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PRBL004- Corporations Law

Lecture 6 – Fundraising &External Administration

Jeswynn Yogaratnam

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y gRoom: 39.3.72; Yellow 1 (3rd flr)Telephone: (08) 8946 6085Email: jeswynn.yogaratnam@cdu.edu.au

OBJECTIVESCHAPTER 6D- disclosure, ie ss 700 –741 inclusive

To examine:the different types of disclosure documents and when each is required;q ;

the general categories of exemption from providing a disclosure document;

the requirements for a complying disclosure document; and

the criminal and civil penalties liabilitiesfor false or misleading statements or non-disclosures in a disclosure document.

What types of companies can raise funds from the public?

Public companiesPty companies are prohibited from engaging in any activity that would require a disclosure to investors under h 6Dch 6D

see s 113 (3)exception 113 (3): (a) to existing shareholders or (b) employees of the company or of a subsidiary

Subsection (3A) makes it an offence

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Application to Public Companiescentres on companies raising money from the public through an offer of shares or other securities.

must be done through a disclosure document unless exempt.

Note: these provisions do not apply to proprietary co’s

The main aim of these provisions :to ensure that investors are in a position to make fully informed investment decisions.To make it easier for smaller public co’s to access capital

Exceptions under s 708Small scale offer

Sophisticated investor

Professional investor

Executive officer

Existing holder

No consideration

Small scale exemption :s 708(1) – (7)

where personal offers are made that result in issues to no more than 20 people in any 12 month period AND with no more than $2M being raised

A personal offer is one that may only be accepted by the person to whom it is made and the person is likely to be interested in the offer because of some previousto be interested in the offer because of some previous contact with the offeror or where the person has expressed an interest in the offer

To calculate $2M s 708 (7) states you include:amount payable for the securities at the time when issuedIf they are partly paid shares being issued- any unpaid amountIf the security is an option- any amount payable on the exercise of the optionIf the securities carry a right to convert the securities into other securities- any amount payable on the exercise of that right

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Sophisticated investor exemption s 708(8) – (11)

Do not need disclosure where offers are made to investors:

1. who are considered to be sophisticated by virtue of the size of their investment ($500,000 plus), OR

1. their wealth (net assets of at least $2.5m or gross income for each of the last 2 financial years of at least $250,000), OR

1. They have general investment experience (the offer must be made through a dealer who certifies that the investor has sufficient investment experience)

the licensee must be satisfied that the investor has previous experience in investing in securities to be able to assess certain matters

Professional investor exemptions708(11)

where offer is made to licensed dealer or investment adviser who is acting as principal in the transaction

or to certain specified bodies regulated by APRA

or to people who control at least $10m for the purpose of investments in securities

Other…Executive officer exemption s 708(12)

where offer is made to an executive officer (i.e. s9-refers to management) of the body whose securities are being offered. Exemption also applies to spouse, parent, child, brother or sister of executive officer or a co controlled by any of those people

E i ti h ld tiExisting holder exemptionwhere offers are made to existing holders of securities, but only if the offer is for fully paid shares under a dividend reinvestment plan or bonus shareplan; or if offer is to issue debentures to one or more existing debenture holders

No consideration exemption s 708(15) – (16)where offer does not require any consideration to be provided for the issue or transfer of the securities

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Types of disclosure documents

A prospectus or a short form prospectus (or in some cases a transaction specific prospectus);

A Short Form Prospectus

An offer information statement; or

A profile statement

Advertising Securities

s 734(2):if offer of securities needs a disclosure doc, a person must not advertise it,

or publish a statement that directly or indirectly refers to the offer or is reasonably likely to induce persons to apply for the securities, unless one of the exceptions apply:

pre-prospectus offers of securities quoted on ASX (certain circs.) - s 734(5)(a);Pre-prospectus offers not quoted on ASX – only permitted to advertise that disclosure doc will be available : s 734(5)(b);Post-prospectus (whether quoted or not) – advertising is permitted provided it refers to disclosure doc : s 734(6).

Securities hawking

Person must not offer securities for issue or sale in an unsolicited meeting with, or a phone call to, another person: s 736

does not apply to communications by email, fax or post

Exceptions:Offer does not need a disclosure doc because of s 708(8) or (10) or s 708(11) Offer is one of quoted securities made by phone by a licensed securities dealer; orOffer is made to a client by a licensed securities dealer through whom the client has bought or sold securities in the last 12 months: s 736(2)

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ASIC’s powers under Chapter 6D

ASIC can modify or vary any Ch 6D provisions where strict compliance with the letter of the law appears to ASIC to be inappropriate: s 741(1)

ASIC can issue a stop order that prevents any further offers issues sales or transfer of the securities being made:offers, issues, sales or transfer of the securities being made: s 739(1)

if satisfied that info in disclosure doc is not worded and presented in a clear, concise and effective manner as required by s 715A

If satisfied the disclosure document is misleading: s 728

Liability for disclosure docsS 728(1) provides that person must NOT offer securities under a disclosure document if there is:

a misleading or deceptive statement in the disclosure doc;an omission from disclosure doc of material required by the content rules set out in ss 710 – 715; ora new circumstance has arisen since disclosure doc was lodged, which would have been required to be included in disclosure doc had it arisen prior to its lodgement

Need supplementary or replacementNeed supplementary or replacement

A person is taken to make a misleading statement about a future matter if he or she does not have reasonable grounds for making it: s 728(2).

offence if the misleading or deceptive statement, the omission or new circumstance is materially adverse from the investor’s perspective: s 728(3)

Also possibility of compensation if investor suffers loss or damage through omission of info: s 729.

Persons liable for disclosure documents

See summary textbook p 160 (Table 7.6)

Section 729(1) liable for loss or damage caused by any contravention of s 728(1) in relation to the disclosure doc if

(1) person making offer; (2) any director of body making offer; (3) a person named in disclosure doc with their consent as a proposed director; and (4) an underwriter(4) an underwriter

person named in disclosure doc with their consent as having made a statement: (a) that is included in disclosure doc; or (b) on which a statement in disclosure doc is based, maybe liable for loss or damage caused by the inclusion of that statement in the disclosure doc.

A person who contravenes, or is involved in the contravention of s 728(1) - liable for loss or damage

“involved in the contravention” means has aided or abetted that contravention, or been knowingly concerned in, or a party to, the contravention: s 79. This requires knowledge of the essential facts and some element of involvement: Yorke v Lucas.

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Defences to Liability

Due diligence defenceS 731(1) provides that a person will not be liable under s 729(1) (i.e. civil liability) and will not be criminally liable, if they prove that they:that they:

made all enquiries (if any) as were reasonable in the circumstances; andbelieved on reasonable grounds that the statement was not misleading or deceptive.

Similarly, a person will not be liable for an omission if they made all reasonable enquiries and, believed on reasonable grounds that there was no omission from the prospectus

Defences to Liability (cont)

Lack of knowledge defences 732(1) and (2)not liable in relation to a misstatement if prove did not know the statement was misleading or deceptive or, in relation to an omission, that they did not know that there was an omission Defence relatively easy to satisfy because there’s no requirement to undertake reasonable inquiries.

Other matters…

Ch 6D cannot be contracted out of

S 700 (4) inserted recently- ch 6D li t ff f iti th tapplies to offers of securities that are

received in Australia regardless of where the resulting issue or transfer occurs

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External Administration

Companies in TroubleOBJECTIVES

To examine:

1. the options available when co is in financial strife;

2 th h i th l t2. the phases in the voluntary administration process;

3. how administrators, controllers and liquidators are appointed; and

4. the nature of the respective powers and duties of Administrators, Liquidators and Receivers

Terminology

Co’s in financial strife can resort to: (1) voluntary administration; (2) appointment of a receiver or controller;(3) liquidation or winding up; and (4) a creditor’s scheme of arrangement.

CCreditor: person or co that is owed money by a company;Secured creditor: one that has a security (i.e. Mortgage or charge) over co’s property that “secures” repayment of debt owed by co;Charge: term used to describe certain types of mortgages and other securities that may be given by co over its property – s 9; and

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What is Insolvency?Solvency of co is determined by reference to whether it is able to pay its debts as and when they become payable – s 95A.

Therefore it is the negative of that gdefinition: a person who is not solvent is insolvent

The definition adopts a cash flow testrather than a balance sheet test :Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823

What is insolvency (cont) ?

What about trading terms? If a debt is on trading terms , ie a course of dealing, and thus not due to be paid until a future date then it is not to reckoned as due at an earlier timePer Thomas J in Re Newark OPty Ltd (In Liq) ; Taylor v Carroll (1991)And Mennheitt J in Clazaturificio Zenith Pty Ltd v NSW Leather & Trading Co Pty Ltd (1970) :Leather & Trading Co Pty Ltd (1970) :

“It would be necessary to make an appropriate calculation to decide when the creditors had to be paid and when the debts would likely to be received in order to decide whether at any particular moment of time the company was or was not able to pay its debts as they fell due.”

Distinguish a temporary lack of liquidity and insolvency as per Barwick CJ in Sandell v Porter

question to be determined by the court

What is insolvency (cont) ?ASIC v Plym [2003] VIC sup ct

continuing lossesliquidity ratios below 1overdue taxespoor relationship with bankno access to alternative financeinability o raise further equity capitalsupplies on COD or otherwise demanding specialsupplies on COD or otherwise demanding special payments before resuming supplycreditors paid outside trading termsissuing of post dated chequesspecial arrangements with selected creditorssummonses, letter of demands warrants against the companypayments of rounded sums to creditors without reference to a specific invoiceinability to produce timely and accurate financial information to display company’s trading performance and financial position and make reliable forecasts

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A brief comparison…Voluntary administration

The aim is to give co in financial difficulties a chance of survival. If not, then to maximise the return to its creditors

Creditors can vote for a deed of companyCreditors can vote for a deed of company arrangement under which they agree to defer and/or reduce co’s debts

Short period of time (about 28 days & there are time constraints)

A brief comparison (cont)

Appointment of receiver or controllerReceiver or controller will usually sell the business or co’s assets and use proceeds to repay or reduce debt to p p ysecured creditors.

Once receiver or controller has finished with co, there’s usually nothing left for unsecured creditors

A brief comparison (cont)Liquidation

Liquidation (a.k.a winding up) occurs when co is hopelessly insolvent

Liquidator is appointed by the court on application of a creditor or is deemed to be appointed when voluntarycreditor, or is deemed to be appointed when voluntary administration ends

Liquidator tries to get as much $$ to pay creditors

Liquidation inevitably ends in deregistration of co.

Can take a long time (years)

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Creditors Scheme of Arrangement

ss411-412 CA

These are quite rare, expensive and cumbersome.

Used when a company is insolvent (member’s scheme of arrangement when it is solvent)

Implementation of such scheme requires at least two applications to court, lengthy documentation and separate meetings of various categories or classes or creditors

The complex procedural requirements and court involvement make it a cumbersome, slow and expensive option and thus not often appropriate for a company in financial crisis.

Voidable transactions and insolvent trading

Unfair preferences: s 588FD

Uncommercial transactions s 588 FB

Unfair loans: s 588FD

Unreasonable director related transactions: s 588 FDA

Transactions for the purposes of defeating creditors s 588FE (5)

Invalidation of floating charges s 588FJ

Defences to voidable transactions

A creditor or other person facing a claim by a liquidator that a transaction is a voidable one, can rely on a defence that consists of several elements.

S 588 FG (1) (2)

Good faithGood a t

No reasonable grounds for suspecting insolvency (and a reasonable person would not have suspected)

Valuable consideration given

The most difficult one is where the creditor or other person want to establish that they had no reason to suspect insolvency: s 588FG

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3. Receivership

Receiver or “controller” is appointed to collect and receive debts and other assets. The appropriate regulations are in ss 416 – 434C.

They can be appointed by the court or by a chargee (e.g. a bank) under the terms of a charge instrument or mortgage.