Corporations Act (‘CA’) – link Criminal Code – link
1) Introduction
Civil Penalty Regime (Pt 9.4B)
STEP 1: Is this a ‘civil penalty provision’?
“Civil penalty provisions” are listed in the Table in s 1317E(3) – including:
- Directors’ or Officers’ duties (ss 180-183) - Company Secretaries’ responsibilities (s 188) - Related parties’ rules (s 209(2))
- Insolvent trading (s 588G(2)) * - Continuous disclosure (s 674)
- Corporate fundraising (ss 727-728) **
S 727(6) – offering securities without a current disclosure document
S 728(4) – misstatement in, or omission from, disclosure document - Director’s duties (ss 181, 182, 183) ***
S 180 – duty of care and diligence
S 181 – duty to act in good faith in the interest of the company and for a proper purpose
S 182 – improper use of position
S 183 – improper use of information - Related party transactions (s 209(2)) ****
S 209(2) – a person ‘involved’ in a public company’s breach of s 208 (i.e., related party transaction without member’s approval)
NOTE: accessorial liability for all civil penalty provisions (s 1317E(4))
- persons ‘involved in’ a breach of a civil penalty provision is taken to have breached that provision (s 1317E(4)(b)) see s 79 (for definition of persons ‘involved in’)
- s 1317E(4)(a) – person also liable if they ‘attempt’ to contravene a civil penalty provision
Note: some civil penalty provisions listed in s 1317E(3) (e.g., s 188) can be subject to an infringement notice (Part 9.4AB) do not need to go to court – the notice is issued, and the person who
contravened must pay the fine
STEP 2: What type of ‘civil penalty provision’ is this?
S 1317E(3) – three categories:
- (1) corporation/scheme - (2) uncategorised - (3) financial service
Insolvent trading (s 588G(2)) * = corporation/scheme
Corporate fundraising (ss 727-728) ** = uncategorised
- S 727(6) – offering securities without a current disclosure document
Compensation order not available (s 1317H-HE) – since not ‘corporation/scheme’
Pecuniary penalty order is available: s 1317G
Relinquishment order is available: s 1317GAB
Disqualification order is available (expressly provided in s 206C(1)(a)(i)]
- S 728(4) – misstatement in, or omission from, disclosure document
Director’s duties (ss 180, 181, 182, 183) *** = corporation/scheme - S 180 – duty of care and diligence
- S 181 – duty to act in good faith in the interest of the company and duty to act for proper purpose - S 182 – improper use of position
- S 183 – improper use of information
Related party transactions (s 209(2)) **** = corporation/scheme
- S 209(2) – a person ‘involved’ in a public company’s breach of s 208 (i.e., related party transaction without member’s approval)
STEP 3: Who has standing? For what orders?
ASIC (s 1317J(1)) – has standing to apply for:
- Declaration of contravention:
ASIC can then apply for:
o Pecuniary penalty order (s 1317G) o Relinquishment order (s 1317GAB) o Disqualification order (ss 206C, 206E) - Pecuniary penalty order
- Compensation order
Corporation (s 1317J(2)) – has standing to apply for:
- Compensation order
Individual (s 1317J(3)) – has standing to apply for [but only if ‘financial services’ civil penalty provision]:
- Compensation order
STEP 4: Has there been a contravention of the ‘civil penalty provision’?
[should have already been answered]
E.g., there was a breach of the fundraising rules – then go to civil penalty
NOTE: persons ‘involved in’ a breach of a civil penalty provision is taken to have breached that provision (s 1317E(4)(b)) see s 79 (for definition of persons ‘involved in’):
- s 79 – person ‘involved in’ the contravention if:
they aided, abetted, counselled, procured (s 79(a)) or induced (s 79(b)) the contravention
OR was knowingly concerned in or a party to the contravention (s 79(c))
OR conspired with others to contravene (s 79(d))
STEP 5: Consequences of contravention of ‘civil penalty provision’?
Consequence 1: Declaration of Contravention
ASIC may apply to the Court for declaration of contravention (s 1317J(1))
- The court must make the declaration if it is satisfied (on the balance of probabilities: s 1317L) that there has been a contravention of the relevant section (s 1317E(1))
Once a declaration of contravention has been made, ASIC can then apply for orders:
- Pecuniary penalty order (s 1317G):
order to pay financial penalty = debt payable to ASIC (s 1317GAA)
Available for:
o Corporation/scheme o Uncategorised o financial service
Awarded if – the contravention ‘materially prejudices’ the company’s interests, its members, or its ability to pay creditors, or is ‘serious’ (s 1317G(1)(b))
Maximum penalty:
o Individual = 5,000 penalty units ($1.05M) or 3x the benefit derived/detriment avoided because of the contravention whichever is greater (s 1317G(3))
o Body corporate = 50,000 penalty units ($10.5M) or 3x the benefit derived/detriment avoided because of the contravention or 10% of corporate’s annual turnover (capped at
$525M) whichever is greater (s 1317G(4)) - Relinquishment order (s 1317GAB):
order to pay the Cth an amount equal to the benefit derived and detriment avoided because of a contravention of a civil penalty provision (s 1317GAB(1))
can be made even if a pecuniary penalty order was made (s 1317GAB(3))
Failed to pay tax
Failed to pay employee entitlements
Failed to pay rent
And failing to pay other debts – e.g., creditors, suppliers etc.
and, the directors had failed to point to what action they had taken that was reasonably likely to lead to a better outcome for the company the directors engaged a business advisory firm that promoted itself as assisting with tax disputes, but the director provided no evidence of what advice the firm provided
Safe harbour also does not apply where (s 588GA(5)):
- Director forms not supplied to liquidator (s 588GA(5)(a))
(e.g., missed out on business activity statements, then can’t get the benefit of the safe harbour) - And the failure amounts to ‘less than substantial compliance’ (s 588GA(5)(b))
Note: if officers refuse to hand over company books or information to liquidator, then that information or books cannot be adduced as evidence to support the safe harbour (s 588GB)
DUTY OF GOOD FAITH / BEST INTEREST OF COMPANY / PROPER PURPOSE Statutory duty (s 181)
Step 1: Who owes the duty to act in good faith in the best interests of the company, and for a proper purpose under s 181(1)?
“Directors” and “Officers”
- If there is issue about whether this person is a ‘director’ or ‘officer’ first, discuss whether they are a ‘director’ or ‘officer’
- [ANSWER] – If __ [name] is a ‘director’ or ‘officer’, then __ [he/she] is subject to the duty to act in good faith, in the best interests of the company, and for a proper purpose (s 180(1))
Step 2: Explain the statutory duty to act in good faith in the best interests of the company, and for a proper purpose in s 181(1)?
S 181(1) requires directors and officers to exercise their powers and discharge their duties ‘in good faith in the best interests of the company’ (s 181(1)(a)), and for a ‘proper purpose’ (s 181(1)(b)).
This statutory duty mirrors the directors’ general law duty to act bona fide, in the best interest of the company and for a proper purpose (Maxwell; Macdonald (No 11))
Step 3: What power was the director exercising, or what or duty was the director discharging?
Here, ___ [director’s name] is exercising ___ [his/her] power to:
- E.g., issue new shares (‘share allotment power’) - E.g., enter into a new loan for the company - E.g., enter into a contract
- E.g., make management decisions
- E.g., to refuse to register share transfers (like Smith & Fawcett)
Here, ___ [director’s name] is discharging ___ [his/her] duty to:
- E.g., negotiate contracts
[Good Faith: s 181(1)(a)]
Step 4: Did the director act in ‘good faith’ (s 181(1)(a))?
As at general law, ‘good faith’ under s 181(1) is a ‘subjective’ good faith, which requires ____ [director’s name] to exercise their power honestly (Ure) and bona fide, in what ___ [he/she] subjectively believes to be in the best interests of the company (Smith & Fawcett, Lord Greene)
[‘Amiable lunatic’ test]
- However, Bowen LJ (Hutton) suggests that the requirement to act in good faith in the best interest of the company must contain a broader notion of reasonableness, so as to avoid having a ‘lunatic’
controlling the company in a manner that is ‘perfectly bona fide yet perfectly irrational’
- Hence, it is better to rely on the requirement to act in the company’s interests, or for a proper purpose to find ___ [director] liable for s 181(1), notwithstanding ___ [his/her] subjective good faith (Regentcrest v Cohen)
YES [Good faith]
- Here, it does appear that ___ [director] honestly believed that ___ [explain the conduct] was in the best interests of the company because ___ [explain].
- ___ [director] does not appear to actually know that this conduct was not in the best interests of the company, so __ [he/she] acted in good faith (Maxwell, [109]; Holyoake, [150]).
- [insert ‘amiable lunatic’ test]
- EXAMPLE:
Smith & Fawcett – Smith’s (director) refusal to register the transfer of the deceased director’s shares to his son was bona fide – because of his sworn affidavit that he and the other directors acted in good faith
Ure – the director’s refusal to register the transfer of shares to Ure (who had purchased them) was bona fide – even though the directors gave no reasons for their decision, the court inferred that their reason for the refusal was their concern that Ure wanted to appoint her husband (a disqualified solicitor) on the board (which would put the company in disrepute)
NO [no good faith]
- Here, __ [director] did not act in good faith because ___ [he/she] deliberately ____ [engaged in this conduct], knowing that it is not in the best interests of the company (Maxwell, [109]; Holyoake, [150]) because ____ [explain].
- [Conflict of Interest or Secret Profit]
The director has not acted in good faith, because ___ [he/she] has a conflict between their personal interests and the interests of the company, and/or made a secret profit by reason of their position – and thereby acted for their own collateral purpose (Maxwell, [106])
The fact that ___ [director] has a conflict of interest, and/or made a secret profit from their position also indicates that ___ [he/she] did not act in the best interests of the company or for a proper purpose – because they acted for their own collateral purposes (an improper purpose) rather than the company’s interests (Adler).
While Maxwell suggests that the general law conflict and profit rules only apply to the ‘good faith’ element, Adler suggests these rules apply also to the ‘best interests of the company’ and
‘proper purpose’ elements of the s 181 duty.
- EXAMPLE:
Byrnes – directors were dishonest because they lied to the board, and thus found to have acted
‘improperly’ in misusing their position to gain a benefit for themselves that is not acting in good faith
E.g., director is hiding information, misleading the board, not disclosing their interest
[Best interests of Company: s 181(1)(a)]
Step 5: Did the director act in the ‘best interests of the company’ (s 181(1)(a))?
The ‘best interests of the company’ refers to the interests of the company ‘as a whole’, and that was interpreted as meaning the ‘shareholders as a whole’ (Ngurli v McCann).
Based on an individual hypothetical shareholder, ____’s [director] conduct ____ [would/would not] be in that hypothetical shareholder’s interests (Ngurli citing Greenhalgh) because ____ [explain].
- EXAMPLE:
Ngurli v McCann – Horace inherited Clifford’s (old director) 1 share (which was a controlling share that became an ordinary share once it was no longer held by Clifford) since Horace was
[Proper Purpose: s 181(1)(b)]
Step 6: Did the director exercise this power (or discharge this duty) for a ‘proper purpose’ (s 181(1)(b))?
Even if the director acted with subjective good faith, they are still in breach if they acted for an improper purpose (Westpac v Bell Group)
[Single Purpose]
Whether ___ [director] exercised the power to ___ [explain] for a ‘proper purpose’ requires a two-step inquiry into (Howard Smith):
- (1) the objective purpose for which the power was granted
- (2) the ‘substantial purpose’ for which the power was exercised – to determine whether it was exercised for a proper purpose
[Mixed Purpose]
Whether ___ [director] exercised the power to ___ [explain] for a ‘proper purpose’ requires a two-step inquiry into (Howard Smith):
- (1) the objective purpose for which the power was granted
- (2) the ‘substantial purpose’ for which the power was exercised – to determine whether it was exercised for a proper purpose
[But for test]
- However, it appears that ___ [director] exercised the power for two different purposes ____ [explain the two purposes – and that one is proper, the other is not proper].
- For mixed purposes, Whitehouse v Carlton has applied the ‘but for’ test (from Mills v Mills)
- Here, the improper purpose of ___ [explain] was a ‘significant contributing’ cause for this exercise of power (satisfying the Howard Smith test), and ‘but for’ this improper purpose, the power would not have been exercised (satisfying the Whitehouse v Carlton test), because _____ [explain].
- Hence, there is a breach of s 181(1) because the director acted for an improper purpose.
EXAMPLES [Proper Purpose]
Share allotment power – proper purposes include:
- Raising capital
- Rewarding employees
- Pursuing commercial opportunities
- to ensure a sufficient minimum number of shareholders to comply with statutory requirements - freedom to a director to plan for increasing participation with its ‘partner’ (Harlowe’s case)
EXAMPLES [Improper Purpose]
Share allotment power – improper purposes include:
- Manipulating voting power (Howard Smith; Whitehouse v Carlton) - Entrenching position (Ngurli; Whitehouse v Carlton)
- Defeating hostile takeover
- Facilitating a takeover by reducing an existing majority or creating a new majority (Howard Smith)
Howard Smith – directors issued shares in Miller to Ampol to reduce Howard Smith’s majority interest – due to the belief that Ampol would pay more for the takeover (i.e., directors acted in the company’s best interest – but not for a proper purpose) factors indicating that the directors issued the shares for an improper purpose:
o (1) This transaction breached the ASX listing rules
o (2) no information was given to the board of directors regarding the financials of company o (3) capital needs were not urgent – based on an overall examination of the company o (4) the company normally raised finance through debt – not equity
o (5) if capital raising was the true motive, then it should have been offered to all shareholders pro rata why was it just allotted to Howard Smith
- Entrenching control in one group of shareholders at the expense of another (Whitehouse v Carlton)
(6) Changing the fundamental nature of the business
- One of the grounds for ‘Just and equitable winding up’ remedy is the ‘failure of substratum’ – i.e., the fundamental nature of the business has completely changed so it is just and equitable to wind up the company
(7) Related party transactions (Ch 2E)
- Directors sell the company’s assets to related parties (themselves, their spouse, their own companies) to extract financial benefits from the company, strip the company of its assets, thus reducing the share value (to oppress Minority shareholders – company does not have enough money to pay dividends + shares now worthless)
- This is a breach of director’s duty – in breach of Ch 2E, but shareholders cannot enforce this
[1] Minority Oppression (s 232)
This oppression or unfairness remedy is NOT limited to a Minority shareholder – a Majority shareholder can be oppressed a minority (Watson v James)
No requirement that the applicant shareholder has ‘clean hands’
- But if the applicant participated or acquiesced in the oppressive conduct, that is relevant to the court’s decision to make an order (Morgan v 45 Flers Avenue)
Step 1: Identify the conduct and that the client is a shareholder
____ [client] is a shareholder.
This conduct of ___ [e.g., refusing to pay dividends] may be oppressive.
Hence, ___ [client] may seek to bring a minority oppression claim under s 232 for a court-ordered remedy under s 233.
[Standing: s 234]
Step 2: Does the client have standing to bring a s 232 minority oppression action (s 234)?
___ [client] has standing to bring a minority oppression action because ___ [he/she] is (s 234):
- (a) – a ‘member’ of the company (s 234(a)) – because __ [he/she] is registered as a member (s 231)
Member can make application for conduct that:
o affects them as members or in another capacity (s 234(a)(i)) OR o affects other members in their capacity as members (s 234(a)(ii)) - (b)-(d) – a former member of the company (in limited circumstances):
(b) – a person removed from the register of members because of a selective reduction (s 234(b))
o ‘selective reduction’ is defined in s 256B(2) as a reduction in share capital that is not an
‘equal reduction’
o [Answer] ___ [client] was removed from the register of members because of a reduction in share capital that is a ‘selective reduction’ (s 234(b)) because it is not an ‘equal reduction’
(s 256B(2)) – since it does not:
• Relate only to ordinary shares (s 256B(2)(a))
• OR
• Apply to each holder of ordinary shares in proportion to the number of ordinary shares they hold (s 256B(2)(b))
• OR
• The terms of the reduction are the same for each holder of ordinary shares (s 256B(2)(c))
(c) – a person who ceased to be a member of the company if the application relates to the circumstances in which they ceased to be a member (s 234(c))
(d) – a person to whom a share in the company has been transmitted by will or by operation of law (s 234(d))
- (e) – a person considered appropriate by ASIC, having regard to investigations that ASIC is conducting into the company (s 234(e))
