Corps Revision Lecture

1. Corps Revision Lecture LSS Tutorials

2. Overview • Intro: Formation/Types of Company/Corporate veil/BoD/GM • Directors’ duties: • DCSD • Insolvent trading • BF/GF/proper purpose • Director must not fetter discretions • Conflicts • Related party transactions • Financial assistance • Consequences of breach/relief from liability • Remedies • Derivative/personal actions • Oppression • Continuous disclosure requirements

4. Problem Solving • Who are the parties and in what capacity can we advise them? • Director, officer, shareholder, corporation, holding co, ASIC, creditors, liquidator, employees • What is their complaint? • Legal issue: breach? • Resolve • Remedies

5. Intro • SLP – Salomon • Corporate Groups • BoD/GM • Calling a meeting – SH rights

6. Directors’ duties questions • Intro • Parties? • Grievance? • Breach of directors duties (analysis) • Defences/presumptions • Consequences of breach/relief from liability • Remedies

7. Duty of DCSD s180(1) • CL/equity/statute? • S180(1) X as a director or other officer, must exercise their powers and discharge their duties with the degree of care and diligence that RP would exercise if they • Were a director or officer of a corp in the corp’s circumstances; and • Occupied the office held by, and had the same responsibilities within the corp as X • What would a RP in [D’s] position with [D’s] knowledge and experience, exercising [D’s] responsibility, in that type of company, have done? Daniels; Wheeler (objective test) • Size of company? • What experience and skills did the director hold himself out to have? • The court in Daniels discussed the following factors: • Continuing obligation to keep informed about the company’s business • Must generally monitor corporate affairs, policies • Familiar with financial status • Attend company meetings; bring informed independent judgment to bear on matters • Can’t hide behind duty of confidentiality to one company to avoid obligations to another

8. DCSD: defences/presumptions • Delegation of powers s190 • s198D allows director to delegate powers • Director responsible for exercise of power by delegate s190(1) • Director not liable if reasonably believed delegate reliable/ competent s190(2) • Santow J in Adler factors • Reliance on information and advice from others s189 • Reliance presumed reasonable if matter relied upon is within professional competence; in good faith; Director made independent assessment • Statutory business judgment rule s180(2), (3) • Charterbridge Corp v Lloyds Bank • Business judgment: any decision to take or not take action in respect of a matter relevant to the business operations of the corporation s180(3) • S180(2)

9. DCSD: policy? • AWA case p181 • Diligence and reliance • Executive vs non-executive directors • Rogers CJ • Clarke & Sheller JJA

10. Duty to prevent insolvent trading

11. Insolvent trading • Does the applicant have standing? • Unsecured creditor • ASIC • Liquidator • Unsecured creditor – personal claim for debt – is there a HC/SUB relationship s588V? • If no HC/SUB relationship – can we find a director liable? s588G

12. Holding co liability for insolvent trading • X can seek compensation from holding co if can prove company (holding co) contravened s588V • Corporation is a holding co of subsidiary • s46 • Subsidiary is insolvent/becomes insolvent by incurring a debt • s95A definition insolvent not being able to pay debts as they fall due • Reasonable grounds to suspect the subsidiary is or would be insolvent

13. Director liability for insolvent trading • Directors of co may be liable for debts of co if they permit co to trade while insolvent s588G • Director will be liable for debts of co if: • Person is director (or shadow director) at the time the debt incurred AND • Co trades while insolvent AND • There were reasonable grounds for questioning co solvency or that it would become insolvent when the debt was incurred AND • Director was aware that there were grounds for suspecting or a reasonable person in the position of the director would have been aware of insolvency under test s95A • QLD Bacon v Rees • ASIC vPlymin • Defences s588H • Expect solvency • Reasonable reliance • Illness • Director took all reasonable steps to prevent co incurring debt • Consequences of breach

14. Insolvent trading: policy? • Deterring directors from taking business risks • Creditor protection • Balance between protecting creditors vs entrepreneurial activity by directors • P.61-62 Boros & Duns

15. Duty of good faith/proper purpose • Equity/statutory duty • S181(1) a director or other officer must exercise powers and discharge duties: • In good faith in the best interests of the corp; and • For a proper purpose • Company’s best interests = shareholders’ best interests • EXCEPT: when company is approaching insolvency  creditors best interests (Kinsela) • Does not include individual SH interests EXCEPT if it’s a special fact fiduciary relationship (Coleman v Myers) • No special obligation to consider employees (Parke v Daily News) • Corporate group s187?

16. Duty of good faith/proper purpose cont. • Proper purpose? • 2 step test: (Howard Smith) • What is the legal purpose of the company giving the director the power? (question of law) • What is the actual reason that the directors exercised the power? (question of fact) • List potential purposes • Courts have 2 different tests (do both): • Substantial purpose test (Howard Smith) • ‘But for’ test (Whitehouse)

17. Director must not fetter discretions • Director retains discretion if makes decision based on his own judgment and what’s in the best interests of the co • Breach: if director promises always to follow the directions of another person • Thorby

18. Duty to prevent conflict s182, 183 • Duty not to profit from the [position/use of information] s182/183 • Statute broader than fiduciary/equity as it applies to all employees • Advantage extends beyond gains made by the officer to gains made by 3P • Use of position s182 • Officer must not improperly use their position to • Gain advantage for themselves or someone else; or • Cause detriment to the corp • Use of information s183 • person who obtains info because they are or have been an officer must not improperly use information to • Gain advantage for themselves or someone else; or • Cause detriment to the corp

19. Related party transactions (public co only) s207/208 • Member approval is required for decisions to give financial benefits to related parties that could endanger SH interests • Is the entity a related party? Note: broad definition of related entity • Is there a financial benefit? S229 • Does it fall under an exempt transaction? S210-216 • If no exceptions apply, must seek member approval… • Disclosure • Consequences: civil penalties

20. Financial assistance s260A • ASIC v Adler – Santow J – focus on prejudicial impact on creditors/SH

21. Consequences of breach/relief from liability • Civil penalty s1317E • Criminal penalty • Relief/indemnification of directors • Relief by court s1317S, s1318 • Ratification at GM • Full and frank disclosure of all material facts to GM + approval 75%: Winthrop Investments v Winns • Indemnification s199A • Insurance s199B

22. Remedies • SDA • Injunction • Oppression • Winding up

23. Continuous disclosure • Chapter 6CA ss674 – 678 • ASX LR 3.1 (public/listed) • Non listed s675

24. Any questions – email me • emboo2@student.monash.edu.au