Chapter 7 – Consequences of breach of duty and members’ remedies Enforcement of the duties [15-001 – 15-220]
Consequences of breach of duty
Enforcement of duties:
- Statutory duties – ASIC enforcement, company compensation remedy - General law duties – company (normally board) and sometimes indiv member can bring legal action against directors – derivative action.
- Statutory remedies [Pt 2F.1]– by individual members
Company’s Civil Remedies:
ASIC enforcement powers
Extensive powers to enforce CA:
E.g. give the person or company (who contravenes a
*prescribed offence) a penalty notice requiring them to pay a penalty of $850 within a specified time [s 1313(1)].
* Prescribed offence = contravention that does not have its own specific penalty.
- Schedule 3 of CA contains the penalties for the contraventions that are specific (not prescribed) offences. It imposes penalty units – defined as $170/u in s 4AA of the Crimes Act 1914.
Civil Penalty Provisions [Pt 9.4B]
(more next page)> 2 types - Corporation/managed investment scheme civil penalties (include directors’ duties in s 180-183, s588G and breach of Ch 2E) & Financial services civil penalties. (pg. 315)
> Court makes a declaration of contravention
> Can only be applied by [s 1317J(4)]:
- ASIC [s 1317J(1)]: seek pecuniary penalty order, disqualification order or compensation order.
- Company [s 1317J(2)]: seek compensation order.
> Civil proceedings (rules of evidence and procedure) and require proof on the balance of probabilities that there has been a contravention [s 1317L].
Criminal Penalty (pg.317)
[ASIC enforcement]:
> Criminal proceedings
> include:
- Breach of good faith in best interests of co and for proper purpose [s 184(1)], use of position [s 184(2)] and use of information [s 184(3)] - reckless or intentionally dishonest - Insolvent trading [s 588G(3)]
> Contravention may result in:
- fine up to $340,000, or
- Imprisonment for up to 5 years, or both.
- Actual penalty decided by court.
Breach of General Law Duties
> Co can apply to court for (pg.319-321):
- Injunctions (to stop a future action e.g. stop director from doing something or to
undertake a particular action)
- Compensation/Damages (for loss suffered as a result of breach)
- Account of profits Used when:
- director made a profit due to breach of fiduciary duty (have to pay profit to co)
- company has not suffered any loss as a result of the breach.
Consider Regal (Hastings) Ltd v Gulliver {1967} 2 AC 134 (pg. 320): director took corporate opportunity and had to account to the co for the profit they made.
- Rescission of contract (undo the contract when unfairly made but not possible when it would adversely affect an innocent party) - Constructive trust (director to hold property on trust for the co, when improperly took the property from co)
> Only available when:
- no unduly delay by company in bringing legal action against director
- co must not be guilty of any misconduct in relation to dealing with the director - co (members) has not ratified (approved) director’s breach [disclosure]
Breach of Statutory Duties
- Companies may apply to court for compensation [s1317H] or account of profit.
- ASIC can bring legal proceedings on co’s behalf.
- [s1324] injunctions for “person affected”
Relief from liability for breach of duty
(below)
Civil Penalty Provisions (cont)
Penalties
Pecuniary penalty order
Corporation/
scheme civil penalty provision
Up to $200,000 s 1317G(1)
Conditions:
(b)(i) materially prejudices the interests of the company or its members, or
(b)(ii) materially prejudices the company’s ability to pay its creditors, or
(b)(iii) is serious.
Financial services civil penalty provision
Up to $200,000 (for individual), $1 million (for company) s1317G(1B) Conditions:
(c)(i) materially prejudices the interests of acquirers or disposers of the relevant financial products, or
(c)(ii) materially prejudices the issuer of the relevant financial products or, if the issuer is a corporation or scheme, the members of that corporation or scheme, or
(c)(iii) is serious
s1317G(1A)
Disqualification order (for contravention of
corporation/scheme civil penalty provisions)
Disqualify person from managing companies for a period that the court considers appropriate if the court is satisfied that the disqualification is justified.
s 206C(1)
Consider:
- person’s conduct in relation to the management, business or property of the company
- any other matters the court considers appropriate.
s 206C(2)
Compensation order
When:
(a)
- Breached corporation/scheme civil penalty provision, or - Breached financial services civil penalty provision, and
(b) damage has resulted from the contravention
s 1317H(1) s 1317HA(1)
Compensation may include any profits made by the person resulting from the contravention.
s1317H(2)/
1317HA(2)
Relief and ratification [15-300 – 15-320]
Relief from liability for breach of duty
Court granting relief for breach of duty (pg.323-324)
- Court can grant relief for breach of both statutory and general law duty.
- No power to grant relief for any criminal liability.
Section 1317S(2) (for breach of statutory duty) / Section 1318(1) (for general duty):
When a person has contravened a civil penalty provision but
> the person has acted honestly, and
> having regard to all the circumstances of the case, it is ‘fair’ for officer to be excused from liability
Then court may relieve the person from all or part of the liability.
Company granting relief for breach of duty (pg.306-307)
Ratification by the company:
- Majority members of company can ratify (approve) some breaches of general law duties by ordinary resolution.
- Members must have all necessary info to vote to ratify a breach.
- Notice of the meeting must set out clearly the breach, state that the member are asked to ratify the breach and waive the right of company to sue the officer for breach of duty.
- Ratification to be effective: vote must occur within a reasonable time following actions of the directors [Forge v ASIC (2005) 23 ACLC 1,010].
- Not possible for members to ratify breach of statutory duties (duties enforced by ASIC not company)
- Limits on power to ratify a breach of general law duty [Miller v Miller (1995) 16 ACSR 73] - not possible when:
> it is oppressive, or
> co is insolvent/near insolvency [Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 ACLC 215] - result in prejudice against creditors, or
> breaches the equitable limitation on majority voting power, or
> results in a personal right of a member being eliminated, or
> results in misappropriation of the company’s property (company property is being taken away by directors or majority members), or
> directors are acting for an improper purpose.
Officer being insured or indemnified against consequences of breach (page 325-326)
- Officer may have insurance policy and terms of policy covering the breach of duty (Compensation is paid by insurance company)- Provided insurance company does not cover a willful breach of duty (intentional).
- Not possible for company to pay compensation.
Member’s statutory remedies [16-001 – 16-240]
- where officers breached their duties, and sometimes where no breach of officer’s duty
Member’s Remedies
To protect minority members (can’t always exit company) from:
(1) Majority members:
- amend the company’s constitution in a way that disadvantages the minority.
- vote to approve sale of assets of the company to themselves at a price which is below market value of the assets.
(2) Directors:
- pay themselves excessive remuneration and refuse payment of dividends to members.
- divert business opportunities away from company to themselves so that company and members suffer financial harm
- issue shares to themselves with the objective of becoming majority members.
General Law Remedies:
- Seek to enforce a personal right of the member (e.g.
right to vote) when directors/majority members are attempting to take away this right.
- Take legal action because the majority members have breached the equitable limitation on majority voting power.
REFER TO CHAPTER 8 LECTURE 4.
Member’s Statutory Remedies:
- Oppression Remedy [Pt 2F.1; s 232]
- Winding up of company [s 461]
- Statutory injunction [s 1324]
- Prevent variation of class rights [Pt 2F.2] (Lect 3 - action that vary/cancel rights, need members approval) - Procedural irregularity [s1322] (Lect 4. Ch 8 – procedure not followed, court can invalidate) - Statutory right to inspect company books
- Member’s statutory derivative action [Pt 2F.1A] **
[member bring legal action against directors, behalf of co)
Statutory Injunction [s 1324] (pg.343):
Order from court:
- to stop a person from engaging in conduct that contravenes the Corporations Act.
- to order a person to engage in a particular conduct (e.g. to pay damages under s 1324(10)).
Section 1324(2): Injunction can be applied for by:
(a) ASIC, or
(b) a person whose interests have been or would be affected by the conduct which contravenes the CA e.g.:
- creditor [Allen v Atalay (1993) 12 ACLC 7: when company sell assets at below their market value]
- member [Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 15 ACLC 715]
Some courts disagree - Section 1324(1A): contravention of CA is automatically taken to affect the interests of a creditor or member if:
(a) insolvency of the company is an element of the contravention, and
(b) company contravene certain of the share capital requirements (buyback, share capital reduction) [Chapter 20].
-Only ASIC can apply for injunction under s1324 in relation to breach of statutory duties under s180-183; (which are civil penalty provisions, breach of statutory duty – only ASIC, members cannot apply for injunction)
