosecution must be commenced within 5 years of the contravention.

16.21 – The double Jeopardy Rule

Adler v DPP (2004) – Adler was order to pay compensation under civil penalty provisions. And then the
courts undertook to commence criminal proceedings. This was not taken by courts to be double jeopardy.
Is S185 applicable here??

s185 – Interactions of sections 180-184 with other laws – does not prevent civil proceedings, can
sue officer for breaches under each area of common law, equity and Statutory Corp Act – so 3
times! As per South Australia State Bank v Clark (1996)

Apply Rules
• Based on s181, William failed to act in ‘Good Faith’, by his failure to disclose the poor financial
position to his co-directors. In addition Williams attempts to have a curse removed from the
company and therefore his subsequent conclusion that the company ‘had never been in a better
financial position’, was misguided and would be considered to be dishonest. William has
contravened s181.
• William failed to comply with s286, and did not keep sufficient financial records for the previous 5
years, and therefore could not state the company’s financial position. Under s588E(4), the
company would be presumed to be insolvent, as s286 was contravened. Additionally when the
debt for dividend payment was incurred, William had no reasonable grounds to know he could
pay that debt, and therefore was in contravention of s588G, and traded while insolvent.
• Based on Daniel v Anderson, the non-executive directors Michelle and Janet will both be
objectively viewed as directors who have full liability and they will have the same liability as the
director William. Since 1995, the subjective approach to directors duties has been replaced by a
higher standard, an objective approach, in order to protect shareholders and other stakeholders,
from directors who hide do not full fill their duties, with such claims as they did not know or did not
attend meetings, but continue to hold the role of director. Michelle and Janet, may both attempt to
say they relied on William for advise as per s189, but they made no investigation into the true
financial status of the company, as no financial records were available and an inspection would
have found empty journal books and unfiled paperwork. As in the case of Sheahan v Verco, Janet
and Michelle would have breached their duty of care as directors, as they failed to comply with
s189. Janet cannot use the defence under s588H(3), that she relied on Williams advise, as she
 failed to fulfil the conditions of s189, as she did not make reasonable investigations. Michelle the
wife of William, cannot use the defence of s588H(4), namely that she did not take part in
management of the company, as she cannot give a good reason as to why she did not participate
in management .

Conclusion
William, Michelle and Janet would all be equally taken as being directors, of equal liability with no
appropriate defences. The dividends declared, would not be payable. The liquidator would sue the
directors, instead of the company, on behalf of the collective shareholders and creditors of the company
John Shaw v Salford. Remedies available under general law are to sue the directors for equitable
compensation, rescission of contract, an account of profits, a constructive trust or an injunction. ASIC may
decide in addition to sue the directors under Statute Law, as codified in the Corporation Act, which would
incur a $200,000 pecuniary penalty under s1317G for each breach of the Corporation Act. ASIC may
refer the case to the Director Public Prosecutions, as a criminal case may be developed based on
s1311(1), as an a contravention of the Corporation Act has occurred.

Chap 17 – Conflict of Interest, related party Transaction –

s182, s183, s191, s915, s1317-8, s9,
s182 – USE OF POSITION duty of employees, officer and director must not IMPROPERLY use their
position to
(a) gain an advantage for themselves or someone else or
(b) cause detriment to the corporation

s183 – USE OF INFORMATION duty of employees, officer, director must not IMPROPERLY use the
information to
(a) gain an advantage for themselves or someone else or
(b) cause detriment to the corporation

s185 – Interactions of sections 180-184 – does not prevent civil proceedings, can sue officer for
breaches
s191 – material personal interest – director’s duty to disclose
(4) effect of Contravention by director – just because director was in contravention of
section does not make the act itself invalid, such as an agreement, instrument, resolution
S195 (1) a director that has a material personal interest in a matter, must not vote or be present at the
meeting.
S915 relates to financial services licenses – allows them to be cancelled or suspended

17.1 Duty to avoid conflict of interest

- ABERDEEN RAILWAY v BLAIKIE BROS (1854) states that directors breach their duty to avoid
conflict of interest if they enter into contract with their company because they are then in a position
where their direct or indirect personal interest is in conflict with the company’s interest. Chairperson was
also a partner in the firm.
Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co (1914) – cannot act under
a conflict of interest by making a secret profit – Two directors of Transvaal persuaded the other directors
to buy property from New Belguim, without disclosing their interest in the company, which was by way
of them both being SH, and one being a director of New Belgium. They made a secret profit. Contract
was rescinded.
17.2 Test for establishing a conflict of interest
Phipps v Boardman [1967] this is leading case where the test for conflict of interest is established. A
trustee and solicitor’s fiduciary obligation in respect to purchasing shares in a company partially owned by
the trust.
Bell Group Ltd (in liq) v Westpac Banking Corp [2008] – summarises test used to assess conflict of
interest, in regards to fiduciary duty owed to company by director. Renegotiate finance that provided little
benefit to the company, but substantial benefit to the company’s major financers.
17.3 Diversion of Business opportunities and Secret Profits
Green v Bestobell Industires Pt Ltd (1982) – Green, a senior manager who worked for Bestobell, put in
tender for construction contract that Bestobell was involved in. As he had inside knowledge, he could
submit a tender for the work, at a price lower than Bestobell, which he did through his company Clara Pty
LTd. Green breached his fiduciary duty and was made to account for the secret profit.

Peso Silver Mines Ltd (NPL) v Cropper (1966) – it is not diversion of business opportunity, if
opportunity does not arise because of the person’s position as a company director or officer. A director
was approached in his personal capacity to invest, in a project that the company had previously been
presented with and rejected.
Regal Hastings Ltd v Gulliver [1967] Note: it does not require that profit to have been made, the
issue is did a conflict of interest arise? Company director were breaching duty as company could not
take up opportunity due to lack of funds. But the directors were in conflict of interest by taking up
opportunity, as why could directors raise funds for themselves, but not for company?. In this case, if was
more that a secret profit was made, even though company did not have funds, and therefore that profit
must be accounted for. Must always avoid any potential for conflict of interest. The directors could have
avoided the breach by disclosing their interest as per s191.
Canadian Aero Service Ltd v O’Malley (1973) – company officers cannot take up a business
opportunity presented to them while in their position as director, by merely resigning from their position as
director.
17.4 Misappropriation of company property
Green v Bestobell Industires Pt Ltd (1982) – Green used company property, which was the information
of the company.
Cook v Deeks [1916] – Directors fell out and some negotiated a contract on behalf of company, but then
diverted that project to a new company. Those directors then also pass resolution, declaring that the
company had no interest in the project. Cook was effectively frozen out of the project and the other
directors had diverted a business opportunity, as the property of the company includes intellectual
property and trade secrets. That resolution was declared invalid, as the SH were acting under a conflict
of interest. The minority SH in this instance could have claimed minority oppression under s232.
17.5 – The Obligation to disclose conflicts – under common law
North-West Transportation Co Ltd v Beatty (1887) Disclosure must be made to the SH at the General
meeting to ensure an unbiased and independent consent. Director can not approve their own conflicts by
disclosing to themselves.
Furs Ltd v Tomkies (1936) – it is no answer to say that the profit was of a kind that the company could
not of itself make, or that no loss was caused to the company, by gain of the director.
17.7 Statutory Duty to Avoid CONFLICTS of Interest s182/183 These duties are wider than under
common law
R v Byrnes and Hopwood (1995) – there is no requirement to proof that the officer actually achieved
his or her purpose in attaining a benefit for themselves, but their must be proof that they believed that
the intended result would be an advantage for themselves, or someone other person, or that their actions
would be of detriment to the corporation. Directors B and H, provided a guarantee on behalf of
Magnacrete, to benefit Jeffcott, not the company, without the approval of the other directors of
Magnacrete. B and H improperly used their positions as directors to gain an advantage for someone else.
In attempting to hide these actions from the other directors, it was proof that they believed they were
acting improperly.
ASIC v Vizard (2005) – shows enforcement of statutory no conflict rule, and civil penalty provisions and
application of precedent established un der Regal Hastings. Director was liable for breach of fiduciary
duty, despite no loss or harm being cause to the company. ASIC v Vizard (2005) Vizard, director of
Telstra, used confidential information to conduct share trading through a family trust. His actions were
deliberate and he attempt to conceal the illegality of his actions. He made no profit but a loss and incurred
no loss to Telstra where he was a director. Disqualified as director for 10 years.
17.8 Statutory Duty to Disclose Material Personal Interests s191
Disclosure must be made to the SH at the General meeting to ensure an unbiased and independent
consent. Director can not approve their own conflicts by disclosing to themselves.
What is meant by ‘Material Personal Interests’, Bell Group Ltd (in liq) v Westpac Banking Corp
[2008] – summarises test used to assess conflict of interest, in regards to fiduciary duty owed to company
by director. Renegotiate finance that provided little benefit to the company, but substantial benefit to the
company’s major financers. Material can be held to mean influencing the vote of the director on the
decision to be made.
Drillsearch Energy Ltd v McKerlie [2009] Directors sought to delay a meeting where they were to be
voted off the board, was found to constitute ‘material personal interest’ because the directors did not wan
to loose their jobs.
S191(2) – disclosure not required, where interest arises because director is a member of the
company, and the interest is held in common with the other MEMBERS of the company.
S191(3) notice must be given & it must be sufficiently detailed Imperial Mercantile Credit Association v
Coleman ‘73
S192 – director can give standing notice of the conflict to the board and does not have to raise issue
again.
S195 (1) a director that has a material personal interest in a matter, must not vote or be present at
the meeting.
Permanent Building Society v Wheeler (1994) – director when in a more senior position, cannot simply
disclose their conflict of interest and abstain from voting, as sometimes they must actively protect the
interests of the company and warn the other directors over the transaction being voted on. This could be
argued as a failure to act with care and diligence. S180

17.9 RELATED PARTY TRANSACTIONS – not relevant for PTY

s 229 : is there a Financial benefit? Classifies what is considered to be a Financial Benefit (FB)
(2) – Acts constituting a FB by giving FB – (a) indirectly (b) through an informal, oral or
unenforceable agreement (c) by conferring financial advantage that does not involve paying
money directly
(3) – Examples of FB given to related party such as (a) finance (b) buying/selling asset (c) lease
an asset (d) supply/receive services (e) issue securities or grant option (f) taking up or releasing
an obligation to the related party
s 228 : is the other party who received the FB a related party?
(1) controlling entities, - an entity that controls a public company is a related party
(2) directors and their spouses of the company or the controlling company
(3) relatives. Of directors and spouses
(7) – acting in concert with related party – I will give you a FB, if you give me one…..
Did an exception apply s210 – s216? states exceptions to members approval to related parties
transactions
No then must get SH approval s208
s210 arm’s length transactions, s211 remuneration,
s212 - indemnities, and legal costs for officers s213 small amounts,
s214 benefits to closely-held subsidiaries, s215 benefits to members that do not
discriminate unfairly
s216 court order
s 208 : was shareholder approval obtained for the related party transaction
MUST TAKE UP FB WITHIN 15 MONTHS OF APPROVAL UNLESS UNDER CONTRACT…..

ASIC v Adler(2002) – page 484 provided loan to related party and txn was not held to be at arm’s length
s210 ( as no evidence such as - payment was not secured, inadequately documented and allowed for
self-acquisition of securities) and no member approval was obtained under s208.

Remedy - S209(2) – CONSEQUENCE OF BREACH - A person who is involved in a contravention of s

208 contravenes a civil penalty provision: s 1317E. Consequence of breach: S209 (1) consequences of
the breach – (a) A contravention of s 208 requirement does not affect the validity of any contract or
transaction connected with the giving of the benefit: (b) the public company or entity is not guilty of an
offence.
When loan made to parent company with no security and no interest payment this is giving a financial
benefit to a related party. SH approval was not obtained formally but based on the facts that the parent
company owned 55% of subsidiary and that the director who initiated the loan owned 15%, the SH
approval would have been obtained, however as it was not obtained…..was this transaction actually valid.
Tom should have disclosed information – got SH approval for transaction…..s239- but that does not prevent
derivative action or ASIC
Related Party Transaction p 483, in regard to conflicts of interest, where financial benefit is given to a related party,
that is must be approved by shareholders.
Step 1. S229 (3)(a)(Finance) – a Financial benefit must have given
Step 2. S228?? An entity controlled by a related party – The parent company received the FB and Tom was a
director also with the parent company Financial Benefit must have been received by a related party
Step 3 no exceptions apply as per s210 –s216
Step 4 – s208 was not complied with as no SH approval was sought and therefore s209 is the consequence of the
breach of s208, and the loan contract will not be invalidated but TOM can be given a civil penalty under
s1317E

17.10 Consequences of Breaching Fiduciary Duties s191, s195 s182, s183 (NOT
208)
GENERAL LAW – CIVIL under s182/s183
Under general law, a failure to disclose a conflict of interested renders the transaction voidable at the
option of the company, by rescinding the contract. The company can also seek to :
• equitable compensation, (company must have suffered loss on the whole of transaction to claim
compensation)
• accounting for profit to strip away gains made by the breach of the duty,
• transaction voidable at the option of the company - rescission of contract
• injunction to stop the breach of duty continuing (s1324)
• OR AN constructive trust over assets acquired arising from the breach of duty - Constructive
Trust - when determining if a constructive trust is there, check if there is an injustice that took
place. The person who suffers the injustice is usually the beneficiary. The person who causes the
injustice is the trustee and the object of the injustice will become the trust property. Remember
that a constructive trust is a creation of the courts to remedy the injustice that has taken place.

CIVIL PENALTIES
s1317E. s184 and s1043A which are only statutory duties and can have criminal penalties as well as civil.
s1317E – Civil Penalty Provision – lists sections it can be applied to
s1317G – Pecuniary Penalty Provision - civil penalty provisions – fines that can be order, max $200,000
for an individual, $1mill for company, payable to ASIC
s1317H – Compensation orders - civil penalty provisions – order to compensate for damage suffered,
profits lost, fines that can be order, max $200,000 for an individual, $1mill for company, payable to ASIC
The transaction is valid but the directors involved commit a strict liability offence that attracts civil
penalties:
(s206C(2)) disqualification
S1323 – ASSET PRESERVATION ORDER
s1324 – injunction – appoint a receiver or undertake any other action

CRIMINAL PENALTIES under s191/s195

Contravening s191 or s195 can give rise to criminal sanctions.
S1311 – criminal sanctions – applies to all contraventions of the Corp Act, unless that section states
otherwise.
Individuals - Fine is $550 - $220,000 and/or 5 years imprisonment.
S184(2) s182 (3)s183 A serious Breach of s182 or s183, will have a will give rise to criminal liability,
where the act was done with intentional dishonest, recklessness or a guilty mind and must be
undertaken by ASIC or DPP.
S1315 – Criminal prosecutions may be commenced by ASIC or DPP. ASIC will conduct the actual
prosecution for minor criminal offences, but will refer more serious cases to the Commonwealth Director
of Public Prosecution (DPP ).
S1312 Corporation – max fine $1.1 million
S1316 – TIME LIMIT – prosecution must be commenced within 5 years of the contravention.

17.11 Defences to liability - Members’ consent – ratification – members give permission to fiduciary
to act in breach of duties owed. However members ratification will not be effective to forgive a breach of
duty where
S239(1) EFFECTS OF RATIFICATION BY MEMBERS at general meeting does not
stop a SDA, but court will take this into consideration when granting leave.
• Members have not given fully informed consent
• The ratification constitutes minority oppression
• The company becomes insolvent, as duties of directors change from being owed to the SH
too Creditors
• The act being ratified is ILLEGAL (criminal act), or for an improper purpose which renders
it beyond the power of the company
• The act represents a misappropriation by the directors of the company’s property
Re Duomatic Lt [1969] – member approval was not formally obtained, but members acted in a manner
consistent with their approval, as directors drew remuneration in breach of corp constitution, but fully
reported their conduct in the annual report to members, which was then approved at the members
meeting. The liquidators were then unsuccessful in suing the directors, as it could be shown that the
members had agreed, even without a formal meeting, and their informal approval was a binding decision
on behalf of the company. The principal of Duomatic, was applied in Australia in Brick and Pipe
Industries Ltd v Occidental Life Nominees Pty LTd (1991)

17.12 Tensions between the general law and statutory duties

The courts as per Angas Law Services Pty Ltd (in liq) v Carabela (2005) – have stated that SH cannot
release directors from statutory duties imposed such as 180(1) – 184. However in Pascoe Pty Ltd (in liq)
v Lucas (1999) it was found that the informed consent of the members did provide such a release.
However in Forge v ASIC (2004), where a criminal penalty is applicable, as the act had a criminal
element, and therefore there is a need to protect the interests of the public, then ratification by members
will not release the directors. General law duties are held to be for a private purpose and therefore to
benefit SH.

Chap 18 – Directors and Officers – the Duty of care and

Diligence
s180, s189, s1317-8
s180 – CARE AND DILIGENCE – civil obligation only! – (EQUIVALENT TO TORT OF NEGLIGENCE IN
COMMON LAW) (1) duty to act of Officers and directors, to discharge their duties with Care and due
Diligence, as what a REASONABLE person would exercise, in a similar circumstance in a corporation of
similar size/complexity, and position of similar responsibilities, role and experience.
(2) Business Judgment Rule as defense.
Is there a business decision made AS DEFINED UNDER 180(3)? AND THEN was the judgment made in
(a) in good faith (honest) and for proper purpose and
(b) without material personal interest and
 (c) inform themselves about the subject matter of the judgment to the extend they reasonably
believe to be appropriate and
(d) rationally believe that the judgment is in the best interest of the company?

Common Law – Negligence 3 essential elements – (1) duty of care owed, (2) breach, (3) Damage–
directors must act with care, skill and diligence in performance of their duties, which is similar to the
common law duty of avoid negligence that results in REASONABLY FORSEEABLE HARM as per:
Donoghue v Stevenson [1932]. S180 in the Corp Act is the statutory version. The snail in the bottle
case.
s189 – Reliance on information or advice provided by others

18.1 The Duty of Care, Skill and Diligence – The Traditional Standard, Higher standards
As a result of 1999 amendments, breach of s 180(1) can’t constitute criminal offence. Only civil.
S199A – you cannot indemnify a director against gross negligence (signing fraudulent cheques presented
by MD that made company insolvent) Re City Equitable Fire Insurance Co Ltd [1925] page 494 This
case also set the lower standard to not bind director to attend meetings, which is now required and the
use of subjective test. Massive corporate greed and collapses in 1980 caused loss to retirement savings
of Australians. Community sentiment has been incorporated into law, requiring a higher standard from
directors.

Commonwealth Bank of Australia v Friedrick (1991)The changed judicial attitudes were initially
reflected in a number of insolvent trading cases decided in early 1990’s such as:

AWA Ltd v Daniels and Rogers CJ in 1992 AWA Ltd v Daniels. Following this case, the duty of care
was measured by taking into consideration the size of the corporation and whether one was an executive
director or not.

Daniels v Anderson (1995) In 1995, the New South Wales Court of Appeal in Daniel v Anderson
imposed a higher standard of care than the statutory duty.
• The Court applied an objective duty applicable to both executive and non executive directors. - The
courts apply an objective test: Would a reasonable person act the same? MUST DETERMINE
what a reasonable equivalent director would have done, based on complexity of company, role in
company. ASIC v Vines (2005), extensive research was undertaken to assess what a reasonable
CFO would have done in Mr Vines’ position.
• Directors duties and associated liability are uniformly applied objectively, no matter what the title
given such as Non-Executive director, nominee, silent, or de-facto. ASIC v Rich (2003) – non-
executive directors cannot avoid liability by claiming that their non-executive status allows them to
perform their function to a lesser standard than executive directors, as all directors must monitor the
financial status of the company. Page 502 However the executive director will have greater
responsibility than the non-executive director and accordingly the level of penalties and duration of
disqualification will be greater for exec directors, when compare to the non-exec.
• States that both executive and non-executive directors owe a duty of care to the company. Non-
executive directors have to monitor the company’s business.
• The concept of a silent director who contributes little in knowledge and does not meet the 8 criteria
of the performance expectations of a director, is not accepted post 1995. Page 498 director must….

• Have basic understanding of what business does

• Under obligation to keep informed about business activities
 • May not shut their eyes to corporate misconduct and cannot claim they did not have a
duty to look. Cannot be a guard to protect SH if asleep in the job.
• Director is advised to attend board meetings, so he can monitor corporate affairs. Is not
required to inspect day-to-day activities. Vrisakis v Australian Securities Commission
(1993) – in this case, the attendance at board meetings was considered expected and an
omission could only be explained by exceptional circumstances such as illness or absence
from the state and that they were then prevented from attending. Sheahan v Verco (2001) –
the non-executive directors took no part in company’s management and failed to hold any
director’s meetings for several years. MD was left to run company. These directors were held
to have failed in their statutory duties, until shortly before the company became insolvent.
• Maintain familiarity with financial status of company, review financial statements etc and
comply with duty to declare insolvency if necessary. They don’t have to carry out an audit as
such, that is going to far.
• Director cannot seek protection from liability by claiming to be a puppet or dummy director, as
a director is now considered to be an essential component of CORPORATE GOVERNANCE.
• Sleeping or passive director is not longer accepted under company law.
• If director is lacking in skill or experience, then they must either acquire it or refuse to take
on role.

Deputy Commissioner of Taxation v Clark (2003) – requirement of skill involves an objective test,
such as ‘ordinary competence’ or ‘reasonable ability’. Diligence means to take reasonable steps to place
themselves in a postions to guide and monitor the management of the company.

James Hardie Ltd Directors were in breach of duties s180(1), for allowing the company to issue an ASX
release that was misleading as it suggested the compensation fund was ‘fully funded’. James Hardie had
restructured its assets in order to avoid full liability for compensation claims related to asbestos related
deaths and illness. The Directors said they were acting in the interests of SH, but the community
demanded they consider the wider group of corporate stakeholders, such as employees and creditor and
individual SH, in light of social corporate responsibility. Law still has to obligate such wider social
conscience. CEO of JHIL (James Hardie) owed higher standard of care as a result of his operational
responsibilities and that Mr Macdonald failed to discharge his duties to JHIL with the degree of care and
diligence that a reasonable person would exercise. The claims made that the there were sufficient
funds were based on some very limiting assumptions, such as that there would be minimal increase in
claims, and a consistent investment return of 11% over 51 years. Court held that directors and officers
should have know that such unrealistic assumptions meant that it was misleading to claim the foundation
to compensate asbestos sufferers was fully funded. The directors failed in their duty of care. The
consequence to JHIL was that JHIL faced legal action for publishing false or misleading / deceptive
statements, and that JHIL would suffer, with associated market reaction. The director and officer failed to
protect the company from the adverse consequences of engaging in misleading and deceptive conduct.

ChairPerson – the possession of particular powers and responsibilities will be taken into account when
determining whether the officer has complied with the duty of care, skill and diligence – ASIC v Rich
(2003) Greaves attempted to argue that the role of chairperson was only ceremonial. Court held
otherwise and held that the chairman if anyone, has a higher duty to keep informed.

Managing Director – CEO – They have ability to control key decisions and information flows within the
organisation, and they have extra obligation to seek to protect the company’s interests and to fail to do so
may be negligence. Permanent Building Society (in liq) v Wheeler (1994) - some directors were
aware that PBS was purchasing property from another company, in which the directors had an interest.
Issue was a conflict of interests as per s182/3. However the MD was taken to have failed in their duty of
care owed to company, as his disclosure of his conflict of interest was not sufficient to discharge
his duty of care, skill and diligence, as not all directors were informed of the possible harm that may
have been caused to the company by purchase of the property and he failed to point out possible
methods of reducing the RISK of the transaction. HOWEVER – the company failed to prove
that this breach of duty CAUSED the loss as the remaining directors would still
have voted to approve the transaction. You must proof that the directors breach
of duty, caused the company to suffer loss or damage. Page 510.

Chief Financial Officer – CFO – A most senior executive. Ensures financial information flows within
company and to public, that it is accurate, sufficient to ensure company complies with its legal obligations
to disclose financial information. CFO is often also company secretary and director. Page 508 ASIC v
Macdonald (No 11)(2009)-CFO Morley, was responsible for finance, audit, tax for JAMES HARDIE.
Morley was found by the court to have contravened his statutory duty of care and diligence as CFO
because he did not clearly communicated these limitations (discussed above) and their
consequences to the board of directors. A reasonable CFO would have known that the range of limited
assumptions meant that the press release could not state with certainty that the foundation was fully
funded. ASIC v Vines (2003) – Vines was CFO for GIO and he failed to act with care and diligence in
relation to the accuracy of profit forecasts given during the takeover battle for GIO. Courts used expert
evidence to verify that Vines did not act as a reasonable CFO in the circumstances.
General Counsel (LEGAL ADVISOR) and Company Secretaries (key administrative and legal
compliance) –
ASIC v Macdonald (No 11)(2009)- Mr Shaffron, breaches his duty under s180(1), as he did not prevent
company from releasing a misleading press release. Shaffron failed in his duty to manage the company’s
legal risk, by failing to properly brief the board of directors and thus allowed the defective media release
to be released.

18.8 Statutory codification of the duty of care, skill and diligence 180
Under Common law the assessment of failure of duty, cases provide precedence. Codification of the
these principals is under s180(1), but cases help to explain.
SKILL is included in s180(1) as the duty is ‘care and diligence’ which has been taken to include SKILL as
per common law - defined in Daniels v Anderson (1995) as ‘that special competence which is not part of
the ordinary equipment of the reasonable man but the result of aptitude developed by special training and
experience.’ Page 511

The words CORPORATOIN CIRCUMSTANCES are included in s180(1) and relate to the type of
company, size and nature of the company’s business, the composition of the board and the distribution of
its work between the board and other officers as stated in Commonwealth Bank of Australia v
Friedrich (1991)

Negligence The breach of the statutory duty under s180(1), generally involves no greater threshold than
that which applies to common law negligence, but that punitive consequences of breaching the statutory
duty, such as disqualification and pecuniary penalties, would require a higher level of seriousness. Vines
v ASIC (2007).
Vrisakis v Australian Securities Commission (1993) Justice Ipp compared the two tests for negligence
under.
• IN COMMON LAW the test for negligence is centred on the duty to avoid causing harm by
engaging in conduct that unreasonably creates a risk of harm.
• IN STATUTORY DUTY the test for negligence is centred on whether the director acted in a
reasonable manner, in light of the failure to BALANCE the potential benefits to the company
against the potential risks.
ASIC v Maxwell (2006) – merely being a director on the board that contravened certain corporate
fundraising laws, did not mean that the director had been negligent.

REMEDY - Consequences
It can said that the duty to exercise care and diligence and s180(1) are substantially
similar. The primary differences relate to the consequences of breaching the duties.
REMEDY – COMMON LAW – remedy for damages for loss caused to the company.
REMEDY – STATUTORY– civil penalty order provision under s1317E, but only a CIVil penalty as there is
no criminal penalty provision, as s180, states specifically that it has a civil obligation only.
s1317E – Civil Penalty Provision – lists sections it can be applied to
s1317G – Pecuniary Penalty Provision - civil penalty provisions – fines that can be order, max $200,000
for an individual, $1mill for company, payable to ASIC
s1317H – Compensation orders - civil penalty provisions – order to compensate for damage suffered,
profits lost, fines that can be order, max $200,000 for an individual, $1mill for company, payable to ASIC
The transaction is valid but the directors involved commit a strict liability offence that attracts civil
penalties:
(s206C(2)) disqualification
18.11 Should Directors’ duties extend below the board of directors? To employees – not yet as per
Vines v ASIC (2007).

18.12 Statutory defences

BUSINESS JUDGEMENT RULE the courts are reluctant to second-guess the business decision of
management, with the benefit of hindsight, rather than the commercial realities and demands that boards
face. This defence can only be used, where a business decision has been made and applies only to
breaches under s180(1), not s181-3. If a director is found liable for a breach of statutory or common law
duties of care and diligence. As per ASIC v Adler (2002) the court decided that Adler could not rely on
the business judgment rule defence, because he clearly had a material personal interest in the
transaction that gave rise to the breach of duty, because of his connection with the company that the loan
funds were used to purchase. He was a director in the other company also. Adler also had a material
personal interest in increasing HIH’s share price, preventing again the use of the defence of s180(2).
180 (2) Business Judgment Rule as defence.
Is there a business decision made AS DEFINED UNDER 180(3)? AND THEN was the judgment made in
(a) in good faith (honest) and for proper purpose and
(b) without material personal interest and
(c) inform themselves about the subject matter of the judgment to the extend they reasonably
believe to be appropriate and
(d) rationally believe that the judgment is in the best interest of the company?

RELIANCE
s189 sets out the Reliance defense: can reasonably rely on information and advice given if the director
made independent assessment of the information provided, in the context of the director’s position and
the business context.Directors can rely on information or advice provided by:
s 189(a)(i) an employee whom the director believes on reasonable grounds to be reliable and competent
in relation to the matters concerned:
(ii) a professional adviser or expert in relation to matters that the director believes on
reasonable grounds to be within the person’s professional or expert competence:
iii) another director or officer in relation to matters within the director’s or officer’s
authority:
(iv) a committee of directors on which the director did not serve in relation to matters within
the committee’s authority:
AND Under s 189(b) (i) the reliance must be made in good faith and
(ii) after making an independent assessment of the information or advice, having regard to the
director’s knowledge of the corporation and the complexity of its structure and operations.
AND under s189 ( c ) the reliance was reasonable
Sheahan v Verco (2001) – the non-executive directors took no part in company’s management and failed
to hold any director’s meetings for several years. MD was left to run company. These directors were held
to have failed in their statutory duties, until shortly before the company became insolvent. The directors
made reliance without undertaking any monitoring
DELEGATION
s190(2) sets out the Delegation defense: Under s 190(2), a director may avoid responsibility for
decision delegated under s 190 if: The director believed on reasonable ground that at all time the
delegate exercise the power in conformity with the duties imposed on directors and after making proper
inquiries (if the circumstances indicated the need for inquiry) that the delegate is competent and reliable.
The ability to delegate responsibilities and rely on subordinates to carry out task is essential for effective
management under s198D. Daniels v Anderson Director could only rely on delegates if they were
sufficiently monitoring the company’s affairs so as to be aware if there were irregularities.

Chapter 19 INSOLVENCY – p 536 – 546 – Director and officers -

Corporate Governance during times of Financial distress, s95A,
s180, s181, s182, s588G,H s1317-8

s1043A Insider trading –prohibited conduct by person in possession of inside information

s 588G (1) Director’s(defacto, shadow, non-executive directors, chairman, MD included) duty to prevent
insolvent trading by company. At the time that a debt is incurred, such as declaration of dividends, if the
director of the company is aware or suspects that they cannot pay this debt, then they have failed to
prevent the company from trading while insolvent.
ASIC v Plymin (Water Wheel Case) (2003) Elliott argued in defence against the allegations of insolvent
trading, as he was unable to prevent the insolvent trading because he was a non-executive director and
therefore owed a lessor duty. Elliott was unsuccessful in claiming lessor duties and the director that
cannot prevent insolvent trading is under an obligation to resign immediately.

s 588G (1) (a). Who is liable? a person who is director at the time when the company incurs the relevant
debt. This is base on the law of equity known as the rule of Barnes v Addy, in 1874, as the person (the
director) that receives property $, as aresult of a breach of trust or fiduciary duty (such as duty to
consider interests of creditors), may be liable to account by returning the property or $. Creditors that
know a company is approaching insolvency and make efforts to elevate their rights to be secured against
company assets, over and above those of other unsecured creditors, will be made to repay any
proceeds they receive, as what occurred in Bell Group Ltd (in liq) v Westpac Banking Corp (2008),
when banks were order to repay $1billion.

s588G(1A) – When Debt incurred – the date that the debt is incurred is defined, per several types of
debts, such as dividends, reduction of share capital, buying back shares, issuing redeemable preference
shares.
Box Valley Pty Ltd v Kiss (2006) – a debt for the purposes of insolvency, is not liability to pay damages
for a likely future breach of contract. Pge 539
Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) – this case demonstrates that delays by
creditors in enforcing repayment do not prevent the amount owed being counted as a debt. Pge 539

s588G(3) – offence - company incurs debt, person is director, company is or becomes insolvent by
incurring debt, person suspects insolvency at the time and person’s failure to prevent company incurring
debt was dishonest.
Kinsela v Russell Kinsela Pty LTd (in liq) (1986) – The Kinsela family prejudiced the interests of the
creditors, when they transferred a lease to themselves as undervalue, as they approached insolvency.
The transfer was ratified by them as the shareholders, but as the company approaches insolvency.
However the duty shifts from being owed to SH, onto preventing further losses to creditors (as SH
under s563A are generally the last ranked claimants in insolvency) and therefore SH cannot ratify an
action that prejudices the interests of creditors.

PRESUMPTION OF INSOLVENCY
s286 (1), (2) – A registered company is required to keep financial records, in such a manner that
transactions can be explained and financial position clearly known, for a period of 7 years.
s588E (4) – An entity is presumed to be insolvent when s286 (1), (2) are contravened.

WHEN IS A COMPANY INSOLVENT?

s95A, if a company cannot pay debts when they become due and payable, than they are considered
insolvent.
Fryer v Powell (2001) – just because company does not have sufficient cash to pay its debts, does not
render it immediately insolvent, as the company may have money that it can procure by selling assets,
borrowing against the security of assets. Page 540
Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) – this case demonstrates that delays by
creditors in enforcing repayment do not prevent the amount owed being counted as a debt. Pge 539

Reasonable grounds for suspecting

Section 588 G (1) (c) requires that there also be reasonable grounds for suspecting that the company is
insolvent at the time. What is meant by reasonable ground? ASIC v Plymin (Water Wheel Case) (2003)
page 541 established extensive list.
Metropolitan Fire Systems Pty Ltd: -“The directors must have reasonable grounds for regarding it as
likely that the company would at the relevant date have been able to pay its debts as and when they fall
due.” Page 542 The directors should have suspected that the company was insolvent because of the lack
of incoming payments and the continued accumulation of business debts that were not paid. Therefore
the directors breached their duty under s588G.

continuing losses Liquidity ratios below 1 – no Overdue taxes

Poor relationship with bank
Suppliers won’t give credit,
demand COD
Dishonoured cheques
Payment to creditors of
rounded sums, that are not
reconcilable to specific
invoices
cashflow
No access to alternative finance Inability to raise further equity
finance
Creditors unpaid outside normal Issuing of post-dated cheques
trading terms 30 days….
Special arrangement with Solicitors letter, judgments or
selected creditors warrants issued against the
company
Inability to produce timely and accurate financial information to display
the company’s trading performance and financial position and make
reliable forecasts

19.4 Voidable TXNS

Liquidators has the power to reclaim property, including money, that has previously been disposed of by
the company in the lead up to liquidation is called a voidable transaction, and therefore increase the pool
of assets that creditors can be repaid from.
s588FA(1) states that unfair preferential transactions that prefer one creditor over others in insolvency
are voidable up to 6 months Airservices Australia v Ferrier (1996) Note though that the pref must result
in a net reduction in assets available to other creditors.

s588FB(1) states that uncommercial transactions (e.g. sale of assets under value, release a debt for
no consideration) in insolvency are voidable up to 2 years. Which is where a reasonable person in the
company’s circumstances would not have entered into the transaction having regard to the benefits and
detriments involved as per Demondrille Nominees Pty Ltd v Shirlaw (1997).

s588FD states that unfair loans are voidable without time limitation. Where the interest or charges on the
loan are extortionate or grossly unfair. Liquidator can reclaim with no time-limit.
s588FDA(1) states that unreasonable director-related transactions are voidable up to 4 years
s588FJ Voidable charges - which involve a floating charge created within 6 months prior to the
commencement of the liquidation, although there are numerous exceptions…..

s588FC – Insolvent Transactions – Defines when a transaction if considered to be an insolvent

transaction and txns under s588FA and s588FB are only voidable if they can be classified as insolvent
txns.
S588FE – voidable transactions –
(4) made to related party can be voidable up to 4 years from relation-back day.
(5) made to obstruct creditors rights can be voidable up to 10 years from relation-back day.
Relation-back day (s9 defn - date that winding up was filed on or taken to have begun under s513

19.8 Defences to voidable TXNS

If a person was genuinely unaware of the insolvency of the company, s588FG, provides defences against
the liquidator’s power to reclaim voidable txns.
Person was not a party to the transaction, but txn would otherwise be voidable
• S588FG(1) received the benefit in good faith (propriety and honest) - Olifent v Australian Wine
industries Pty LTd (1996)
• S588FG(1) – person had no reasonable grounds for suspecting the company’s insolvency
when the txn occurred. Queensland Bacon Pty LTd v Rees (1966) ‘Suspicion’ as been judicially
defined as ‘more than idle wondering. It is a positive feeling of actual appreshension or mistrust
without sufficient eveidence’
• No Reasonable person in similar circumstances would have grounds to suspect the company’s
insolvency.

Person was a party to the transaction, but txn would otherwise be voidable
• S588FG(2) received the benefit in good faith and had no reasonable grounds for suspecting the
company’s insolvency when the txn occurred.
• But they must prove they gave valuable consideration for the transaction, or
• Have changed their position in reliance on the transaction.
• S588FG(2) However this defence does not apply to unfair loans or unreasonable director-related
txn.

REMEDY
S1317E – generally liable under this section for debts of company civil penalty, but if insolvent trading
occurs due to dishonesty, criminal liability under ‘Sch 3’ which may incur up to a $220,000 fine and /or 5
years prison.
S180(2) Business judgment rule is not a defence in Australia yet.
S588J– Court can make an order for compensation to creditors of company
S588G(3) – criminal liability
S588M – Recovery of compensation for loss resulting from insolvent trading PERSONAL LIABILITY
(2) liquidator may recover from the director, as a debt due to the company, an amount equal to
the amount of the loss or damage.
s1317S / s1318 Relief from liability only applicable when civil penalty made under s1317E Does not
apply to sleeping directors, only applies when director can prove they acted honestly and in the
circumstances ought reasonable to be granted relief from liability. – case Hall v Poolman (2007) –
company had increasing debts, and continue to trade while insolvent, as there were prospects of the
situation improving, but had attempted to resolve a tax debt with the ATO over a period of 10 months.
Eventually company was placed into liquidation. Irving was found only liable for debts made past
reasonable point in time (3 months), when it became clear that the ATO tax debt would not be resolved
and insolvency was definitive. So Irving was given partial relief.
DEFENCES TO INSOLVENT TRADING
s588H(2) sets out the Reasonable grounds to expect solvency defense: Were any or some of the
criteria to suspect insolvency observed? Courts look for solid facts not mere hope (as in
METROPOLITAN FIRE SYSTEMS CASE) and a ignorance is no defense (as in TOURPRINT
INTernational Pty Ltd v BOTT (1999) – directors after Daniels v Anderson, can rely on ignorance as a
defence). Metropolitan Fire Systems Pty Ltd: -“The directors must have reasonable grounds for
regarding it as likely that the company would at the relevant date have been able to pay its debts as and
when they fall due.” PAGE 542The directors should have suspected that the company was insolvent
because of the lack of incoming payments and the continued accumulation of business debts that were
not paid. Therefore the directors breached their duty under s588G. Statewide Tobacco Services Ltd v
Morley (1990)- A director that is a spouse and director that never attends meetings because they
trust their partner, cannot rely on this defence. The days of the sleeping director are over.

s588H(3) –Reliance on others providing information on the solvency of the company – In respect of
breaches of s180(1), who relied on another s189. As a defence to being sued as a director for trading
while insolvent, a director may claim that they relied on others for information under s189. Did the director
reasonably rely on a competent and reliable person and did he expect solvency by independent
assessment of that information? And was the person being relied upon, have the responsibility given to
them to provide such financial information? Williams v Scholz [2007] – directors relied on a sales
manager they mistrusted and there was no evidence to show that the sales manager was to provide
directors with financial information.

s588H(4) – Director did not take part in management of company. As a defence to be sued for trading
as a director for trading while insolvent, a director may claim they did not participate in the management
of the company. A good reason must be given, such as hospitalisation. If a director is a spouse and
says they implicitly trust the other director who is their spouse, this is not considered a good reason. DCT
v Clark (2003) - A director that is a spouse and director that never attends meetings because they
love, trust, confidence and have faith in their partner, would not be entitled to reliance , on the ‘some
other good reason, aspect of being absent from management. Statewide Tobacco Services Ltd v
Morley (1990)- A director that is a spouse and director that never attends meetings because they
trust their partner, cannot rely on this defence. The days of the sleeping director are over. Page 549.

s588H(5) sets out the Reasonable steps to prevent insolvency defense: Did the director put the
company under voluntary administration? ASIC v Plymin (Water Wheel Case) (2003) Elliott argued
in defence against the allegations of insolvent trading, as he was unable to prevent the insolvent trading
because he was a non-executive director and therefore owed a lessor duty. Elliott was unsuccessful in
claiming lessor duties and the director that cannot prevent insolvent trading is under an obligation
to resign immediately.

Who can bring the action and what remedies are available?
Liquidator can bring the action, as creditors now have duty of care owed to them
Can we try to recover funds from parent company? Might be possible if wholly owned subsidiary is that correct?

Chapter 20 – MINORITY OPPRESSION members remedies

s231, 232, 234, 236, 461(1)(k), 1324
Make sure what the question is about – is it about the shareholders’ rights or about directory duty, that is
owed to the company. Shareholders can exercise their votes in a manner they see fit, but not outside of
what is a reasonable scope, where the majority vote is used for an improper purpose – meaning where
the purpose that the power to vote was not intended to be used for.

20.1 General Law Remedies –

20.2 GENERAL LAW - FRAUD ON THE MINORITY – Majority’s vote will be void in law if it is
done for an improper purpose, that is a purpose that the power to vote was not intended to be
used.
Ngurli Ltd v McCann (1953) – Fraud on the minority – there is a limit to which the majority may exercise
their votes for their own benefit, if must be bona fide and for benefit of the company as a whole, however
the majority choice can be held as invalid, where it is taken for ulterior purpose.
Peter’s American Delicacy v Heath (1939) pg 561 – a chief reason to deny unlimited effects of a power,
such as altering company constitution, is to avoid a power being used for an personal gain, and the use of
that power must be done for reasons that are consistent and within the original contemplates objects of
the power.
Bona fide
Allen’s test ‘ and in the interest of the company as a whole’ when assessing the
validity of alterations to the constitution - Peter’s American Delicacy Ltd v Heath (1939) page 202
resolution, to alter constitution, to pay dividend with shares rather than cash, and assigned based on
proportion of paid up capital, rather than share value held by member. Court upheld this as being bona
fide, as it did benefit company as a whole.

20.3 Altering the constitution to take away property rights

Gambotto v WCP LTd (1995) Page 203, pg 562 protection of minority, Gambotto case overturned
the Bona Fide test, and raised a higher standard of proper purpose, as Company could not amend
constitution to purchase (expropriate – take away property rights) (by conferring a new power), Mr
Gambotts’s shares, unless it is for aproper purpose and fair ,(rather than the old ‘Bona Fide’
test), which it was not in this case. Fair means that money offered for the shares must be equal at least to
value of shares. There must be procedural fairness, in that no undue influence allowed, must make offer,
then hold meeting, all relevant facts disclosed ....
Reasons that are NOT taken as being a proper purpose are
– substantial savings in administrative costs and tax. NO
A proper purpose is when
• SH is competing with the company - YES
• SH’s membership would result in loss of its business i.e. must now be owned by Australian citizens
only. -YES
Gambotto case applied in Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd [2007] p 562
Most courts however do not apply Gambotto, but rather use s661 to compulsorily acquire shares.
However onus of proof is reversed and the majority must prove that they undertook the amendment for
a proper purpose and fair. Pg 563

20.4 Statutory Enforcement of the Constitution

S140(1)effect as contract (a) between company and member (b) between company and
director/company secretary (c) between member and other members Hickman v Kent or Romney
Marsh Sheep-Breeders’ Assoc [1915] – members may enforce only those provisions in constitution and
RR, in order to protect a member against conduct that impacts on their rights as a members in their
capacity as members s140(1).

20.5 Statutory Remedies

Principle of PROPER PLAINTIFF rule due to Foss. Prior to 1999, as per Foss v Harbottle if a wrong
was done to company ( such as breach of director’s duties), then the company was the ‘proper plaintiff’.
The member could not bring this action, unless one of several allowable exceptions had arise pg 564 –
such as: (1) where the constitution was not satisfied,
(2) matter infringed on personal rights of the member,
(3) conduct constituted fraud on minority,
(4) actions of company were ultra vires as they were outside object clause (which is no largely
obsolete).
In these and other exceptions the member could enforce the company rights. This was known as a
derivative action, as the member is seeking to protect someone else’s rights.
S236 – BRINGING OR INTERVENING IN, PROCEEDINGS ON BEHALF OF A COMPANY - The proper
plaintiff if a director is at fault, is the company, as the company as separate legal entity can do this under
s140(2) where the director and company form a contract, and director will comply with company
constitution. However when company will not sue, then the SH cannot take legal action under s140, but
this creates unfairness so exceptions exist, such as statutory derivative action. Person must be
a valid person as listed under s236(1)(a)(member as per s231, former member or person entitled to be
registered as a member of the company or related body corp, an officer or former officer) and can apply
to the court under s237(1) to be granted leave to sue the director on behalf of company. The leave
application is brought in the company’s name, and person is given leave to stand in the company’s shoes
and enforce the legal rights. Benefits that result from case will flow to the company.
S242 – court has power to make company liable for the costs of litigation, under the SDA, but applicant
will be assumed to be responsible.

S237 – APLYING FOR AND GRANTING LEAVE –requirements to obtain ‘leave’

s237(2) must satisfy all of these requirements – when court must grant application
(a) it is probable that the company will not sue by itself, and
(b) the applicant is in good faith and, Swansson v RA Pratt Properties Pty Ltd (2002) Wife
applied under 237 to sue ex-husband as director for secret commission. Court decided that there
was a collateral purpose, an ulterior motive, which would amount to an abuse of power of the
courts.
(c) he is acting in best interest of the company, and - Chahwan v Euphoric Pty Ltd t/as Clay
& Michel (2008) – when company is in liquidation SDA will not be granted, as it may not best
interest of the company and will consider the state of insolvency when granting leave.
(d) a serious question is going to be tried and Ragless v IPA Holdings Pty LTd (in
liq)(2008) – must show they have sufficient evidence, but rather that there is real question to be
tried.
(e) he has served 14 days written notice or been granted exception.

237(3) – directors have previously decided not to bring an action, but the applicant must rebut the
assumption that the granting of leave is not in the best interest of the company.

S239(1) EFFECTS OF RATIFICATION BY MEMBERS at general meeting does not

stop a SDA, but court will take this into consideration when granting leave.

Remedy – compensation made payable to company

S1324 – Statutory Injunction – court has power to order an injunction to stop a person from engaging in
conduct that is in breach of Corp Act.
S1324(10) allows compensation – ‘damages’, to be paid either in addition to, or instead of granting an
injunction and either to the company or to another person. Normally damages are paid to the company,
as the derivative action was taken on behalf of the company.
S1324(10) Note: that any person whose interests are affected can apply for an injunction.
S1324 – if a member or creditor, can establish that the conduct of the company, has affected their
interests ( as undertaken by the directors or otherwise), then they can obtain an injunction and/or
damages under s1324, which means that they are not limited to undertake a Derivative action as per
Smolarek v Liwszyc (2006)

S461(1)K winding up – compulsory winding of a SOLVENT company on just and equitable

grounds
(a) 20.12 – Justifiable lack of confidence in the management of the company’s affairs. Management
have conduct company affairs in breach of law, member may seek a just and equitable winding up, on
ground justifiable lack of confidence Loch v John Blackwood [1924] – directors refused to hold AGM,
pay dividends and so forced SH to sell shares.
(b) 20.13 Equitable considerations – Breakdown in mutual trust and confidence in a small company
Ebrahimi v Westbourne Galleries [1973] – partners in business, became company, appointed and gave
shares to a new director, but then old director removed, which results in old director not receiving share of
profits. Court would up company, as breached equitable principles of good faith.

Divorce of 2 major SH, resulted in breakdown of mutual trust and confidence and a minority Sh was
entitled to have company wound up under 461(1(k). - re: Dalkeith Investments Pty Ltd (1984) What
remedy should be used? However a remedy under s232 was less drastic and more appropriate, as the
company was profitable and had considerable assets. Court does not want to keep successful business
operating if possible.The winding up would have been prejudicial to the other shareholders, than just the
applicant.

( c ) Company unable to make or implement decisions

CIC Insurance Ltd v Hannan & Co Pty Ltd (2001) board had no wiling directors and no candidates
willing to fill.
(d) DEADLOCK - When partners refuse to speak to each other Re Yenidje Tobacco [1916]

(e) 20.16 Failure of Substratum – Ceases to carry on the business for which it was formed. Re Tivoli
Freeholds [1972] business formed to carry on theatre proprietor, conducting entertainment, with an asset
of a theatre. Company cam under control of another company and appointed its own nominee directories.
Theatre burn down and hence theatrical functions ceased. Company then sold land and either lent money
or bought shares. Minority members successfully petitioned for winding up on grounds of justifiable and
equitable grounds, as the company was acting entirely outside what could be regarded as intention and
understanding when members became members. The activities were not outside the object clause, and
therefore the judgement looked beyond the objects clause to things such as the prospectus.
(f) ASIC v Pegasus Leverage Options Group Pty Ltd - ASIC will wind up company to protect public
interest and in this case to protect investors, as company had repeatedly contravened Corp Act,
mismanaged and misconduct

20.17 Minority Oppression remedy – the most important member remedy available under s232 and is
called a PERSONAL ACTION
S234 – Who can apply for order – must be person as member, current or removed due to selective
reduction, or ceased to be member and application relates to those events, etc
S233 Orders the Court can Make – remedies – (a) wind up company (b) modify constitution (d) purchase
of any shares (h) appoint receiver and manager
S232 Grounds for Court order under section 233 if – [must satisfy one or (a, b or c) and one of (d, e)]
(a) the conduct of a company’s affairs or
(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 to, or in any other capacity

- s53 sets out that a company’s affairs is interpreted broad as anything relating to the company.
- s233(1) states that the court has wide powers to make any order it considers appropriate

20.19 Key terms of 232(e) – OPPRESSIVE, UNFAIRLY PREJUDICIAL AND UNFAIRLY

DISCRIMINATORY
S232 (e) if there is conduct to a minority, that is oppressive, unfairly prejudicial or unfairly
discriminatory.
Court will consider how a reasonable person would view the conduct within the context in which
it occurs.
Wayde v NSW Rugby League Ltd (1985) – Established the test. Was the decision made to exclude one
club as there were too many teams competing a decision that any other board would reasonably have
made ? If yes, then there is no oppression. It can be that a decision in prejudicial or discriminatory, but it
must be unfairly so, for it to be OPPRESIVE.

Case – Wayde v NSW Rugby league - This case establishes the criteria “ Whether any reasonable
director would have done the same thing”. In oppression – just because you have experienced damage
does not mean it was oppressive
Oppression is not measured in terms of damage, but whether a reasonable director would have done
the same thing. Company restructure – job lost and can’t pay mortgage and decides to commit suicide,
that is not oppression as company restructures are legally accepted and “reasonable” as other director
would do same thing to ensure survival of company in similar circumstances and director must fulfil duty
to act in best interest of company

Oppressive – burdensome, harsh wrongful

Criteria to establish on next page

• Diversion of business opportunities case Scottish co-operative Wholesale Society Ltd v Meyer
[1959] When a director or majority members, divert business opportunity to themselves, or to company
they control, but minority member will receive no benefits from, than that is oppression. In this case,
Subsidiary company held 2 licenses to purchase yarn. Agreement was to weave yarn into cloth in parent
company, a Society, and then sell back to subsidiary so it could sell cloth. Disagreement arose with license
holders and Society obtained yarn from elsewhere and the remaining directors of the subsidiary appointed
by the society let the subsidiary company decline. 2 directors who held license to buy yarn and were
effectively left with a worthless subsidiary, sued for oppression and the society was ordered to purchase
the shares from the 2 effected directors.
• Improper exclusion from management case Hogg v Dymock (1993) – If the member has a
reasonable expectation of continuing in management and they are excluded from participating in
management of the company, or they are removed., that is oppressive. In this case a husband and
wife bought company together and intended to share in day-to-day conduct of the business. When
they disagreed and the plaintiff was dismissed from employment by the company, that was
oppressive. Fexuto Pty Ltd v Bosnjak Holdings Pty sets out that Exclusions from management are
oppressive & unfair
• Unfairly restricting dividends case Thomas v HW Thomas Ltd (1984) Small company and
Malcolm Thomas is MD and member, and puts forward motion to sell some assets as there were
many assets and turn them into income generating investments, so that dividends could be paid at a
higher rate. The majority of members disagree and court upheld that Thomas was not being
oppressed, as was reasonable to comply with the wishes of the majority in following a conservative
investment approach. 15-210
• Unfairly restricting dividends case In the instance that small dividends are paid to shareholders,
but directors pay themselves excessive remuneration out of profits that could otherwise be paid as
dividends then that is oppressive.
• Excessive remuneration for directors where previous profits had been paid as dividends had been
paid as dividend, not remuneration Roberts v Walter Developments Pty Ltd (1997) Exclusion
from the management of WD The fact that John had been excluded from management once it
became clear that he was trying to have the company wound up was unjustified in the circumstances.
Of course, if John was simply trying to be a pest and trying to undermine the way in which WD should
be run then perhaps a decision to exclude him from management might have been justified. This was
particularly relevant when it became clear that John was not really looking to wind the company up
but was looking for an alternative remedy. Failure to pay dividends The mere failure to pay
 dividends does not normally constitute unfair or oppressive conduct. However, it can be oppressive in
certain circumstances. In this context, it is interesting to note the language of Wheeler J on this
question. It is rare for courts to make an oppression ruling on the failure to pay dividends. "A mere
failure to pay dividends, even where they are able to be paid, does not constitute oppression or
unfairness but is capable of being oppressive in some circumstances. It may be necessary to
consider the history of the company, the extent of its financial needs, and the reasonable
expectations of its members among other factors. ..." (emphasis added) In the early years of WD
dividends had not been important because John together with his brother Russell had been involved
in management. However, things changed. Between 1986 and 1993 because John had stopped
being an active participant and did not wish the company to expand further, he was not looking for
income from the company. Russell was being paid director's fees. The failure to adequately consider
John's position (which could have been covered by the payment of dividends) and rather to consider
the directors' remuneration issue of the effective way to reward Russell's participation was seen as
amounting to unfairly prejudicial conduct towards John. Directors' remuneration As noted
previously, the court was satisfied that when one looked at the failure to pay dividends and the
amount of remuneration being paid to the directors this showed an unwillingness on the part of
Russell and O'Halloran to consider the interests of John in particular. That failure indicated that they
were not concerned with the minority shareholder's interest as much as they should have been.
• Oppressive conduct of board meetings case John J Starr (Real Estate) Pty Ltd v Robert R
Andrew (A’asia) Pty Ltd (1991) When Board meeting is conducted in unfair manner, this is
oppressive. Manner in which board meetings were held were oppressive, as the MD held 63% of
shares and would refuse to provide board with proper budgets, bring to attention significant matters
with no notice at meetings, restrict speaking times of board directors when significant matters to be
discussed, make major decisions with no reference from board of directors. - HANNES v MJH sets
out that share issue for improper purpose is oppressive & unfair
Issuing share in circumstances where the main purpose is to reduce a member’s ownership
interest in the company case Kokotovich Construction Pty Ltd v Wallington (1995) directors. W
+ K were in defacto relationship, and became separated. K had governing director’s share and
removed W as director/secretary and issued additional shares to himself and family, reducing W’s
ownership interest in the company, which was oppressive.
• Failure of directors to act in the interests of the company case Re Spargos Mining NL (1990)
and Jenkins v Enterprise Gold Mines NL (1992) Breaches of duties can constitute oppression.
Funds were channelled out of the company. Loans were provided to IRL with no security. Bought
shares a 3 times the market price ,in IRL group rendering Spargos insolvent. Bought shares in IRL,
solely to provide cash to IRL, for no benefit to Spargos. Directors of Spargos and Enterprise, failed to
act for the interest of their company and breached their duties, but did act in interest of IRL. This
behaviour overall constituted Oppression.

20.23 What orders may be made

S233(1) Wide powers of the court to make any order it considers appropriate, when s232 breached.
S233 – remedies made direct to SH if personal action taken
Wind up company
To amend the company’s constitution
To order the company to purchase the member’s shares
Note – no court permission required for personal action to be brought by a SH, when SH takes action
against company and can be based on conduct of company that is actual or proposed of the company
S1324(10) Note: that any person whose interests are affected can apply for an injunction.
S1324 – if a member or creditor, can establish that the conduct of the company, has affected their
interests ( as undertaken by the directors or otherwise), then they can obtain an injunction and/or
damages under s1324, which means that they are not limited to undertake a Derivative action as per
Smolarek v Liwszyc (2006)

20.24 Valuing Shares Minority member claims they were paid not a fair value, then shares are to be
valued, as if the oppressive conduct had not occurred Rankine v Rankine (1995). Dynasty Pty Ltd v
Coombs (1995) – look at net tangible assets, and in other cases might be more appropriated to consider
dividend history or past earnings and potential future earnings.

20.25 STRATEGIC ACTIONS – oppressed SH may not have $ to litigate and instead may….
20.26 obtaining information
20.27 complain to ASIC who may pursue certain breaches of statutory duties or report to ASX.

Chapter 21 Auditors Duty s292, s296, s307, s308, s1292, pt2M.4 Div 3 (auditor
independence s324CA)

Financial records, Reporting Requirements, Continuous

Disclosure
FINANCIAL RECORDS
s 286(1): All companies, unless exempted by ASIC, are required to keep financial records: s286. Duty to
keep financial records: Correctly record and explain its transaction and financial position and
performance. Would enable true and fair financial statements to be prepared and audited.

S9 The term financial record is defined under s 9. Van Reesema v Flavel : confirm definition under s 9.
Keeping invoices and receipts… is important but not enough. We need to keep proper accounting books.

Consequence of non compliance: Directors should ensure compliance of their company. If not
contravention with s 344(1) civil penalty. + s 588E(4)+ contravention of s 344(1) can be criminal offence if
the contravention is dishonest: s 344(2)
Exercise S290 - Can directors access financial records of the company
Does pty company usually need to audit its financial records?

FINANCIAL REPORTING – PERIODIC DISCLOUSRE REQUIREMENTS

Who HAS TO DO A FR?
s 292 – who has to Preprare FR and DR - Public companies and large proprietary (except small PTY)
companies and any disclosing entities under s111AA are required to produce annual audited financial
reports FR and directors reports DR
s301(1) – Audit of Financial Report Public companies and large proprietary companies, (except small
PTY) are required to AUDIT financial report.
s293 – Small PTY Shareholder direction – with at least 5% of shares - can direct small pty to prepare
and distribute FR and DR.
s294. Small PTY ASIC direction – with at least 5% of shares - can direct small pty to prepare and
distribute FR and DR.statements: Small proprietary companies may also be requested by ASIC or by a
shareholder to produce an annual financial statement:
S301(2) A small proprietary company is only required to have the financial statement audited if the
shareholder or ASIC requests that the statement be audited..
S301, s307, s308 - - must have audit of FR undertaken, except small PTY
S312 – officers must assist auditor in conduct of the audit
S314 – MEMBERS – a company, disclosing entity or registered scheme must make available FR DR and
AR to members
WHERE IS IT THAT pty MEMBERS CAN REQUEST REPORTS>>>???
S317 – public companies to lay FR, DR AR at AGM – deadline applies as per 250N
S319 – Lodge the FR, DR and AR with ASIC - who – public company, disclosing, large PTY, but not
small, exempt if 319(3) grandfathered
S340 – s341, s342(2),(3) – ASIC may exempt a larger PTY company from audit requirements
S162, 163 – can convert to a PTY from public, and avoid all the financial disclosure obligations, but must
not exceed 50 members s113.
ANNUAL FINANCIAL REPORT – what is in it Balance Sheet, income statement, statement of
changes in equity, cash flow statement
S295 – Contents of annual FR -
S296 – Compliance with accounting standards and regulation
S297 – TRUE AND FAIR View
S295 (4) Must include declaration by directors – solvency, whether in directors’ opinion FR are in
accordance with Corp Act, if entity is disclosing - that if CEO and CFO have also signed such
declarations under s945

DIRECTOR REPORT – what is in it

S298 – s300A - Annual Directors Report -
AUDITORS REPORT – contents – see below – ‘PERFORMANCE’

CONTINUOUS DISCLOSURE REPORTING REQUIREMENTS

For a summary of reporting requirements see pp 599-605
S111AA – AX disclosing entities – who are you? when securities are listed on ASX, anyone that raises
funds where a disclosure document is lodged with ASIC under CH6D of Corp Act – generally not a Large
PTY
S319 – Who must LODGE Annual Report to ASIC – public company, disclosing, large PTY, but not small
LODGE DOCS, but to WHO ASIC or ASX?
S674 – must disclose information to ASX as they are a listed and have continuous disclosing
requirement, but only when the listed entity is required by the listing rules of the licensed financial market,
where they must disclose information to the market. –
ASX LR 3.1 once an entity becomes aware of infor, that reasonable person, would expect to have
material effect on price or value of entity’s securities, then must immediately tell ASX
Jubilee Mines NL v Riley (2009) – Jubilee mines discovered nickel but were not actively going to mine
that resource and overlooked to disclose the discovery. Shareholder sold shares and later discovered the
nickel resource, which was not disclosed and sue, and was awarded $1mill. On Appeal, this information
was classified as not being required to be disclosed, as it was not intending to mine the nickel, and
disclosing it would have only fulfilled the policy of ‘if in doubt disclose’, as it would have actually been
misleading to disclose that information and contravened Corp Act as that conduct would have been
misleading or deceptive.
S675 - must disclose information to ASIC for non-disclosing entities

Auditors – duties, independence, rights, liabilities

Function : Carry out an audit and present a reliable, independent report on the accounts and financial
position of a company. An auditor’s report contains professional opinions based on audit of the
company’s financial reports. The main role of an auditor is to verify the financial information disclosed by
the company correctly reflects the state of the company’s accounts.
S324BA - WHO CAN BE AN AUDITOR –registered company auditors page 592
S1280(2A) – sets out education requirements for auditor
S1299A – company may become registered as an authorised audit company
Firms to not provide non-audit services to a firm, and receive large fees which can influence their audit
outcome. Separation of duties concept.
S327 – an auditor is appointed
• in a company, as per requirements under s292 s301
• or small PTY under ss293, 294
S325 - an auditor is appointed in a PTY

AUDITOR INDEPENDENCE – POST CLERP 9 IN 2004

s324CA – CC – statutory test, imposes obligations to remove existence of a ‘conflict of interest situation’
by providing a general test o the auditor being able to ‘exercise objective and impartial judgment in
relation to the conduct of the audit as per s324(1)
s324CH – auditors must not obtain employment with client for 2 years. Auditor must not perform audit on
company he has worked at within last 12 months. There is an obligation under 324CG(1), to not engage
in activity that is covered by the table of relationships as per s324CH
s324DA-DD – audit partner rotation, so that company cannot use the same registered auditor for 5 years
in a row

s307-308 PERFORMANCE of the AUDIT – BECOME DUTIES OF THE AUDITOR

• Carry out an audit
• Report an opinion to members, based on the audit, whether the financial statements are properly
drawn up in accordance with the CA- including their compliance with accounting standards and
whether they present a true and fair view;
• Be independent of the company
• Exercise a reasonable degree of care and skill

Lead auditor is the company auditor who performs the actual audit and has the duties as below.
Review auditor – reviews the overall conduct of the audit s324AF.
s308(1) – Auditor must report to members, and give auditors’ opinion on compliance with accounting
standards s296 and true and fair view s297
s308(3) – describe any irregularities or defects
s309 – same but for half year reports, s304, s305
Pacific Acceptance Corp Ltd v Forsyth (1970) if accounts are complex, an auditor is required to devise
procedures and a program to assist in the detection of errors or fraud pge 467 lipton
Dominion Freeholders Ltd v Aird {1966} – cannot rely on company accountant, directors and other
employees in carrying out their functions, they must make their own independent opinion.
S250RA(1) (2) – Auditor for a listed company or rep, must attend the company AGM where AR will be
considered.
S1289 – protects auditor from actions of defamation and thereby encourages candid responses to
questions posed at AGM or made in writing under s250PA

1. Exercise reasonable degree of care and skill

1.1 s311 DUTY TO DETECT AND REPORT FRAUD AND
IRREGULARITIES
Arthur Young & Co v WA Chip and Pulp Co Pty Ltd [1989] page 468 litpon– it was held that an
auditor will breach their duty of care if having detected a possible irregularity not amounting to suspicion
of fraud, the auditor fails to investigate further and report the matter to the appropriate officer of the
company. (Auditing standard ASA 240.) there will be no breach if the amount is immaterial. If matter is not
dealt with, then auditor must report to ASIC under s311.

Fomento (Sterling Area) Ld v Selsdon Fountain Pen Co Ltd- [1958] “To perform his task properly, [an
auditor] must come to it with an enquiring mind – not suspicious of dishonesty … but suspecting that
someone may have made a mistake somewhere and that a check must be made to ensure that there has
been none.” His vital task is to take care to see that errors are not made, be they errors of computation,
or errors of omission or commission, or downright untruths. To perform his task properly, he must come to
it with an inquiring mind – not suspicious of dishonesty, I agree – but suspecting that someone may have
made a mistake somewhere and that a check must be made to ensure that there has been none.
Contractual agreement which implies: - Legal contract has the 6 elements (Intention, Agreement
(offer & Acceptance), Consideration, Capacity, Consent, Legal Purpose must be valid, terms
express and implied
The scope of obligations are imposed on auditors, mostly in their contract with client. The contract is
between client and auditor and therefore liability under contract, is not to 3rd parties, owing to the doctrine
of privity of contract.
Negligence – a duty of care is owed by an auditor to the company he has a contract
with. Negligence in an audit would relate to a pure economic loss, as opposed to a physical injury, and
the courts are reluctant to allow just anyone to sue an auditor.
Esanda Finance Ltd v Peat Marwick Hungerford (1997), a third party Esanda relied on the FR that
were audited by Peat Marwick PMH, made about Excel. The report did not disclose the correct financial
position and Excel went into receivership. Esanda failed in claiming a duty of care was owed to them.
PMH claimed successfully that in their role as an auditor they only owed a duty to someone who fit the 3
criteria below
1. that the auditor knew the information would be communicated to the 3rd party, either as an
individual or class of people and
2. that the auditor knew the information would be communicated to the 3rd party, for a purpose that would
lead the 3rd party into a transaction of the kind that the 3rd party entered into and
3. that they would enter into the transaction in reliance of the audited FR and risk incurring economic
loss.

CONTRACT – CAUSATION AND DAMAGE - LIABILITY

If the auditor breaches their contractual duty to exercise reasonable care and skill, they can be liable to
pay damages. The award of damages is to return the company to a position, had the contract been
properly performed. It must be shown that the breach caused the loss. The loss must not be too
remote.
Segenhoe Ltd v Akins (1990): Company sue auditors for overstatement of profits due to an under
provision for tax. Dividends were paid as a result out of capital. The auditors were successful sue for
being liable to the company for the payment made as dividend.
Trade Practices Act s52 – auditor can be sued for misleading or deceptive conduct, as they were under
contract.
S1041 - PROPORTIONATE LIABILITY OF AUDITORS – post 2004, the joint and several liability of
auditors has been replaced with a proportionate liability based on the portion of the damage for which the
defendant was responsible. Centro properties Group – loans were characterized as being non-current
liabilities, when in fact they were current and due within the next 12 months under AASB101. This
mislead the market as to the company’s value. Share price collapsed by 95% in 12 months. Class actions
taken against Centro and ultimately against auditors for acting negligently.

Daniels v Anderson (1995). – the auditors (Daniels) did not report immediately on the deficient internal
control mechanisms and were consequently sue by the company for negligence. These deficiencies left
the company at risk, and if the company had been informed and been able to act, they could have
avoided a large loss in foreign exchange dealings and therefore the auditors negligence had caused
the loss. However the board of AWA was also held to be negligent and to have contributed to the losses
suffered.

Defense for this duty: Contributory negligence – auditor being sue for tort of
negligence, may seek to reduce their liability by raising defence of contributory negligence by the
company, as the loss suffered was partly due to its own negligence. Daniels v Anderson – AWA’s
management failed to establish adequate internal controls in relation to foreign exchange operations.

Rights of the auditor

ss 310 – auditors power to obtain information
ss312 - Assisting Auditor

PRIORITY OF CHARGES
STEPS:
• Land is not a registered charge but goes by date of creation of charge under the Torrens scheme.
• Always check the date of registration. Explain why this is the date of registration every time. Refer to
the relevant sections.
• Check the order of priority with reference to the relevant sections.

All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: What is the order of priority of the charges?
LAW: s262 states that most charges need to be registered.
s265(4),(5),(6),(7) sets out that charges that are provisionally registered become
registered on the day of provisional registration if full lodgment is made within the
deadline set by ASIC, otherwise they are registered on the day of full lodgment.
s279(3) states that registered fixed charges have priority over registered floating charges
unless there is a negative pledge (s279(3)).
s280(1)(a) states that registered charges have priority in order of their registration.
s280(1)(b)(c) states that registered charges have priority over unregistered charges.
s281(b) states that unregistered charges have priority in order of their creation
s280(2) sets out that knowledge of existing charges postpones priority of new charges.
APPLICATION: Check date of registration. Explain why this is the date of registration.
Check order of priority with reference to the correct sections.
CONCLUSION: The order of priority of the charges is: first …, second …, third … […]

EXTERNAL ADMINISTRATION : STEPS:

• Law: Who can put the company under each type of external administration? What is the outcome of
each type of external administration? What are the advantages/disadvantages of each type of
external administration?
• Application: Check each party by itself! Check if the relevant party can use the type of external
administration. What is the possible outcome? Why is this the best type of external administration for
the party?
<XYZ> PTY LTD is a proprietary company because it has PTY in its name.
• <XYZ> LTD is a public company because it has no PTY in its name.
All the sections referred to in the issues are from the Corporations Act (Cth.).
ISSUE: Which type of external administration will suit the interests of the creditors best?
LAW:
Winding-up Receivership Voluntary Scheme of
Administration Arrangement
Initiation COMPULSORY: s232(1) Court s436A Directors Creditors
s459A Insolvency
s461 Other ground ASIC s436B Liquidator Members
VOLUNTARY: Secured creditor s439C Substantial
s491 members chargee
creditors in
insolvency
Outcome Distribution of assets Preservation of s439C Deed of s411 Compromise
and deregistration assets/return to company specified in scheme
trading arrangement document
Sale of assets Voluntary liquidation
and liquidation Return to trading
Advantages Pays secured Flexible compromise
charge
Dis Slow, expensive, No moratorium Fate of company in Slow, complex,
advantages Employment hands of creditors, expensive due to double
terminated, short time to majority and multiple
offers low return investigate court action
APPLICATION: (1) For (substantial) secured chargees:

Winding-up Receivership VA SoA

Initiation Available Available Available Available
Outcome Payment Payment Deed of arrangmt Payment
Dis/Advantages Expensive Loose client Inexpensive Expensive

(2) For unsecured creditors:

Winding-up Receivership VA SoA
Initiation Available Not available May convince Available
BoD
Outcome Get paid last May get paid Compromise
Dis/Advantages Slow Inexpensive Slow, expensive

(3) For employees:

Winding-up Receivership VA SoA
Initiation Available Not available May convince Available
BoD
Outcome Prefred creditor May get paid Compromise
Dis/Advantages Terminates job May keep job Slow, expensive

CONCLUSION:
(1) For secured chargees: First voluntary administration, second receivership, third scheme of
arrangement, fourth winding-up.
(2) For unsecured creditors: First voluntary administration (if they can convince Board of Management),
second scheme of arrangement, third winding-up.
(3) For employees: First voluntary administration (if they can convince Board of Management), second
scheme of arrangement, third winding-up.