Post on 26-Oct-2014
Directors’ fiduciary duties
The fiduciary duties may be classified as follows:
Duty to act in good faith and in the best interest of the company.
Duty to act for a proper purpose.
Duty to avoid a conflict of interest.
Duty to retain discretion.
Directors owe their fiduciary duties to the company.
Directors’ duty to act in good faith in the best interests of the company and the shareholders as a
whole (a collective body) does not mean that they owe duties to particular shareholders.
However, in isolated and special circumstances, the fiduciary duty may be owed to an individual
shareholder.
For such circumstance to arise, the director must have been in direct and close contact with the
individual member so that the director caused the member to act in a certain way which turned out
to be detrimental to them.
Brunninghausen v Glavanics
Facts: B and G were the shareholders and directors in a family company, however after a
disagreement between them G took no active part in the management of the company until their
mother-in-law intervened to make peace. Shortly thereafter, G agreed to sell his shares to B.
However, G was not aware that B was negotiating to sell the company to another person for a higher
price per share than B was offering G. Thereafter, B sold the business and profited from the higher
price to the detriment of G.
Decision: The relationship between B and G was fiduciary in nature because G had been effectively
locked out of the company and had no way of verifying the true value of his shares in the company.
These elements of vulnerability and control in a small family company give rise to fiduciary
obligations on B to provide full disclosure to G regarding the potential sale of the business.
A breach of the fiduciary duties is enforced by the company.
If the company is in liquidation, it will be the liquidator who has the ability to bring actions on behalf
of the company.
The company enforces the general law duties seeking remedies.
Remedies available include:
Damages (what the company has lost)
An account of profit (what the director has gained)
Rescission of a contract and injunction (an order requiring and restraining a certain action)
Constructive trust arrangement (the effect of maintaining for the company the benefit gained by
directors as a result of the breach of duty)
Directors should not consider the interests of employees at the expense of the interests of the
company’s shareholder.
When a company is solvent, the directors should be aware of the shareholders’ interests.
Parke V Daily News Ltd
A company that controlled two newspapers sold one of them. The directors intended to distribute
surplus proceeds from the sale among its employees by way of compensation for dismissal. A
shareholder brought an action to prevent these payments.
It was held that the directors breached their fiduciary duties to act in the best interests of the
company because the proposed payments were not reasonably incidental to the carrying on the
carrying on of the company’s business. They were gratuitous payments to the detriment of
shareholders and the company as a whole.
Ratification
As the fiduciary duties are owed to the company, the law has permitted the company (via its
shareholders in general meeting) to ratify (approve or forgive) the conduct amounting to the breach.
Whereas ratification is available for general law breaches, its operation is limited.
If the company is insolvent the creditors are at risk. The directors should be aware of the creditors’
interests. Ratification is not possible if the company is in insolvent.
Kinsela V Russell Kinsela Pty Ltd===
The directors of a family company in financial difficulties arranged for the company to transfer its
business and lease its building to themselves on advantageous terms. This meant that when the
company went into liquidation the directors could continue to carry on the family business but the
company could not easily sell the property.
The court held that the liquidator could invalidate the lease because the directors breached their
duty. The company’s shareholders had no power to ratify the directors’ breach of duty upon the
ground of the company’s insolvency at the time of the transaction, and it involved their failure to
take account of the creditors’ interests.
Ratification will not be valid if a fraud on the minority shareholders
Cook V Deeks
Facts: In this case, several directors (including two Deeks brothers and another director) of the
Toronto Construction Company had a disagreement with one of the other directors (Cook). The
directors then negotiated a major construction project on behalf of the company, but diverted that
project to a new company that they had established in an attempt to exclude Cook from the project
(Cook was neither a shareholder nor director of the new company). The directors then used their
shareholdings to pass a resolution at a members’ meeting declaring that the company (that is
Toronto Construction) had no interest in the project, effectively freezing out Cook from the project.
Issue: Did the directors breach their fiduciary duty by giving the business opportunity to the new
company rather than Toronto Construction?
Decision: The directors acted in breach of their fiduciary duty and the shareholders’ resolution was
invalid because the directors/shareholders were acting under a conflict of interest.
The court remedied the loss to the first company (Toronto) by imposing a constructive trust
arrangement – the 3 directors holding the benefit of their breach (the business transferred to the
new company, Dominion) on trust for the first company
Duty to act in good faith
To act in good faith means the director must genuinely believe that they are acting for, and, in the
best interests of, the company. The determination of the duty has an objective element and this
means that directors will not necessarily comply with their duty merely because they have an honest
belief that they are acting in the company’s best interests. What the directors consider as in the best
interests of the company may not what the court considers.
Advance Bank V FAI Insurance Ltd
Directors used company funds to campaign for the election of certain candidates for election to the
board of directors. Although the directors honestly believed that they were acting in the company’s
best interests, because they resolved to form a campaign committee that used company funds to
promote the re-election of certain directors and to secure the defeat of candidates nominated by
FAI, a substantial shareholder. The information supplied by the committee to shareholders was
emotional and misleading.
Duty to act for a proper purpose
Directors have extensive powers to run the company however where they use such power to
prejudice groups of shareholders or to secure their own positions, they may breach their duty.
Howard Smith V Ampol – creating or destroying a majority of voting power
The Privy Council held that directors may act for improper purposes even where a share issue is not
motivated by self-interest. Directors breach their duty to act for proper purposes if they use their
power to issue shares for the purpose of creating a new majority shareholder or to manipulate
voting control within the company. This is so even where the directors may honestly believe their
actions are in the best overall interests of the shareholders.
Ngurli Ltd V McCann
Directors who issue shares for the purpose of maintaining their position of control of the company
breach their fiduciary duty and the share issue may be invalidated.
The power must be used bona fide for the purpose for which it was conferred, that is to say, to raise
sufficient capital for the benefit of the company as a whole. It must not be used under the cloak of
such a purpose for the real purpose of benefiting some shareholders or their friends at the expense
of other shareholders or so that some shareholders or their friends will wrest control of the
company from the other shareholders.
Duty to avoid a conflict of interest
Where the law imposes a duty to act honestly it is important that the person is seen to be acting
honestly.
Where a director is in a conflict of interest it is no defence to show that the company did not suffer
any loss or that it was not in a position to take up the contract or that the contract was fair.
Directors’ fiduciary duties require them to act in the company’s interests at all time. In Furs v
Tomkies case, the court held that it will be a breach of duty where directors conduct secret
negotiation to the company’s detriment.
Where opportunities arise in the normal course of directors carrying out their role (corporate
opportunity) they should not seek to benefit personally, or take the matter further, unless they have
disclosed relevant matters to the board.
Queensland Mine Ltd v Hudson
Hudson was the managing director of Queensland Mine Ltd and in this position took up mining
exploration licences when the company was not in position to do so. At all times he made a full
disclosure. He resigned from his position and developed the venture.
Control of Queensland Mines Ltd changed and proceedings were brought against Hudson. It was
argued that he had breached his duty and abused his position as managing director.
The Privy Council held that the opportunity to earn the royalties arose from the use Hudson made of
his position as managing director. However, he fully informed Queensland Mines shareholders as to
his interest in the license, and the company renounced its interest and assented to Hudson
proceeding with the venture alone. Queensland Mines failed in its action for an account of the past
and future profits from the royalties payable to Hudson.
In regard to a director’s duty to avoid conflicts of interest, the Privy Council in this case said that
there must be a real, sensible possibility of conflict and not just a theoretical technical or remote
one.
Duty to retain discretion
Directors as the managers of a company must be allowed freedom to conduct the company’s
business. However, the principle has been developed that they should not be allowed to limit the
exercise of their discretion. Thus they cannot enter into a contract which will bind them into voting
in a particular way at board meetings.
If it can be shown that a contract to vote a certain way is in the belief of the directors in the
company’s best interests, the directors will not be in breach of their duty.
Directors’ Statutory Duties
Pursuant to s 185 the general law applies in addition to the duties set out in s 180 to s 184.
Where a director’s conduct contravenes a provision of the Corporations Act it will be ASIC, in its role
as corporate regulator that will investigate the contravention, commence proceedings and seek
appropriate penalties.
It should be noted that where directors breach their statutory duties ratification by the
shareholders is NOT available.
The relationship between the general law duties and the statutory duties of directors
General law duty (fiduciary duty) Corporation Act (statutory duty)Care and diligence S180 and 588GUse power for proper purpose S181 and 184Good faith and best interests of the company S181 and 184Avoid conflict of interest S182, 183, 191 and 195
Section 191 – director’s duty to disclose
S191(1), A director of a company who has a material personal interest in a matter that relates to
the affairs of the company must give the other directors notice of the interest unless they are
exempt from doing so under section s 191(2)
“Material personal interest” means it requires a real possibility of conflict
S191(2), list of situation:
- Director’s remuneration
- Interests where the director is a guarantor of a loan to the company
- Where the directors are already aware of such interest
One of the situations set out in s 191(2) is that which relates to where a company is a proprietary
company and the other directors are aware of the nature and extent of the director’s interest and its
relationship to the affairs of the company. In this case, the director with the material personal
interest does not need to disclose (s 191(2)(b)).
S191(3) sets out the detail required in the notice to the company, and any contravention of the
section has no affect on the validity of any transaction (s 191(4)). This section does not apply to a
proprietary company with one director only (s 191(5)).
The statutory duties of directors can be divided into 4 main groups:
Director’s position – good faith, proper purpose and avoid conflict of interest (s181, 182 & 183)
Dishonest and reckless conduct (s184)
Management standards – care and diligence (s180 & s588G)
Disclosure obligation (s191 & 192)
S181 – Good faith for the best interests of the company with a proper purpose
This section mirrors the general law duty to act in good faith, in the best interests of the company
and for a proper purpose. A breach of the duty to act in good faith is a civil penalty provision
(See s1317E – declaration of contravention).
Although these duties are expressed as two separate tests, there may be overlap in certain cases
(for example, the exercise of a power to benefit the directors rather than the company will breach
both limbs as it is not in good faith and not for a proper purpose.
S182 – Use of position (fiduciary duties relating to no conflict and no secret profit rules)
A director, secretary, other officer or employee of a corporation must not improperly use their
position to gain an advantage for themselves, someone else or cause detriment to the company.
A breach of this section is a civil penalty provision (See s1317E – declaration of contravention).
Whitlam v ASIC
The NSW Court of Appeal overturned the trial judge’s holding that Whitlam had breached his duty as
a director to act honestly, and made improper use of his position by deliberately failing to sign poll
papers with respect to his appointment as proxy at the NRMA’s annual general meeting.
S183 – Use of information (fiduciary duties relating to no conflict and no secret profit
rules)
A person who obtains information because they are, or have been a director, other officer or
employee of a company must not improperly use the information to gain an advantage for
themselves or someone else or cause detriment to the corporation.
A breach of this section is a civil penalty provision (See s1317E – declaration of contravention).
ASIC v Vizard
Vizard was a non-executive director of Telstra. During his time as director, Vizard obtained
information from board meetings and internal briefing documents that outlined a strategy of
acquisitions in other IT firms. Vizard then established a family trust, managed by his accountant, to
purchase shares in firms that Telstra had intended to takeover or acquire large stakes in. most of
these share trades were losses, and no Telstra funds were used for the acquisitions (that is Telstra
did not suffer any losses from the share trades). ASIC sued Vizard for breach of s183 (and its
predecessor provision).
Held: Vizard admitted liability and was ordered by the court to pay close to $400,000 in pecuniary
penalties and was disqualified from being a company director for 10 years. The court, relying on the
precedent in Regal Hastings, said: ‘a director is denied the ability to use such information for his or
her own purposes. It does not matter that the director’s action causes no harm to the company or
does not rob it of an opportunity which it might have exercised for its own advantage.’
S184 – Breach of ss181, 182, or 183 resulting in criminal offences.
Where directors or other officers act in a manner prohibited in ss181, 182, or 183, that is, they do
not exercise good faith or act for a proper purpose, or they misuse their position or their information
for gain, and in doing so they are reckless or intentionally dishonest, they will be in breach of s184.
This section targets criminal liability and through schedule 3 of the Corporations Act results in
punishments including fines and imprisonment.
Kwok v R
A director who deliberately failed to disclose a conflict of interest in relation to a lease transaction
with associated companies was held to have acted dishonestly and thereby breached s184. The
director was sentenced to periodic detention.
Duty of care, skill & diligence
Arises under:
General law
- Under general law, whether a director had breached the duty of care and diligence depended on
a largely subjective assessment of the director’s own skills and knowledge. Directors need only
display the skill and care as would be expected of such person with his or her experience and
knowledge. Thus little knowledge and skill on the part of the director would mean a low standard
of care and skill.
- This standard (as applied in Re City Equitable) is no longer relevant.
Re City Equitable Fire Insurance Co Ltd
Romer J considered directors did not need to exhibit a greater degree of skill than may reasonably
be expected from a person of their particular knowledge and experience. However, as the
commercial environment increased in complexity during the later part of the 20th century,
accountability and objectivity altered the application of the standard. Accordingly, the standard
applied to a director’s duty of care in Re City Equitable is no longer relevant. Today, as established in
AWA v Daniels, an objective standard applies.
Statute Law
S180(1) act with reasonable care and diligence
S180(2) business judgement rule (BJR)
AWA v Daniels – the modern duty of care and diligence
During the late 1980’s, AWA Ltd enter into investment in foreign exchange (FX). It had initially
seemed that the FX trading was profitable, however this was due to the deception of one of its
middle managers who, without adequate supervision, concealed losses of almost $50 million. During
the time that these losses where accumulating two audits were conducted and even though the
audit partner in charge (Daniels) raised some concerns as to AWA’s internal controls (although these
did not reach the board) the true position was not made clear in either on the audits.
The NSW Court of Appeal found that the auditors were primarily responsible for the loss but that
nonetheless the company’s directors had a duty to take reasonable steps to monitor management
and be familiar with the company’s financial position. The Court of Appeal found the executive
directors to have been negligent and this was attributed to the company. Accordingly, the liability of
the auditors was reduced as the result of this contributory negligence.
Directors must be pro-active in their approach to management
Directors must possess a minimum objective standard of competency
They must keep informed of the company’s activities and engage in general monitoring of the
activities of the company
Maintain familiarity with the company’s financial position by regularly reviewing the company’s
financial position.
Attend board meetings regularly.
S180 – Care and Diligence
Directors must carry out their powers and discharge their duties with the degree of care and
diligence that a reasonable person would exercise if they were a director of the company, in the
company’s circumstances and occupied the office and had the same responsibilities within the
company as the director had (s180(1)).
Section 180(2) introduces into the law, a business judgement rule for directors. The BJR has,
according to the Explanatory Memorandum to the bill introducing these amendments, been
introduced to ensure responsible risk taking and not to insulate directors from liability.
Under the BJR, directors will be given the benefit of the doubt in making business decisions and
will be said to have acted with care and diligence in section 180(1), if they satisfy the four
requirements set out in section 180(2)(a-d).
- The judgement must be made in good faith and for a proper purpose;
- The director must not have a material personal interest in the subject matter
(Avoid conflicts of interest)
- The directors informed themselves about the subject matter of the judgement;
- The directors must rationally believe that the judgement is in the best interests of the
company
Business judgement is defined in section 180(3) to mean any decision to take or not to take action
in respect of a matter relevant to the business operations of the company.
ASIC v Adler
The Supreme Court of NSW found that Adler as a director was in breach of ss180, 181,182 and 183
of the Act as a result of a $10million payment by HIHC, a wholly subsidiary of HIH Limited, a listed
company, to a trust controlled by Adler Corporation; Adler was a director of HIHC and HIH. Adler
caused the money to be used for three main purposes.
1. A part of the $10 million was used to buy share in HIH to give the impression that the Adler family
was purchasing the shares. His purpose in doing this was to maintain or stabilise the HIH share price,
or prevent it falling by an even greater amount; his own company had a substantial investment in
HIH.
2. A further part of the $10 million was used to purchase shares in various unlisted speculative
companies from Adler Corporation, at cost after the collapse in April 2001 of the stock market. The
shares were in technology and communication companies and no independent valuation was made
of the shares.
3. The balance of the money was used to provide unsecured loans, without adequate
documentation to companies associate with Adler.
Adler (as well as Williams and Fodera) sought to rely on the business judgement rule as a defence
to the actions brought by ASIC for breach of duty of care under 180(1). However the court rejected
Adler’s defence upon the basis that the decision to invest the $10 million received from HIHC in
Pacific Eagle Equity Pty Ltd amounted to a clear conflict of interest (that is, Adler had a material
personal interest in the subject matter of the business judgement in breach of s180(2)(b))
Matters such as the advantage gained by Adler, the perilous financial position of HIH, the lack of
safeguards in place regarding the advance of funds, the risk involved , the false impression to the
market, the conflict of interest, all played a part in establishing the breaches.
As a result of the breach of his duties, Adler was disqualified from managing corporations for 20
years (s206C), ordered (Williams, the HIH CEO and Adler Corporation Ltd) to pay almost $8 million
compensation (s1317H) and fined $450,000 (Plus the same for Adler Corporation Ltd) under
s1317G.
Part B
Stacey, as a director of Expandoola Pty Ltd, owes fiduciary and statutory duties to the
company. Under the general law, the fiduciary duties that are owed by Stacey are the duty
to act in good faith for the best interests of the company with a proper purpose and the
duty to avoid conflicts of interest. These duties are also a reflection of the sections 181,182
and 183 under the Corporations Act. The main duty which Stacey has breached in this
context is the duty to avoid actual and potential conflicts of interest. The focus to be placed
on this matter is the duty to avoid of conflicts of interest other than the other duties
mentioned above. The duty to avoid conflicts of interest is a strict duty. A director may
breach the duty even though she acts honestly. The event associated with Noelation Pty Ltd
which is marketing the secret touch keypad may amount to a conflict of interest because it
involves a misappropriation of corporate opportunities by Stacey. A director’s fiduciary
position inhibits the director from taking up for him or herself business opportunities which
the director has a duty to obtain for the company. Where a director is in a conflict of
interest is no defence to show that the company did not suffer, any loss or that it was not in
a position to take up the contract or that the contract was fair. Director’s fiduciary duties
require them to act in the company’s interest at all time. In Furs v Tomkies case, the court
held that it will be a breach of duty where directors conduct secret negotiation to the
company’s detriment. Where opportunities arise in the normal course of directors carrying
out their role (corporate opportunity) should not seek to benefit personally, or take the
matter further, unless they have disclosed relevant matters to the board. However, certain
questions come across regarding the arguments supporting Stacey. Was Stacey under a duty
to obtain the opportunity for the company? She could have heard about it while having her
personal affairs done. Can directors exploit corporate opportunities which come to them in
their “private capacity”?
Argument supporting Stacey
It was outside the course of her office as a director. In Regal Hastings v Gulliver, the Lord
Russell held that a fiduciary is accountable for profit arsing by reason of and only in the
course of her or his fiduciary office.
Stacey was not given any responsibility by Expandoola to negotiate the agreement with
Noel.
Argument against Stacey
Expandoola has recently expanded into computer design and construction recently. This
means Expandoola has a strong intention and sign of interest in expanding further into the
market of computer hardware accessory. In the company’s standpoint, it is an obvious
breach of fiduciary duty to avoid a conflict of interest. Stacey as a director of the company
should always consider the company’s interest all the time. The corporate opportunity
should have been obtained for the benefit of the company. Stacey’s duty extends to a
business opportunity which although not within the director’s responsibilities is either being
actively pursued by the company, or in which the company might reasonably be expected to
be interested, given its current line of business and expansion. Applying this concept, Stacey
may be in breach of duty. There might also be a breach of s 184 which is based on the act
being reckless or intentionally dishonest in connection with ss 181,182 or 183.
The possible outcomes of Stacey’s conduct would be the remedies sought by both the
company under the general law and ASIC under the Corporations Act.
Expandoola may take an action against Stacey for an account of secret profit gained through
the involvement with Noelation even where Expandoola has not suffered a loss.
Accordingly, the company could terminate her employment contract and sue her for an
account of profit made through the secret involvement in Noelation’s business. However,
ratification is available to approve or forgive the breach conducted by Stacey through
shareholder’s general meeting under the general law.
ASIC may also prosecutes Stacey for contravening ss 181, 182 and 183 which attract a
pecuniary penalty of up to $200,000 under s 1317G. moreover, ASIC can bring an action for
breach of s 184 which targets criminal liability through schedule 3 of the Corporations Act
resulting in punishments including fines and imprisonment. As a result of contravention of
statutory duties, ratification would not be available if ASIC brings an action against Stacey.
Who could bring proceedings against Jess and Laura under s 588G of the Corporations Act
and analyse the prospects of success of any such proceedings.
If a company is insolvent, directors should not deteriorate the situation by incurring debt. In
fact, s 588G (the duty to prevent insolvent trading by company) makes directors personally
liable in such a situation. Insolvent trading by directors allows the liquidator, pursuant to s
588M, to claim the amount outstanding from the directors. Accordingly, what was originally
a company debt becomes the personal responsibility of the director. Moreover, s 588G is
also a civil penalty section allowing ASIC to pursue actions against directors. Civil penalty
orders and compensation can be sought.
In Expandoola’s case, when one of the creditors of Expandoola (Laurencla Pty Ltd) claimed
the payment, there were reasonable grounds for Laura and Jess in the director’s
circumstances to suspect that the company would become insolvent. In addition to that,
when Laura suggested to Stacey that the company’s accountants should be contacted for
advice at that time but Stacey did not take the matter further. Even if the company paid
back the owing amount to Laurencla, there were obviously a suspicion in regard of the
company’s financial position at the time when the creditor raised up the issue. In
Metropolitan Fire Systems Pty Ltd v Miller case, the court considered that the company
was insolvent having regard to the following factors: creditors were pursuing legal action;
amounts owed to creditors were large and well overdue; any assets the company had could
not be quickly realised; and funds to pay its current debts were not available at the time or
in the near future.
Even though the Corporations Act provides defences for directors to s 588G actions under s
588H, Jess and Laura‘s defence based on s 588H(2) which provides a defence where the
director had reasonable grounds to expect solvency and did expect that when the debt was
incurred the company was solvent and would remain solvent can be rejected by the court as
seen in Tourprint International Pty Ltd v Bott. In that case, the director failed to inquire as
to the company’s position from the accountant or other directors and did not inspect the
company’s book. This situation is really similar to how Laura responded to Stacey’s
suggestion on contacting the company’s accountant. Thus, Jess and Laura are unlikely to
protect themselves under s 588H against any proceedings brought by either the liquidator
or ASIC.
Takeover
S 608 – relevant interests in securities
Central in takeover law is the concept of ‘relevant interest’
A person will have a relevant interest in securities if they hold the securities, have the power to
control, the right to vote in relation to the securities or the power to control the disposal of the
securities.
S 606 – prohibition on certain acquisitions of relevant interests in voting shares
20% threshold
Prohibitions on acquisition to ensure fairness to target shareholders.
A person must not acquire a relevant interest in voting shares above the threshold limit of 20% of
the issued capital
A person must not acquire a relevant interest in voting shares which increases a person’s holding
to any percentage between 20% to 90%
The prohibitions in s606 do not apply if a person has over 90% relevant interest of the voting
shares
The threshold is based on relevant interest, not based on ownership.
For breaches of s 606 there are fines (s 1311 and schedule 3 are relevant). Other orders per s 1325
may be sought such as direct disposal of shares.
Compulsory acquisitions
To avoid a potential conflict arising from target shareholders’ disruption when takeover is
successful by a bidder
S 661A - Compulsory acquisition power following takeover bid
Where a bidder (inc. associates) has a total relevant interest in 90% of the voting shares and 75% of
the bid is accepted, then a compulsory buy out is possible.
S 662A – Bidder must offer to buy out remaining holders of bid class securities
Shareholders can avoid being locked in by forcing a bidder with a 90% relevant interest to buy them
out.
S 664A & S 664AA – Threshold for general compulsory acquisition power and time limit on
exercising compulsory acquisition power (6 months rule)
Where a person has a full beneficial interest in 90% (even if not acquired during a takeover) they
may, subject to certain conditions, compulsorily acquire the balance within 6 months.
Acquisitions exempt from the s 606 prohibition
There are basically two paths by which shares can be acquired beyond the threshold:
(i) exempt acquisitions that involve of the permitted means of acquisition; and (ii) other exempt
acquisitions.
S 611 – Exceptions to the acquisition
Permitted means of acquisition (takeover bid, market bid and off-market bid)
Creeping takeover (if a person hold 19% of the company’s share for a continuous period of 6
months or more they may acquire 3% each 6 months thereafter)
An acquisition under a will or by operations of law
An acquisition that results from an issue under a disclosure document in relation to an initial public
offering (a company is floated onto the stock exchange and offers its shares to the public for the
first time)
Permitted means of acquisition
Together with acquisitions that are exempt because of their nature (such as under a will) s 611 sets
out the means by which a bidder may proceed with a takeover even though the bid seeks to acquire
an interest above the threshold limit of 20% in s 606 and would therefore be otherwise in breach of
that section. The permitted means are:
Off-market bid
Procedure outlined in s 632 and s 633
The target company can be listed or unlisted
The bid can be a full bid or a partial bid
The bid can be conditional (subject to some restrictions)
The consideration can be proportional by way of cash and/or share
Market bid
Procedure outlined in s 634 and s 635
The target must be listed
The bid must be a full bid
The bid must be unconditional
The consideration can only be cash
In both forms of permitted means of acquisition, the Corporations Act requires preparation of
documentation aimed at providing sufficient information for both of the target and the bidder.
Bidder’s statement – content requirements in s 636
The identity of the bidder
Terms of bid
Details of bidder’s intention
- In relation to the continuation of the business of the target
- Any major changes to be made to the business
- Plans for the future employment of the present employees of the target
Various reports included in bidder’s statement from experts or others must be accompanied by a
statement indicating the persons consent to the use of the information
Lodged with ASIC, however, ASIC has no responsibilities for its content
Target’s statement – content requirements in s 638
Informs its own shareholders
Details of target’s statement
- Directors recommendation
- must include all information that shareholders and its advisers would reasonably require to
make an informed assessment whether to accept the offer under the bid.
- Directors of a target company who do not make a recommendation in the target’s statement
must give reasons as to why a recommendation is not made.
S 640 requires that an expert’s report accompany the target’s statement if:
The bidder is connected with the target; or
The bidder is already entitled to not less than 30% of the shares
The expert must report on whether the takeover is fair and reasonable
S 670A
This section specifically focuses on takeover situations and prohibits misleading and deceptive
statements in takeover documentation.
S 670A imposes criminal and civil liability on certain people for false or misleading materials in
documents and statements in relation to takeover bids.
Those who may be exposed to the liability during takeover:
- Directors if they prefer their own interest
- Experts who provide reports containing material omissions
Insider Trading
S 1043A(1)(a)-(b), an “insider” is a person who possesses price sensitive information which is
information not generally available and if it were available, a reasonable person would expect it to
have a material effect on the price or value of financial products. Financial products are defined to
include securities.
The person:
Trades in the share – Trading offence
Procures someone else to trade in the share – Procuring offence
Gives the information to someone who will likely to trade in the share or procure someone
else to do so – Tipping offence
Prohibitions in s 1043A
According to S 1043A, an insider must not apply for, acquire or dispose of the relevant financial
products (or procure another person to do so) or enter an agreement to that effect. That is, the
insider cannot trade or tip in relation to the securities and cannot induce or encourage (s 1042F)
others to do so.
For a breach of the prohibited conduct in s 1043A is an offence under s 1311. Civil penalty
provisions apply to breaches of the insider trading provisions and note Schedule 3 (2000 penalty
units and/or 5 years imprisonment)
S 1042A sets out the meaning of inside information.
S 1042A includes (in the definition of ‘information’) matters of supposition and other matters that
are sufficiently definite to warrant being made known to the public, and matters relating to the
intentions or likely intentions of a person.
Defence to insider trading
In s 1042C information is described as generally available if it consists of readily observable matter
or it has been made known in a manner that would likely be brought to the attention of people who
commonly invest in financial products of a kind that might be affected by the information; since it
was made known, a reasonable period for it to be disseminated among such persons has gone by.
It is important to note that despite the use of the word “insider”, the s 1043A prohibitions do not
focus on whether the person has a connection with a company. The insider trading prohibitions
apply to anyone, whether they have a business or employment connection with a company or not.
The prohibitions focus on the possession of inside information.
R v Rivkin
Mr Rivkin was negotiating the sale of his property to Mr McGowan, the CEO of Impulse Airlines.
Qantas was about to purchase Impulse Airlines (thereby taking a competitor out of the market).
McGowan informed Rivkin about the confidential transaction and Rivkin arranged for his family
company to acquire Qantas shares. When the transaction became public knowledge Qantas shares
rose in value and Rivkin sold at a profit. He was convicted of insider trading, sentenced to 9 months
periodic detention and fined $30,000.
Insolvency & Restructuring
S 95A
(1) – A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when
they become due and payable.
(2) – A person who is not solvent is insolvent
If a company is in financial difficulty and its creditors seeking payment from the company, there are
several ways of dealing with the situation.
Where company restructure is possible
Scheme of arrangement
Voluntary administration
Receivership
Where no restructure is possible
Liquidation or winding up
Insolvency is commonly the reason why a company goes into restructuring or liquidation. However,
it is possible for a receivership, voluntary administration, schemes of arrangement or winding up to
take place even where a company is solvent.
Scheme of arrangement
Member’s scheme of arrangement
This scheme is one way of a company can be reorganised while it is still solvent.
“friendly takeover” – reorganisation of member’s right
- Share rights may be altered or classes of shares converted;
- Members may agree to a transfer of the company’s assets to another company, cancelling their
shares and then receiving shares in the other company;
-where a scheme involves the acquisition of shares and the acquirer has achieved 90% of the offered
shares a compulsory buy-out of the remaining shares is possible. Similarly the remaining
shareholders can force a bidder to buy them out (s 414). This restructure is not intended to avoid the
takeover provisions and operates with the same level of disclosure.
Example case is the acquisition of Coles Group Ltd by Westfarmers Ltd
Arrangements are made with shareholders, not creditors
Member’s schemes will continue to be an important tool in effecting the reorganisation or
reconstruction of a solvent company
Creditor’s scheme of arrangement
This scheme is used between the company and its creditors in an attempt to rescue a company in
financial difficulties.
Insolvent situation
Arrangements are made with creditors
This form of restructuring is not often chosen in situations of insolvency because it is slow to
complete and the need for the courts consideration of the scheme before it is finalised creates
uncertainty among creditors.
Complex procedural requirements:
- Lengthy documentation
- Separate meetings of various categories or “classes” of creditor
How a scheme may work
If such schemes are approved they will generally involve either a compromise (creditor accepts part
of debt and/or an instalment arrangement is adopted) or a moratorium (creditor waits for part or
all of debt).
If the scheme affects creditors, a 75% majority (by way of total debts) is required. If the scheme
affects members, the requirement is a majority in number (overall) and 75% of those votes cast at
the meeting (s 411(4)). The scheme must then be approved by the court (s 411(4)(b)).
Procedural requirements set out in ss 411 and 412
S 411(4)(b) – court approval is required to initiate a scheme and also for an order that is
made for a meeting of creditors or members convened
If the company is being wound up, the liquidator also may apply
A copy of the court order approving the scheme must be lodged with ASIC – s 411(10)
If a meeting is ordered by the court, the company must send an explanatory statement and
other relevant information to those entitled to attend – s 412
Voluntary Administration
Voluntary administration does not last for a long time (about a month). It is a means to quickly
assess the company’s position and then leave the decisions as to its future to the creditors.
This is the most popular restructuring mechanism due to the characteristics as follows:
Quick to implement (about a month)
Not subject to court intervention
The aim of VA is to give insolvent companies a chance of survival or , if it is not possible at
least to maximise the return to its creditors – s 435A
Who may appoint the administrator?
Chargees (secured creditors) – s 436C
Liquidators, or provisional liquidators – s 436B
The board of directors – s 436A
Qualification of administrator
A person appointed as an administrator must be a registered liquidator – s 448B
Requirements for registration as a liquidator – s 1282
Member of ICAA/CPA
Completion of a course in Corporations Law as part of an approved degree
ASIC must be satisfied that the applicant will properly perform the duties of a liquidator
Disqualification of administrator – s 532
A person cannot be appointed as an administrator where that person owes the company, or the
company owes that person, an amount exceeding $5,000;
Where the person is a director or employee of the company or;
Where the person is an auditor, or a partner or employee of an auditor, of the company
Liability of administrator
Administrators owe fiduciary duties to the company. They will also be subject to various statutory
duties, as pursuant to s 9 they are defined as officers of the company (e.g. ss 181, 182 and 183).
The administrators are also personally liable for certain categories of debts incurred during
the period commencing more than 5 business days after the appointment (s 443B).
Examples of the debts are services rendered to the company, goods brought or property
hired, leased or used by the company (s 443A).
Pursuant to s 443D the administrator has a right of indemnity from the company’s property
in relation to any liability under s 443A
Powers of the administrator
The administrator takes control of the company and has wide powers of investigation (s 438A). The
role of an administrator is set out in s 437A and includes exercising all of the functions that the
company or any of its officers could perform. The administrator will be the company’s agent for
the carrying out of its business (s 437B).
Limitation on administrator’s power is that administrator cannot destroy property rights that arose
before administration except where expressly authorised by state.
Effect on directors
During an administration, the company falls under the control of the administrator.
Directors may perform company functions only with the administrator’s written consent
approval – s 437C
Directors may enter the contracts or transactions pursuant to an order of the court – s 437D
Directors who breach these provisions may be order to pay compensation where the court is
satisfied that the company or another person has suffered loss or damage because of the act or
omission constituting the offence – s 437E
Effect of the administration
During the period of administration, there is a moratorium or “freeze” or “stay” (held up) on
creditors bringing court action, winding up proceedings and other claims: ss 440A – 440G
However, there are exceptions as follows:
In s 441A a substantial charge that enforces within ‘the decision period’ is not bound by the stay.
The ‘decision period’ is defined in s 9 and is the period beginning on the day when: notice of the
appointment of the administrator is given (if required) to a chargee under s 450A(3); or the day
administration begins, and ends on the 13th business day thereafter.
In s 441B a chargee that enforces prior to the appointment is not bound;
In s 442C a chargee with a charge over perishable property is not bound.
Obviously, the extent to which a company under administration has its funds depleted by chargees
exercising their rights under ss 441A, 441B, or 441C will affect the possibility of a successful
restructure. Creditors may reject a restructure if their return is insufficient.
Schedule of administration
First creditors’ meeting takes place within 8 business day after the commencement of
administration – s436E
The administrator convenes the meeting by giving written notice to the creditors and by publishing
the notice of the meeting in a national or relevant states’ newspaper at least 5 business days before
the meeting – s436E (3)
At this meeting the creditors:
Must decide whether to appoint a committee of creditors
If creditors committee is appointed, it has power to consult with the administrator and receive and
consider reports by the administrator – s436F
Replace the administrator and appoint someone else as administrator
Second creditors’ meeting is to be held within 5 business days before, or within 5 business days
after the end of the “convening Period” – s439A
The outcome of the meeting is a choice to be made from 3 options: Deed of Company
Arrangement, company wound up; or administration simply ends without either of these options
being chosen – s439C
Deed of company arrangement
The aim of saving the business of the company and preserving employment is achieved if the
creditors choose to enter a deed of company arrangement under s 439A. All creditors are bound by
the deed, however a secured creditor is not prohibited from enforcing or otherwise dealing with its
security, subject to certain matters set out in s 444D. The effect of s 444D is that a secured creditor
(chargee) will not be bound by the terms of a deed of company arrangement unless they have
either voted in favour of the deed at the second creditors meeting, or the court has made an order
restricting the realisation (enforcement) of their security.
s 444E – once a deed of arrangement is in place, and until it terminates, those bound by its terms
cannot make an application to wind up the company or continue an application commenced prior to
the deed, nor can they bring or continue proceedings or enforcement process against the company.
s 444G – a deed of company arrangement not only binds the company but also its officers and
members, and the deed’s administrator.
The benefit of the creditors entering a deed of company arrangement is primarily that a
restructure of the company, by providing the opportunity for it to trade out of its financial
difficulties, is more likely to maximise a return in relation to their debt. Certainly this is a reason that
a voluntary administration would propose a deed of company arrangement.
Receivership
Two main ways receivers are appointed:
By court
S 1323 – the grounds of appointment where an investigation is being carried out by ASIC as
concerns a breach of the Corporations Act.
S 233 – where a shareholder succeeds in an action for oppression (s 232)
By secured creditors
Most receivers are appointed privately (rather than by the court) by secured creditors who wish to
enforce their security.
s 418 – a person appointed as a receiver must be a registered liquidator
A receiver is an agent of the company and will owe a duty to the company to act in good faith as
included in the definition of an ‘officer’ in s 9.
The board of directors remain in place but certain directors’ powers are superseded or modified.
Powers such as those relating to financial reports are not affected.
The appointment of a privately appointed receiver does not alter the legal personality of the
company.
Powers of receivers
s 420
Enter into possession and take control of the company’s property;
Carry on the business of the company;
Execute documents or to bring proceedings; and
Engage or discharge employees
Further powers are outlined in s 429, s 430 and in s 431 which sets out the power to inspect the
books of the company relevant to the property that forms the subject of the receivership.
Duties of receivers
General law or Statutory law
Owes duties to the secure creditors by whom the receiver was appointed
When appointed by the court a receiver takes on a fiduciary relationship with the company
Receiver is an officer for the company provisions
s 420 – the receiver is under a duty of care to sell company property at market value or otherwise at
the best price that is reasonably obtainable having regard to the circumstances existing when the
property is sold. This is to avoid the practices of receivers who ignore the company’s interests and
focus on their appointers’ (chargees’) interests only.
Liquidation
Where restructuring is not successful, or not attempted, a company has a final mechanism that
enables to deal with its financial difficulty. This is liquidation. Once a company is in liquidation
(wound up) it ceases to exist as it did before and comes under the control of the liquidator whose
job it is to finalise any outstanding matters, identify assets and accumulate and convert them so that
creditors receive a proportionate return on the amount they are owed. There are two main types of
winding up which are voluntary winding up by the members or creditors, or compulsory winding
up by the court.
Voluntary winding up
There are two types of voluntary winding up:
Members voluntary
Provided the company passes a special resolution (75%) – s 491
The directors make a written declaration of solvency that the company will be able to pay
its debts in full within 12 months after the commencement of winding up – s 494
The company will go into voluntary liquidation and a liquidator will be appointed by
ordinary resolution. The powers of the directors will cease and the liquidator will take the
control of the company – s 495
The company files a copy of resolution to ASIC within 7 days and within 21 days published
causes of notice of passing of resolution in Government Gazette – s 491
Creditors voluntary
If the company is not solvent (it is insolvent) then the voluntary winding up can still proceed with the
approval of the creditors. An example of this is where at the second meeting of creditors under a
voluntary administration the creditors vote to wind up the company (s 459A).
Compulsory winding up
In s 459A, and pursuant to an application under s 459P, the court may order that an insolvent
company be wound up.
S 95A sets out that a person is solvent if they can pay all of their debts as and when they become
due and payable. Accordingly insolvency is when this cannot happen.
An application under s 459A that a company be wound up in insolvency can be made by several
parties including the company, a creditor, a member, a director, or ASIC.
Application by ASIC
The leave of the court must be sought. Pursuant to s 459P(3) leave will be given where the court is
satisfied that there is a prima facie case that the company is insolvent.
Application by creditors
Where a creditor seeks to wind up a company under s 459A based upon service of a statutory
demand (s 459E) there are three main elements of which a court must be satisfied.
The applicant for the order must prove:
1. Insolvency
2. The amount outstanding exceeds the statutory minimum ($2,000 or other prescribed
amount)
3. The court has jurisdiction (that is, the company is one to which the Corporations Act
applies)
A company is insolvent if it can’t pay its debts as they become due and payable. A creditor can rely
on certain presumptions in s 459C to establish insolvency. These include that a receiver has been
appointed under a floating charge, or that execution of process has been returned unsatisfied (this
means that a sheriffs officer has not been able to collect a judgement debt).
Statutory demand – s 459E
The most common presumption of insolvency is the company failed to comply with a statutory
demand (s 459C(2)(a)). This sets out that the court must presume that the company is insolvent if,
during or after the three months ending on the day when the application for winding up was made,
the company failed to comply with a statutory demand. Accordingly for a creditor to be able to
establish insolvency as the result of non-compliance with a statutory demand, the non-compliance
must have occurred within the three months before the application to wind up was
filed/commenced, or after that date.
Key elements of statutory demand
A statutory demand must be a written document (s 459E(2)(d)) prepared by creditor which sets out
the details of the debt and that if the debt is not satisfied with 21 days of service of the demand
then the company is presumed insolvent pursuant to s 459C.
It must relate to a debt which is due and payable, and the amount of the debt is at least the
‘statutory minimum’.
service of the demand is by pre-paid post to the registered office of the company as set out in the
ASIC records.
Unless the debt referred to in the statutory demand is a judgement debt, the demand must be
accompanied by an affidavit verifying that the amount claimed is due and payable (s 459E(3)).
Defence of a company against a statutory demand
A company that has an offsetting claim in relation to the debt and for some other reason disputes
the statutory demand has 21 days from service of the demand to apply to the court to set it aside
(s 459G).
The two main grounds on which the court may set aside a demand are:
That it contains a major defect: s 459J(1)
There is a genuine dispute about the existence or amount of debt: s 459J and s 459H
In Graywinter Properties Pty Ltd v Gas Fuel Corp Superannuation Fund case, it was established that
a mere assertion of a genuine dispute, or a bare claim that the debt was disputed, were both
insufficient for the purposes of s 459G
Compulsory winding up by the court on ground other than insolvency – s 461
Oppression of the minority
The company has no members
ASIC reports that the company should be wound up
The court is of the opinion that the company should be wound up
The company fails to commence business or cease operations for a year or more
The company passes a special resolution to compulsorily wind up
Liquidator duties – Distribution of funds
The liquidator’s role involves identification, collection and distribution of the company’s assets.
The liquidator may need to examine the directors of the company or other relevant parties to assist
in the identification of assets. The liquidator will also meet with the creditors and keep them
informed of the progress of the liquidation.
Following the processes of collection, the liquidator will be in a position to distribute funds.
First, to secured creditors. Before any distribution under the priorities in the Corporations Act
occurs, the secured creditors are entitled to enforce their security.
After the secured creditors have enforced their claims the remainder of the funds are distributed
pursuant to the priorities in s 556 . The order of priority includes:
The cost of preserving the company’s business and realising its property,
The costs of the winding up (including solicitors costs);
Other costs necessary to winding up such as those of administration or liquidator;
Wages (employee directors are subject to a limit in the amount claimed);
Compensation for injury;
Holiday or sick pay entitlements (directors subject to a limit);
Retrenchment; and
Non-priority creditors ranked equally pursuant to s 555
The principle of equality of distribution set out in s 555 is referred to as the pari passu rule and
reflects that the basis of the process of liquidation is designed to benefit the creditors generally.
Liquidators’ power to recoup funds
Liquidator is able to claim compensation from any director who has breached their duties and
target directors personally where there is insolvent trading (s 588G)
In Paul A Davies (Aust) Pty Ltd v Davies, the company had been placed into liquidation. The
liquidator targeted a director for breach of fiduciary duty and succeeded in recouping the total
benefit gained by the director as a result of the breach.
Liquidator is able to “claw back” via court proceedings, under the “voidable transactions”
Provisions
Voidable Transactions
Voidable transaction is a transaction entered into by a company in the period leading up to its
winding up.
There are two major criteria that must be addressed before the liquidator can succeed in calling in,
or collecting, assets pursuant to the voidable transactions provisions.
1. The issue of the company’s insolvency at the time of the transaction
2. When the transaction took place
The liquidator can look for past transactions over varying periods depending on the type of
transaction. The period that can be examined is called the relation-back-day period.
Start of relation-back-day (RBD):
Compulsory liquidation
The day on which the application for the order was filed
Voluntary liquidation
The day the special resolution to wind up the company was passed
Company in voluntary administration
The day of commencement of the administration
The orders that can be sought by the liquidator are set out in s 588FF and include:
An order directing a person to pay to the company an amount equal to some or all of the money
that the company has paid under the transaction
An order directing a person to transfer to the company property that the company has transferred
under the transaction
An order “undoing” the transaction
Defences to voidable transaction
S 588FG sets out that transactions are not voidable as against certain persons in a number of
circumstances.
The court is not permitted to make an order which materially prejudices the person’s right or
interest if the person receives no benefit because of the preference transaction or if he or she did
receive a benefit:
It was in good faith
When received the person had no reasonable grounds for suspecting that the company was
insolvent or would become insolvent
A reasonable person in the person’s circumstances would not have had such grounds for
suspecting the insolvency of the company
Insolvent Trading –s 588G
If a company is insolvent, directors should not compound (multiply) the situation by incurring debt.
In fact, s 588G makes directors personally liable in such a situation. Insolvent trading by directors
(s 588G) allows the liquidator, pursuant to s 588M, to claim the amount outstanding from the
directors. Accordingly what was originally a company debt becomes the personal responsibility of
the director.
S 588G is also a civil penalty section allowing ASIC to pursue actions against directors. Civil penalty
orders and compensation can be sought.
The purpose of the liquidator using s 588G is to recoup funds to meet amounts owing to creditors
by the company
There is a breach of s 588G if a company incurs a debt and at the time (or by the incurring of the
debt) a director is aware of insolvency or there are reasonable grounds for a person in the
director’s circumstances to suspect that the company is (or would become) insolvent.
A breach of s 588G enables the liquidator to sue the directors for compensation.
S 588G is also a civil penalty section. Accordingly, breach may result in a director being subject to a
pecuniary penalty of up to $200,000 (s 1317G), an order to pay compensation to the company
(s 1317H) and disqualification from managing a corporation (s 206C).
Elliott v ASIC
The facts of the matter involved two companies, Water wheel Holdings Limited and Water Wheels
Mills Pty Ltd that were placed into voluntary administration by their directors. ASIC brought
proceedings under s 588G against three of the directors including Mr Elliott, a non executive
director. The Court considered that although Elliott had substantial business experience and should
have obtained the relevant financial information about the company from management, he failed to
do so and in fact ignored the company’s liquidity crisis.
The Court of Appeal held that it was not necessary in proving a breach of s 588G(2) that ASIC
establish that the director (Elliott) was under a duty to take any particular step which would have
prevented the company incurring the debt. In essence a failure by a director to prevent a company
from incurring a debt is a failure by that director to take all reasonable steps within his power to
prevent such debt. As a result of the finding that he breached the insolvent trading provisions Elliott
was fined, ordered to pay compensation to the companies and disqualified from managing a
corporation.
Defences to an insolvent trading action – s 588H
S 588H(2) provides a defence where the director had reasonable grounds to expect solvency and did
expect that when the debt was incurred the company was solvent and would remain solvent.
In ASIC v Plymin, the Court rejected a defence based on s 588H(2) advance by Mr Elliott, a director,
on the grounds that he failed to obtain from those managing the company essential matters
including a list of the amounts owing to creditors and regular profit and loss and cash-flow
statements.
S 588H(3) provides for a defence where there is reliance on reasonable grounds that a competent
and reliable person, who was responsible for providing information regarding the company’s
solvency, indicated that the company was solvent.
S 588H(4) provides a defence where illness results in not taking part in the management of the
company.
S 588H(5) provides a defence if the director took reasonable steps to prevent the company incurring
a debt.