Operation of the Board Of Directors
Company Organs and Division of PowerOrgans of a CompanyBoard of DirectorsMade of up directorsLaw and company constitutionShareholdersMade up of members Determined by majority voteRequirement for Directors?S201 – Every company must have one or more directors – at least one in a proprietary company and at least three in a public company.Reside in Australia –Public – two must reside in AustraliaPrivate – one must reside in AustraliaS114 – Permits public and private to have one member, but still requires that they satisfy the minimum director requirement.No minimum education requirements – Facilitate open standardsConstrain small companiesMust be at least 18 and must be a natural personReplaceable Rules & ConstitutionConstitution governs power -S198A(2) – In absence of statutory or List Rule, reliance on replaceable rule – division of power is governed by the companies constitution.Replaceable Rules – S134 – Where no rule exists in the companies constitution, the Corporations Act 2001 is referred to expressly.S135 – A company can change any part of its constitution thereby removing particular replaceable rules.Operation of the Board Of DirectorsFunction of board of directors?Board of directors usuallyset goals, formulate strategy and approve business plans for the company;to approve annual budgets and key management decisions (such as decisions on major capital expenditure, business acquisitions, restructuring and refinancing);to appoint and reward the CEOto monitor management performance and business results;to set and review policies for shareholder communication and approve reports to shareholders; andto set and review budgetary control and conformance strategiesCollective or personal responsibility?Personal - Enshrined in s180 through s184Re Westmid Packing Services Ltd – Lord Woolf MR‘the collegiate or collective responsibility of the board of directors is based on individual responsibility and that any individual who undertakes the statutory and fiduciary obligations of being a company director should realise that these are inescapable personal responsibilities’Standard Lowered for Different Directors?Daniels v AMA LtdClarke and Sheller JJAReasonable Steps – ‘directors must take reasonable steps to place themselves in a position to guide and monitor the management of a company’Meet as required, not as stipulated – ‘the board should meet as often as it deems necessary to carry out its functions properly in the particular circumstances of the company — it is not a matter of tailoring the extent of the duty or function to pre-fixed intervals between board meetings’Standard for non-executive directors not lowered - while it would be unreasonable to expect every director to have equal knowledge and experience of every aspect of a company's activities, courts have rejected the argument that a lower standard of care should apply to non-executive directors than to executive directors;Delegating - the old law, according to which a director is justified in delegating to and trusting the officers of the company unless he or she is aware of circumstances so plain that no-one with any degree of prudence would rely on the judgment, information or advice of the officer concerned, does not accurately state the duty of directors whether non-executive or not in modern company law;Rely on others for knowledge - a director may not rely on the judgment of others where there is notice of mismanagement or an investment poses an obvious risk, and if the director knows or should know of facts which would awaken suspicion and put a prudent person on guard, then a degree of care commensurate with the evil to be avoided is required; andObligation to remain informed of company - directors are under a continuing obligation to keep informed about the activities of the corporation, but this requires general monitoring of corporate affairs and policies rather than a detailed inspection of day-to-day activities.Board ProceedingsMaterial Personal Interest – a director with material personal interest in a matter being considered at a director’s meeting must not be present while matter is being considered OR vote on the matter – s195(1)Exception – can be present if director with material personal interest Disinterested directors pass resolution to that effect. Resolution must: Identify director, the nature of the director’s interest in the matter and its relation to the affairs of the company – s195(2)States that directors are satisfied that the interest should not disqualify the director in question – s195(3)ASIC makes an order to that effectLack of Quorum [call general meeting] – if s195(1) prevents formation of quorum, 1 or more of directors (including those with personal material interest) may call general meeting and general meeting may pass resolution to deal with the matter – s195(4)Contravention does NOT affect validity: contravention of 195(1) does not affect validity of any resolution – s195(5)**Notice – Directors’ meeting may be called by a director giving reasonable notice individually to every other director – s248C (RR)Fair & Reasonable – Each director is entitled to notice, must be fair and reasonable – Toole v FlexihireNo Notice? [see irregularities]Resolutions outside of directors’ meeting – Directors may pass resolution without directors’ meeting if all directors entitled to vote on the resolution sign document containing statement that they are in favour of the resolution – s248A(1)Separate copies ok – but must contain identical wording of resolution and statement – s248(A)(2)Timing: resolution is passed when last director signs – s248A(3)Decisions without a meetingTwo limb test:Circle Petroleum Pty Ltd v GreensladeMust have Prior Notice – All directors had prior notice of the meeting or when together, they waived notice;Capacity as a director – Directors amounting to a quorum were available in their capacity at directors to constitute a sufficiency to discuss company affairs.Poliwka v Heven Holdings Pty Ltd‘concurrence with the resolution must be expressed by each director in their capacity and for the purpose of resolving as a director, the affairs’Alternate directors: s201K – can resolve ‘lack of quorum’With the other directors’ approval, a director may appoint an alternate to exercise some or all of the director’s powers for a specified period.Must give Notice – If the appointing director requests the company to give the alternate notice of directors’ meetings, the company must do so.Same Powers – When an alternate exercises the director’s powers, the exercise of the powers is just as effective as if the powers were exercised by the director.Terminate at any time – The appointing director may terminate the alternate’s appointment at any time.Must be in writing – An appointment or its termination must be in writing. A copy must be given to the company.Note: ASIC must be given notice of the appointment and termination of appointment of an alternate (see subsections 205B(2) and (5)).Sole-director resolutions and declarations – Director of private company with only one director may:Pass resolution by recording it and signing the record – s248B(1) (RR)Make a declaration by recording it and signing the record – s248B(2) (RR)*Record – declaration/resolution must be recorded in company’s minute books – s251AUse of Technology – Directors’ meeting may be called or held using any technology consented to by all directors (may be standing consent) – 248DWithdrawal of consent: must be within a reasonable period before meetingChairing meetings – Directors may elect director to chair meetings; may determine period for which director is to be chair – s248E(1) (RR)Must elect director who is present to chair meeting – s248E(2) (RR) If no chair has been elected, or if previously elected chair is not available or declines to act for meeting of part thereof, directors must elect a director present to chair the meeting – Quorum (pty companies) – Unless directors determine otherwise, quorum is 2 – 248F (RR)Quorum for directors meeting is 2; and Quorum must be present at all times during meetingResolution void if no quorum – A resolution passed at a meeting at which no quorum is evinced is null & void per Clamp v Fairway Investments Pty Ltd.Irregularities – (see below)S1322 – absence of a quorum can be remedied under whereAccidental omission to give notice of a meetingLack of ‘reasonable opportunity’ for a member to participate in a meeting at two or more venuesVoting ultra vires per s259D(3)Passing of director’s resolutions (resolution = decision of the board):Simple majority – Resolution must be passed by majority of votes cast by directors entitled to vote on resolution – s248G(1) (RR)Casting vote held by chair –Chair has casting vote if necessary in addition to any vote they have in capacity as director – s248G(2) (RR)Conflict of interest – chair may be precluded from voting because of conflict of interest – 248GIrregularities – including absence of quorum, defective notice/timing – s1322(2)Do NOT invalidate proceedings (i.e. automatic validation) generally an irregularity does NOT invalidate proceedings – s1322(2)UNLESS Court is of opinion that irregularity has caused or may cause substantial injustice that cannot otherwise be remedied by order of court; ANDThe court has declared the proceeding to be invalidWhat invalidates a Proceeding?Lack of reasonable opportunity to attend meeting – 1322(3A)Exercise of voting rights in contravention of s259D(3): s1322(3B)What DOES NOT invalidate?Meetings/meeting notices NOT invalidated by Accidental omission – 1322(3)Non-receipt of notice – 1322(3)Inability of person to access notice – 1322(3AA)Inability of person to attend – 1322(A)UNLESS: upon application of person concerned, person entitled to attend meeting or ASIC, court declares proceedings at meeting to be voidCourt’s power to make orders [next page] Court’s power to make orders: Court may make any of following orders upon application by Any interested person (s1322(4)(a)), provided that no substantial injustice is caused or is likely to be caused to any person (s1322(6)(c)):Order declaring any act, matter, proceeding is NOT invalid by reason of contravention of CA or constitution – s1322(4)(a)Limits: court must not make such an order unless – ss1322(6)(a)Procedural matter – the act/matter/thing is essentially of procedural natureHonest contravention – persons involved in or party to contravention acted honestlyJust and equitable – it is just and equitable to make the orderOrder directing rectification of ASIC register – s1322(4)(b)Order relieving any person of civil liability in respect of breaches under s1322(4)(c)Person must have acted honestly – s1322(6)(b)Order extending/abridging period for doing any act, matter, thing or instituting any proceeding – s1322(4)(d)Any consequential or ancillary order – s1322(4)Reasons for making orders: court must NOT make order unless it is satisfied Operation of the General Meeting Who are members? **** [see also Members Remedies]****Membership – s231(a) – a person is a member of a company if they haveOriginal membership – Are a member of the company on registration New membership – Agree to become a member of company and name is entered on register of members – s231(b)Conversion of company – become a member under s167 (where company is converted from company limited by guarantee to company limited by shares) – s231(c)Matters which must be decided by general meeting –altering the corporate constitution – s136consolidating or subdividing the company's shares – s254Hreducing the company's issued share capital – ss 256B and 256Caltering rights attached to shares – Pt 2F.2altering the company's status – Pt 2B.7a selective buy-back – s 257Da buy-back exceeding the 10/12 limit – s 257Cremoving a director (public company) – s 203D[special resolutions see Voting at General Meetings]What is a meeting?A physical gathering of persons Require more than one person to be present – Sharp v DawesTypes of meetingsAnnual general meeting (AGM) or Extraordinary general meeting (EGM – i.e. any meeting other than an AGM)AGM –Public Co: MUST hold AGM within 18 months after registration – s250N(1)MUST hold AGM at least once in each calendar year AND within 5 months after end of financial year – s250N(2)EXTENSIONS – s250P(1) Company may apply to ASIC to extend period in which AGM is held If application made before AGM due to be held, ASIC may extend period in writing – s250P(2)ASIC MUST specify period of extension – 250P(2)ASIC MAY impose conditions – 250P(4)Company MUST comply with extension period (250P(3)) and conditions (250P(4))THESE ARE STRICT LIABILITY OFFENCES – s250N(2A); 250P(5)EXCEPTIONS –Externally administered companies –ASIC may make an order (by legislative instrument) exempting the following from s250N:Specified class of companies being wound upSpecified class of companies under administrationSpecified class of companies subject to deeds of co. arrangementPrivate companies Do not need to have members’ meetings – Directors Can elect do so at their own discretionConvening or ‘Calling’ MeetingsReasonable time and place – s249RMeeting of a company’s members must be held at a reasonable time and place usually in the state in which Co was incorporatedBusiness of AGM may include – s250RThe consideration of the annual financial report, directors’ report and auditor’s report;The election of directors;The appointment of the auditor;The fixing of the auditor’s remuneration.Board of directors may call members’ meeting – s249CCollectivelyIndividual directors may convene meetings of membersMeeting at more than one venue – s249SA company can hold its meeting at two or more venues which allows the members to have a ‘reasonable opportunity to participate’Court may call meeting of members – 249G If impracticable to call meeting any other way This is unusualMeetings can be convened byBoards of directors – Have a fiduciary duty to convene meetings at a time and a place where members are able to attend – Smith v SadlerIndividual directorRefer s249C – allow some companies to allow a single direct to convene a meeting of membersCourt – S249G(1) – Allows a Court to order a meeting of the companies members if it is ‘impracticable’ to call the meeting in any other way.Fiore v Carlton Football Club Ltd – Warren J required members to meet to consider various motions to remove existing directors and replace them with new onesS1322 – Empowers a Court to order that a meeting be held in circumstances where directors fail to call a meeting per s249D.Premier Gold NL v Ocean Resources NL – ‘… where matters of urgency, or the overwhelming interest of shareholders, require that a meeting should be convened in the interests of justice and that nothing short of this would suffice to protect the interests either of the company or the shareholders’Members of the company – Power of requisition: directors MUST call general meeting on request of: 249D(1)Members with at least 5% of votes that may be cast at next GM ORAt least 100 members entitled to vote at the GMTiming: meeting must be called within 21 days after request given to company; must be held not later than 2 months after request is given to the companyFailure of directors to call meeting:Members with more than 50% of votes of the members who made the requisition may call a general meeting – s249EMeeting must be held not later than 3 months after request given to co – s249E(2)Company must pay reasonable expenses the members incurred because directors failed to call and hold meeting – s249E(4)Company MAY RECOVER COSTS from directorsGeneral power to call meetings – Members with at least 5% of votes that may be cast at a general meeting may call a general meeting; MEMBERS must pay expenses – s249F(1)Directors NOT liable for the amount if they prove that they took all reasonable steps to cause the directors to comply with s249D – s249E(5) Notice of MeetingAuditor must receive notice – 249K Share held jointly – only listed shareholder must be Amount of notice – S249HAmount of notice of meetings: non listed companies21 Days Notice – s249H(1) Subject to subsection (2), at least 21 days notice must be given of a meeting of a company's members. However, if a company has a constitution, it may specify a longer minimum period of notice.Short period of notice – s249H (2) – A company may call on shorter notice:(a) an AGM, if all the members entitled to attend and vote at the AGM agree beforehand; and(b) any other general meeting, if members with at least 95% of the votes that may be cast at the meeting agree beforehand.Short notice not allowed for removal or appointment of director – s249H (3) – At least 21 days notice must be given of a meeting of the members of a public company at which a resolution will be moved to: (a) remove a director under section 203D; or (b) appoint a director in place of a director removed under that sectionShorter notice not allowed – removing auditors249H (4) – At least 21 days notice must be given of a meeting of a company at which a resolution will be moved to remove an auditor under section 329.Contents of Notice of Meetings of Memberss249L – MUST inform of: Date, place, time General nature of meeting’s businessProvide information which directors think that members need to know (subjective test) ANDInformation that a reasonable commercial person would think members would need to know (objective element)MAY have obligation to provide information not held by company If special resolution to be proposedMUST include information on appointment of proxyS249L(3) - MUST be worded in clear, concise, effective manner (i.e. not misleading or deceptive)Misleading? Courts tend not to be too legalistic; it is presumed that the document will be read by See Fraser v NRMA Holdings: if notice is going to a broad cross-section of community, directors may have to confine information to that which would be realistically usefulQuorum requirements for members’ meetings - s249TReplaceable rule – quorum is 2S249(T)(2) – Determining whether quorum is present includes proxies and body corporate representatives. Appointment of two proxies, constitutes only one member for quorum – Donrob Enterprises Pty Ltd v QLD Petroleum Management LtdLarge companies usually replace this rule; usually set a percentage Voting at General Meetings [including special resolutions]S250E - Generally each member gets one voteSubject to any restrictions, members of a company with share capital:On a show of hands – each member has one vote; andOn a poll – each member has one vote for each share the member holdsS250K – Poll can be demanded on any resolutionS250L – Poll can be demanded byAt least five members entitled to voteMembers with at least 5% of the vote that may be cast on the resolution on a pollChairperson250L(3) – Poll can be demanded before or after hand voteOrdinary resolutions – passed by simple majority (most decisions are passed this way)Special resolutions – passed by majority of 75%S9 – special resolution of which notice has been properly given,Of which 75% of the votes cast by members entitled to vote.Required by special resolutionadoption of a constitution after the registration of the company (s 136);amendment or repeal of the constitution (s 136);change of company name (s 157);change of company type (s 162);variation of rights attached to shares in a class of shares where a company does not have a constitution, or has a constitution that does not set out the procedure for varying those rights (s 246B);a selective capital reduction (s 256C);a selective buy-back of shares(s 257D);the giving of financial assistance by a company for the acquisition of its shares (s 260B); anda voluntary winding up: s 491.ProxiesCommon Law – the right to appoint proxies to attend and vote at a general meetingHarben v PhillipsStatutory – Can attend and vote in place of memberS249X – member of company who is entitled to vote can appoint a person to the members proxy to vote for that personPublic – mandatory rulePrivate – replaceable ruleS249X(3) – if a member is entitled to cast two votes then they are able to appoint two proxies but is not entitled to appoint more than two.If only one vote available, each proxy has half a vote.Rights of ProxyA proxy can attend and vote in the same capacity as the member which provided the proxy right. They canspeak at the meetingvote in accordance with voting rightsjoin in a demand for a poll s249Y(1)Requirements for valid proxys250A(1) - Proxy appointment is valid if sign and containing the following infoMembers name and addressCompanies nameProxy name; andMeeting at which the appointment is valid Power of Members towards Board Management‘Simple meeting of members cannot override the functionality of a Board of Directors’Automatic Self-Cleansing Filter Syndicate Co Ltd v CunninghameRestricted scope of power of membersCan exercise the power to appoint additional directors RESOLVE QUORUM – thereby resolving the deadlock and thereby providing the power to the board that it needs. But cannot take over management decisions – reversing the Baron v Potter.Residual Power was too wide to confer management decisions - The reverse power that was exercised there was the power to appoint an additional director – this was the authority that was being stated in this case – it was not intended to confer on members the residual power of management.Massey v WalesWhat if members disagree?S203D – Members should remove directors appropriately.Refer to ‘Directors Duties’Legal proceedings against board?Majority of members does not have power to acquire authority to force the company to take legal action where the constitution provides this power on the board to decide on the institution of proceedingsKraus v JG Lloyd Pty Ltd consistent with Quin and Axtens Ltd v SalmonDirectors DutiesWho is the subject of Director Duties?S9 – Definition of a director‘director’ – a person who is appointed to the position of a director; or is appointed to the position of an alternate director and is acting in that capacity; regardless of the name that is given to their position; and ‘officer’ – includes director & a person who‘makes, or participates in making, decisions that affect the whole or substantial part of the business or corporation’‘who has the capacity to affect significantly the corporation’s financial standing’Re HIH Insurance Ltd; ASIC v AlderCourt held Adler to be an officer on the basis that he participated in decisions that affected the whole of the business of the subsidiary and that he had the capacity to affect significantly the subsidiaries financial standing.‘consultant’ = officer if decisions made substantially affect companyRe Dwyer v Lippiatt‘general counsel’ and ‘CFO’ = officersASIC v Macdonald Includes ‘de facto’ and ‘shadow directors’‘Shadow Directors’ can include corporationsStandard Charter Bank of Australia v AnticoWhat are the Positive and Negative Limbs?Positive limbDuty to act in care and diligenceBest interests of the companyDuty to exercise powers for a proper purposeDuty to give adequate discretion to matters and keep discretion unfettedNegative limbDuties not to put in a position of conflictInsolvent trading duty Common Law ObligationsContractA director employed under a contract of service may contain express or implied terms which extend to ensuring that they, as an employee, will exercise the appropriate degree of skill and care as a reasonable person would occupying the same positionLister v Romford Ice and Cold StorageEquitable obligationsFiduciary relationship with the company – no difference between common law and equitableLagunas Nitrate Co v Lagunas Syndicate‘if directors act within their powers and with such care as is reasonably expected from them, having regard to their knowledge and experience, and if they act honestly for the benefit of the company, they discharge both equitable and legal duties’Measure of damages is differentDaniels v AWAForeseeability and remoteness are only relative to common law and are not relevant to equitable mon Law NegligenceDuty of care owed to the company at common lawDaniels v AWADirectors are subject to a common law duty to exercise reasonable care and skill in addition to other duties they may hold in contractual, equitable or statutory obligations.This applies to both directors and non-executive directorsStandard of Care?Objective standard compared to that of a reasonable personStandard of Skill?ASIC v Gallagher‘what an ordinary person, with the knowledge and experience of the defendant might be expected to have done in the circumstances’S180 – Duty to act with reasonable care [civil penalty, no criminal]S180(1) provides that a director or other officer of a company must exercise their powers and discharge their duties with the degree of care and diligence that a ‘reasonable person would exercise if’ they werea director or officer of a company in the companies circumstances; andoccupied the office held by, and had the same responsibilities within the company as the director or officer.ASIC v MacDonald (2009)‘The test is basically an objective one in the sense that the question is what an ordinary person, with the knowledge and experience of the defendant might be expected to have done in the circumstances if he was acting on his own behalf.’‘reasonable care’Re City Equitable Fire InsuranceThe standard of care owed by a director is that equated to the standard which an ordinary prudent person would provide.Statute and Common LawVines v ASIC (2007)No difference between the statutory duty to act with care and diligence and the common law position.Factors to consider whether breach:***AWA v DanielsAll Directors:Must become familiar with activities of companyHave a continuing obligation to make enquiriesMust continue to keep themselves informed about all aspects of the company’s operationsWhere director appointed because of special skill, still has obligation to be familiar with other aspects of company businessMust ensure board has appropriate processes and means to ensure that management is running the company properly Must be familiar with company’s financial position (i.e. by regularly reviewing company’s financial statements)Cannot claim immunity because unable to read financial statementsRisk-taking is ok, but ignorance and failure to inquire will not protect from liabilityDirectors cannot shut eyes to corporate misconduct‘the companies circumstances’ASIC v Maxwell (2006)The companies circumstances includeType of companySize and nature of companies businessComposition of the boardDirectors position and responsibilities within the companyExperience of directorsBalance of responsibility between directors‘responsibilities within the company’ – [higher raises standard of care]any responsibilities including those acquired by through any distribution of the company’s operations.ASIC v Rich (2003)***Higher position within the company raises the standard of care owed‘[a]rrangements flowing from the experience and skills that the director brought to office and any arrangements affecting the work that the director would be expected to carry out ... as reflected in the common law position’‘balancing risk’Vines v ASICFor a defendant to have breached their duty of care, the balance of the foreseeable risk of harm from the defendants against the potential benefits of the company.MeasureMagnitude of risk to the company’s shareholders and membersProbability of the occurrence of risk in relation to the company’s operations‘conflict of interest heightens standard of care’If there is a potential conflict of personal interest and a director’s dutyRe HIH Insurance Ltd; ASIC v AdlerDirectors standard of care is raised to a higher levelConsequences of breach?S180(1) – civil penalty Could transgress into a criminal penalty $200K or 5 years imprisonment ifKnowingly, intentionally or recklessly; and either Dishonestly with an intention to gain an advantageIntention to deceive or defraudREFER Consequence of Breaches/RemediesCommon types of breachesRe One Tel. Ltd; ASIC v RichMonitor Management – monitor management;Reasonable Steps – take reasonable steps to assess the company's financial position and performance;Adverse developments – take reasonable steps to assess properly material adverse developments;Arm the board with information – put the board of directors into a position to assess these matters and take appropriate steps;Accurate Financial Info – ensure the establishment of appropriate systems to produce financial information which was accurate and reliable;Cash Reserves – maintain cash reserves at a level which ensured liquidity; andHave a CFO – take reasonable steps to employ an appropriately qualified finance director.ASIC v PFS Business Development GroupWages – failing to ensure that employees were paid wages in a timely manner or at all;Trade while Insolvent – permitting the group companies to continue to trade while insolvent;Book keeping failure – failing to ensure the group companies kept proper books and records of all transactions engaged in by them;Taxation Obligations – failing to ensure that several of the companies complied with their taxation obligations; and “general mismanagement” of the group companies.Sheahan v Verco – Non-executive directorsInadequate Meetings – failing to ensure there were sufficient meetings of directors (there was only one meeting of directors)No Business Familiarity – failing to become familiar with the business of the company and how it was conducted so they could form a sound business judgment about whether it was being properly run; andBook keeping failure – failing to take any steps to ensure the company maintained and kept proper financial statements and records.Statutory Business Judgement Rule – s180(2) – [Defence provision]Provides that a director or officer of a corporation has statutory obligations when making a business judgement relevant to their duty of care and diligence in s180(1) and per common law and equitable duties.They mustMake the judgement in good faith and for a proper purpose; andDo not have a material personal interest in the subject matter of the judgementInform themselves about the subject matter of the judgement ‘as reasonably as they believe to be appropriate’Rationally believe the judgement is in the best interests of the corporation.Key – the director or officer must prove that they believed they were making a business judgement in the best interests of the corporation in a rational manner and the decision is one that no reasonable person in their position would hold.s180(3) – any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.‘inform themselves of the subject matter of the judgment’ASIC v Adler evinced generally that the following must be taken into considerationImportance of judgement to be made;Time available for obtaining information;Costs of obtaining information;Directors confidence in those who explored a matter;State of the corporations business at the time;Other board decisions being considered at the time.‘rationally believe’Wider scope of discretion afforded than that of ‘reasonably believe’ which probably (currently untested) falls outside the common law test of ‘reasonably believe’.Is a rational belief a reasonable one?S181 – Duty to act in the best interests of the company and to act for a proper purpose[civil & criminal penalty]S181(1) provides that a director or other officer of a corporation must exercise their powers and discharge their duties‘in good faith in the best interests of the corporation’; and‘for a proper purpose’Purpose – Codify principles of common law to ensure that directors and officers act in the ‘best interests of the company and to act for a proper purpose’. ‘Separate and distinct duties’S184(1) & s187 treats each of the above duties separately ‘interests of the company’Interests of existing membersDirectors must consider interests of existing members because they have capital interest vested in the company. Pt 2F.1 provides remedies for the conduct of the affairs of a company in a manner that is ‘contrary to the interests of the members as a whole’S461(1)(e) provides compulsory winding up where directors ‘have acted in the affairs of the company in their own interests rather than in the interests of the company as a whole’ [see members remedies]Percival v WrightDirectors owe duties to the corporate entity rather than the membersNot interests of the company Kinsela v Russell Kinsela Pty LtdDirectors permitted the giving of a lease on extremely favourable terms to two directors when a subsidary company was in financial distressCourt found that the lease was void. Diakyne Pty Ltd v RalphDirector breached duty to act in the best interests of the company by paying $110K from company funds to another company the director control alleging as a ‘payment for performance’.There was noBonus available in the contractFinancial situation was poor$110K was considerable due to financial healthConflict of interest through the beneficial grant to a controlling company.Interests of creditorsUnsecured Creditors – no proprietary interests in the companies assets and no standing to interfere with the company’s business or decisions Mills v Northern Railway of Buenos Aires CoUpheld in Spies v R (2000) HCACreditors – Must consider the interests of creditors – and future creditors – but unsecured creditors have no standing.Winkworth v Edward Baron Development Co LtdS588G – Objective test – insolvencyLinton v Telnet PtyA decision of directors would be in breach of duty if an intelligent and honest person in the position of the directors could not have reasonably believed that the transaction was for the benefit of the company having in mind the interests of the companies creditors.Cannot ‘prejudice creditors’ – that is, favour one creditors payments over another’sKalls Enterprises Pty Ltd v BaloglowEmployees, customers, contractorsPark v Daily NewsPayments not reasonably incidental – Payments to employees which are not ‘reasonably incidental to the carrying on of the business and which was not beneficial to the future wealth of the business’ are not permitted.Gifts – Directors and management are permitted to implement and make decisions in self-interest but cannot be ‘overtly generous with company resources such that there is no prospect of commercial advantage’Re George Newman & Co Groups of CompaniesWalker v WimborneDirectors must not act in disregard of the interests of the company when dealing with multiple companies in a group. Each company must be treated as having its own individual interests and each must respect each companies individual members and creditors evinced in the concept of ‘separate legal entity’ Debt restructuringCharterbridge Corp v Lloyds BankWhere a loan is made by one group company to another – the Court primarily assess whether the loan is made through ‘upstream’ or ‘downstream benefit’.Downstream – Where the loan is from the parent company to a subsidiary this is usually permissible since it is possible that the parent gains financial returns through dividends and addition of the subsidiaries performance.Upstream – Where the loan is from the subsidiary to the parent, this is not usually permissible since it typically is to the detriment of the subsidiary and for the benefit of the parent S182 – Duty not to make improper use of position [civil & criminal penalty][civil & criminal penalty]S182(1) – A director or officer must not improperly use their position toGain an advantage for themselves or someone else; orCause detriment to the corporation(2) includes a person ‘involved’ in a contravention of (1)Determining breach – Howard Smith Ltd v Ampol Petroleum LtdWhether a director has breached their fiduciary duty and used a power for an improper purpose involves a two-limb test:Determining what the power may, and may not, be exercised for; andDetermining as a matter of fact the purpose for which the power was exercised and whether that purpose is within the permitted purposes of using the powerDetermining what the power can be exercised forAnalysing the power-conferring provision typically stated in the companies constitution and its functionWhitehouse v Carlton Hotel Pty LtdPositive Power – Constitution of a company may show the positive purpose for which the power is conferredNegative Power – Constitution may show the negative power of conferral that power provides.Also ConsiderSize and Nature of the CompanySmall company – directors typically have greater powers than in larger listed companies.Power to Issue SharesHoward Smith v Ampol Petroleum ‘too narrow an approach to say that the only valid purpose for which shares may be issued is to raise capital for the company’Permissible to suggest the power should not be used unless the constitution expressly permits it.Cannot defeat votes or DILUTE SHARESBell IXL Investments v Life Therapeutics [2008]The board cannot issue shares with the motive of defeating voting power of existing shares in order to simply create a new majority.If the directors dominant purpose is a ‘legitimate commercial objective not related to control’ then it is a proper purpose.Howard Smith v Ampol PetroleumDetermining whether the purpose is permittedSubjective Test – The question of fact as to whether the power was exercised for a proper purpose is one for the Court and it should give credit to the bona fide intention of the directors and respect their judgement Howard Smith v Ampol Petroleum Directors should ensure that their decisions can be justified – that is, they are able to determine some ‘credible and properly orchestrated financial or business object support by evidence of an assessment of other viable alternatives’Permanent Building Society v WheelerOnus on proof on the party alleging misuseIf the companies constitution does not require directors to provide grounds or reasons for why they have made a particular decision or decision, a party must show a prima facie case of misconductMetropolitan Life Assurance Co v UreExamplesCommon examples of breaching this a ‘proper purpose’ includeDiakyne Pty Ltd v Ralph (2009)Failing to consider financial circumstances;Significant sum given financial circumstances;Payment without debate or dispute;Not permissible under a contractASIC v Warrenmang (2007)Authorise payment for themselves and their personal benefitKokotovich Constructions v Wallington Issuing share capital to make the rights of any additional shareholders seemingly valuelessDuty note to fetter future discretionDuty to retain discretions doesn’t infer that a director must exercise their power in the future in a particular manner – rather they mustprovide adequate consideration to the suitability of the contract as a whole; and act in good faith of the company as a whole in committing the company to the contract.Thorby v GoldbergChange of Circumstances –If the entering of a contract does bind the way a director can act in the future and because of changed circumstances, it may not be in the best interests of the company to continue the contract. It is possible this may breach a directors fiduciary duty.Talbot v NRMA Ltd (2000)Takeovers and Proper PurposeS659AA – takeover panel is the main panel which resolves disputes regarding takeovers.Re Pinnacle VRB Ltdthe Panel's functions are limited to applying the principles set out in s 602 as essential elements in a wider public interest discretion;the Panel is not empowered to enforce compliance with the law or to set aside contracts on equitable grounds or for non-compliance with those parts of the Corporations Act dealing with the duties of directors; andthe Panel does not have the power which a court of law has to perform any of its functions (including the powers to order discovery between parties and to punish for contempt). S183 – Duty not to make improper use of information [civil & criminal penalty]s183(1) provides that a person who obtains information as a director or officer or employee, or who have been a director of officer, must not improperly use that information togain an advantage for themselves or someone else; orcause detriment to the corporation.(2) includes a person ‘involved’ in a contravention of (1)****Establishing breach of s183In order to breach s183 – the following must be establishedThe defendant was a director or officer or employee at the time of the alleged breach;The defendant acquired said information;Can be confidential or not – McNamara v FlavelThe defendant acquired said information due to their position as a director or office or employee;The defendant made improper use of said information;The improper use lead to an advantage or detriment to the corporationThe said advantage was for the director or officer or employee or some other personCommissioner for Corporate Affairs v Green‘to gain, directly or indirectly, an advantage or to cause detriment’Chew v RImproper use of position could only be proven where the defendant made the purpose of gaining an advantage or causing a detriment without actually establishing a burden of proof that an advantage was gained or detriment caused.‘improper use of position’R v BrynesHCA stated‘Impropriety consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case’State of Mind is relevant‘the state of mind of the alleged offender is important – the offenders knowledge or means of knowledge of the circumstances in which the power is exercised and his purpose or intention in exercising the power are important factors in determining the question whether the power has abused’Examples (next page)ExamplesCommon examples of breaching this a ‘proper purpose’ includeDiakyne Pty Ltd v Ralph (2009)Failing to consider financial circumstances;Significant sum given financial circumstances;Payment without debate or dispute;Not permissible under a contractASIC v Warrenmang (2007)Authorise payment for themselves and their personal benefitKokotovich Constructions v Wallington Issuing share capital to make the rights of any additional shareholders seemingly valuelessS189 – Reliance on information or advice by othersDirector’s reliance on information/advice is taken to be reasonable unless the contrary is proved, if director relies on information or professional/expert advice, given or prepared by: s189(a)employee of the corporation whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned; s189(a)(i)a professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within the person’s professional or expert competence – s189(a)(ii)another director or officer in relation to matters within the director’s or officer’s authority – s189(a)(iii)a committee of directors on which the director did not serve in relation to matters within the committee’s authority (s189(a)(iv)); and***the reliance was made – s189(b)in good faith; andafter making an independent assessment of the information or advice, having regard to the director’s knowledge of the corporation and the complexity of the structure and operations of the corporation; andthe reasonableness of the director’s reliance on the information or advice arises in proceedings brought to determine whether a director has performed a duty under this Part or an equivalent general law dutythe director's reliance on the information or advice is taken to be reasonable unless the contrary is proved.Southern Resources Ltd v Residues Treatment & Trading Co Ltd Exercise Independent Judgment – ‘no more than that they, having listened to and assessed what their colleagues have to say, must bring their own mind to bear on the issue using such skill and judgment as they may possess’.Duty to give adequate considerationDirectors are required to exercise an functional amount of discretion and they are in breach of their duties if they act ‘blindly at the directions of another’ Sole director/shareholder: may exercise any powers of company except those required (by const or CA) to be exercised in general meeting – 198EMAY execute negotiable instruments; but may determine that such instruments can be executed in other ways.S190 – Responsibility for actions of the directors delegatesManaging director – directors may appoint 1 or more of themselves as managing director for period and on terms as directors see fit – s201J (RR)Conferral of powers – directors may confer upon MD any directors’ powers; may revoke or vary this conferral – s198C (RR)Delegation –198D – unless constitution says otherwise, directors may delegate any powers to any of: a committee of directors; a director; an employee; any other person The following must occur if a power is delegated:Recording of delegation – The delegation must be recorded in the company's minute bookSubject to directors’ directions – The delegate must exercise the powers delegated in accordance with any directions of the directorsEffect as if exercised by directors – The exercise of the power by the delegate is as effective as if the directors had exercised it – s198D(3)Directors still liable – If the directors delegate a power under section 198D, a director is responsible for the exercise of the power by the delegate as if the power had been exercised by the directors themselves.Director NOT responsible – under subsection (1) if – s190Reasonable belief that delegate would exercise power in conformity with the duties imposed on directors of the company by this Act and the company's constitution (if any); ANDThe director honestly believed:On reasonable grounds; andIn good faith; andAfter making property enquiriesthat the delegate was reliable and competent in relation to the delegation of the power by the director.***Court Must Consider [***critical next page***]***Court Must Consider Re HIH Insurance Ltd; ASIC v AdlerFunction that was delegated – the function that has been delegated is such that it is proper to leave it to the delegate;Extent to which the director put the inquiry – the extent to which the director is put on inquiry, or given the facts of a case, should have been put on inquiry;Relationship of the director and delegate – the relationship between the director and the delegate must be such that the director honestly holds the belief that the delegate is trustworthy, competent and someone on whom reliance can be placed. Cannot have knowledge that delegate is unreliable – Knowledge that the delegate is dishonest or incompetent will make reliance unreasonable;Risk of the transaction & whether delegation was suitable – the risk involved in the transaction and the nature of the transaction;Any other steps taken by director to trust delegate – the extent of steps taken by the director, for example, inquiries made or other circumstances leading the director to trust the delegate;Duty to Avoid Conflicts – ‘The Conflicts Rule’ – s191Definition – Prohibits directors placing themselves in positions of inherent conflict such that a personal interest or duty directly conflicts with their duty to the company.Embodied in s191 which states –A director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless s191(2) says otherwise.Phipps v Boardman – strict approachLoad Upjohn stated the key principle‘the fundamental rule of equity that a person in a fiduciary capacity must not make a profit out of his trust which is part of the wider that a trustee must not place himself in a position where his duty and interest may conflict’Realistic approachIt is not possible to follow the strict approach evinced in Phipps v Boardman in the commercial sense since thenA director could not hold sharesCould not occupying board position at companies who compete in some similar marketsCould hold a position as a nominee director ‘real and not remote possibility’ [modern approach]S191(2) – The possibility must be ‘real and not remote’Hospital Products Ltd v US Surgical CorpMason J stated that no person having fiduciary duties to discharge should be allowed to enter where there is ‘a real or substantial possibility of a conflict’.‘must give notice’S192(1) requires that directors must provide notice to other directors giving the nature and extent of the interest in accordance with s192(2).Uncertainty – if the director or directors are uncertain about whether they are in conflict – it is a practicality that they seek legal advice as to the nature of the conflict of interest and the cost of advice.Notice - S192(1) provides that the notice and interest must be given:At a directors meetingTo other directors individually in writing.Camelot Resources v MacDonaldMust provide Sufficient detail for the board as a whole to understand the scope ‘mere suggestions’ are insufficient.Private Company – s194 – replaceable rule Provides that if a director has a material interest that relates to the affairs of the company andThe director discloses the nature and extent of the interest and its relation to the affairs at a board meeting; andThe interest is not one captured by s191then the director can vote on the matter and any transactions which relate to it providing the disclose is made before the transaction is entered into.Public Company – S195(1) provides that a director of a public company must not [it is not a replaceable rule for public companies]be present while the matter is being considered at the meeting; orvote on the matter.unless s195 allows the director to present through the exceptions of s195(2).Lack of quorum – S195(4) – if there is not enough directors to form a quorum because of s195(1) then one or more directors may call a general meeting (including those with a material interest) and the general meeting can pass the resolution. ‘extent of the interest’The Courts, must, take into the extent of the interests when applying the conflicts ruleDirector and Shareholder – If a person is a director on Company A and holds shares in Company B, then the director does not breach his obligations if Company B does business with Company A as a shareholder owes no fiduciary duties.Extent of Holding – However, if the director were to hold so many shares that they have a substantial holding then this would be a cause of concern and disclosure.ANZ Banking Group v Bangadilly Pastoral Co ‘contracts remain valid’Even if a director has failed to disclose their interests with s191 – it is not a basis for recession of a contract.Roden v International Gas ApplicationsIt is typically voidable if the disclosure goes against the companies constitution and is at the option of the companyCmaelot Resources v MacDonaldHolding Competing DirectorshipsSensible to disclose – Prudent behaviour would suggest that a director holding competing directorships disclose the extent of the relationship. Disclose would jeopardise nature – If disclosing the extent of the relationship would jeopardise the nature of the conflicting interest, then (i.e. in a takeover) – the director should abstain from board proceedings.Fitzsimmons v RConflict between a duty of honesty and a duty of confidentialityDirector in such a position should disclosed to other directors that they are in a position of conflict in respect of the matter and that they should neither participate or be involved in the deliberations or vote.‘indirect interest is relevant’If Company A is contracting with Company B – where the director of A is also a director, member of officer of B – then the director may have a competing interest worthy of disclosure.Walker v Nicolay‘must obtain consent from first company’R v Byrnes‘A director of a company who is also a director of another company may owe conflicting fiduciary duties. The director of the first company must not exercise their powers for the benefit or gain of the second company without disclosing the second companies interest and obtaining the first’s consent.’The Profit RuleDefinition – The profit rule provides that a fiduciary is to account for the profits they make in connection with their fiduciary duties otherwise they may breach s182, s183 and s184.Strict Application – Regal (Hastings) Ltd v GulliverA fiduciary is accountable for profits arising ‘by reason of and in the course’ of their fiduciary officeDifficulties in rationalisationThe difficulty with the above formulation is that there are no realistic circumstances available to directors to engage in profit-making due to conflicting meanings.‘by reason of’ - suggests that a director can take advantage of profits which do not arise ‘by reason of’ their position‘in the course of’ – contrary to the above, ‘in the course of’ suggests that ‘any’ profit making made by a director is held accountable. Realistic approachIt would be seemingly unrealistic for a director to completely abstain from engaging in personal benefits entirely when rationalising this against a director’s role of promoting and achieving success for the company on whose board they sit.‘Causal connection’SEA Food International v LAMThere must be a ‘sufficient temporal and causal connection between a directors fiduciary duty and the business opportunity in order to establish a breach of duty. This will depend on Circumstances of the opportunity;The nature of the opportunity;The extent, breadth and depth of the company’s operations; and Future operations.[see also Curing Breaches below]‘director benefiting personally if company cannot’Rationale – If a director was permitted to profit from opportunities that the company could not engage in, then they would be tempted to purposefully miss opportunities for their gain.Regal (Hastings) Ltd v GulliverThose who are in a fiduciary position who make a profit are liable to account for that profit as the liability arises from the ‘mere fact that profit was made’. The profiteer cannot ‘however honest and well-intentioned’ escape the risk of being called to account.Chan v Zacharia – HCA upheld Regal Hastings but added that it may not apply in circumstances were it would be ‘unconscientious’ to so.‘director benefiting opportunities in a private capacity’Rationale – A director who is personally interested in a transaction could not, realistically and rationally, make an impartial and unbiased decision as to whether the transaction is ‘fair’ from the companies perspective.Furs Ltd v TomkiesNon-directoral or private capacityPeso Silver Mines Ltd v CropperPermitted a director to take up a private opportunity that the company could not as the defendant acted in good faith, in the interests of the company and with sound business reasons and was acting as a member of the public.No longer good law.SEA Food International v LamOpportunity arose by reason of position as director Must considerWhen the opportunity arose – before or after being appointedCompanies Business – the nature and extent the company’s operations and anticipated future operations.Whether the opportunity was one of relevance to the companyDid the company reject the opportunity and on what basis was it rejected?Too expensive & not viableNot a realistic opportunityNo synergies‘resigning to exploit opportunity’CMS Doplhin Ltd v Simonet [English Case]The general rule is that ‘the underlying basis of the liability of a director who exploits – after his resignation – a maturing business opportunity of the company is that the opportunity is to be treated as if it were property of the company in relation to which the director had fiduciary duties.’ ‘By exploiting the opportunity after resignation he is appropriating for himself that property’Curing BreachesTwo primary ways breaches of fiduciary duties can be cured:General meeting / member approvalGeneral meeting can with a directors full disclosureProvide express consent that the director can act despite a clear breach; andratify a completed act which has breached a dutyFur v TomkiesDisclosure must beBefore the consent of the company in a general meeting so they are able to inform themselves of the nature and extent of the breachthe profit-making opportunity and consequential affectsConcerned party excluded from votingThe director(s) concerned are excluded from votingRestrictionsCannot vote or authorise a fraudCannot vote or authorise discrimination, unfair practices etcRegal Hastings Board ApprovalDirector owes their duty to the company and the company is entitled to have the impartial and unbiased decisions of every directorWoolworths v KellyOnly with the authority of its constitution –The board can authorise some breaches of duty relating to business opportunities i.e. if the board provides that it is outside the scope of its operations and therefore a director is free, with express permission, to exploit itQueensland Mines v HudsonNominee DirectorsDefinition – A nominee director is one who is appointed by some appointor with a degree of loyalty to the company above that of a ‘mere degree’ but whom is typically appointed for some other interest than that of the company.‘some other interest’Nominee directors are appointed to represent a party such as a creditor or a debtor who has substantial amount of risk vested in the company and represents this other interest.‘powers are constitutional dependent’Nominee director’s powers are typically provided for in the constitution such that obligations for actions are be expressly stated.director position for debt obligation more than % shareholding gains director position‘access to information’A nominee director cannot be deprived of access to corporate information but is subjected to the fiduciary obligations in using such information. If the director right to information would ‘breach’ their fiduciary duty then the right to access information disappears. Berlei Hestia Ltd v HernyhoughTypically the right to access information must:Allow a director to act in their directorial capacity and have access to such information which allows them to fully comply with fiduciary and statutory obligationsSouth Australia v BarrettAllow a director to only use the information for the companySouth Australia v BarrettOn cessation of directorship, the director cannot continue to access information or use the information which was accessed for any purpose which would breach their fiduciary capacitySouth Australia v Barrett‘conflict between appointor and company’Strict View – if a nominee director exercises interests of both the appointor and the company then they are in breach of their duties as they are in conflict per Phipps v Broadman.Don’t not have to shut mind ‘completely’ to appointor – Mills v MillsRe Broadcasting Station 2GB Pty LtdNominee directors who act in the interests of their appointors would not breach a duty unless it is ascertained that they would have acted in such a manner regardless of the knowledge that their acts were not in the interest of the company.‘position of actual conflict’If conflict is impossible to remove – nominee directors should remove themselves from the possibility of conflict by focusing on the duty to the companyScottish Co-operative Wholesale Society v MeyerHarm to Appointor - If harm is inevitable to the appointor by doing so – then they must ensuring that all interests are taken into accountRe Cumberland HoldsingBreach – if nominee directors fail to take the above steps, then they are in clear breach of their statutory duties per s180 and s181 Ampol Petroleum v RW MillerSTATUTORY Breaches and Relief - ASICOutline – A failure to observe the provisions of the Corporations Act 2001 can result in either a criminal or civil punishment – the later usually being through a pecuniary penalty (monetary fine).S1317E – Civil ProceedingsApplies to 180, 181, 182, 183209 (related parties)S588G(2) (insolvent)Step 1 – Declaration of Contravention is required by stating a contravention listed in s1317E – [ASIC ONLY]This is the first procedural stepOnly ASIC has standing to enact – s1317J(1)Plaintiff must state:The penalty contravenedThe person responsible for contraventionThe resulting actions causing contraventionThe aggrieved corporate body or entity s1317E(2)UNLESS contravention of s588G(2)If Court determines that defendant has contravened s588G(2) then there is no requirement for the Court to make a declaration under s1317E.The aggrieved Corporation can only seek a [see next page]Compensation Order – s1317J(2) & (4)Court will only grant relief for a contravention of a civil penalty provision s1317H(1)Step 2 – Pecuniary Penalty Order – S1317G – [ASIC ONLY]Once s1317E is declared, ASIC can seek a Pecuniary Penalty Order – Must satisfyMaterially prejudices the interests of the corporation, scheme or members;Material prejudices the corporations ability to pay creditorsIs seriousMax $200K Court ordered individual$1 million for a body corporate – 1317(1B)Penalty design to act as deterrent to company and officers and corporate community at large.ASIC v Chemeq LtdCivil Judgement debt payable to ASICRich v ASICMcHugh J stated‘only consider imposing a pecuniary penalty if a civil penalty disqualification be an inadequate or inappropriate remedy’Step 2 – Disqualification Order – s206COnce s1317E is declared, ASIC can seek a Disqualification OrderPermits ASIC to disqualify a person from managing any type of corporation for a period (public or private) which the Court considers relevant to the magnitude of the contravention.ASIC v VinesCourt must consider:Persons conduct in relation to management, business or property of any corporation; andAny other matters deemed appropriate by the Court [206(2)]ASIC v Australian Investors Forum‘any other matters’ infers that the Court can take into account persons historyLength of Order –APRA v DerstepanianASICs recommendation is ‘relevant but not determinative’ to the Court although it is provided greater weightReason for imposition – ‘not only to protect shareholders against further abuse, but also to punish and more importantly for general deterrence’ASIC v VizardStep 2 [company OR ASIC only] – Compensation Orders– 1317HCompany can apply to the Court for compensatory order under – s1317J(2) & (4)1317H provides statutory authority to order compensatory relief to a corporation or registered scheme for damage suffered as a result of a contravention.The order mustState the contraventionThe amount of compensation to be awarded1317H(3) – Diminution Value – [measures the value of something before and after the causative act or omission creating the lost value]1317H(3) – in determining damage suffered must consider diminution in value of the property resulting from the contravention.Test of causation – Must be applied rather than any associated equitable compensatory ‘but for’ testO’Halloran v RT Thomas & FamilyMultiple defendants [continued next page]Multiple defendantsIf compensatory relief is claimed against multiple defendants which have varying levels of responsibility then it is atypical for a Court to apportion liabilityASIC v LoitertonRecover compensationCould utilise s1324 which allows any person(s) whose ‘interests are affected’ to file an injunction and for damages.Court Relief from Liability [civil]S1318 – Provides the Court the power to relieve a person from liability in circumstances where the Court deems such relief fit.Only available to actions whereNegligenceDefaultBreach of TrustBreach of DutyS588G - InsolventThe defendant, who can only be a,Officer or employee of the corporationAn auditor of the corporationAn ‘expert’ per s9Receiver, liquidator or court appointed person.must demonstrate thatThey acted honestlyHaving regard to all the circumstances of the case the person ought to fairly to be excluded for the contravention****‘all the circumstances’ASIC v VinesThose connected with the person’s appointment as an officer of the relevant corporation.The level of regret post-contraventionThe seriousness of the contravention Importance of provision per public policyLevel of carelessness towards breachConsequences to others.Level of advice receivedWhether there was an economic benefit receivedVines v ASICS1318 – ‘consider conduct short of reasonable care and diligence’The mere fact that the defendants conduct contravened the statutory duty of care and diligence – infers conduct was unreasonable.However, s1318 can consider the degree to which the defendants conduct fell short of the standard of reasonable care and diligence and provide basis for triggering of s1318.In this case, while CFO acted honestly, the breaches were inexcusable for a person in that position.S1317S Not limited by s1318The Court can ‘relieve a wholly or partly liable person’ either ifThe person has acted honestly; andHaving regard to all the circumstances of the case the person ought to fairly to be excluded for the contravention‘all the circumstances’Those connected with the persons appointment as an officer of the relevant corporation.Applies to ‘proceedings for contravention of a civil penalty provision’ and is available in proceedings forDeclaration of ContraventionA pecuniary penalty orderA disqualification order under s206CCompensation Order s1317HS588G – Insolvent trading by directorsS1317S(2)Must take into accountAny action the person took regarding liquidators or administratorsWhen the action was takenThe results of the action.Criminal Liability [ASIC ONLY]S184 – Reckless or DishonestUp to 5 years imprisonment per Sch 3 of the Act.Director or officer who commits an offence where Recklessness; orIntentional dishonesty is added in ‘addition’ to that of the civil penalty provisions in s181, s182, s183.S208 – Financial Benefit‘person’ involved in a public company giving financial benefit to related party if the involvement is dishonest.S588G(3) – Insolvent TradingDirector incurs a debt whilst insolvent if they suspected at any time the company was Insolvent; and theydishonestly failed to prevent the company from incurring the debt.S1317P – ‘declaration of contravention irrelevant for criminal proceedings’Criminal proceedings can be brought against a person for conduct ‘substantially the same as conduct constituting a contravention of a civil penalty’ regardless whether a declaration of contravention, pecuniary, disqualification or compensation order has been made.‘Pecuniary Penalty evidence not admissible’ – 1317Q – Evidence for a pecuniary penalty ONLY is not admissible in criminal proceedings.Disqualification, compensation and mere contravention not relevant.Shareholder RemediesStatutory Derivative Action‘Derivative action’ It is not a personal cause of action – it is a right which is derived from the company itself.It is an action derived when a person relies on another’s cause of action and is an exception to the general principle that one cannot obtain relief unless they are personally aggrieved. S236(1) –Allows members or officers to bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party and take control of those proceedings, or for a particular responsibility in those proceedings. Who can enact s236?A person or member who is registered as a member of the company or of a related body corporateAn officer or former officer of the companyTo what kind of proceedings?It allows a person who is authorised toBring proceedings on behalf of the company;To intervene in any proceedings to which the company is a party for the purposes of taking control of those proceedings or a particular role in those proceedingsRequirementsS237(2) – requirements which must be satisfied Not bring action itself – It is probable that the company will not itself bring the proceedings Court must be satisfied that the company will not take proceedings against itselfGassegrain v Gerard Cassegrain & Co Pty LtdGood Faith – The applicant is acting in good faithSwansson v RA Pratt Properties Pty LtdDemonstrate good faith where applicant:is a current shareholder who has more than a ‘token’ shareholding and the action seeks to recovery property so value of applicants share increaseis a director or officer and has a ‘legitimate interest’ in the good welfare and management of the company to recover property or ensure that the board isn’t acting unlawfully.Best Interests – It’s in the best interests of the company that the applicant is granted leaveSwansson v RA Pratt Properties Pty LtdMust ProvePurpose for which the company was formed;Business and the effect of the litigation on the business;The practical benefit to the company.Serious Question – There is a serious question to be triedCharlton v BaberApplicant must provide a sufficiency of material to enable the Court to make a substantive determination as regard to the question to be tried.Swansson v RA Pratt PropertiesThe ‘relatively same threshold’ as that of a interlocutory injunction.Notice – s237(2)(e)(ii) – Theapplicant gave notice to the company at least 14 days before making the application of the intention to apply for leave; andThe Court deems it appropriate even if no notice is provided per s237(2)Court & CostsS241 – Provides the Court the power to make any orders or give any directions regarding such applications for leave.S242 – The costs are broadly decided by the Courts and generally are paid by The applicantThe company; orAny other party to the proceedings.Is there a rebuttable presumption?S237(3) –A rebuttable presumption exists for the company that providing leave for a statutory derivative action is not in best interests of the company ifCompany has decided not to bring the proceedings for some reason, or to settle or to compromises;All directors who participated:Acted in good faithDirector’s belief is rational unless no reasonable person in their position would believe it rmed themselves of the subject matter of the decision as reasonably Not have a material interest in the decisionReasonably believed the decision was in best interests of the company.Statutory injunctionAuthorises ASIC or any persons ‘whose interests have been, are or would be affected by the conduct’ to initiate proceedings for an injunction to restrain a contravention under the Act.S1324(1) – Where a person has, is or is proposing to engage in conduct which mayContravene the Act;Attempting to contravene the Act;Assist the contravention of the Act;Induce or threaten a person to contravene the Act;in any way, directly or indirectly, ‘knowingly concerned’ in, or party to, the contravention by a person of the Act;Conspire to contravene the Act.a Court [only court] can grant an injunction on terms it deems fit which retraining the named person or persons from engaging in the conduct or any act or thing. Section 1324(6) allows the Court to grant an injunction restraining a person from engaging in conductwhether or not it appears to the court that the person intends to engage or continue to engage in such conduct per s1324(6)(a)whether or not the person has previously engaged in such conduct s 1324(6)(b); andwhether or not there is imminent danger of substantial damage to any person if the conduct is not so restrained s 1324(6)(c).Who can apply?S1324 –A person whose interests have been, are or would be affected by conduct in contravention of the Corporations Act to apply to the Court for an injunction.Includes a creditor whose interests have been affectedAllen v Atalay‘knowingly concerned’Cannot be ‘knowingly concerned’ unless the person has ‘knowledge of the essential facts constituting the contravention’ASIC v Manito Pty LtdRemediesS1324(10) allows the Court to grant an injunction and order the defendant to pay damages to any other person in addition, or in substitution of, the injunction.S1324(7) – Do any act or thing that the Court Common Law RemediesRecession –A director who breaches a duty can make a transaction voidable at the election of the companyCamelot Resources v MacDonaldThird Party – If a director has made a transaction with a third party and breached a duty and it would cause loss to the third party then the right to recession is lost unless the third party had knowledge of the breachTransvaal Lands Co v New Belgium Bona Fide for purchasers without value – cannot rescindRatificationRatification – the company becomes bound by some relationship with another party when a person is acting in excess or abusing the power conferred on them by the company. It ‘cures the defect that the original act was performed without authority and then the company is bound by it and take can advantage of it as if it was the authorised person’ - FCT v Sara LeeUltra Vires – where excess of power such that the company becomes bound – outside of s128 and s129 where a person can assume that from information provided to the public that a person is a director – the company is bound by ratifying the unauthorised act under law.Ratification within reasonable time – ratification should be within a reasonable time period Hughes v NM Superannuation Board Pty LtdRatification as abuse of power – Where a person with authority ratifies but such a ratification is for an improper purpose – they breached s181.Whitehouse v Carlton Hotel Pty LtdRatification by BOARD –Board can ratify on behalf of the company by passing a board resolution to ratify Re Portuguese Consolidated Copper Mines LtdBoard Ultra Vires – Must go to the members by ordinary resolution at a general meeting [see members]Ratification by MEMBERS [next page] Ratification by MEMBERS – If a board is ultra vires on their authority then they can ratify the transaction in a general meeting.Irvine v Union Bank of AustraliaLimits – Provisions of the constitution may restrict the members power to ratify certain transactions without board approvalBoschoek Pty Ltd v FukeCannot dispose of company assets or cause it to bear an obligation to the point of insolvencyKinsela v Russell Kinsela Pty LtdAccount of Profits –Director profits from a breach –A director who profits from a breach of fiduciary duty may be accountable for that profit regardless of any loss suffered by the companyRegal (Hastings) Ltd v Gullivers181, s182, s183A director may be liable for profits from other director’s breaches.Marson Pty Ltd v Pressbank Pty LtdAccount Of Profit too LargeIf an account of profit is too large due to directors ‘acumen and skill’, then a director can be allowed a reasonable remunerationPhipps v Boardman****Equitable CompensationA breach of duty causing loss to the company can allow the Court to award an equitable monetary compensation‘the court has an inherent power to award equitable compensation to relieve against loss occasioned by breach of fiduciary duty’Travisktock Holdings v Saulsman Assessment of Compensation – Diminution Value -Value of the assets reduced by the defendants wrongdoing at the date of restoration as opposed to the date of the defendant caused the loss to the plaintiff Re Dawson Apportionment by Contribution Contributory fault by the plaintiff will not reduce the amount of equitable compensation as fiduciary focuses on Astley v AustrustConstructive TrustImproper use of company property –Director is a constructive trustee of company assets – If a director improperly uses company property and the director has breached a duty and retains some assets from that item, the company has a claim to the assetPaul A davies v DaviesThird Party – This includes if the company has been transferred to some third party Re Candian Oil Works CorporationMonetary Gain –If the director makes a gain in a form other than monetary then the director is accountable as a trustee and company has election to Hold director account for the gainClaim the property Eden v Risdales Railway Lamp & Lighting Co LtdInjunction –Threaten to breach or continues to breachAn injunction can be provided which will prevent the breach from occurring or continuing to occur.Threaten to breachCourt more likely to impose an injunction than account of profits or damages since no economic damagePacificia Shipping v AndersenDamagesThe quantum of damages for breach of the equitable duty or the common law duty arising out of the same facts may differ significantly because conditions such as foreseeability and remoteness, to which damages at common law are subject, are not relevant to equitable compensation – Daniels (t/as Deloitte Haskins & Sells) v AWA Ltd Members Personal RemediesMembers have personal rights arising inExpress contracts betweenMember/Member or Member/Company‘Shareholder agreement’ – Made between all shareholders of the companyHas specific provisions which are enforceable at allPublic Listed Company –If company is listed on stock exchange, it is implied term of a contract between a shareholder and a company that they comply with relevant ASX listing rulesZytan Nominees v Laverton GoldStatutory Contract under s140The Statutory contract is theCompany constitution; and/orAny replaceable rules.The combination of the constitution and any replaceable rules is that it forms a statutory contract under s140 such that Binds the company and each member;Company and each director and secretary;Binds each member and each other member.Declaration or injunctionUsually, a member who sues under the statutory contract can only claim a declaration or an injunctionNo DamagesArdelthan Options v EasdownPersonal cause of action available under Common LawRatification of issues of shares for an improper purpose[see improper purpose AND ratification also]A member has an individual membership right to have the voting power of their shares undiminished by an allotment made for an improper purpose.‘members voting rights are a fundamental attribute of membership which members must be able to protect’Residues Treatment & Trading v Southern ResourcesSpecial Fact fiduciary relationshipDirectors can owe individual shareholders fiduciary duties as well – Glavanics v BrunninghausenEquitable constraints on alteration of the constitutionGambotto v WCPCompany can alter constitution by special resolution by 75% of its membersOnly two instances when alter constitution is for a proper purposeFirstMinority shareholder is in competition with the companyRegulations require shareholder portions to be met [i.e. % owned by Australian]SecondExercise must not operate oppressively on the minority shareholderMust be fair:Procedural fairness – full disclosure and independent valuationSubstantive shares – any price below market price will be prima facie unfair.Winding Up & OppressionCompulsory Winding UpS461 – Member or contributor can request that company is ‘wound up’ only when It is ‘just and equitable to do so’ – s461(1)(k)Directors are acting in their own interests and not the companies – s461(1)(e)When there is ‘oppressive, prejudicial or discriminatory conduct’ – s461(1)(f)Standing – S462The party must have standing under s461 and includesCompanyCreditorsASICLiquidatorsAPRAS461(1)(k) – ‘just and equitable to do so’Court must believe winding up of the company is ‘just and equitable’ to do soCourts will typically only wind up a company whereBreakdown of trust between directors & membersDirectors eroded business purpose and loathed each otherEbrahimi v Wesbourne GalleriesDeadlock which cannot be resolvedTwo shareholders with 50% each and complete breakdown in communicationKhamo v XL Cleanining ServicesFailure of substratumBusiness ceases to carry on for its intended purpose and for the purpose in which it was formedRe Tivoli Freeholds Ltd Public InterestMultiple breaches of Corporations ActMisconduct and mismanagementInsolvent tradingNeed for public investor protectionASIC v Austimber Pty LtdActing in own interests [next page]Acting in own interestsS461(1)(e)directors have acted in affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appears to be unfair or unjust to other members; orRarely used and more likely to use s232Oppressive, prejudicial or discriminatory conduct [next page]S461(f) and (g)Where company has acted in a manner which is oppressive, unfairly prejudicial, unfairly discriminatory against a member, or contrary to the interests of the company as a wholeIt is widely acknowledged that “oppressive conduct” under this comprises the same elements as s232 (see below)Oppression Remedy s232 [favoured over winding up]Favoured over winding up becausePart 2F.1 [oppressive conduct of affairs] has wide interpretative language and is a more flexible remedy(d)? contrary to the interests of the members as a whole; or (e)? oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. Court has wide discretion to make more appropriate decisions which is less ‘extreme’ than winding upCourt should be ‘extremely reluctant to wind up a solvent company’International Hospital Concepts v National Marketing Concepts‘unfairness’‘Unfairness, namely conduct that is so unfair that reasonable persons considering the matter would not have thought it fair’Wayde v NSW Ruby League‘more than merely complaining about management’It must be more than merely complaining about the managerial aspects of the company and how it is being operatedRe G JefferyCircumstances s232 has been used [next page]Circumstances s232 has been usedImproper diversion of businessRe Bright Pine Mills Pty LtdExcessive Remuneration Sanford v Sanford Courier Service Pty LtdPersons who bring in large profits should be adequately rewarded for doing so – Morgan v 45 Flers Avenue Pty LtdFailure to prosecuteFailure to prosecute and Court believes is oppressive, unfairly prejudicial, unfairly discriminatory or where a reasonable person would have done in circumstances.Shears v ChisholmUnfairly restricting dividendsCompany does not pay dividends is NOT a realistic grounds of oppressive conductGrave v BiagioliShould review dividend structure when profits are growing if directors have increased their own salaries across same periodShamsallah Holdings Pty Ltd v CBD Refrigeration and Air-conditioning Services Pty LtdShare issue to reduce stake in companyIf company was created – on the basis – that fixed proportional stakes in the company – could be unfair prejudicial for a company to reduce shareholding.Re Dalkeith Investments Pty Ltd Improper exclusion from managementExclusion from management is permissible under s232 and is a grounds for oppression if the person aggrieved was represented an expectation of participating and functioning in management.Hogg v DymockDenial of access to informationDenial of access to financial books and any other books or records may constitute prejudicial behaviour and be grounds for oppressionRe Back 2 Bay 2 Pty LtdCourt could also use statutory injunction to ‘compel access’ to such material to the extent of prejudicial or unfairness evinced on the affected person.Decisions for related companies rather than shareholdersTransferring large sums of money upstream and downstream in order to accrue benefits is not permissibleRe Spargos Mining NLMisappropriation of company funds If a director breaches there fiduciary duties and misappropriates funds and assets. This can be oppressive conduct.Martin v Australia Squash Club Pty Ltd ................
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