COMPANY LAW EXAM NOTES
TABLE OF CONTENTS
EXAM PLANNING STRUCTURE ... 2
INTRODUCTION TO COMPANY LAW ... 4
TYPES OF COMPANIES ...5
SEPARATE LEGAL IDENTITY (INCL. DIRECTORS’ DUTY TO PREVENT INSOLVENT TRADING) ... 10
CONSTITUTION AND REPLACEABLE RULES ... 29
REPLACEABLE RULES ... 29
CONSTITUTION ... 31
CORPORATE CONTRACTING ... 39
SHARE CAPITAL, DEBT CAPITAL AND DIVIDENDS ... 50
COMPANIES POWER TO ISSUE SHARES ... 50
CLASS RIGHTS ... 52
REDUCING SHARE CAPITAL – SHARE BUYBACKS/FINANCIAL ASSISTANCE FOR THE PURPOSE OF COMPANY SHARES/DIVIDENDS... 55
DEBT CAPITAL ... 64
DIRECTORS, MEMBERS AND CORPORATE DECISION MAKING ... 65
BOARD OF DIRECTORS ... 66
POWER OF SHAREHOLDERS ... 75
DIRECTORS’ DUTIES... 81
ARE THEY A DIRECTOR, OFFICER OR EMPLOYEE? ... 82
DUTY TO ACT IN GOOD FAITH AND COMPANY’S BEST INTEREST...2
DUTY TO EXERCISE POWERS FOR A PROPER PURPOSE ... 88
DUTY TO RETAIN/NOT FETTER DISCRETION ... 92
DUTY TO AVOID CONFLICTS OF INTEREST ... 94
DUTY OF CARE, SKILL AND DILIGENCE ... 104
GENERAL LAW REMEDIES FOR BREACH OF COMMON LAW DUTIES - COMPANY ... 113
STATUTORY CIVIL PENALITIES - ASIC ... 115
RELEIF FROM LIABILITY... 117
MEMBERS’ REMEDIES ... 120
STATUTORY DERIVATIVE ACTION... 121
OPPRESSIVE CONDUCT... 124
WINDING UP ORDERS ... 128
STATUTORY INJUNCTIONS ... 130
MEMBERS’ PERSONAL ACTIONS AND PERSONAL RIGHTS TO SUE ... 131
CORPORATE MORTALITY ... 132
DUTY TO ACT IN GOOD FAITH AND COMPANY’S BEST INTEREST
Duty to act in good faith and company’s best interest
→ Consider with proper purpose duty STEP 1
Introduction
STEP 2 Did the director act in
good faith?
STEP 3 Was it in the best
interest of the company?
STEP 4 Conclusion
Step 1 – Introduction
• TEST: By [Act], [D] may have breached their statutory duty under s 181(1)(a) (N/B: limb 1) to exercise their powers and discharge their duties
o (a) in good faith in the best interests of the corporation; and o (b) for a proper purpose
• → this is a fiduciary and statutory duty
Step 2 – Did the director act in good faith?
• TEST: Directors are required to do what they (subjectively) honestly believe is in the company’s best interests (Re Smith and Fawcett). The duty to act in good faith is mostly subjective and the court will generally believe the Director (Bell Group) → therefore high threshold.
• EXCEPTION: However, there may there may be an objective bottom line - o If the decision is one that no reasonable director acting upon proper
considerations could properly have reached, the court can strike it down (dictum of Bowen LJ in Hutton v West Cork Railway Co) (‘amiable lunatic test’)
Step 3 – Was it in the best interest of the company?
• TEST: The best interest of the company corresponds with the interests of its shareholders as a collective group
o ‘[T]he phrase, 'the company as a whole' does not...mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body’ (Adopted by Williams ACJ, Fullagar and Kitto JJ, Ngurli v McCann (quoting from Greenhalgh v Arderne))
• What if there are different groups of shareholders with divergent interests?
o TEST: The duty to act fairly between the shareholders (Mills v Mills)
Individual shareholders
• TEST: The general rule is that this equitable duty is owed by directors to the company (Percival v Wrights). In special
circumstances a fiduciary relationship may arise between a director and an individual shareholder, and the director may then owe fiduciary duties to the shareholder (Coleman; Brunninghasen).
Factors to consider:
• The family character of the company (Coleman).
• If there are very few Drs /SHs and if they have close relationships (Bruninghausen).
• Dependence on information/advice (Coleman).
• If the Drs have a high degree of inside knowledge (Coleman).
• If there is a relationship of confidence and trust (Coleman).
• The structure of the shareholdings and the company (Coleman)
• The position of the Drs in the company and also in the family (Coleman).
• The Significance of a certain transaction for the parties (Coleman)
• If the transaction is directly between a Dr and a SH, rather than the Co and the SGH (Bruninghausen)
ANALOGISE/DISTINGUISH:
Percival v Wright (early case – later criticised):
• Directors purchased shares at requested price. Did not tell shareholders they were engaged in negotiations for sale of the business at higher share value.
• HELD: No legal obligation to disclose - would not have been in best interests of company.
• Note: this decision has been criticised. Today, they would be able to obtain relief under s 1041H for misleading and deceptive conduct.
Coleman v Myers
• Family dominated company. Father was chair and son was MD.
• Son wanted to buy all shares. Made cash offer. Did not disclose some aspects of deal to shareholders and represented offer price as true value of shares when value of company assets made value of shares worth more. Dad and son recommended to the shareholders that they accept offer and approached individual shareholders to encourage acceptance.
• HELD: Owed duty to each shareholder because of: family character of company, position of directors in the company and the family, high degree of insider knowledge, how they persuaded shareholders to sell
Glavanics v Brunninghausen
• Company 1: Defendant was sole effective director and majority shareholder and plaintiff was a director and only other shareholder
• Company 2: plaintiff was a director. The companies operated in same field.
• Relations strained for years and plaintiff not involved in Company 1.
Companies go into competition with each other. Parties enter into negotiations for the sale of plaintiff's shares in Company 1.
Defendant approached by third party to buy Company 1.
• HELD (on Appeal) Handley JA - Fiduciary duty owed by directors to shareholders where there are negotiations for takeover or acquisition of company. Directors must loyally promote joint interests of all shareholders. Conflict could only arise if sought to prefer personal interests to joint interest.
Employees • TEST: Companies must comply with relevant labour laws but there is no corporate law requirement that directors consider the interests of company employees.
• N/B: Directors can consider employees (but not over shareholder interests) (see eg, Parke v Daily News; Hutton v West Cork Rly Co)
• Eg ‘The law does not say that there are to be no cakes and ale, but that there are to be no cakes and ale except such as are required for the benefit of the company' (Hutton v West Cork Rly Co)
ANALOGISE/DISTINGUISH:
Parke v Daily News (early case – later criticised):
• Companies’ main assets were sold, directors resolved to distribute surpluse sale proceeds to employees who were being made due to the sale. One of the shareholders sought an injunction preventing the payments on the basis that it was in breach of the directors’
fiduciary duties
• HELD: The proposed payments were not reasonably incidental to the carrying on of the company’s business. They were gratuitous and not in the interests of the company as a whole. The directors were in breach of their duty to act in the interests of the company/ it was a breach to distribute earnings to employees as this money could have done to shareholders.
Creditors • TEST: In discharging their duty to act in GF and for benefit of company as a whole, directors must have regard to interests of creditors where company insolvent or close to insolvency (Walker v Wimborne)
o Generally, no fiduciary duty by directors directly to creditors (Spies v R) BUT their interest cannot be ignored in discharging of duty to act in good faith and in interest of their company.
o Duty is NOT to creditors but to consider creditors’ interests.
Duty still owed to company but entity in this context extends to not prejudicing interests of creditors.
• Members cannot release directors from this duty (Kinsela) ANALOGISE/DISTINGUISH:
Kinsela v Russell Kinsela Pty Ltd (in liq)
• Company granted a lease of its business premises on commercially questionable terms to two of its directors – Mr and Mrs Kinsela while it was in a precarious financial position.
• This placed company assets beyond reach of creditors and directors could still use premises to conduct business. Shareholders approved execution of lease. Company wound up three months later and liquidator sought declaration that lease was voidable.
• HELD (on appeal) - In a solvent company, shareholder interests entitle them to be regarded as the company. They can authorise or ratify a particular action of the directors. But where interests at risk are creditors’, shareholders cannot authorise breach. Creditors entitled through liquidation to displace power of shareholders and directors, to deal with the company’s assets.
o The plainer it is that it is creditors’ money at risk, the lower may be the risk to which the directors may justifiably expose the company.
o Here the company was plainly insolvent at the date of the lease so no issue in determining whether the degree of financial instability imposed upon the directors an obligation to consider the position of the creditors.
o → Directors clearly breached their duty and the execution of the lease was voidable transaction
Westpac Banking Corp v Bell Group Ltd [No 3]
• Banks given security over assets which gave them priority over other creditors (including the ATO). Company goes into liquidation and banks call on securities. Liquidator tries to get back security for
benefit of all creditors. Needed to establish that banks knew transaction giving security was in breach of duties.
• HELD: Bell directors breached duty to not act other than in interests of companies by causing various companies to prejudice interests of creditors other than banks. So, interests in creditors of
companies in assets of the group could not be served by execution of deeds with banks.
Corporate groups
• TEST: As each company is a separate legal entity, directors of a company within a corporate group must act in the best interests of that company as a whole (Wimborne). There is an alternative test from Charterbridge which says that there is no breach if an intelligent and honest person in the position of the director could have reasonably believed that the transactions were to the benefit of the company. Equitcorp applied the Charterbirdge test but majority preferred (obiter) test of Mason in Walker v Wimborne.
• Exception: It is permissible for a directors’ to act in the best interest of group/parent if they believe that will benefit their own company (Wimborne).
Wholly-owned subsidiary
• TEST: Per s187, a director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary if:
o The constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company o The director acts in good faith in the best interests of the
holding company
o The subsidiary is not insolvent . . . and does not become insolvent as a result of the director’s act
ANALOGISE/DISTINGUISH:
Walker v Wimborne → strict approach
• Liquidator sued co directors for breach of duty arising from their practice of transferring funds between various companies to enable the companies to meet their debts as and when they fell due.
• HELD: Each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies. In this respect it should be emphasised that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors.
Charterbridge Corp Ltd v Lloyds Bank Ltd → liberal approach
• In a group situation and when it was clear that the directors had not considered the interests of the relevant company at all, the proper test is whether an intelligent and honest person in the position of the director of the company could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company
Equiticorp Finance Ltd (in liq) v Bank of NZ → intermediate approach
• The directors of two subsidiary group companies gave a charge to the Bank of New Zealand over the liquidity reserves held by each of
the companies. The directors considered that unless the bank was granted these charges, it might “pull the plug” on the whole corporate group.
• HELD: The use of the liquidity reserve was for the benefit of the two subsidiary companies. Loss of the bank’s support would have created a financial disaster for the whole corporate group. Both subsidiary companies therefore had a direct interest in maintaining the bank’s support. These derivative benefits to the two subsidiary companies providing the charge justified the directors’ action
• 'A preferable view may be that where the directors have failed to consider the interests of the relevant company they should be found to have committed a breach of duty. If, however, the transaction was, objectively viewed in the interests of the company, then no consequences would flow from the breach’.
Nominee / proxy directors
• TEST: Nominee can have regard to their appointor’s interests provided they honestly believe they are also acting in the best interests of the company (Re Broadcasting Station 2GB Ltd)
o In companies where the appointment of nominee directors is written into their constitution, the concept of ‘interests of the company’ may be construed by court as also embracing the interests of the appointor (Levin v Clark)
Corporate social
responsibility
• Actions cannot be justified merely by corporate social responsibility in Australia, unlike in the UK.
Step 4 – Conclusion
• TEST: On balance, the surrounding circumstances likely reveal that, in [act]:
o [D] was above all seeking to benefit [Company]. Therefore, the duty has not been breached. OR
o [D] was NOT above all seeking to benefit [Company]. Therefore, the duty has been breached
• → See Remedies below.
• → See Relief from Liability below.
• Consider criminal liability - breach of s 181(1)(a) has potential criminal consequences if acted recklessly or intentionally dishonest (s 184).
