AGSM MBA PROGRAMS MNGT5391 LAW OF CORPORATE MANAGEMENT … · MNGT5391 Law of Corporate Management...

AGSM MBA PROGRAMS

MNGT5391 LAW OF CORPORATE

MANAGEMENT AND

FINANCE

COURSE OUTLINE SESSION 4, 2011

MNGT5391 Law of Corporate Management and Finance

TABLE OF CONTENTS

1. COURSE STAFF 3

2. COURSE DETAILS 3

2.1 Teaching Times and Locations 3 2.2 Units of Credit 3 2.4 COURSE AIMS AND RELATIONSHIP TO OTHER COURSES 3

2.5 STUDENT LEARNING OUTCOMES 4

3. APPROACH TO LEARNING AND TEACHING IN TH3E COURSE 5

4. ASSESSMENT 5

4.1 Formal Requirements 5 4.2 Assessment Details 5 4.3 Assignment Submission Procedure 6 4.5 Late Submission 7 4.6 Special Consideration and Supplementary Examinations 7

5. ACADEMIC HONESTY AND PLAGIARISM 7

6. COURSE RESOURCES 7

7. COURSE EVALUATION AND DEVELOPMENT 8

8. STUDENT RESPONSIBILITIES AND CONDUCT 9

9. ADDITIONAL STUDENT RESOURCES AND SUPPORT 9

10. COURSE SCHEDULE 10


1. COURSE STAFF A/Professor Anil Hargovan (School of Business Law and Taxation, Quad 2036) Phone: 9385-3577/3293 Email: [email protected] Students are invited to consult with the lecturer on any aspect of the course. Students can approach me during class breaks or after class. Otherwise the best means to contact me is by email. Appointments can be made on request. 2. COURSE DETAILS 2.1 Teaching Times and Locations TBA 2.2 Units of Credit This course is a 6 credit unit course. 2.3 SUMMARY OF COURSE This course is designed to provide a comprehensive introduction to corporate law in Australia. While the course presumes no prior legal knowledge, students will find it helpful to have completed the optional course Legal Aspects of Business, as more time is spent in that course introducing students to basic legal concepts outside of corporate law. The subject matter of this course is the corporate law of Australia. It is trite to observe that any reader of the financial press will note the prevalence of corporate law issues. Daily, financial papers report matters involving intra-corporate disputes, boardroom tussles, accusations of director misconduct and claims arising out of insolvent trading, just to name a few matters. The aim of this course is to equip participants with sufficient knowledge of corporate law principles to understand the legal issues underpinning these stories, as well as enable participants to appreciate the legal risks involved with corporate structures. 2.4 COURSE AIMS AND RELATIONSHIP TO OTHER COURSES The course aims to develop an awareness of corporate governance issues when managing or directing a company, or acting as an officer or company secretary. It identifies the danger areas and common pitfalls faced by management when conducting the company’s business affairs. Employees of the company are also subject to statutory duties under the Corporations Act 2001 (Cth). The course also aims to ensure that corporate employees are aware of their potential liability and the range of legal sanctions available to the company and the regulator (ASIC). The course contains essential knowledge for all managers, particularly on the subject of corporate governance from a legal perspective. Particular issues covered include:

The corporation as a separate legal entity and legal implications The corporate constitution and internal governance rules


Financing the corporation’s activities Legal framework for corporate fundraising Corporate governance with a focus on the duties of directors (executive and

non-executive) and officers (including company secretary) Legal remedies for shareholders Legal options for companies in financial distress

MNGT 5391 Law of Corporate Management and Finance is offered as an elective course in the AGSM MBA Program. The course presupposes no prior legal training or education. There are no pre-requisites or co-requisites. This course, with its emphasis on corporate law, also compliments MNGT 5384 Legal Aspects of Business which covers selected aspects of commercial law. 2.5 Student Learning Outcomes By the end of this course, students should be able to:

1. analyse the legal significance of incorporation (concept of separate legal entity and its practical ramifications);

2. explain the principles and rules on internal corporate governance; 3. explain the duties and liabilities of company directors, officers and employee; 4. explain the legal framework for corporate fundraising (debt and equity finance); 5. evaluate the rights and remedies of shareholders; 6. articulate basic principles of Australian corporate law; 7. apply those principles in a rational and coherent manner; 8. be able to articulate that process intelligently; 9. identify and assess the social/economic/political issues within which areas of

corporate law are located; and 10. work confidently with principles of corporate law.

MBA Program Learning Goals This course contributes to the development of the MBA Program Learning Goals, which are the qualities, skills and understandings we want you to have by the completion of your degree, as indicated below:

Course Learning Outcomes

MBA Program Learning Goals

See 4.2 1. An in-depth engagement with the relevant disciplinary

knowledge in its interdisciplinary context

See 4.2 2. Team based skills

See 4.2 3. Critical and analytical thinking

See 4.2 4. Decision-making and problem-solving

5. An ability to manage change


3. APPROACH TO LEARNING AND TEACHING IN THE COURSE The course will comprise a weekly three hour seminar for the duration of the term and stresses interactive teaching and learning. The approach to teaching and learning in this course is premised on the fact that active student involvement in the course will facilitate understanding and deep learning of the course materials. The teaching strategy in the course adopts a combination of weekly lectures and seminars designed to allow delivery of a body of material and the opportunity to discuss and contextualise the material in each classs. This is done with reference to pre-set problems and contemporary examples from the financial press or case law to aid understanding and illustration of the legal principles discussed. It is essential that students learn to select the important issues in problem type questions and that they be able to advance, in discussion, a carefully analysed solution aimed at resolution of the factual situation based on both relevant legislation and case law. Teaching Strategies

The course involves two key components – the combined lecture and seminar, and your private study.

Each lecture will provide an overview of the topic at hand and will then focus on explaining the concepts and issues. The role of the lecture is to assist with understanding the context of the topic as well as work though the difficult points. Students are invited to participate in this exercise. Thereafter, attention is turned to the pre-set discussion answers which students are expected to prepare. The seminar requires your participation. It is designed to help consolidate, interpret and apply the lecture material. Additionally, the seminar is also designed to allow students to develop the skills necessary to analyse problems which may arise in practice.

4. ASSESSMENT 4.1 Formal Requirements

In order to pass this course, you must: achieve a composite mark of at least 50; and make a satisfactory attempt at all assessment tasks (see below).

4.2 Assessment Details

Assessment Task Weighting Learning Outcomes assessed

Length Due Date

Group Research Assignment (written and oral)

50% Critical and analytic thinking and problem solving; team based skills

1,500 words

TBA in Week 1

Individual Research Assignment (written)

50% In-depth engagement with disciplinary knowledge; Critical and analytical thinking

3,000 words

Week 9 (March 9)


and problem solving

4.2.1 Individual Research Assignment: (Written) The individual Research Assignment (worth 50 marks and 50% of the course) is a significant piece of research and involves a 3,000 word paper (minimum of 2, 800 words) exploring corporate law issues on a topic set by the lecturer dealing with the resolution of a real world legal problem. Further details on the topic will be discussed in the first class of term upon release of the topic in Week 1. The Research Assignment is due in class in Week 9. The Research Assignment will be returned, together with feedback, by or before Week 12 of session. 4.2.2 Group Research Assignment: (Written and Oral) The Group Research Assignment (worth a total of 50 marks and 50% of the course) involves a 1, 500 word paper and 20 minute oral presentation addressing the issues raised in the Group Research Assignment. Further details on the topic and specific due dates will be addressed in the first class of term. The written component of the Group Research Assignment is worth 30 marks and the oral presentation of that assignment in class is worth 20 marks. The marking criteria for both Research Assignments will focus on the quality of the analysis undertaken (its strength and soundness) and on the correct identification and application of relevant corporate law principles. The marking criteria for the Oral Presentation of the Group Research Assignment will focus on the quality of the presentation and the level of innovation displayed. Further details will be discussed in the first class of term.

The learning outcomes of this assessment design include:

the ability to analyse legal issues in a logical and structured way (ie. to identify problems, research relevant sources, and to critically evaluate)

the development of, and confidence, oral and written communication of legal issues

the development of research and problem solving skills

the improvement of understanding, and appreciation, of good corporate governance practices in management

In addition, it is envisaged that the assessment task will also develop your time management and personal organisation skills. 4.3 Assignment Submission Procedure

Assignments are to be handed in class to the lecturer and an electronic copy is to be emailed to the lecturer by, or before, the due date.


4.5 Late Submission AGSM MBA Programs applies a daily penalty of 5% to late assignments. This policy was reviewed in October 2009 in light of the fact that certain schools within the Australian School of Business apply a 10% penalty. The decision of AGSM MBA Programs following this review was that current 5% penalty is appropriate to all of our programs and will remain unchanged. Refer to policy on http://www.asb.unsw.edu.au/currentstudents/agsmmba/academicinformation/assessmentsandexaminations/Pages/default.aspx#penalties 4.6 Special Consideration and Supplementary Examinations

AGSM MBA Program Policy and information on special consideration, including supplementary exams can be found at: http://www2.agsm.edu.au/agsm/web.nsf/Content/MBA-PoliciesandProcedures-Assessment-Examination 5. Academic Honesty and Plagiarism Plagiarism is the presentation of the thoughts and words of another as your own. The University regards plagiarism as a form of academic misconduct, and has very strict rules regarding it. For advice on acknowledging your sources and referencing correctly to avoid plagiarism see the AGSM manual, Managing Your Learning (Section 8) and the UNSW Plagiarism and Academic Integrity webpage. You should also familiarise yourself with the information regarding academic misconduct and the appeals process on the UNSW website: Academic Misconduct https://my.unsw.edu.au/student/academiclife/assessment/AcademicMisconductStudentMisconduct.html Student Complaint Policy http://www.policy.unsw.edu.au/policy/Student_Complaint_Policy.htm

6. Course Resources

Prescribed text/s

o J. Harris , A. Hargovan and M. Adams , Australian Corporate Law (2nd edition, LexisNexis/Butterworths, 2009); and

o J. du Plessis, A. Hargovan and M. Bagaric, Principles of Contemporary Corporate Governance (2nd edition, Cambridge, 2010)

Highly Recommended

o Australian Corporations Legislation, 2010, LexisNexis/Butterworths (or electronic access at www.austlii.edu.au)

Additional Readings The following is a select bibliography of reference material:


R. Baxt, K. Fletcher and S. Fridman, Cases and Materials on Corporations and Associations (10th edition, LexisNexis/Butterworths, 2009)

This is a collection of case extracts with commentary. It will be useful for students wishing to obtain a fuller picture of the facts and reasoning in individual cases, which will be the subject of class discussions.

R. Austin and I. Ramsay, Ford’s Principles of Corporations Law (14th edition LexisNexis/Butterworths, 2010)

This is the standard reference work for Australian corporate law. It is written with a legal audience in mind (and therefore goes into detail beyond that required for this course) but nonetheless contains full discussion of all the legal points we will cover. Students wishing additional references can contact the lecturer for further details. Websites

UNSW Library information. http://info.library.unsw.edu.au/web/services/services.html

www.treasury.gov.au gives access to legislation, background papers and other useful information concerning corporate law reform and the development of the corporations legislation

www.camac.gov.au provides access to CAMAC discussion papers

(themselves a useful source of information about corporate law and corporate law reform)

www.asic.gov.au provides access to the role and operation of the regulator

(Australian Securities and Investment Commission) and is a useful source of information on regulatory activity

7. Course evaluation and development Mid and end of session feedback is sought from students about the courses offered in the School and continual improvements are made based on this feedback. Significant changes to courses and programs within the School are communicated to subsequent cohorts to students. For this year specific change was made, based on student feedback, to introduce the two week Integrative Experience in Weeks 11 & 12 of Session in order for students to apply all the disciplines learned in all the core courses and included:

• Continue to provide substantive foundation • Facilitate integration of concepts from core subjects • Simulation, competition • Substantive integration with adaptive leadership skills • Finance, Ops, Data Analysis, Marketing, Strategy


8. Student responsibilities and conduct AGSM’s reputation is dependent on the conduct of the members of its community. We expect the conduct of our students to be fair and responsible at all times. Information and AGSM policies on student responsibilities and conduct, including academic misconduct, equity, and grievance procedures, can be found at http://www.asb.unsw.edu.au/currentstudents/agsmmba/studentresources/studentsrightsandresponsibilities/Pages/default.aspx For information on AGSM attendance requirements, procedures for granting special consideration and supplementary examinations, see http://www.asb.unsw.edu.au/currentstudents/agsmmba/academicinformation/programrequirements/Pages/mba.aspx Students are also expected to be familiar with and adhere to University of New South Wales policies in relation to general conduct and responsibilities. See UNSW A-Z Student Guide. See, especially, information on ‘Attendance and Absence’, ‘Academic Misconduct’, ‘Assessment Information’, ‘Examinations’, ‘Special Consideration’, ‘Student Responsibilities’ and ‘Workload’, and policies such as ‘Occupational Health and Safety: https://my.unsw.edu.au/student/atoz/OccupationalHealth.html From time to time, the University will send important announcements to your university e-mail address without providing you with a paper copy. You will be deemed to have received this information. It is also your responsibility to keep the University informed of all changes to your contact details 9. additional Student Resources and Support The University and the Australian School of Business provide a wide range of support services for students, including: AGSM manual: Managing Your Learning ASB Education Development Unit (EDU) (www.business.unsw.edu.au/edu)

Academic writing, study skills and maths support specifically for ASB, AGSM and MBT students. Services include workshops, online and printed resources, and individual consultations. EDU Office: Room GO7, Ground Floor, ASB Building (opposite Student Centre); Ph: 9385 5584; Email: [email protected]

UNSW Learning Centre (www.lc.unsw.edu.au) Academic skills support services, including workshops and resources, for all UNSW students. See website for details.

Library training and search support services: http://info.library.unsw.edu.au e Learning information: [email protected] UNSW IT Service Desk: Technical support for problems logging in to websites,

downloading documents etc. Library, Level 2; Ph: 9385 1333. Website: www.its.unsw.edu.au/support/support_home.html

UNSW Counselling Service (http://www.counselling.unsw.edu.au) Free, confidential service for problems of a personal or academic nature; and workshops on study issues such as ‘Coping With Stress’ and ‘Procrastination’. Office: Level 2, Quadrangle East Wing; Ph: 9385 5418

Student Equity & Disabilities Unit (http://www.studentequity.unsw.edu.au) Advice regarding equity and diversity issues, and support for students who have a disability or disadvantage that interferes with their learning. Office: Ground Floor, John Goodsell Building; Ph: 9385 4734


10. Course Schedule

Wk Date Topic Reference

1 12 Jan Development, Structure and Administration of Australian Company Law (Role of ASIC) Corporate Structures (types of companies)

Ch 1-2 and 3(pp 69-83)

2-4

19 Jan

27Jan

2 Feb

Incorporations and its Legal Effects (Separate Legal Personality) and Lifting the Corporate Veil

Legal Treatment of Corporate Groups

Use and Abuse of Corporate Groups: James Hardy Ltd Case Study

Ch 5

5 9 Feb Forming and Organising the Company: Internal Governance

Ch 6

6 16 Feb Corporations as Legal Actors: Contractual, Civil and Criminal Liability of Corporations

Ch 7

7 23 Feb Corporate Finance: Promoters; Corporate Fundraising (Investor Protection/Director Liability Issues); Debt Capital (Debentures)

Ch 8-11

8 2 Mar Corporate Finance: Debt v Equity; Shares and Share Capital Transactions

Ch 10-11

9-11

9 Mar

16 Mar

23 Mar

Corporate Governance/Management:

Corporate Management: Meetings (legal aspects)

Duties of Directors and Officers (Common Law and Statutory Duties)

1. Fiduciary Duties: Case Studies (including director of HIH Ltd; Telstra Ltd)

2. Duty of Care, Skill and Diligence: Case Studies (including board of directors of James Hardy Ltd; officers of GIO Ltd and chairperson of One Tel Ltd)

Ch 12

Ch 15-19

12 30 Mar Rights and Remedies of Shareholders (Common Law and Statutory)

Ch 20

13 6April(PH 26/02)

Financial Distress: External Administration ( Overview of Schemes of Arrangement; Voluntary Administration; Receiverships; Liquidation)

Ch 24


LECTURE TOPIC OUTLINE Week 1

Topic:Structure of Australian Company Law and Administration

Introduction and Overview of Course

(i) Introduction: review course outline, settle assessment and administration; (ii) Review of legal method: brief review of concept of precedent and interaction of

case law and statutory provisions;

1. Overview of development of English company law; the history and development of Australian company law and the constitutional background to the Corporations Act 2001 (Cth);

2. Law Reform: The Corporation Law Simplification process and the Corporate Law Economic Reform Program (CLERP);

3. Administration and enforcement of the national scheme. Investigation and prosecution. Role of the Australian Securities and Investment Commission (ASIC);

4. Role of the Australian Securities Exchange (ASX); 5. Policy and principles of Corporate Law. 6. Why form a company? Corporate Structures

Types of companies (a) Classification according to liability

CA s112, s9 (definition of “company limited by shares”, “company limited by guarantee”, “unlimited company”)

Company limited by shares Company limited by guarantee Unlimited liability company No liability company

(b) Classification according to size

CA s113, s45A Public and proprietary companies Small and large proprietary companies

(c) Classification according to listing

CA ss 45A, 112-116, Part 1.5 “Small Business Guide”.

(d) Corporate Group CA s46, 9 (definition of “holding company”) (e)

How do you form a company?


ASIC Website: http://www.asic.gov.au CA ss 117-123

(f) Advantages and disadvantages of the corporate form Text: Harris, Hargovan and Adams: Chapters 1, 2 and 3 (pp 69-83) Articles:

Easterbrook F and Fischel D, ‘Limited Liability and the Corporation’ (1985) 52 University of Chicago Law Review 58;

Halpern P, Trebilcock M and Turnbull S, ‘An Economic Analysis of Limited Liability in Corporation Law’ (1980) 30 University of Toronto Law Journal 117.

Questions for discussion: 1. Where did the corporate form originate? What original purpose did it serve? 2. What benefits did early versions of the corporate form provide? 3. How important was limited liability to early forms of business associations? 4. What, if anything, did the Bubble Act accomplish? 5. Why is regulation of corporate activity so controversial in federal states? 6. How would one characterise the Australian system of corporate regulation?


Weeks 2 and 3

Topic: Incorporation and its Legal Effects (Corporate Personality and Lifting the Corporate Veil);

Legal Treatment of Corporate Groups

Corporate Personality

This is perhaps the single most important (and also most controversial and difficult) aspect of modern corporate law. It is now axiomatic to state that the corporation, once created, constitutes a legal person, separate from its members and controllers. However, in a modern political world, observers have difficulty applying this principle consistently, especially where results can seem harsh. There is also some tension between the law, which treats each individual corporation as a “separate person” and practice, where more often than not, controllers think of a group of corporations linked by common directors or shareholders or by ownership, as a single economic unit. In this section, we explore what it means to say that a corporation has “personality” and look at the various means that have been employed to deal with the inevitable problems that arise. We will consider:

the significance of corporate personality the benefits of corporate personality the problems created by treating corporations as people common law and statutory techniques for dealing with corporate personality fraudulent use of the corporate form the concept of the corporate group legal treatment of corporate groups the use and abuse of corporate groups the need for law reform

1. Concepts of separate corporate personality and limited liability

Salomon v Salomon and Co [1897] AC 22 Lee v Lee's Air Farming Ltd [1961] AC 12 Macaura v Northern Assurance [1925] AC 619 Nicol v Allyacht Spars Pty Ltd (1987) 163 CLR 611 Andar Transport Pty Ltd v Brambles (2004) 206 ALR 387

2. Piercing the veil of incorporation (At Common Law) (a) Fraud or improper conduct

Gilford Motor Co Ltd v Horne [1933] 1 Ch 935 Jones v Lipman [1962] 1 All ER 442 Creasey v Breachwood Motors Ltd [1993] BCLC 480 Artedomus v Del Casale [2006] NSWSC 146 Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1


(b) Agency

Smith Stone and Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 Tate v Freecorns Pty Ltd [1972] WAR 204 ACN 007 528 207 Pty Ltd v Bird Cameron (2005) 91 SASR 570

(c) Groups

Walker v Wimborne (1976) 137 CLR 1 Industrial Equity v Blackburn (1977) 137 CLR 567 Adam v Cape Industries Plc [1990] Ch 433 DHN Food Distributors Ltd v London Borough of Tower Hamlets [1976] 3 All

ER 462 (CA) Qintex Australia Finance Ltd v Schroders Australia Ltd (1990) 3 ACSR 267 BHP Billiton Finance Ltd v Commissioner of Taxation [2009] FCA 276;

affirmed [2010] FCAFC 25.

(d) Other categories

Briggs v James Hardie (1989) 7 ACLC 841 CSR Ltd v Wren [1998] Aust Torts Rep 64,806

(e) General Principle ? Briggs v James Hardie (1989) 7 ACLC 841

3. Piercing the veil of incorporation (Under Corporations Act)

Section 588G (director’s personal liability for insolvent trading) Section 588V (parent company liability for insolvent trading of its

subsidiary) CA ss 9 (Definition of "director"), 588G, 588V Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR

290

The Position of Employees upon Insolvency

CA Part 5.8A

4. Use and Abuse of Corporate Groups Case Study: James Hardie Group

David Jackson QC, Report of the Special Commission of Inquiry into the Medical and Research Compensation Fund (2004), available at http://www.cabinet.nsw.gov.au/publications.html

Dunn E, ‘No soul to be damned and no body to be kicked’ [2005] Sydney Law Review 15 (available at http://www.austlii.edu.au/journals/SydLRev/2005/15.html


Prince, Davidson and Dudley, “In the shadow of the corporate veil: James Hardie and asbestos compensation” (2004) http://www.aph.gov.au/library

Text: Harris, Hargovan and Adams: Chapter 5 Articles: (see Ch 5 of prescribed text for a fuller list of references)

Hargovan, A and Harris, J “Piercing the Corporate Veil in Canada: A Comparative Analysis” (2007) 28 The Company Lawyer (UK) 58-62.

Hargovan and Harris, “The Relevance of Control in Establishing an Implied Agency Relationship between a Company and its Owners” (2005) 23 Companies and Securities Law Journal 461-466.

Harris, “Lifting the Corporate Veil on the Basis of an Implied Agency: A Re-evaluation of Smith, Stone and Knight” (2005) 23 Companies and Securities Law Journal 7.

Harris and Hargovan, “The Nature of the Corporate Employer’s Duty of Care to Employees: Is it Co-extensive?” (2004) 32 Australian Business Law Review 367

Harris, "Lifting the Corporate Veil in Industrial Disputes" (2004) 22 Companies and Securities Law Journal 69.

Hargovan, A “Breach of Directors’ Duties and the Piercing of the Corporate Veil” (2006) 34 Australian Business Law Review 302.

Hargovan, A “Piercing the Corporate Veil on Sham Transactions and Companies” (2006) 24 Companies and Securities Law Journal 436.

Ramsay and Noakes, “Piercing the Corporate Veil in Australia” (2001) 19 Companies and Securities Law Journal 250.

Farrar, “Legal Issues Involving Corporate Groups” (1998) 16 Companies and Securities Law Journal 184.

Noakes, “Dogs on the Wharves: Corporate Groups and the Waterfront Dispute” (1999) 11 Australian Journal of Corporate Law 27.

Ramsay and Stapledon, “Corporate Groups in Australia” (2001) 29 Australian Business Law Review 7.

Gronow, “Insolvent corporate groups and their employees: The case for further reform (2003) 21 Companies and Securities Law Journal 188.

Watson, “Who Hides behind the Corporate Veil? Finding a Way out of the Legal Quagmire” (2002) 20 Companies and Securities Law Journal 198.

Questions for Discussion

1. Was the transaction considered by the English House of Lords in Salomon’s case

fraudulent? 2. Upon what factors would your judgment of Salomon’s transaction depend? 3. What is meant by “piercing the veil” of incorporation? 4. Should the law distinguish between tort claimants and contract claimants? 5. Should “undercapitalisation” be relevant to “piercing the veil”? 6. How does the concept of corporate personality and the treatment of a corporation

as a separate entity impact upon: A parent company Directors of companies in a corporate group Creditors of companies in a corporate group


Should the law apply different principles in cases involving corporate groups? If so, what might those principles be?


Problem Question 1

A, B and C are the directors of The Very Big Company Ltd (VBC). VBC has a wide range of interests in finance, manufacturing and retailing. VBC's empire has grown rather haphazardly over the years and VBC sits at the apex of a complex web of corporations in which it holds shares. The board of VBC now wants legal advice in connection with the following transactions:

(i) Incendiary Limited, a wholly-owned subsidiary of VBC, is engaged in the manufacture of disposable cigarette lighters. This company originated two years ago, when A, B and C decided that VBC should incorporate a new company to carry on its business in relation to manufacturing of petroleum based products. Incendiary's head office address is identical to VBC's. Its only directors are A, B and C. There are approximately 20 employees of Incendiary. From time to time, these employees are paid by cheques drawn on the account of VBC. The senior management of Incendiary are issued with manuals entitled "VBC's Business Plan" when they are appointed. All of the machinery and equipment used by Incendiary are owned by VBC and leased to Incendiary.

Several months ago, VBC received a letter about an accident that had occurred involving one of the Incendiary products, the "U-Bute-ane" lighter. The lighter spontaneously combusted in the pocket of its owner, causing substantial injury. Attached to the letter was a forensic report indicating that the seals in the lighter were defective. VBC is concerned about any potential liability it may have. A, B and C are not concerned about the liability of Incendiary as it has no assets and no retained earnings, as each of the last two years its profits have been paid to VBC by way of dividend.

(ii) Another subsidiary of VBC is VBC (Property) Ltd. (VBC Prop) Its business is real estate speculation. A, B and C are also on the board of VBC Prop. Last year they identified a potentially valuable site for investment and agreed that VBC Prop would purchase it. There was one problem with the property, however, and that was that its commercial viability depended on the success of a new draining technology. Failing this success, the land would remain a worthless swamp. A, B and C approached the Greedco National Bank for finance. The Bank agreed to finance the purchase and the draining of the land. Accordingly, VBC Prop acquired the property on the basis of mortgage finance advanced by Greedco. In the course of negotiations, A, B and C made some comments about VBC's willingness to guarantee the debts of VBC Prop, but none of the paperwork was ever completed. Greedco's local manager simply assumed that as the same people controlled both companies it didn't really matter. It is unclear in any event whether she appreciated that she was dealing with two different companies. As luck would have it the drainage failed and VBC Prop is now insolvent. As both VBC and VBC Prop used Greedco Bank, the Bank has simply been debiting VBC's account for the mortgage payments for the last 3 months. A, B and C have just discovered this and want advice.


Week 4

Topic: Internal Governance [Corporate Constitution, Replaceable Rules and its Legal Effects]

In this part of the course, we look at the process of formation of the corporation. From the previous readings, you should already have noted that this process changed fundamentally when the ability to form a corporation was made generally available, rather than dependent on the exercise of Royal or Parliamentary prerogative. Accordingly, from the mid-nineteenth century onwards, the process of formation of companies has become increasingly simplified, culminating in recent Australian changes, doing away entirely with the need for a corporate constitution. Our aim here is for an understanding of the relevance of the constitution as well as an understanding of the usual internal governance mechanisms relied on by most corporations. A. What is a corporate constitution?

1 Historial background

Memorandum and articles of association Replaceable Rules

2 Contents of the corporate constitution

CA ss 117, 125, 134-141, s9 (definition of “constitution”)

3 Effect of mandatory rules CA ss 203D, 203E * Link Agricultural Pty Ltd v Shanahan (1998) 28 ACSR 498 at 515-517

Questions for discussion

What do you think is the practical effect of the move from the old articles and memorandum to the concept of replaceable rules? The legislation no longer requires all companies to adopt a corporate constitution. What sorts of companies, in your opinion, are likely to adopt a corporate constitution?

Browse through the provisions referred to in Section 141 of the

Corporations Act. What kinds of matters are governed by the replaceable rules? Note that some provisions (for example ss 203D, 203E) are not designated as replaceable rules. Why do you think this is so?

B Alteration of the corporate constitution

(a) Method of alteration

(b) The power to alter is mandatory


(c) Limitations on alteration

(i) Entrenchment: subss136(3), 136(4) (ii) Section 140 (iii) Class rights (s 246B) (iv) Oppression (“fraud on the minority”, s 232)

CA ss 9 (“special resolution”), 136(2)-(5), 137, 140(2) Gambotto v WCP Ltd (1995) 69 ALR 266, 16 ACSR 1

Question for discussion

To what extent, and by what mechanisms, can free alterability of the memorandum and articles of association be undermined?

C Effect of the corporate constitution 1. Statutory contract CA s 140

2. Parties to the contract: s 140

3. Limitation on the obligations imposed or rights given

Hickman v Kent or Romney Marsh Sheep-Breeders' Association [1915] 1 Ch 881

4. Enforcement

(a) By members

(i) Enforcement of rights qua member (ii)Alternative views (iii)Procedural irregularities (iv)Remedies

(b) By Officers

(c) By the company

5. Alterability of the statutory contract

Shareholders’ agreements

Russell v Northern Bank Development Corp Ltd [1992] 3 All ER 161

Further reference:


Goldwasser, “Shareholder Agreements – Potent Protection for Minorities in Closely Held Corporations” (1994) 22 Australian Business Law Review 265

D Outside contracts which are affected by or incorporate the corporate

constitution 1. Inconsistency between outside contracts and the corporate constitution

CA s 198C, 203C Shindler v Northern Raincoat Co Ltd [1960] 1 WLR 1038

2. Effect of alteration of the articles on the outside contract

Bailey v NSW Medical Defence Union (1995) 184 CLR 399 Text: Harris, Hargovan and Adams: Chapter 6


Problem Question 2

Commonwealth Properties Limited was incorporated on January 1, 1995. Ownership of its shares is widely dispersed among members of the public. Amongst its shareholders are two lawyers, Bob and Paul, each of whom owns 5% of the corporation’s shares. Both Bob and Paul are also directors of the corporation.

Commonwealth Properties Limited is governed by a constitution. The constitution includes the following clauses:

1: Each director of the corporation shall own one share.

2: The Company may by special resolution remove any director before the expiration of his or her period of office and appoint another qualified person in his or her place. The person so appointed will hold office during such time only as the director in whose place he or she has been appointed would have held office had he or she not been removed.

3: Bob shall act as the solicitor for the corporation so long as he remains a director. Any legal work required to be carried out by the corporation shall be offered to Bob, who shall advise the corporation as to whether or not he wishes to act in any way for the corporation relevant to the matter concerned. Only in the event that Bob declines to so act shall the corporation’s legal work be performed by another solicitor, and in that event the board of directors shall request Bob to recommend another solicitor qualified to act for the corporation in the matter concerned. After having regard to the advice proffered by Bob, the board of directors shall either retain the solicitor recommended by Bob or retain another solicitor of its choice.

In all other respects the company is governed by the replaceable rules.

This arrangement has worked reasonably well for the last several years. In practice, Bob presents a retainer agreement to the company for execution at the commencement of each year. The company pays a small fee to Bob each year in connection with this contract of retainer.

In the last several weeks, Paul has succeeded in acquiring a substantial number of shares. He now holds 60% of the voting shares in the company.

The company is in the process of acquiring a substantial amount of property and Paul is keen to perform the legal work. He believes that he can perform the work more effectively and cheaper than Bob. Consider the effect of each of the following scenarios:

A. At the next meeting of the company’s board Bob is absent. Paul proposes that the company retain Paul to act on behalf of the corporation in respect of all new real estate purchases. Assume that this directors’ resolution is approved by ordinary resolution at the next meeting of shareholders. At that same meeting of shareholders, the following resolution is passed by a vote of 62% in favour:

“That in accordance with the company’s constitution, clause 2, Bob be removed as a director”

B. Paul increases his control of the company and now owns 92% of its shares. He is still keen to get rid of Bob immediately, both as a shareholder and as a director and does not wish to wait until the election of directors at the next annual general


meeting of the company. Paul calls an extraordinary general meeting of the company at which the following resolution is put:

“That the company’s constitution be amended to insert the following provision:

‘4. Any shareholder holding 90% or more of the company’s shares shall be entitled to purchase any remaining shares for $1.20 per share.’”

Attached to the notice of meeting are several valuations of the company’s shares, all putting the value of the shares at between 80 and 90 cents per share. In addition, there is a statement from Paul indicated that Bob has been overcharging the company for its legal fees, that substantial legal work will need to be done in the next few months and that the purpose of the resolution is to remove Bob from the company in order to save substantial legal fees.

Bob is not present at the meeting. All shareholders other than Paul vote on the resolution, which is carried unanimously. Privately, Paul is aware that if the forthcoming series of real estate acquisitions is successful, the value of the company will double.


Week 5

Topic: Corporations as Legal Actors: Contractual, Civil and Criminal Liability of Corporations

This week we look at the way in which a corporation deals with the outside world. We explore the means by which corporations, through the operation of agency, enter into contracts. We also look at how criminal law and tort law is applied to corporations. A. Contractual Capacity of the corporation

1. At common law: the doctrine of ultra vires

2 Abrogation by statute

Corporations Act ss 124-125

B. Authority of organs and agents

1. Contracting by corporate organs

Corporations Act ss 126-7

2. Authority at common law

(a) Actual authority

(i) Express actual authority (ii) Implied actual authority

Incidental authority Usual authority Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549

(b) Ostensible authority

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB

480 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising Pty Ltd (1975) 133

CLR 72

3. Assumptions As to Authority (a) At Common Law

Royal British Bank v Turquand (1856) 119 ER 886


Limitation: Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611

(b) Statutory Assumptions Section 129 Limitation:

CA ss 128-130 * Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd

[1992] 2 VR 279 BNZ v Fiberi Pty Ltd (1994) 12 ACLC 48, 14 ACSR 736

C. Breach of duty (a) CA s 129(4)

(b) CA s 124(2)

Text: Harris, Hargovan and Adams: Chapter 6 (pp 183-184) and 7 (pp 234-242)

Discussion questions Why would a corporation include an objects clause or an express restriction on, or

prohibition of, the company’s exercise of any of its powers in its constitution? What is the effect of a breach of an objects clause or an express restriction on, or

prohibition of, the exercise of power in a corporate constitution?

In deciding when to hold that a company is or is not bound by a transaction, the courts and the legislature have to protect and balance competing interests. What are those competing interests? Do you think that the courts and/or the legislature have struck the right balance?


B. Liability of Companies in tort and crime “Public policy requires that once companies are recognised as separate legal

persons, they should be liable for torts and crimes, and bound to carry out their contractual obligations. It would be totally unacceptable if companies alone of all legally recognised persons were immune from the law in these areas.

Nevertheless, the unique nature of a company, as a legal abstraction having no physical existence, raises difficult issues as to when a company can be said to have committed a tort or crime, or have entered into a binding contract. As Viscount Haldane observed in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co ltd [1915] AC 705 at 713:… a corporation is an abstraction. It has no mind of its own any more than a body of its own…”

(a) Liability in Tort

Organic Theory and its application Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915]

AC 705 H L Bolton Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159

Vicarious Liability and its application Hollis v Vabu Pty Ltd (2001) 207 CLR 21

(b) Liability in Crime

Primary liability Tesco Supermarkets Ltd v Nattrass [1972] AC 153

Fashioning Rules of Attribution Meridian Global Funds Management Asia Ltd v Securities

Commission (1995) 13 ACLC 3245 ABC Developmental Learning Centres Pty Ltd v Wallace

[2006] VSC 171

Secondary Liability Proceeds of Crime Act; Trade Practices Act; Customs Act; Criminal

Code Act Text: Harris, Hargovan and Adams: Chapter 7 (pp 209-234)


Problem Question 3

Ms James is the chairperson and a director of Security Pty Ltd, Sydney’s largest provider of security services. Ms James holds 60% of the issued shares in Security Pty Ltd. The company does not have a constitution.

For the past 5 years, the company secretary of Security Pty Ltd has been the company’s in-house counsel, Mr Grafton. Mr Grafton is an excellent company secretary and, during his tenure, the company had lodged all notices required by s 205B of the Corporations Act with the Australian Securities and Investment Commission.

Prior to 1 February this year, there were only four other directors of Security Pty Ltd: Ms James’ two sons, Mr Evanovitch and Ms George. They all regarded Ms James as the “owner” of Security Pty Ltd and considered that she was entitled to run the company as she saw fit. Ms James shared this understanding of her role in the management of Security Pty Ltd. She frequently committed Security Pty Ltd to transactions without seeking the prior consent of her fellow directors. However, she always subsequently brought the transactions to the attention of the board and sought its ratification of her actions. On no occasion have the other four board members refused to ratify Ms James’ actions.

On 1 February this year, Mr Grafton was appointed to the board of Security Pty Ltd. He retained his position as company secretary. At his first board meeting the next day, he said:

“I am very pleased to have been rewarded for my hard work over the past 5 years and am confident that I will be able to make an even more valuable contribution to the company in my new role as director. In particular, I feel that my proven skills as a lawyer and administrator will enable me to ensure that this board properly fulfils its duties to the company, by meeting regularly and thoroughly considering all proposed transactions before they are entered into.”

Ms James did not respond to this speech. The other four directors were amazed at what they saw as a veiled criticism of the way Ms James had conducted the affairs of the company in the past. Nevertheless, each of them enthusiastically welcomed Mr Grafton to the board and said that they too were sure he would be able to make a valuable contribution. Ms George even went so far as to say:

“There is always room for improvement. I am sure that it is time we, as a board, reviewed the way in which we supervise this company. It is possible that over the years we have developed some lax procedures. I look forward to considering any suggested changes Mr Grafton proposes.”

Mr Grafton decided not to push matters any further at his first board meeting.

Ms James holds 100% of the shares in the company, Real Estate Pty Ltd, which invests in real estate. In early February this year, Ms James learnt that a small office building in the centre of Perth was for sale for a very good price. She thought that the building might be a good investment for Real Estate Pty Ltd and decided to fly to Perth immediately to inspect the building. She personally telephoned Security Pty Ltd’s travel agents, Travel & Co Pty Ltd, and asked them to book a first class flight to Perth in her name. She told Travel & Co Pty Ltd to charge the ticket to Security Pty Ltd’s account.


Ms James was extremely impressed by the office building in Perth and decided that Real Estate Pty Ltd should buy it. Unfortunately, Real Estate Pty Ltd had insufficient cash reserves to purchase the building. Ms James approached Friendly Bank for a loan of $1 million. Friendly Bank had previously lent money to Real Estate Pty Ltd and already held a fixed and floating charge over all the assets of Real Estate Pty Ltd. Friendly Bank was unwilling to lend a further $1 million unless it obtained additional security. Ms James suggested that Security Pty Ltd could guarantee the loan. Friendly Bank readily agreed to this arrangement. Although Friendly Bank had never dealt with Security Pty Ltd before, it was aware that a recent article in The Financial Review described it as a very successful provider of security services and spoke of Ms James as the “brains behind the company”.

On 7 February this year, Friendly Bank lent $1 million to Real Estate Pty Ltd and Security Pty Ltd executed a guarantee of the loan in favour of Friendly Bank. The guarantee was executed under seal. Ms James witnessed the affixing of the seal as director. Mr Grafton was not at work on 7 February and no other director was available. Ms James was desperate to have the transaction finalised and therefore asked her personal assistant, Ms Rendell, to witness the affixing of the seal. Ms James told the representative of Friendly Bank that Ms Rendell was the company secretary of Security Pty Ltd. The representative of Friendly Bank accepted this representation. Friendly Bank had not examined the returns lodged by Security Pty Ltd with the Australian Securities and Investment Commission under s 205B of the Corporations Act.

In light of Mr Grafton’s comments at the board meeting, Ms James decided not to disclose the guarantee to the board.

Continuing the family interest in real estate, Ms James two sons’ decided to buy a house at Palm Beach, which they thought would make a perfect weekender for them and their friends. They were unable to obtain a loan to fund the purchase. Therefore, they decided to execute the contract of sale in the name of Security Pty Ltd. They both signed the contract of sale. The vendor was pretty sure that the two sons were purchasing the house for their personal use. She had heard them discuss the parties they would have there and could not see why a security company would want to purchase the house. However, after checking the returns lodged under s 205B of the Corporations Act by Security Pty Ltd she saw that both sons were directors and decided not to inquire any further.

Advise whether Security Pty Ltd is bound by:

1. the contract to purchase the airline ticket from Travel Pty Ltd; 2. the guarantee given to Friendly Bank; and 3. the contract to purchase the Palm Beach house.

You are not required to consider breach of duty by any directors of Security Pty Ltd.

Week 6

Topic: Corporate Finance: [Promoters; Corporate Fundraising (Debt and Equity Capital); Investor Protection]

Generally, promoters are persons who are involved with organising and supervising the formation of a company. Promoters are placed in a powerful position of control in


respect of the fledgling company. Promoters may also contract on behalf of the company before it is actually formed. Their position and activities raises issues of accountability and liability. The poor image that promoters generally had at the turn of the last century is captured in the following extract: If … we were asked to say what picture formed in our minds at the mention of the expression “company promoter,” most of us would probably confess that we envisaged a character of dubious repute … and who, after rising to affluence by the preying on the susceptibilities of a gullible public, finally retires from the scene in the blaze of a sensational suicide or Old Bailey [a famous court in England] trial. In other words, we … envisage someone whose profession it was to form bogus companies and foist them off on the public to the latter’s detriment and [the promoter’s] own profit. Such figures have existed and it is probably too much to hope that they will ever be entirely eradicated …1 Promoters are usually involved in fundraising activities. This topic looks at the manner in which promoters are held accountable during their involvement in forming or promoting the company. 1. Promoters of companies. Identifying the promoters. An examination of the legal duties of promoters and of the remedies available for breach of those duties

Twycross v Grant (1877) 2 CPD 469 Tracy v Mandalay (1953) 88 CLR 215 Erlanger v New Sombrero [1878] 3 AC 1218 Gluckstein v Barnes [1900] AC 240

Pre-registration contracts and liability CA: s 131. Text: Harris, Hargovan and Adams: Chapters 8 2. Funding the corporation (shares and debentures): (i) Chapter 6 D of the Corporations Act. (ii) Rationale and types of disclosure documents. (iii) When are disclosure documents required? – ss 706; 708 (iv) Contents of disclosure documents (v) Prospectus offerings and ASX listing – ss 723-724 (vi) Legislative framework for investor protection under Ch 6 D. (vii) Role of ASIC – s 739 (viii) Directors liability and Defences – ss 728-729; 730-733

Fraser v NRMA Holdings Ltd (1995) 13 ACLC 132 Cadence Asset Management Pty Ltd v Concept Sports Ltd [2005] FCAFC 265 ASIC v Maxwell (2006) 59 ACSR 373

Text: Harris, Hargovan and Adams: Chapter 9 (ix) Debentures and charges. Floating charges. Registration and priority.

Text: Harris, Hargovan and Adams: Chapters 8, 9 and 10

1 Gower LCB, Principles of Modern Company Law (5th ed, Sweet&Maxwell, London, 1992 ) 296.


Questions for Discussion The following advertisement appears in the Australian Financial Review: Opportunity

Capital required for a new corporate venture in New South Wales. Returns of at least 50% guaranteed. Shares will be issued. Phone (02) 9385-3577 for a brochure.

Discuss, with reference to policy considerations and relevant provisions of the Corporations Act, whether such an advertisement is permissible? If not, should it be permissible? What objections, if any, can be raised to this form of advertising for corporate finance?

Problem Question 4

Worldwide News Ltd, a foreign company based in the United States, issued a prospectus in Australia which it offered ordinary shares to the Australian public. The purpose of the issue was to finance the expansion of the company into television broadcasting. The prospectus stated that the company was an applicant for a new television broadcasting licence and, if granted, the company claimed there would be substantial earnings arising from this new business venture. The prospectus included a report from an auditor who confirmed that the income and profit forecasts were fair and reasonable based on the information provided by the directors. The prospectus also included an advice from the directors of Worldwide News Ltd that there was no chance of the company being unsuccessful in its application of this licence.

Worldwide New Ltd’s application for the licence failed and it now appears that the company’s solicitors’ advice was negligent in that it failed to take into account the rules regarding foreign ownership of television broadcasting licences in Australia. Over two million shares were issued pursuant to the prospectus offer which is still open for subscription.

(a) Who, if anyone, faces liability for the statements in the prospectus and what are

the possible outcomes? Answer with reference to the Corporations Act; and (b) What causes of action are open to ASIC, the regulator, under Chapter 6D of the

Corporations Act?


Week 7

Topic: Corporate Finance: [Debt v Equity; Shares and Share Capital Transactions]

(i) Shares:

Equity financing v Debt financing (overview) The legal nature of shares Reasons for classes of shares Classes of shares (ordinary v preference shares)

Redeemable preference shares – s 254(k) Alteration of class rights and statutory protection – s 246

(ii) Impact of Company Law Review Act 1998:

(a) The new share capital rules

No par value shares Removal of share premium accounts

(b) Impact on doctrine of capital maintenance: Trevor v Whitworth

(c) New Simplified Procedure for Share Transactions (Chapter 2 J of Corporations Act):

Protection of creditors and shareholders Reduction of capital – s 256 Financial assistance – s 260 Share buy backs – ss256; 257

(iii) Consequences of breach Failure to comply with Chapter 2 J Civil penalty provisions

o ASIC v Adler (2002) 41 ACSR 72 Potential (personal) liability for directors: s 588G

Text: Harris, Hargovan and Adams: Chapter 11

Questions for Discussion

Do you think the law has the right balance in relaxing the maintenance of capital rule and affording creditor protection?

What are the implications of the law reform that now grants companies the licence to effect capital reductions free from the previous requirement of judicial approval? Consider the implications with reference to the James Hardie Case Study discussed earlier in Weeks 2-3 of the course.


Weeks 8-10

Topic:Corporate Governance: The Duties of Directors and Officers of the Corporation

Introduction to Corporate Governance: This is an aspect of corporate law that has attracted increasing amounts of attention. This part of the seminar will involve looking at the restrictions that apply to the way in which corporations are managed and governed. Essentially, as we shall see, in the various common law jurisdictions, the law started from the proposition that it was rare for courts to review managerial decisions and that managers were indirectly accountable, subject to broadly-defined general standards. In addition, shareholders were (as we shall see in the next seminar topic) given limited ability to speak directly. The result of this was a tendency to “let the directors direct, and the managers manage”. This has changed radically in recent years, and we now have numerous statutory provisions in all jurisdictions imposing specific duties on company directors and officers. In Australia particularly, these provisions can be extremely complex. At this stage of the course, we will concentrate on the division of power between the general meeting of shareholders and the board of directors. To what extent are shareholders able to affect management by passing resolution, call meetings or otherwise relying on the corporate constitution to support action?

A Division of powers between the corporate organs 2 Usual division

Typical Division Corporations Act ss 198A(1), 198E(1) 1. Powers Exercised by the General Meetingwers exercised by the general meeting

(a) Powers conferred on the general meeting by the CA

(b) Powers conferred on the general meeting by the articles

(c) Residual powers of the general meeting

(d) Reserve powers of the general meeting

2. Powers Exercised by the Boarders exercised by the board

(a) Powers conferred on the board by the CA

(b) Powers conferred on the board by the articles

Specific powers CA s 198A(1)

(c) The board’s immunity from general meeting interference and the

construction of regulation 66


Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 NRMA v Parker (1986) 6 NSWLR 517; 4 ACLC 609 [BFF 274]

Questions for discussion How did Automatic Self-Cleaning Filter Syndicate Co Ltd v Cuninghame redefine

the relationship between the general meeting and board of directors at the beginning of the 20th century?

What is the rationale for the division of powers between the board of directors and

the general meeting in CA s 198A(1) for:

(a) large public companies which are listed on the Australian Securities Exchange; and

(b) small proprietary companies.

If you were devising the corporate structure for a small proprietary company would

you adopt CA s 198A (1) in its current form? If not, how would you divide power between the board and the general meeting? What is the rationale for the option which you have chosen? Would your choice as to the appropriate division of powers be different for different kinds of small proprietary companies?

Is the increasing importance of institutional shareholders in large public companies

a factor to be taken into account in deciding upon the appropriate division of power between the board and the general meeting?

What are the dangers associated with giving the general meeting the capacity to

override the decisions of the board of directors concerning the management of the company?

B General meeting Formal decisions

1. Formal Meetings (a) Types of general meeting - Part 2G.2

Annual general meeting: CA s 250N (public companies) Extraordinary general meeting

(b) Convening a general meeting

(i) Who can convene a general meeting?

s 249C (a director) s 249D (a director at request of members) s 249F (members themselves) s 249G (the Court)

(ii) Notice of the meeting Who receives notice?: CA s 249J


Manner of service: CA s 249J Period of notice: CA ss 249H, 249HA Content of the notice: CA ss 249L, 249N-P

NB: s 249N member’s rights to put resolutions 5% or 100 members. (s 249O - 2 months notice required)

(c) Conduct of meetings

Quorum: CA s 249T Chair: CA s 249U Resolutions: CA ss 9, 249L(c) Voting: CA ss 250E-M Proxies: CA ss 249X-250D

(d) Minutes

CA ss 251A, 251B

(e) Case law on notices and circulars

* Re Marra Developments (1976) 1 ACLR 470 [BFF 312] Fraser v NRMA Holdings Ltd (1995) 127 ALR 543 (BFF 866]

Further References Companies & Securities Advisory Committee, Final Report: Shareholder Participation in the Modern Listed Public Company (June 2000).

Questions for discussion Who can convene a general meeting and pursuant to what power? In Re Marra Developments Ltd, Wootten J said, in relation to proxy battles at

general meetings, “the only function of the court is to keep the ring and see that the contest is carried out in accordance with the rules laid down by law”. What rules does the court lay down to test the adequacy of notices and circulars? Are they appropriate for 21st century companies?

In Re Dorman Long and Co Ltd, Maugham J observed that “the dice are stacked in

favour of the view of the directors”. In what ways do you think that the rules relating to company meetings entrench centralised managerial power and give directors a strategic advantage in relation to agenda control in company meetings?

How might the rules relating to company meetings be different if they were based

on a model of shareholder democracy?

Dicta in NRMA v Parker concerning the function of the members of the company in general meeting (at 614) is logical, given the decision in Cunninghame’s case. Do


you think it goes too far in rendering shareholders mere “bystanders” to the corporate decision-making and policy-making process?

2. Informal Decisionsmal decisions

(a) Unanimous assent

(i) Under general law

Re Express Engineering Works [1920] 1 Ch 466 * Re Duomatic Ltd [1969] 2 Ch 365 [BFF 458] Re Compaction Systems Pty Ltd [1976] 2 NSWLR 477 Herrman v Simon (1990) 4 ACSR 81

(ii) Under statute

CA ss 249A, 249B

(b) Court's jurisdiction to cure irregularities

CA s 1322


What is the theoretical basis of the doctrine of unanimous consent?

Should we have a doctrine of unanimous consent?

3 Shareholder’s access to corporate information Questions at general meetings: CA ss 250S, 250T Access to public information Constitution and minutes Access to company registers Common law Statutory right: CA ss 247A, 247B, 247C Question for discussion

What is a proper purpose under CA s 247A?

Text: Harris, Hargovan and Adams: Chapter 12 (pp 358-368)

C Board of directors

1 Definition of director CL s 9 (definition of "director") Standard Chartered Bank of Australia Ltd v Antico (1995) 13 ACLC 1381 DFCT v Austin (1998) 28 ACSR 565 [BFF 380]

Types of directors

Managing director: s 198C Alternate director: s 201K


Executive vs non-executive directors Nominee directors

3 Directors’ access to information

CL s 290 CL s 198F

Corporate Governance: The Duties of Directors and Officers This aspect of the course is the most important, and the most complex, from the standpoint of corporate directors and officers. Building on the knowledge developed in the last class, where we looked at the way in which managerial power is divided up in modern corporations, we now look at the legal control of the discretions of directors. This involves looking at:

The obligation to act in the best interests of the company; The obligation to act for a “proper purpose”; The obligation to avoid conflict of interest; Use of position for personal gain; Use of information gained from position; The obligation to act with due care and diligence; The “business judgment rule”;

Sanctions for breach: Possible criminal penalties; The civil penalty regime

Reading: There is a great deal of material to cover in these two classes. The rough division of material is: Week 6: HRS Chapters 10, 11 Week 7: HRS Chapters 12, 13 and 14 Detailed Outline: Directors and Officers Duties

A Duty to Act in Good Faith for the Benefit of the Company


To whom is the duty owed?

1 General principle

Percival v Wright [1902] 2 Ch 421 [BFF 352]

2 Exceptions

Coleman v Myers [1977] 2 NZLR 225 [noted BFF 351] Brunninghausen v Glavanics (1999) 32 ACSR 294 [BFF 353]

e benefit of the company as a whole

(a) Bona fide

Re Smith & Fawcett Ltd [1942] Ch 304 [BFF 342]

(b) The corporators as a whole

Mills v Mills (1938) 60 CLR 150 [BFF 339]

(c) Creditors

Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 [BFF

346] Spies v R (2000) 74 ALJR 1263, paras [93]-[97] [BFF 349]

(d) Others: employees, customers, community interests

Dodge v Ford Motor Co 170 NW 668 (1919) Parke v Daily News Ltd [1962] Ch 927 Teck Corp Ltd v Millar (1973) 33 DLR (3d) 288

(e) Interests of the company in a group of companies

Charterbridge Corporation v Lloyds Bank [1970] 1 Ch 62 Equiticorp Finance Ltd v Bank of New Zealand (1993) 32

NSWLR 50 CA s 187

B Duty to Exercise Powers for a Proper Purpose

(a) Analysing the purpose for which a power may and may not be exercised

(b) Determining the purpose of a particular exercise of power

Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33

CLR 199 Hogg v Cramphorn [1967] Ch 254; [1966] 3 All ER 420 Teck Corp Ltd v Millar (1973) 33 DLR (3d) 288 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285


Darvall v North Sydney Brick and Tile Co Ltd (1989) 16 NSWLR 260

3 Statutory du CA ss 181, 184(1)

(a) Equitable remedies: injunction, compensation, avoidance

(b) Corporations Act

(i) Civil consequences, Part 9.4B

1. Application by ASIC: s 1317J

Declaration of contravention: CA s 1317E Pecuniary penalty order: s 1317G Compensation to the company: s 1317H Disqualification: s 206C

2. Application by the corporation: s 1317J(2)

Compensation to the company: s 1317H 3 Relief: s 1317S

(ii) Criminal offence: s 184(1)

Penalty: Schedule 3 Imprisonment: Schedule 3 Disqualification: s 206B

(iii) Injunction: s 1324

Text : Harris, Hargovan and Adams: Chapter 16


The law of Massachusetts provides that: “In determining what he reasonably believes to be in the best interests of the corporation a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, region and nation, community and societal considerations, and the long-term and short-term interests of the corporation and its stockholders, including the possibility that these interests may be best served by the continued independence of the corporation.” (Mass Gen Laws Ann ch 156B, para 65)

Should the Australian Corporations Act be amended to include a similar provision?

How does the court deal with the situation where different directors had different purposes in exercising the relevant power?


How does the court deal with the situation where a director has mixed or multiple purposes in exercising the relevant power?

As a matter of policy, how stringently should the courts examine directors’ actions in the face of a hostile takeover? Are the directors in a position of inherent conflict of interest in such circumstances?

C Director’s Obligations to avoid Conflict between Duty and Interest

1 Directors' interests in contracts with their own company

(a) General law

Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 Guinness plc v Saunders (1990) 8 ACLC 3061

(b) Effect of the corporate constitution or replaceable rules

CA s 194

(c) Statutory provisions

(i) Disclosure of interests

CA ss 191-193

(ii) Restriction on voting for directors of public companies

CA s 195 2. Secret Profits: The appropriation of Company Property, Information and Opportunity

(a) General law

Cook v Deeks [1916] 1 AC 554 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 (HL) Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1 Green v Bestobell Industries Pty Ltd (1982) 1 ACLC 1 Industrial Development Consultant Ltd v Cooley [1972] 1

WLR 443 Queensland Mines Ltd v Hudson (1978) 52 ALJR 399

(b) Statutory provisions

(i) Improper use of position

CA s 182


(ii) Improper use of information

CA s 183 ASIC v Vizard (2005) 145 FCR 57

CA s 187 3. Remedies

4 Remedies

(a) Equitable remedies: account of profits, rescission, injunction


(i) Civil consequences, Part 9.4B

(ii) Criminal consequences, s 184 (2) & (3)

(iii) Injunction, s 1324

4.. Related Party Transactions : Chapter 2 E of Corporations Act ASIC v Adler (2002) NSWSC 171; (2002) 41 ACSR 72


D Duty of Care, Diligence and Skill 1 SouSrce of the duty

1. Source of the duty: Equity Negligence Statutory Contract

2 Scope of the dut:y

2. Scope of the duty: Corporations Act ss 180, 189, 190, 198D

Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 AWA v Daniels (1992) 7 ACSR 759, 864-875 Daniels v Anderson (1995) 16 ACSR ASIC v Adler (2002) NSWSC 171; (2002) 41 ACSR 72 ASIC v Macdonald (No 11) [2009] NSWSC 287; (2009) 256 ALR 199 ASIC v Rich (2003) 44 ACSR 341 ASIC v Rich [2009] NSWSC 1229; (2009) 236 FLR 1 ASIC v Citrofresh International Ltd (No 2) [2010] FCA 27

tutory right to delegate and rely on others 3. Statutory right to delegate and rely on others:

CA ss 189, 190, 198C, 198D, 198E ASIC v Macdonald (No 11) (2009) 256 ALR 199 ASIC v Citrofresh International Ltd (No 2) [2010] FCA 27

4 Statutory Business Judgment Rule

4. Statutory Business Judgment Rule as Defence CA s 180(2) ASIC v Adler (2002) NSWSC 171; (2002) 41 ACSR 72


ASIC v Macdonald (No 11) [2009] NSWSC 287; (2009) 256 ALR 199 ASIC v Rich [2009] NSWSC 1229; (2009) 236 FLR 1

5. Remedies

(a) Damages/compensation


Civil consequences, Part 9.4B Injunction, s 1324

ASIC v Macdonald (No 12) [2009] NSWSC 714 ASIC v Citrofresh International Ltd (No 3) [2010] FCA 292

Text : Harris, Hargovan and Adams: Chapter 18 Questions for discussion

Was the early duty of care, diligence and skill (as outlined in Re City Equitable)

pitched too low? What model of the relationship between shareholders and directors justified a low standard?

Should the law impose the same duties on different directors with different skills, experience etc? For example, should a director appointed to the board of a mining company, for her special expertise in geology be subject to the same standard as other directors?

Should the law in this area recognise differences in the role of executive and

non-executive directors in corporate governance?

The Explanatory Memorandum for the Corporate Law Economic Reform Program Act states: “The fundamental purpose of the business judgement rule is to protect the authority of directors in the exercise of their duties, not to insulate directors from liability. While it is accepted that directors should be subject to a high level of accountability, a failure to expressly acknowledge that directors should not be liable for decisions made in good faith and with due care, may lead to failure by the company and its directors to take advantage of opportunities that involve responsible risk taking.”

Do you agree that the business judgment rule will not “insulate director from liability”? Do you think it will encourage directors to take appropriate risks? Will it affect the outcome of litigation?

E Duty not to fetter discretion


F Duty to Prevent Insolvent Trading

1 Liability under Corporations Act s 588G

(a) Incurs a debt

CA s 588G(1A) Hawkins v Bank of China (1992) 26 NSWLR 562; (1992) 7

ACSR 349 CA ss 596AA-AC

(b) Insolvency

(a) Test of insolvency: s 95A (b) Presumption of insolvency: s 588E Fryer v Powell (2001) 37 ACSR 589 ASIC v Plymin (2003) 46 ACSR 126 Lewis v Doran (2004) 40 ACSR 175 affirmed (2005) 54 ACSR 410

(c) Reasonable grounds for suspecting insolvency

(d) Director’s state of mind

2 Defences

CA s588H

(a) Expectation of solvency on reasonable grounds

Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR

118, 122-128 Statewide Tobacco Services Pty Ltd v Morley (1990) 2 ACSR

405 affirmed [1993] 1 VR 423 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR

699 Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123

(b) Reasonable reliance

Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699

McLellan, in the matter of The Stake Man Pty Ltd v Carroll [2009] FCA 1415.

(c) Justifiable non participation

Tourprint International Pty Ltd v Bott (1999) 32 ACSR 201 DCT v Clarke (2003) 45 ACSR 332


(d) Taking all steps Statewide Tobacco Services Pty Ltd v Morley (1990) 2 ACSR

405 affirmed [1993] 1 VR 423

3 Consequences of contravention

(a) Civil penalty provision

CA s 206C, Pt 9.4B

(b) Criminal offence

CA ss 588G(3), 206B, Schedule 3 (c) Compensation

CA Part 5.7B, Division 4

4 Liability under Corporations Law s 588V

G Exculpation of Directors and Officers for Breach of Duty 1 By the general meeting

(a) General principle (b) Limitations

Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 Angas Law Services Pty Ltd v Carabelas [2005] HCA 23; (2005)

53 ACSR 208 CA s 239

2 Ratification by the Board

Queensland Mines Ltd v Hudson (1978) 52 ALJR 399 [BFF 393]

3 Relief granted by the court

CA ss 1318, 1317S Daniels v Anderson (1995) 16 ACSR 607 at 664-5 (CA); AWA v Daniels (1992)

7 ACSR 759 at 854-6 and 877 (Rogers J) Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 191-99 Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123 McLellan, in the matter of The Stake Man Pty Ltd v Carroll [2009] FCA 1415.

4 Constitution

5 Indemnification

(a) History (b) New contours of the prohibition on a company exempting its officers or

auditors from liability, or indemnifying them against certain types of liability: s 199A(1) (2) (3); s 199C.


(c) Distinction between ratification and indemnification

CLERP Proposal for Reform: Paper No 3 “Directors’ Duties and

Corporate Governance” pp 50-53

6 Modification (a) Duty to avoid conflicts

G Insurance: CA s 199B

Text : Harris, Hargovan and Adams: Chapter 19 Regulatory Guide 217: Duty to Prevent Insolvent Trading: Guide for Directors (available at www.asic.gov.au)

For issues canvassed in Weeks 8-10, see also J. du Plessis, A. Hargovan and M. Bagaric, Principles of Contemporary Corporate Governance (2nd edition, Cambridge, 2010) Chapters 2, 4, 10 and 11

Problem Question 5 Lee is a successful chemical engineer with expertise in petroleum products. In November 2007, upon request by, and as a favour to, his friend Alex, Lee became a non-executive director of NSW Service Stations Ltd, a company which owned and operated a number of services stations in New South Wales. Alex is the managing director of the company. By agreement, Lee did not take a director’s fee for sitting on the board of NSW Service Stations Ltd. Lee rarely attended board meetings and relies on Alex, who has qualifications in accounting, for information about the financial affairs of NSW Service Stations Ltd. Lee explained to Alex that he saw his role as non-executive director to be


confined to “planning and policy-making” and, besides, Lee also said to Alex that “I’m an expert in chemical engineering, not in financial matters.” Over the last twelve months, from October 2007 to October 2008, NSW Service Stations Ltd experienced several episodes of cash flow shortages in its business operations. In November 2008, a liquidator is appointed to NSW Service Stations Ltd. The company has suffered loss in excess of a million dollars. An investigation of the affairs of NSW Service Stations Ltd by the liquidator found the following:

that NSW Service Stations Ltd had to replace petrol pumps at a net cost of over $800,000 due to the board’s decision to import these items, from Techno Pty Ltd, which were non-complaint with Australian safety standards. The company’s contract with Techno Pty Ltd was in the sum of $400,000. An independent expert’s report to the Board had earlier recommended, in preference, the purchase of locally manufactured petrol pumps which complied with Australian standards. Alex is a major shareholder in Techno Pty Ltd;

that the interim financial accounts presented at the monthly Board meeting in

December 2007 correctly indicated a cash flow problem. The minutes of the meeting records Lee’s attendance at this meeting.

The liquidator seeks your advice as to whether any legal action may be taken against Lee and/or Alex to recover money as a result of a breach of their duties as directors of NSW Service Stations Ltd, other than arising out of insolvent trading, under:

a) common law and

b) pursuant to the Corporations Act

Your answer should also advise the liquidator of NSW Service Stations Ltd as to his chance of success for probable cause(s) of action identified.


Problem Question 6

Indigo Pty Ltd, a company conducting business in the printing industry, was formed in 1994 by Mr and Mrs Blue. They were appointed as directors. The company employed an accountant. The company’s financial records were kept on a computer, accessible to all directors, and maintained by the accountant each month.

In October 2007, a third director was appointed to Indigo Pty Ltd. Green, the newly appointed director, previously worked as a consultant to the printing industry. Due to his strong marketing skills, Green was invited to become a non-executive director and chairperson of Indigo Pty Ltd. Green also has a strong background in operational management but has no experience in corporate financial management. Green accepted the invitation because Mr and Mrs Blue were friends in need of help with business marketing and also because ‘by all appearances’ the business was thriving. Prior to accepting the appointment, Green met with the other two directors at a formal board meeting. The minutes of the board meeting records that the company’s accountant was also in attendance and that the only item discussed related to the general performance of the printing industry in New South Wales.

Within 12 months of Green’s appointment as a director, Indigo Pty Ltd ceased trading in September 2008 with outstanding debts of $750,000 and appointed a voluntary administrator. The administrator was thereafter appointed as liquidator in October 2008. The liquidator’s Report produced a month by month analysis of the company’s financial performance for the period September 2007 to September 2008. According to this information, Indigo Pty Ltd had significant cash flow difficulties during this entire period and was not making a profit.

The liquidator, in taking legal action against all of the company’s directors for insolvent trading, has successfully proved in court a breach of the requirements of s 588G of the Corporations Act. The evidence showed that Mrs Blue accepted her appointment as a director of Indigo Pty Ltd at her husband’s request but was happy at all times to leave the management of the company to him. Furthermore, she did not believe that her participation was required, especially since the law changed in 1995 to permit single director companies. Each year Mrs Blue signed the company’s annual returns declaring the company was solvent, but this document was not explained to her and she said: “I have faith and trust in my husband whom I love very dearly and therefore I would sign documents whenever asked.”

Green and Mrs Blue now seek to rely on a statutory defence in s 588H of the Corporations Act to defeat the liquidator’s claim for compensation payable to Indigo Pty Ltd on the basis of insolvent trading: With reference to the Corporations Act, relevant precedents and the facts above, advise:

(a) Green; and (b) Mrs Blue, as directors of Indigo Pty Ltd, of their chances of success in

avoiding personal liability under the statutory defences in s 588H.


Week 11

Topic: Shareholders’ Rights and Remedies

This topic looks at the way in which Australian corporate law tries to balance the

interests of various stakeholders, and the interests of majority with minority

shareholders.

This involves looking at the various judicial and statutory devices which have been

used to curb the power of the majority and prevent the exercise of absolute control.

We look at recent case law to illustrate the principles governing when courts will

intervene to protect the interests of:

Shareholders Creditors Employees Other stakeholders.

Detailed Outline:

A Equitable limitations on the voting power of majorities

Note that this was dealt with in week 3 when we discussed amendment to corporate constitutions

1 Equitable principle relevant to voting rights

(a) Members are not fiduciaries

(b) Doctrine of fraud on minority

(c) Other limitations on voting power

2 Types of resolutions

(a) Release of directors’ duties

Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 [BFF 468]

(b) Appropriation of property


(c) Alteration of articles

Peters American Delicacy Co Ltd v Heath (1939) 61 CLR 457 Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286

(d) Acquisition of shares

Gambotto v WCP Ltd (1995) 69 ALJR 266 CA Chapter 6A

Fraud on the minority: Gambotto v WCP Ltd (1995) 69 ALJR 266


The traditional formulation of the doctrine of fraud on the minority, namely that the majority must exercise its powers “bona fide for the benefit of the company”, is a classic “mud rule”. What principles emerge from the case law in this area to give content to this vague and general rule, and make it more crystalline?

What are the implications of Gambotto’s case for the law in the area? Does Gambotto shift the law in this area too far in the favour of minority shareholders?

B Shareholder actions erivative suit

Statutory Derivative Actions (SDA): CA Part 2F.1A, ss 236-242


What is the aim of the statutory derivative suit from a regulatory perspective?

Historically, what difficulties lay in the path of a shareholder wishing to bring an action against the company's directors?

To what extent do you think that the new statutory derivative suit will reverse these difficulties?

C Statutory protection for minorities 1. Compulsory Liquidation Remedies Compulsory liquidation remedies

(a) The just and equitable ground (section 461(k))


CA s 461(k) (i) Quasi-partnership companies

Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

(ii) Failure of substratum Re Tivoli Freeholds Ltd [1972] VR 445

(iii) Deadlock Re Yenidje Tobacco Co [1916] 2 Ch 426

(iv) Public Interest

ASIC v Storm Financial Ltd (2009) 71 ACSR 81

(b) Directors acting in their own interests

CA s 461(e) * Re Weedmans Ltd [1974] Qd R 377

(c) Relationship between winding up and oppression provisions

CA s 467(4) * Re Dalkeith Investments Ltd (1985) 3 ACLC 74

22 Oppression 2. Oppression Remedy (Section 232)

(a) Modern grounds for relief

CA s 232 (i) Standing (ii) Grounds for complaint

Thomas v H W Thomas Ltd (1984) 2 ACLC 610 Wayde v New South Wales Rugby League Ltd (1985)

59 ALJR 798; (1985) 3 ACLC 799; 10 ACLR 87 * Re Spargos Mining NL (1990) 3 ACSR 1 * John J Starr (Real Estate) Pty Ltd v Robert R

Andrew (Australasia) Pty Ltd (1991) 6 ACSR 63 Jenkins v Enterprise Gold Mines NL (1992) 10 ACLC

136; (1992) 6 ACSR 539 * Gambotto v WCP Ltd (1995) 69 ALJR 266

(iii) Orders

CA s 233 3 Class rights 3. Class Rights

CA Part 2F.2, ss 246B-246G Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512


4 Statutory Injunctive Relief: s. 1324 4. Statutory Injunctive Relief

CA s 1324 Allan v Atalay (1993) 11 ACSR 753, 12 ACLC 7



Problem Question 7 TwoTel Limited is a public, listed company in the business of providing telecommunications services. The company has performed exceptionally well over the last several years, owing to its innovative sales approach and its many technological advancements in providing digital telephone service and internet access. Recently, Richie Rich, one of the directors of the company resigned and has just announced his intention to set up a rival operation. Understandably, this announcement has caused the Two Tel shareprice to drop by 20%. In light of this development, several of the shareholders of the company have formed what they call the “Shareholders’ Action Group” (SAG). Fortunately for SAG, among its members is Richie’s ex-wife, Renee, who remains on the Two Tel board of directors. Renee has informed SAG that at the last directors’ meeting there was extensive discussion of whether the company should commence a lawsuit against Richie. Apparently, there is concern that Richie may be using some of Two Tel’s proprietary software and may also be soliciting some of Two Tel’s major corporate clients. Richie has previously signed a non-competition agreement with Two Tel which restricted him from soliciting Two Tel customers for a period of two years should he leave the company. At the recent board meeting, it was resolved that no action should be taken against Richie. Renee has informed SAG that she believes the reason for this is fear among the other directors, as she believes that a number of them may be personally indebted to Richie. Renee has urged SAG to cause a shareholders’ meeting to be convened for the purpose of ensuring that action is taken against Richie. The constitution of Two Tel Limited contains the following provision: “The directors of the company must call and arrange to hold a general meeting on the request of: (i) members with at least 10% of the votes that may be cast at the general

meeting; or (ii) at least 100 members, each of whom holds a minimum of $5,000 in issued

share capital.” There are 100 members of SAG, however only half of those individuals hold $5,000 in issued share capital. Nonetheless, Renee has advised SAG that if SAG were to requisition a meeting, the board would concur. It seems that Renee is relying on her understanding of the Corporations Law, having completed a law degree at The University of Sydney in 1995. SAG have requested the board to call a meeting, relying on their right to do so in the corporate constitution and have proposed an agenda and several resolutions, the general intent of which is to cause the board to answer questions regarding the recent departure of Richie as well as cause the board to commence litigation against Richie for breach of contract and misuse of confidential information. The board has refused to convene the meeting as requested. Instead, the board have circulated a notice for the company’s Annual General Meeting which contains no mention of recent events concerning Richie. Furthermore, included in the notice of meeting is a draft resolution proposing that the members of the


company resolve to ratify any breaches of duty by board members which may have occurred during the past year. At the Annual General Meeting, Renee (on behalf of SAG) attempted on several occasions to raise questions concerning Richie’s departure. The Chairman of the meeting refused to put her questions to the board, ruling the questions out of order as they did not relate to an agenda item. When a vote was taken on the resolution ratifying previous breaches of duty, the vote was overwhelmingly in favour, with the bulk of the votes coming from proxies held by the Chairman. Renee and the other members of SAG are furious and have come to you for advice. What can they do to further their aims and what are their chances of success?


Week 12

Topic: Corporations in Financial Distress: External Administration Options

Chapter 5 Corporations Act

1. Alternatives to the immediate winding up of a company A. Amalgamations and reconstructions

Procedure and notices (s. 411 and 412) Powers of court to facilitate (s. 413) Mopping up (s. 414)

B. Voluntary Administration Procedure: commencement of administration, conduct of administration,

administrator’s duties and powers, creditor's rights and obligations Effect of administration: protection of company's property during

administration and exceptions Termination of administration at creditor's meeting by selection of deed of

company arrangement, winding up or release from administration; effect of deed of company arrangement

C. Receivership 2. Winding up or liquidation of companies A. Voluntary winding up

Members voluntary winding up (Part 5.5 Divisions 1 & 2) Procedure and test of solvency

Creditors voluntary winding up (Part 5.5 Divisions 1 & 3) Procedure

B. Compulsory winding up On grounds other than insolvency (s. 461-464), especially the just and

equitable ground (s. 461(k)); standing to apply for winding up (s. 462) On grounds of insolvency (Part 5.4)

Application for winding up (s. 459P) and power to wind up (s. 459A -459B). Test of insolvency (s. 95A) and presumptions of insolvency (s. 459C). Procedure for statutory demand (s. 459E and F). Procedure to determine disputed debts in statutory demands (s. 459 G – N)

3. Effect of external administration on:

Company Directors Creditors Employees


Cases: Australasian Memory v Brien [2000] HCA 30

Re Ansett Australia Ltd and Mentha (No 3) [2002] FCA 2


Spencer Constructions Pty Ltd v Aldridge Pty Ltd (1997) 76 FCR 452 David Grant & Co Pty Ltd v Westpac (1995) 13 ACLC 1,572 Sons of Gwalia Ltd (admin appt) v Margaretic (2007) HCA 1

Articles on Sons of Gwalia decision by the High Court: Legal and Policy Issues

Hargovan, A. (2008) (with Harris J) ‘Shareholders as Creditors: A Response to the CAMAC Discussion Paper on Law Reform’ 22 Australian Journal of Corporate Law 135 -160.

Hargovan, A and Harris, J ‘The Shifting Balance of Shareholders Interests in Insolvency: Evolution or Revolution?’ (2007) 31(2) Melbourne University Law Review.

Hargovan, A and Harris, J ‘Sons of Gwalia and statutory debt subordination: An appraisal of the North American experience’ (2007) 20 Australian Journal of Corporate Law 265.

Hargovan, A and Harris, J ‘Sons of Gwalia and the High Court: Implications for shareholders, creditors and the insolvency regime’ (2007) 7 (7) Insolvency Law Bulletin 80.

Hargovan, A and Harris, J ‘Sons of Gwalia: policy issues raised by the subordination of shareholder claims’ (2006) 7 (1) Insolvency Law Bulletin 1.


Problem Question 8 Brad is the managing director of a medium sized Internet company, None Tel Pty Limited. None Tel Pty Limited is a family company owned by Brad and his two nephews, Jimmy and Lockie. Brad is also in charge of customer relations and devotes a large amount of his time to this task. Jimmy and Lockie are also directors of None Tel Pty Ltd. Lockie is a non-executive director who also sits on the boards of 6 other companies and, by agreement, does not take a director’s fee for sitting on the board of None Tel Pty Ltd. Jimmy and Lockie take no active part in the day to day management of None Tel Pty Ltd. Jimmy, who has qualifications in information management, is an expert in computers and focuses solely on the company’s technical operations. Jimmy rarely attends board meetings and relies on Lockie, who has a MBA degree, for information about the affairs of None Tel Pty Ltd. The last board meeting attended by Jimmy was in March 2010. Over the last 6 months, None Tel Pty Ltd has experienced several episodes of cash flow shortage in its business operations. These cash flow shortages are due to None Tel Pty Ltd’s contractual commitment to the company’s supplier of internet access, who requires payment within seven days of the end of each month and purchasers (customers) of None Tel Pty Ltd services delaying payment for up to two months after being billed. Some of the customers claimed that None Tel Pty Ltd's web servers were “crashing” too often with the result that the customer’s web page was not accessible for up to two days at a time. Customers were either refusing to pay their bills when this occurred or demanding a reduction of the billed amount. To overcome the server “crashing” problem, Brad committed None Tel Pty Ltd to the purchase of one million dollars in new computer servers. This new equipment was paid for out of the accumulated profits of None Tel Pty Ltd in December 2009. The investment in the new equipment had virtually depleted the accumulated profits and, in doing so, removed the company's only alternate source of funding, which funds None Tel Pty Ltd relied upon when cash flow was tight in the internet service business. In February 2011 Brad received a letter from the newly appointed liquidator of None Tel Pty Ltd's largest customer, HIH Sales Limited, advising that it was highly unlikely that HIH Sales Ltd would be able to pay None Tel Pty Ltd the $750,000 owed for internet services provided. Brad immediately realised that a loss of this magnitude could very possibly mean that None Tel Pty Ltd might not be able to meet its current financial commitments. You may assume that HIH Sales Ltd's liquidator is correct.

The directors of None Tel Pty Limited wish to avoid an immediate winding up the company. (a) Advise the directors of None Tel Pty Ltd, with reasons, of the most

appropriate alternative to an immediate winding up of a company available in the Corporations Act. Describe the procedure involved in


any alternative you identify and explain the reasons for the most likely outcome;

and

(b) Assume None Tel Pty Ltd has been liquidated in February 2011. The

Liquidator has discovered that the accumulated profits did not exist and that the company’s interim financial accounts presented at the monthly Board of Directors meetings in October and November 2010 correctly indicated large company losses totaling in excess of a million dollars. The liquidator is contemplating legal action against all the directors for insolvent trading. With reference to the Corporations Act and the facts, advise all the directors of None Tel Pty Ltd of their chances of avoiding personal liability for insolvent trading.

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