BLAW20001

CORPORATE LAW 2020

LECTURE 1
Julian Panetta – [email protected]
GM02, Mezzanine Level, Melbourne Law School
 Welcome
 Housekeeping
 Subject Administration
 Introduction to Companies
 Separate Legal Entity
 Limited Liability

TODAY’S LECTURE
 This subject is for everyone!
 We are all starting from the very beginning
 Everyone has the ability to do very well in this
subject
 Corporate Law is VERY different to PBL
 If you are interested in the JD….this subject will
give you a taste of what it is like to be a JD
student and how law subjects are taught at MLS

WELCOME
 Reading Guide and Course Outline
 Canvas – LOADS of material on there for you
 Textbook – Commercial Applications of
Company Law 2020 (“CACL”)
 Prior editions??
 Resources – heaps of resources to help you
with your legal writing on Canvas

MATERIALS
 1 x 2 hour lecture per week – recorded using
Lecture Capture
 Most lectures will run between 1 – 1.5hours.
Some will take the full 2 hours.
 Purpose of lectures – content focused
 For those students affected by the travel ban
– the lectures will be recorded via lecture
capture and posted on Canvas.

LECTURES
 1 x 1 hour tutorial per week – commencing in Week 2
 Please attend the tutorial you are registered into
 Drop-in tutorials – TBA
 Purpose of tutorials – skills based. This is where you
will develop your legal writing skills using IRAC and
answer legal hypothetical questions
 For those students affected by the travel ban, a
tutorial will be filmed and made available on Canvas
each week for 48 hours. Please keep an eye on the
announcements

TUTORIALS
 Held every day of the week – the timetable is on
Canvas
 Attend any without prior appointment
 If you have any questions about course content,
legal writing or subject administration – go to a
consultation
 Please do not email the teaching staff – attend a
consult if you have queries.
 For those students affected by the travel ban,
you may use Zoom to join into one of the
scheduled consultations. Please see the
information on Canvas

CONSULTATIONS
 Coordinating Tutor – Kayla Milone
 Tutors
 Kit Lee
 Glendon Coote
 Janette Nankivell
 Rebecca Catterwell
 Contact details – on Canvas

TEACHING STAFF
 3 x MCQ Online Quiz – 5% each – Total 15%
 Similar to PBL. 10 questions. 30 minutes to complete.
No option to ‘stop-the’clock”
 Written Assignment – 1000-words – 15%
 Practice responding to a legal hypothetical problem
 Tutorial Attendance – 10%
 Easiest 10% of your life! Full marks just for attending.
 Take-home Exam– 60%
 Problem based hypothetical questions
 For those students affected by the travel ban, all
aspects of the assessment can be completed online.

ASSESSMENT COMPONENTS
 Lots of information on Canvas about how to
make good notes
 Work on them as you go
 Make your notes useable – not confusing and
not too bulky
 Feel free to discuss note taking with the
teaching staff

MAKING NOTES
 3 online quizzes – instead of 2
 Tutorial attendance mark
 Maintaining daily drop in consultations
 Reduced weight on the final exam
 Reordering of topics
 More guidance on IRAC

NEW IN 2020
 Class discussion – 5 minutes
 What is a company? Tell me what you already
know!
 More than 2.7 million companies in Australia
and growing by the day

WHAT IS A COMPANY?
 Two primary sources of law in Australia
 Statute / Legislation / Acts – law made
by parliament
 Case Law / Precedent / Common Law –
law made by the courts

WHAT IS LAW?
 General term used to describe the legal rules governing:
 formation and termination of companies
 characteristics of companies
 relationships between participants in companies –
directors, officers, shareholders, creditors
 companies’ dealings with outsiders
 Aims/purposes include:
 investor protection
 commercial stability and consumer confidence
 certainty - standard form rules

WHAT IS COMPANY LAW?

 Other sources
◦ Corporations Regulations, ASIC Act, ASIC exemptions,
accounting standards, ASX Listing Rules (for listed
companies)
 Usecases and legislation to support your answer –
practise this skill each week in your tutorial.

OTHER SOURCES OF COMPANY

LAW
A company:

 Is a person!
 Can sue and be sued
 Can enter into contracts
 Can raise funds

 Perpetual succession

 Doctrine of separate legal entity

 How does a company do all of these things?

 Through its people!
CHARACTERISTICS
 Directors OF
and members (shareholders)
COMPANIES
 Private law that decides disputes between
 Shareholders vs the company
 The company vs shareholders
 Public law that allows ASIC to punish wrongdoers
and seek compensation for the company
 Remember that judges decide cases based on
previous case decisions (precedents) and sections
of legislation.
 In this course, all the cases and the legislation
apply as the law – use both in your answers

PRIVATE LAW AND PUBLIC LAW

 The company is a separate legal person - an
‘artificial legal person’
 Humans are ‘natural legal persons’
 Companies can legally do most things that humans
can do, and some extras e.g. issue shares
 Company can incur obligations and hold rights, and
sue and be sued, in its own name
 Company can contract with its controllers and
others
 Company has ‘perpetual succession’
 Company is a separate taxpayer

SEPARATE LEGAL ENTITY

 So Mr Salomon was:-
 Director
 Shareholder
 Employee
 Secured creditor under the debenture securing
the debt
 Issue - was Mr Salomon entitled to priority under the
debenture over other, unsecured creditors of the
company?
 Depends on whether the company and its controller
are separate legal entities
 Court said yes

SALOMON V SALOMON
 Lee v Lee’s Air Farming Ltd: issue - could
Mr Lee be both the controller of a company
and its employee?

 Macaura v Northern Assurance: issue - was

Mr Macaura the “owner” of property that
belonged to a company controlled by him?

OTHER CASES
S124 CA
(1) A company has the legal capacity and powers of an individual
both in and outside this jurisdiction. A company also has all the
powers of a body corporate, including the power to:
(a) Issue and cancel shares in a company
…
 Claims against a company to which ‘rights’ attach
 Lots of different ‘rights’ – depends on the particular shares
 Shares are valuable assets that can be sold by the
shareholder
 But remember, shareholders don’t own the company’s
assets!
 Companies can be shareholders in other companies – this
entitles them to shareholder rights and remedies.
EQUITY CAPITAL – WHAT ARE
SHARES?
 Shares can be created with different rights
attaching e.g. different
◦ Dividends ‘rights’
◦ Voting rights
◦ Rights and priorities in repayment of capital or
surplus on winding up
 Called ‘class rights’
 Company decides these rights: s 254B
 Directors have power to issue shares (s198A) but
the issue of shares may require shareholder
approval in some circumstances

EQUITY CAPITAL – CLASSES OF

SHARES
 Mostcompanies elect to issue shares of two
classes:-
 Ordinary Shares; and
 Preference Shares
 Typicallyspeaking, ordinary shares will have
the following rights:-
 Right to share equally in dividends
 Right to vote at the general meeting of
the company

EQUITY CAPITAL – ORDINARY

SHARES
 Different to ‘ordinary’ shares
 Preference shares usually carry rights to:
 A fixed dividend
 priority for repayment of capital
 But limited voting rights
 no right to share in surplus on winding up
 Shareholders approve these rights: s 254A(2) CA
 There may also be other shareholder approvals
required e.g. variation of class rights, done in later
lecture

EQUITY CAPITAL – PREFERENCE

SHARES
 Debt is money that the company owes to
outsiders
 Can be secured or unsecured
 Debt MUST be repaid even if the company is
profitable or not
 Debt often attracts interest!

DEBT FINANCE
 Depends on the company’s needs and objectives
 Equity Finance?
 Looks good!
 Not required to pay a dividend
 Appears Safer
 Debt finance
 More attractive?
 Has to be repaid
 Nothing worse than having the bank on your bank

DEBT V EQUITY
• The company’s debts have to be paid by the
company, not its shareholders
• In a company limited by shares, a member’s liability
to pay the debts of the company is limited to the
amount (if any) unpaid on their shares: s 516
• If shares are fully paid for, no further contribution
required
• Company may issue shares that are partly paid
• Shareholder is obliged to contribute further if a
“call” is made on partly paid shares.
• If call is not paid, shares may be forfeited
• CA s 254M

LIMITED LIABILITY
• Ensure you are familiar with Canvas
• Read the Subject Guide
• Consolidate your understanding of:-
• Key corporate law principles
• Salomon's’ Case
• Limited Liability
• Types of shares
• Debt v Equity Financing

TO SUMMARISE
• Lecture 2
• Constituting Companies !!

NEXT WEEK…
BLAW20001
CORPORATE LAW 2020

LECTURE 2
Julian Panetta – [email protected]
GM02, Mezzanine Level, Melbourne Law School
 Tutorials have started – please remember to go to
the tutorial you are registered into

 Tutorial and Consultation Timetables – available on

Canvas

 Drop in tutorials
 Tuesday 7:15pm with Kit Lee in G29
 Friday 2:15pm with Janette Nankivell in Rm 109

WELCOME BACK
Please complete this on your phone or laptop. We will then run
through the answers together

REVISION QUIZ
 You need to distinguish between:
 unincorporated entities; and
 incorporated entities
 Unincorporated entities have no legal personality separate
from their participants e.g. sole traders, clubs, partnerships
 Incorporated entities (‘corporations’, ‘companies’) are
separate legal persons
 Associations can be incorporated under state laws
 Our subject concentrates on companies incorporated
under Corporations Act 2001 (Cth)

CHOICE OF FORM OF BUSINESS

 In deciding whether to incorporate a company or not,
consider:
 Will you make a profit or is it a non-profit?
 Do you want limited or unlimited liability for
shareholders?
 How big do you want your business to be?
 Do you want to raise equity capital?
 Are you willing to comply with formalities and pay
expenses
 Are you willing to submit your business to audit and
reporting requirements?
 Do you want a particular tax treatment?

RELEVANT CONSIDERATIONS
 Advantages:
 can have more than 20 members (outsize partnerships prohibited by s115)
 may have limited liability
 may be easier to raise capital
 different tax treatment – dividend imputation
 company law as standard form contract
 flexibility
 Disadvantages:
 Usually greater expense in formation and compliance
 May have to reveal information to the public
 The decision must always depend on the individual circumstances of
the business

CHOOSING A COMPANY
 Corporations formed under the Corporations Act are
“companies”
 Companies are classified:
 as public or proprietary – Ltd or Pty Ltd
 by reference to the basis and extent of the members’
liability
 Company limited by shares
 Company limited by guarantee (public only)
 Unlimited company
 No liability company (public only)
 Some provisions of the Corporations Act apply only to
certain types of companies

TYPES OF COMPANIES
 Proprietary companies
 s 113:
 no more than 50 non-employee members
 no fundraising activity requiring a disclosure
document under Chapter 6D
 Must have one or more directors – s 201A
 may be a company limited by shares or an unlimited
company with share capital – s 112
 Some different rules for proprietary companies under the
Act or the company’s internal governance rules e.g.
removal of directors
 More flexibility, more privacy

PROPRIETARY COMPANYS (PTY LTD)

 Public companies:
 everything other than proprietary companies: s 112
 Must have three or more directors: s 201A(2)
 Sometimes have different rules e.g. dividends – s 254W;
disclosure
 Allowed to have an unlimited number of shareholders
 Can raise funds from ‘the public’
 but in return, public companies are subject to stricter rules
 More procedures e.g. compulsory annual general meetings
 More publicity e.g. published financial statements
 Aim is greater shareholder protection through transparency
and accountability

PUBLIC COMPANIES
 Companies can be
shareholders in other
companies

 Often different aspects of the

business are owned or carried
out by different companies in a
group

 Holding companies &

subsidiaries (s46) and related
bodies corporate (s50)

CORPORATE GROUPS
S46 CA – What is a subsidiary?
A body corporate (in this section called the first body) is a subsidiary of another
body corporate if, and only if:
(a) the other body:
(i) controls the composition of the first body’s board; or
(ii) is in a position to cast, or control the casting of, more than one‑half of the
maximum number of votes that might be cast at a general meeting of the first
body;
or
(iii) holds more than one‑half of the issued share capital of the first body
(excluding any part of that issued share capital that carries no right to
participate beyond a specified amount in a distribution of either profits or capital);

CORPORATE GROUPS – S46

50AA Control
(1) For the purposes of this Act, an entity controls a second
entity if the first entity has the capacity to determine the
outcome of decisions about the second entity’s financial and
operating policies.

 s50AA is very broad

 All subsidiaries are entitles controlled by their holding or

parent company

CONTROL – S50AA CA
 Companies created through registration by ASIC
 Procedure in s 117;
 ASIC Form 201
 Names – s 148
 Public companies – LTD
 Proprietary companies – PTY LTD
 No liability – NL
 Why are the naming ‘tags’ necessary? They act as a
flag if you do business with the company.

REGISTERING COMPANIES
 Time for a break
 Rest
 Relax
 Discuss all things corporate law related
 Come and chat with me if you have a question

BREAK TIME (10 MINUTES)

 Every company can decide how to manage their internal
workings, with some limits: These rules are called their
internal governance rules

 Found in:
 the ‘replaceable rules’ [RR], or
 the company’s own constitution, or
 a combination of the two.

 Corporations Act s 134

THE INTERNAL WORKINGS OF A COMPANY

 Default set of rules which apply unless you state otherwise

 RRs apply unless they are displaced or modified by a constitution – s

135(2)

 Scattered throughout the Act.

 A company can adopt the replaceable rules, ignore them by putting in

place its own constitution or use a combination of both

 Really handy table at s141 of the CA

REPLACEABLE RULES
 - A handy table of all the
replaceable rules can be
found in s141 of the Act

- The Replaceable Rules

are scattered
throughout the Act

TABLE OF REPLACEABLE RULES

 The Company Constitution – a set of rules which tells you
how things are to be done within your company!
 Can work solo or in addition to the replaceable rules (they
can work together)
 Can be adopted when the company is registered, or later: s
136(1)
 Adopting, amending or repealing a constitution after
registration requires a special resolution of members:
s136(2)
 Special resolution – s9: 75% vote of those present who are
entitled to vote

THE CONSTITUTION
 To summarise, a company’s
internal management may be
governed by:-
 the Replaceable Rules;
 The Company Constitution; or
 A combination of both

COMPANY RULES – AN ILLUSTRATION

 You can change the constitution of your company.

 In order to do so, you need a “Special Resolution” – see s9

s136 Constitution
…
(2) The company may modify or repeal its constitution, or a
provision of its constitution, by special resolution.

CHANGING THE CONSTITUTION

 The company’s constitution and the replaceable rules work
together – they talk to one another.

 See below:-

S135 Replaceable Rules

…
(2) A provision of a section or subsection that applies to a
company as a replaceable rule can be displaced or modified
by the company's constitution.

THE CONSTITUTION AND REPLACEABLE

RULES
 A constitution can contain extra requirements for changing its rules – s136(3). This is called
“entrenchment”.

 An entrenching clause can only be changed if it is itself complied with e.g. a larger % required, or
approval of a particular person.

Example
Hagrid may want the following constitutional clause never to be changed:-
“Whoever holds the position of Managing Director shall always be the chairperson of the
meeting.”

 s136(2) allows a change of the constitution by special resolution

 However, drawing upon s136(3) and (4), the constitution could state that the clause can only be
changed if Hagrid votes for the change or there is a unanimous decision

ENTRENCHMENT
Section 140 – Effect of constitution and replaceable rules
A company’s constitution (if any) and the RRs that apply to it have effect as a contract
between:
 the company and each member
 the company and each director and secretary
 a member and each other member

 The constitution and the replaceable rules create contracts between ONLY those parties
named in s140

 To enforce the contract, the clause must affect you in the capacity contemplated by s140

 Eley v Positive Govt Security Life

 Contract NOT enforceable. The clause did not affect Mr Eley in his capacity as a member. It
affected his employment rights which would be dealt with under a different body of law.

LEGAL EFFECT OF THE INTERNAL GOVERNANCE

RULES
Discussion (5 minutes)
Fred is a member of Jokes Pty Ltd and wants to be the company’s CEO for
life.

Would you put this in the company constitution? Discuss.

ACTIVITY
 Breach of contract – so use contract law rules for
interpretation and remedies

 Oppression – s 232 to s 234 – looked at in Lecture 11

 Procedural irregularity – Lecture 4

 NOT a breach of the Act – s 135(3)

FAILURE TO COMPLY WITH THE INTERNAL

GOVERNANCE RULES
 Special type of company in which the only member is also
the only director

 Only allowed for proprietary companies (as public

companies must have at least 3 directors)

 RRs do not apply – s 135(1)

 Some special rules apply – s 198E, 201F and 202C

SINGLE DIRECTOR / SHAREHOLDER

COMPANIES
 Review the advantages and disadvantages of the corporate form

 Note some of the key differences between public and proprietary companies

 Ensure you are familiar with some of the rules relating to corporate groups, including the
definition of “control” under s50AA

 Explain how and why rules may be ‘entrenched’ using the constitution

 Ensure you understand the internal governance of a company, including:-

 the Replaceable Rules;

 the Constitution; or
 a combination of both

 Read s140 carefully and make sure you understand how it works, who it applies to, when it
can be enforced and what remedies are available for a breach

TO SUMMARISE
 Lecture 3
 Decision making in companies
 Variation of class rights

2 down….10 to go 

NEXT WEEK
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Revision Questions - Week 2

Presented by: Julian Panetta
Current run (last updated Mar 16, 2020 7:53pm)

9 236 205 86%

Polls Participants Average responses Average engagement

Which section of the Corporations Act deals with the legal

capacity and powers of a company to issue share?
Response options Correct Count Percentage
92%
section 124 ⠔ 151 69%
Engagement
section 126 ⠕ 47 22%

section 128 ⠕ 20 9%

218
Responses

A company is a person. Is this...

Response options Correct Count Percentage
92%
True ⠔ 196 90%
Engagement
False ⠕ 21 10%

217
Responses
Which of these statements about companies is NOT correct
Response options Correct Count Percentage
92%
A company is an artificial person ⠕ 7 3%
Engagement
A company can issue shares, own land and
⠕ 4 2%
enter into contracts

217
Perpetual succession is a corporate feature
enjoyed only by proprietary limited ⠔ 206 95%
companies Responses

Is the following statement True or False. "Preference

shareholder never enjoy voting rights"
Response options Correct Count Percentage
92%
True ⠕ 62 29%
Engagement
False ⠔ 155 71%

217
Responses

Is the following statement true or false. Companies can

raise funds by issuing shares or borrowing funds.
Response options Correct Count Percentage
91%
True ⠔ 215 100%
Engagement
False ⠕ 0 0%

215
Responses
Is this statement true or false. "The primary issue before
the court in Lee v Lee's Air Farming was whether the
corporate veil could be pierced to allow Ms Lee to make an
insurance claim"
Response options Correct Count Percentage
91%
True ⠕ 100 47%
Engagement
False ⠔ 114 53%

214
Responses
What is the key principle which was established in Salomon
v Salomon & Co
Responses
81%
Separate legal entities doctrine of separate legal entity
Engagement
seperate legal entity djdjej Separate legal entity

The corporation is a separate identity/person from owners

Separate Legal Entity Corporations are seperate from their owners.

201
Responses
Seperate entity Companies are desperate legal entities

A company is a seperate person from its owners. Separate legal entity

arousing Company is a separate legal entity from its owners

Company and the owner are separate entity

the company is a separate legal entity from its controllers

seperate legal entity Doctrine of separate legal entity

Doctorine of separate legal entity

Whether or not Mr. Saloman and his company were separate legal entities.

A company and its members are separate legal entity

companies are seperate legal entities idfk

The debenture given to Salomon due to sale of Salomon's business is

effective. As Salomon & Co is a separate legal entity, the company has to
prioritise debenture before repaying its creditors.

Companies are delegate legal entities Company is a separate entity

A company is a separate legal entity from its owners or shareholders

Separate legal entity seperate legal entities

Company is a separate legal entity which separate from directors,

shareholders and employees

seperate legal entities

The company is a separate legal person and is treated separately from its
controller

the doctrine of separate legal entity Principle of separate legal entity

The company is a separate legal entity

Company is a separate entity from the owner

Whether the company and controller are separate legal entity?

That even if he was the owner and the company goes bankrupt, Salomon still
gets his part of the shares when the company undergoes liquidation

the company and its controlling shareholders are separate legal entity
Responses

Company and controller must be a seperate entity

The separation of companies from their 'owner' seperate legal entity

A company is a seperate legal entity Separate entity

Principle of seperate legal entity Limited liability

Doctrine of Separate Legal Entity

Mr Salomon the man and Salomon the company are different

Whilst Salomon controlled the company, it was not his agent or trustee.
Company treated as operating business in its own rights and being separate
from controller. Thus he was entitled to be paid for his debt, even though
other creditors of the company would not have been paid because the
company had insufficient assets to pay all its creditors.

That a company is a separate legal entity from its members.

Company is a separate legal entity Company is a separate legal entity

separate legal entity doctrine Seperate legal entity

Shoemaker Solomon and his company are independent entities

Companies must pay persons with priority payments first before others if
liquidating.

Separate legal entity

Whether the company and controller are speerate legal entity?

Companies are a legal separate entity from its controlling person or people

A company is a seperate legal entity from its owner/s

The company was a separate legal entity to Mr Salomon

Company is a seperate entity Doctrine of separate legal entity :)

Doctrine of Separate legal entity doctrine of separate legal yeet

The doctrine of separate legal entity separate legal entity

company is an artificial person different from its owner

Entity can borrow from owner as they're different entity

The idea that a company is a seperate legal entity Separate Legal Entities

The doctrine of seperate legal entity

That company is it's own artificial person Seperate legal entity

the company is a separate legal entity to the person controlling the company.

The Salomon principle provides that a company is essentially regarded as a

legal person separate from its directors, shareholders, employees and agents.

Mr Salomon and his company are seperate legal entities.

separate legal entity

Responses

Company controller and the company are separate legal entity

That a company is a person..

The owner and corporation are separate legal entities and therefore, Salomon
was able to become a creditor and thus be paid by the firm during liquidation.

a company is a separate legal entity and different from the person running it

Legal Separation company and owners

Company is a separate legal person A company is a separate legal entity.

Companies exist as a legal entity separate from its members

separate legal entity Doctrine of separate legal entity

separate legal entity hell yeah

the owner and the company is separate entity

A company is a separate legal entity from its participants

Separate Legal Entity doctrine of separate legal entity

Company is a separate legal entity Seperate legal entity

possible to form a company with only one participant

Separate Legal Entity separate legal entity

Company is a seperate legal person Separate legal entity

whether the company and its controller is a separate legal entities

Is the company and controller separate entities

Company and shareholders are separate legal entities

Separate legal entity

Companies are a Seperate Legal Entity to its owners/shareholders/controllers

Separate Legal Entity Doctrine Seperate entity

Separate legal entity doctrine. Company can forms contract with owner

A company is a seperate entity from its owner

the benefits of incorporation were capable of extending to small, private

companies, even though such companies arguably were not the type of
business which the companies legislation was intended to facilitate.

The doctrine of separate legal entity Separate legal entities

The business and owners are seperate entities

Companies are separate legal persons from their owners.

Sole trader with 2 seperate companies Doctrine of separate legal entity

Seperate Legal Entity Companies have minutes liability

Separate legal entity RIP snape Separate legal entity

Responses

Separate legal entity Separate legal entity, limited liability

Doctrine of separate legal entity seperate legal entity.

Doctrine of Separate Legal Entity Doctrine of Separate entity

That a company is a separate legal entity from its owner(s) and can therefore
enter into relationships and contracts with them

That a Salomon was a different legal entity to Salomon and Co

Separate legal entity separate legal entity legal entity

Separate legal entity

The company and the owner are seperate legal entities

A company is a seperate legal entity to its owners

Mr Salomon entitled to priority under the debenture over other, unsecured

creditors of the company

separate legal entity Separate legal entity Seperate legal entity

The doctrine of a separate legal entity Doctrine of separate legal entity

The separate legal entity of a company and its members

Separate Legal Entity Separate Legal entity

Company and owner is seperate legal entities

The company is a separate legal entity from its controller, and can enter into
contracts by itself.

The company is a separate legal entity from its owner jjjj

separate legal entity a company is a separate legal entity

doctrine of seperate legal entity - a company is a seperate legal entity from all
assumed controllers

doctrine of separate legal entity Company as a separate entity

Separate legal entity nnn

that salomon the person and his company are two different entities

Separate legal entity

Companies are seperate legal entities from their owners/share holders

A person and a company are 2 diff entities separate legal entity

limited liability Separate legal entity

Companies are a separate legal entity from those that run/own shares in the
company.

Sepearate Legal Entity

Depends on whether the company and its controller are separate legal
entities
Responses

separate legal entity, limited liability

company is a legal entity separated from staffs and owners

Seperate legal entity Doctrine of Separate Legal Entity

Separate Legal Entity The doctrine of separate legal entity

Entity can borrow fund from its owner as they're different entity

A company is a seperate legal entity from its owners

The company is a separate legal entity. The company can enter into contract
with Salomon.

Doctrine of Separate Legal Entity

Salomon and Salomon & Co are two separate entities as a company is

considered to be a separate entity from the owner

The company is the seperate legal entity.

The key principle established in Salomon v Salomon is the doctrine of

separate legal entity.

Mr Saloman was shoemaker, and owner of shoemaking business. He decided

to create a company and sold the business to the company, in exchange for
cash and shares. In addition, company gave security over one of his assets in
the form of debenture. The company's assets have to used to pay mr salomon
first in case of liquidation.

>Co went bust, insufficient assets to pay off. As mr salomon has charge over
the assets.

Shareholders are separate legal entities to the company

The doctrine of separate legal entity Separate legal entity principle

Companies are considered a separate legal entity to humans Deez nuts

Doctrine of separate entity. Company is a separate legal person.

A company is a separate legal entity from its owners and shareholders.

doctrine of seperate legal entity

That salomon and Salomon co are seperate legal entities therefore Salomon
is able to receive what is owed to him before other creditors due to clause put
in the place

Separate legal entity Separate legal entity Separate legal entity

Limited liability Separate legal entity doctrine

Doctrine of seperate legal entity

That a company is a seperate legal entity to its owners

Separate legal entity Separate legal entity

Doctrine of separate legal entity Seperate legal entity

Briefly explain what limited liability means
Responses
74%
shareholders are legally responsible for the debts of a company only to the
extent of the nominal value of their shares. Engagement

The company must pay all of its debts and the owners' debts are limited

Banks can't ask debt from shareholders and shareholders are only
responsible for the amount of shares they invest on
182
Responses
if the company is sued and debts need to be collected shareholders are
protected and only pay the unpaid amount of their shares

not liable to personal assets, only liable for the amount that they invest
nothing else. can not go a er personal assets

In a company limited by shares, a member's liability to pay the debts of the

company is limited to the amount (if any) unpaid on their shares

In a case of insolvency, creditors are limited to the company's assets and

unpaid proportions of shares.

the debt limited to the company when wind up

only responsible for own certain part of liability

If sole proprietor borrows a lot of debt, creditors will ask owner of the sole
proprietor to repay its debts. Thus the sole proprietor is exposed to all of
debts, that is, unlimited liability. Assuming that all company shareholders
have fully paid their shares, when company incur huge amount of debts and
can't repay, creditors will ask company to pay. the shareholders thus have
limited liability, as in, they only have to be in-charged of the amount of shares
they have not pay

The liability of the company is limited to the amount of unpaid shares of the
shareholder

Limited liability means that a shareholder is only liable for their debts to the
extent of their investment.

The shareholders are not unlimitedly liable for the debts of the company.
They only risk is their share investment.

Liability is capped to the company and what you've invested in it Idk

Shareholders can only be called on to pay amounts unpaid on shares

Shareholders or members and other officers of a company are only liable for
the company's debts and obligation to the extent of their unpaid shares

Limited liabilities means that the business' assets and obligations are owned
under it's own name, which it's not related to the personal assets of its
participants and the shareholder cannot lose more then what they have
invested in the capital of the corporate.

shareholders liability are limited to what they invest separate entity

Members, employees are not liable for company debts

When the company goes bankrupt, owners don't need to use their own asset
Responses

The debt incurred are limited to the company itself and the members dont
have to contribute given that their shares are fully paid.

Liability is confined to the seperate legal entity and the owners personal
assets cannot be held liable for the entities actions

Liability is limited to any unpaid amount on issued shares

Limited liability means the liability is limited to the amount invested only

dont needa pay all the debt

Shareholders of the company have limited liability in the case that the
company goes under

Debt only has to be repaid to an extent

Shareholders are not personally liable to pay the company's debts.

It refers to shareholders being limited in the amount they need to pay the
company's debts in a situation where the company needs to repay creditors,
only to the amount of their shares

You tell me Liability is with the company and not the owners/ shareholders

limited liability means that if a company fails and starts to wind up then the
shareholders of that company are not liable to pay

Employees in a company does not take full responsibility for the company but
does take some amount for which he or she is entitled to

If company is liquidated, liability is limited to shareholders

liability is limited to unpaid amount of shares. A person cannot be sued for its
personal assets

When company is closed down any debt or borrowing outstanding by the

company will not be entitled to shareholder personal properties or wealth

the share

The limited liability means that if the company broke down, shareholders do
not need to pay for it.

If a company has a liability, its members liability is only limited to the amount
of unpaid shares. If they already pay the whole amount of the shares they
have, they don't have any liability le .

Meaning you wont be the only one that takes all the loss

Owners of the company incurs the liability of the company in proportion of

their ownership

The company's debts are paid by the company, not its shareholders. Thus
shareholders' liability is protected and creditors can only come a er
shareholders for amounts unpaid on their shares

Limited liability means that owners are liable only for any unpaid amount on
their shares in the circumstance a company enters administration

that the shareholders of a company are not liable for the repaying of debt in
the event of a company winding up
Responses

If companies goes into liquidation, debtors cannot come a er the

shareholders' money/ dividends/ private assets. Debtors can only be payed
back with company funds/assets

A company has limited liability so if it goes bankrupt the owner doesnt have
to contribute their own funds?

shareholder's liability to pay debts of a company is limited to the amount

unpaid on their shares

Should a company enters into administration, shareholders are only liable to

the amount of outstanding shares they owe is they have not paid the full
amount. For those that have, they are not liable for anything

personal assets are protected/ limited from due liability of the company

When a company is on an winding up or is unable to have sufficient funds to

pay the debts on time, the participants inside the company as long as they
have fully paid their shares are not entitled to pay more than what they have
already invested in.

That the company is only liable to pay out it's remaining amount of money
when the company files bankruptcy.

Shareholders only stand to lose the amount they have invested as share
capital

Limited liability means that the owners shareholders are not liable for any
debt of a company in the case of it goes bankrupt

In a company limited by shares, a member's liability to pay the debts of the

company is limited to the amount (if any) unpaid on their shares

In a company limited by shares, a member's liability to pay the debts of the

company is limited to the amount (if any) unpaid on their shares

That a shareholder is liable to pay the debts of a company only to the value of
which that they have invested

opposite unlimited liability

Shareholders have no obligation to pay more money that they have already
paid, or agreed to pay, for the company's debt

Shareholders just need to pay the amount unpaid on shares (if any) in case
the conpany is wound up.

Owners of company not liable for full amount of company's liabilities

a shareholder is limited by their liability in the shares they hold

he condition by which shareholders are legally responsible for the debts of a

company only to the extent of the nominal value of their shares.

Shareholders r responsible for debts of company only to the value of their

shares

liability has to be paid by the company not its shareholders

Only lose the money that you have invested in the firm arousing
Responses

This means that the shareholders are only required to pay amount for their
stocks. Once the company collapses, the creditors are not allowed to seek the
shareholders for repayment

liability for a person is not extended past the person itself; limited liability in a
company sense means members are only liable for contributions

Only the money invested in a company may be held accountable to that

company in the case of insolvency i.e. directors only liable for however much
of the company they own

legal responsibility lasts only to a certain extent

where personal wealth would not be put at risk and owner would not be
personally liable to satisfy the outstanding claims if the business fails

The shareholders don't need to pay all the liability, the only pay the debt for
the amount of shares

The loss of the shareholders is limited to the shares they invested

It means that when the company go to liquidation, the stakeholder are not
responsible for remaining liability

Sharholders only liable to the extent of any unpaid shares

The shareholder's assets won't be used up when paying off the company's

debt if it becomes insolvent unless the shareholders have been issued a
partly paid share and they are being called by the company.

All shareholders/members are only liable for the debts of the company up to
the nominal value of their shares

the extent of liability a member has in a company is that of any unpaid share
capital they have

No shareholder(s) or executive(s) hold personal liability.

The shareholders of a company bear no financial liability in an event when

the company decides go into liquidation. The company liabilities do not fall
upon its shareholders, as long as the shares are fully paid for.

In a company limited by shares, a member liability to pay the debtor is limited

to the amount unpaid on their shares

shareholders do not respond to company's liability

Owners and shareholders are not responsible for repaying the debt using
their own money.

Limited liability means that a company has to pay its debts, not its
owners/shareholders. Shareholders are limited to paying the amount unpaid
on their shares.

Members are only liable to pay any amount outstanding on their shares in the
event the company becomes insolvent

Shareholders can't by sued for the company's debts

Limited to the fund invest

The liability is limited to what the company has. Pay creditors first
Responses

Limited liability is the separation between the owners of the company

(shareholders) and the company itself. Shareholders liability is 'limited' to
unpaid shares.

Limited liability means that a member of a company limited by shares is

usually not required to contribute amounts from their personal wealth
beyond the subscription price of their shares to meet the debts of the
company.

The shareholders liability to the company's debts is limited to the unpaid

amount on their shares

Shareholder do not liable to company's liabilies

Not obliged to pay for the company's debt

Owner can't be hold accountable for entity's liability

A member of a company limited by shares is usually not required to

contribute amounts from their personal wealth beyond the subscription price
of their shares to meet the debts of the company

Limited liability means that liability is limited

Shareholders will not be responsible for the company's losses and debts
provided they have fully paid the shares

There's only a certain extent to which people will be financially responsible

for the downfall of a company

Means the shareholders only need to payoff their capital contributed to the
company and doesn't have any other obligation to pay.

A member's liability to pay debt of the company is limited to the amount

unpaid on their shares

Limited liability means shareholders do not have to bail out the company if
the company goes bankrupt. Shareholders will only lose what they have
already put into the company and any partially paid shares.

Company's debts paid by company not shareholdera

Owners not reponsible for corporate debt with their personal wealth

Shareholders are only required to pay for the shares they are issued - if these
are fully paid, the shareholders are not required to finance the company's
debts.

Shareholders liability is limited to any unpaid shares

A member's liability to pay the debts of the company is limited to the amount
unpaid on their shares. S 516

liability limited by the contribution of the shareholder to the company

That liability is limited... _---

Liability of shareholders is limited only to the unpaid amount on partially paid

shares

Company shareholder will not be liable when company go insolvent.

Assets of owners are protected

Responses

that the shareholders dont have to pay out all the company' debts

Liability of a company does not extend to personal assets of members

(shareholders), it is limited by the amount unpaid shares only

The shareholders / members are only liable for shares unpaid

Companies and their owners are seperate legal entities

a member's liability to pay the debts of the company is limited to the amoubt
unpaid on their shares

That the company's debts must be paid for by the company, not the
shareholders

a company that the member's liability is limited to the company

If shareholder already paid the shares in full, company can't call them up
anymore.

Shareholders cannot be called upon to pay a companies debts unless they

own partly paid shares. In this event they are only liable for the amount owing
on their shares

Shareholders are not responsible for the actions of a company

If the company were to go under, the shareholder's personal assets are

shielded from paying back the debts.

Liability of shareholders is limited to the unpaid amount on shares that they

hold

Shareholder's/owner's financial obligations in a company are limited to what

they invested into the company and any unpaid shares, and are not liable for
the company's debts.

It means you do not have to use your personal assets to pay off the liability.
Shareholders only have liability for the amount which they paid to buy shares

Company itself is liable not an individual shareholder. Only liable to unpaid

amount on shares

Means the shareholders only need to payoff their capital contributed to the
company and doesn't have any other obligation to pay.

Deez nuts

Owners of a company is only limited to be liable for any unpaid shares they
hold.

The company's debts have to be paid by the company, not its shareholders

company's debt must be paid by the company not the shareholders

Shareholders are limited to their contributon to the company in the event of

the company winding up.

the shareholders liability is limited to its shares only

Company don't have to repay all debt that exceed its assets, in stead, it
liquidate.
Responses

limited liability means that the shareholder is protected and has no obligation
to pay if a company undergoes liquidation (unless the shares are only partly
paid)

The liability of a shareholder is limited to their claim on the entity.

seperate entity

The amount of liability of each member is only bound to the amount unpaid
for their pieces of share if the corporate enters into insolvency

The directors and shareholders are a seperate legal entity from the company
and are not responsible for repaying the debt of the company.

Shareholders are limited to the amount unpaid on their shares

The amount that shareholders or members of a company are obligated to pay

companies debts are to be paid by the company and not the shareholders

Limited liability for the company and those in it; doctrine of separate legal
entity is employed for this to work

The companies obligations are duties are its own. Not those of its controllers
or shareholders.

Limited liability means that any financial liability that the corporation takes
on does not get carried to the shareholders, unless they have partly paid their
shares only.

limited liability means shareholders are not responsible to the company's

debts.

Shareholders are liable only to the amount that they have invested in the
company

extent of liability a member has in a company is that any unpaid share capital
they haave

shareholder is liable to what they invest only

Shareholders are separate from the company as it is a separate legal entity

and so if the company falls into liquidation shareholders will not be required
to pay anything to creditors. Unless there is a part payment they will need to
pay the funds owing but other than that they are not liable or connected with
the company

Shareholders are only liable to pay any amount of unpaid shares in the case
of liquidation.

A member liability to pay the debts of company is limited.

shareholder's liability is limited to the unpaid amount of shares if the

company wound up

You tell me

Company's debts have to be paid by the company - shareholders have limited

liability meaning that the amount of debt they have to pay is limited by the
unpaid amount of their shares

Company is limited by shares

Responses

In a company limited by shares, a member's liability to pay the debts of the

company is limited to the amount (if any) unpaid on their shares: s 516

Limited liability means that shareholders liability to a businesses debts are

limited only to their share capital invested.

debts must be paid by the company not the shareholders

limited liability means that the shareholders /owner are not responsible for
the debts of the company

The owner is separate from the company.

Shareholder or owners or directors or anyone in the company are not

responsible for the debt

Members's liability to pay debts of the company are limited to the amount
unpaid on their shares.

If the company goes into liquidation, they have to pay their liabilities
according to importance

Limited liability means that owners are only liable for the amount they have
invested and cannot be forced to pay the companies obligations

Shareholders, directors are not responsible for the full extent of a company's
debt

The liability of a company is limited to shareholders depending on the

amount of unpaid sharss

A shareholder in a company is only required to pay creditors the amount they

owe in shares

Limited liability means that members are not liable to pay all of the liabilities
of the company.

shareholder's liability is limited to the amount unpaid on their shares in the

event where company is insolvent

Shareholders are not liable for debts owed by a company aʱer bankruptcy

he condition by which shareholders are legally responsible for the debts of a

company only to the extent of the nominal value of their shares.

It means that if a company were to liquidate, they would need to repay all of
their creditors, but the owner's will not have to put up collateral.

Shareholders liability is limited to the extent of their shareholding in the case

the company becomes insolvent and has to clear it's debts shareholders are
liable for the extent of their shareholding

Limited liability means that the debt of a company is limited to its owner

if the company goes into debt, the member is only liable for unpaid shares. if
there are no unpaid shares, there is no liability. the debt is the company's, not
the shareholders.

Limited liability means that shareholders or members within a company are

seen as separate legal person from the company and therefore are not
required to pay the company's debts.
Responses

Shareholders are not

Limited liability means a company has obligation in their borrowings

Which is more valuable right now?

Response options Count Percentage
69%

Engagement

49 30%

164
Responses

115 70%
BLAW20001
CORPORATE LAW 2020

LECTURE 3
Julian Panetta – [email protected]
GM02, Mezzanine Level, Melbourne Law School
 Tutorial and Consultation Timetables – available on Canvas

 Drop in tutorials
 Tuesday 7:15pm with Kit Lee in G29
 Friday 2:15pm with Janette Nankivell in Rm 109

 COVID-19 Update

 Test 1


WELCOME
Written assignment BACK
Please complete this on your phone or laptop. We will then run
through the answers together

REVISION QUIZ
 What we have established so far:-
 we’ve set up a company
 the company is governed by the rules in the Act and our own internal governance rules

 The source of these ‘rules’ impact the decision making in companies.

 Power to make decisions is divided between the company’s two organs:

 the members voting together– called ‘the company in general meeting’
 the board of directors: ‘the Board’, ‘the directors’

 Division of powers depends on:

 the Act
 the internal governance rules
 company law cases
ALLOCATING DECISION MAKING POWER
 Particularly in small companies, the people who are on the Board of Directors are also
the members / shareholders in the company

 Query – in which capacity are they exercising decision making power? Is it in their
capacity as a shareholder or as a director?

Example
Harry, Hermione, Ron and Ginny are all equal shareholders and directors of Spells Ltd

Can Harry and Hermione remove Ron and Ginny from the Board?

 Spells Ltd is a public company

 As directors of Spells Ltd?
 As members of Spells Ltd?

WEARING DIFFERENT HATS

 Usually, directors (also called ‘board of directors’ or ‘board’) have general
power of management: RR s 198A

 Role is to manage, or direct the management of (supervise), the company

s198A Powers of Directors (Replaceable Rule)

s198A(1) [Management of business] The business of a company is to
be managed by or under the direction of the directors

s198A(2) [Exercise of Powers] The directors may exercise all of the

powers of the company except any powers that this Act or the company’s
constitution (if any) requires the company to exercise in general meeting

WHO RUNS THE COMPANY DAY-TO-DAY? –

S198A
 Board can make all decisions except for those given to the
members in general meeting by the Act or by the internal
governance rules (RRs or constitution)

 Board may delegate certain functions to committees of the

board e.g. audit committee: s 198D – if constitution permits!

 Generally board delegates day-to-day management to the

CEO/ managing director: RR 198C

DELEGATION & COMMITTEES

 Members cannot interfere with powers of board:
 Automatic Self-Cleansing Filter Syndicate v Cunninghame;
 The decision to so sell company assets was a management decision and within
the powers of the board and not the shareholders
 John Shaw & Sons
 The decision to commence litigation was within the directors’ broad powers of
management and the members had no business interfering with that power

 What options are available to members who disagree?

 Vote out board
 Sell shares
 Change s198A or other rules

WHAT IF MEMBERS DON’T LIKE WHAT THE BOARD

DECIDES?
 Minimum number of directors – 1 for proprietary and 3 for public – s
201A

 Types of director
 Properly appointed directors
 Directors elected by company in general meeting
 Directors appointed by other directors under special powers

 De facto and shadow directors – discussed later in this lecture

HOW MANY DIRECTORS?

s201G Company May Appoint a Director (Replaceable Rule)
A company may appoint a person as a director by resolution passed in general
meeting

 Here the word “company” means the shareholders in general meeting

 “Resolution” – this is a simple or bare majority. Just over 50%

 s201G is a Replaceable Rule

 See Table 10.1 ‘How are directors appointed and removed’ for differences
between pty ltd, unlisted public and listed public companies.

MEMBERS VOTE DIRECTORS ONTO THE BOARD

 How?
 Vote in general meeting

 Rules are different for pty companies and public (whether listed or unlisted)
 Public company: s 203D (must be an ordinary resolution)
 Public company shareholders ALWAYS have the power to remove
directors from the board
 Not a replaceable rule
 Proprietary company: RR s 203C (ordinary resolution)
 Note this is a replaceable rule but it applies until it is replaced.

 S 203A – director can resign

MEMBERS REMOVE DIRECTORS FROM THE BOARD

 S 203E – directors of a public co can’t be removed by other directors

 What about Pty Ltds? - s 203C [RR]

 Alternate director – s 201K [RR]

 S 201J [RR] – directors appoint managing director (MD)

CAN DIRECTORS CONTROL THE COMPOSITION OF

THE BOARD?
 Four key ingredients for proper appointment
 someone who consents – s201D
 human not company – s201B(1)
 minimum 18 years old – s 201B(1)
 not disqualified – cannot be bankrupt, convicted of certain offences,
or subject to banning order – s 201B(2)

WHO CAN BE APPOINTED AS DIRECTOR? (PROPER

APPOINTMENT)
 S9 “Director”
 Director of a company or other body means:
(a) A person who:
(i) Is appointed to the position of a director; or
(ii) 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

(b) Unless the contrary intention appears, a person who is not validly appointed as a
director if

(i) they act in the position of a director; or

(ii) the directors of the company or body are accustomed to act in accordance with
the person’s instructions or wishes

DIRECTORS – S9
 De facto director
 see the s9 definition of director under (b) (i)
 Not properly appointed
 Acting in the position of director

 Shadow director
 see the s9 definition of director under (b) (ii)
 Not properly appointed
 Directors of the company are accustomed to act in accordance with the persons wishes or
instructions.

 Consequences of being a de facto or shadow director?

 Means by which duties and accountability of directors can be imposed on someone (human or
body corporate) who is not appointed as a director

DE FACTO AND SHADOW DIRECTORS

 Standard Chartered Bank of Australia v Antico (1995) 13 ACLC 1
 Pioneer had effective control over Giant by virtue of its shareholding and this was
acknowledged in the annual report of Giant
 A number of strategic decisions taken by Pioneer were accepted by Giant
 All things considered, it appeared as though Pioneer had the ability to exercise control over
the management and financial affairs of Giant
 It was accepted that Pioneer was a shadow director of Giant.

 Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2010)
28 ACLC
 Was Apple a shadow director of Buzzle?
 Some instructions or influence is not enough
 Not a shadow director.

SOME CASES
 Acts collectively; one vote per person

 Majority vote and casting vote of chair – s 248G [RR]

 Specific director roles:

 Chair
 Managing director
 Executive director
 Non-executive directors

HOW DOES THE BOARD OF DIRECTORS OPERATE?

 Some rules which govern director meetings:-
 How are directors’ meetings called?
 s248C (RR) – “reasonable notice”
 Quorum?
 s248F (RR) – minimum of 2 directors
 Chairing directors’ meetings
 s248E (RR) – directors may elect a director to chair the meeting
 Use of technology
 s248D – permitted (e.g.) video conferencing, telephone), all
directors must agree

BOARD MEETINGS
 Member votes are done in general meetings

 Internal management rules or the Corporations Act give right to make certain limited
decisions about the company to the members

 Some rules and sections differ for public and proprietary companies

 Member approval is required to:

 adopt, modify or repeal the constitution: s 136(2)

 change the company’s name: s 157
 change type (e.g. from proprietary to public): s 162

 Special resolution is required in each case

WHAT CAN MEMBERS DECIDE?

 As a shareholder, you hold shares in a company which represent your
ownership interest in that company.

 The shares which you own, contain various rights which you may exercise

 Class rights – the rights attaching to your shares

 dividend ‘rights’;
 voting rights;
 rights to return of capital when company is liquidated

 These are examples of ‘class rights’ they are the rights attached to your
shares and those rights depend on the type and class of shares you hold

WHAT IS A CLASS RIGHT?

 A ‘variation’ of class rights suggests that the rights attaching to one or more classes of shares are
being changed.

 General law and deemed variations under statute

 General law variations

 Very narrow approach
 Strict change in your legal position e.g.,) your right to vote or your right to receive a dividend
must be changed

 Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512

 Not a general law variation if your power or enjoyment of your rights has changed.

 White v Bristol Aeroplane Co [1953] Ch 65

 Dilution of voting rights of preference shares was held not to amount to a variation no the class
rights attaching to preference shares

VARYING CLASS RIGHTS – GENERAL LAW

 The deeming provisions in s246C ADD to the general law

 s246C Certain Actions Taken to Vary Rights etc

 The legislation is asking you to accept that there has been a variation if the
conditions in the legislation have been satisfied

 READ the deeming provisions carefully and see if your facts fit within one or
more of the deeming provisions. If so, you have a deemed variation of class
rights

 Table 7.1 in CACL – very handy

VARYING CLASS RIGHTS – DEEMED VARIATIONS

UNDER STATUTE
s246C(1) Company with share capital
If the shares in a class of shares in a company are divided into further classes, and after the
division the rights attached to all of those shares are not the same:-
(a) The division is taken to vary the rights attached to every share that was in the class
existing before the division; and
(b) Members who hold shares to which the same rights are attached after the division form a
separate class

Example
Lets assume we have one class of ordinary shares, all with one vote per share. The company
now wants to divide the shares into further classes:-
 Ordinary A – one vote per share
 Ordinary B – 10 votes per share

Query – whose rights have been varied?

DEEMING PROVISIONS (1)

s246C(2) Variation of rights
If the rights attached to some of the shares in a class of shares in a company are varied
(a) The variation is taken to vary the rights attached to every other share that was in
the class existing before the variation; and
(b) Members who hold shares to which the same rights are attached after the variation
form a separate class

Note
 This is somewhat similar to s246C(1) but it doesn’t contemplate the division of shares
into further classes

DEEMING PROVISIONS (2)

 To recap, we will deal with two types of variations:-
 General Law variations
 Deemed variations under s246C

 This is power reserved for members under s246B of the Act

 Pursuant to s246B(1), if your company has a constitution which sets out the procedure for
varying or cancelling someone’s share rights (or class rights  follow the procedure

 Example clauses
 “Class rights attaching to A class ordinary shares, can be varied only with Gilderoy’s approval”

 “Class rights attaching to A class ordinary shares, can only be varied with a 90% vote of the
company at a general meeting”

PROCEDURE FOR VARYING CLASS RIGHTS – S246B(1)

 s246B(2) applies if your company does not have a procedure in its constitution for
varying class rights

 Typically, the following is required to vary / cancel class rights under s246B(2)

 a special resolution of the company:

 ALL the members in general meeting
 A vote of 75% or more of those who are present and entitled to vote

 a special resolution of the CLASS of members holding shares in the class

 Look to see which ‘class/s’ have been affected
 A vote of 75% or more of those who are present and entitled to vote

PROCEDURE FOR VARYING CLASS RIGHTS – S246B(2)

Example
Lets assume we have one class of ordinary shares, all with one vote per share. The
company now wants to divide the shares into further classes:-
 Ordinary A – one vote per share
 Ordinary B – 10 votes per share

Query – whose rights have been varied? Why? What procedures must be
followed to give effect to the proposal?

EXAMPLE
 Basic structure for responding to questions involving the variation or cancellation of class rights:
 Check
 Has there been a variation or cancellation of class rights?
 General law – strict change in legal position; and/or
 Statutory deeming provisions – s246C
 If “no” – no variation of class rights
 If “yes”
 Does the company’s constitution have a procedure for variation / cancellation?
 If “yes”
 Follow the procedure and note s246B(1)
 If “no”
 s246B(2)
 Special resolution of the company; AND
 Special resolution of the class of members holding shares in a class

GUIDANCE AND STRUCTURE

 Review decision-making within companies and note the difference in power / decision-
making ability between the board of directors and the members in general meeting

 Recognise that decision-making power is influenced by ‘capacity’

 Understand the principles from key case law e.g) Automatic Self-Cleansing Filter
Syndicate, John Shaw & Sons

 Be familiar with the rules relating to the appointment and removal of directors

 Know the difference between “properly appointed” directors and ‘other’ types of directors

 Explain how the board of directors can operate and the various types of director functions

 Understand how the general law and statute applies to variations / cancellations of class
rights, including the relevant procedures required.

TO SUMMARISE
 Lecture 4
 Member meetings and decision making

3 down….9 to go 

NEXT WEEK
BLAW20001
CORPORATE LAW 2020

LECTURE 4
Julian Panetta – [email protected]
GM02, Mezzanine Level, Melbourne Law School
 UoM transitions to a “virtual campus”
 Please see my announcement on Canvas
 Changes to assessment
 No class attendance mark
 MCQ and Test 3 have been re-weighted

 Lectures, Tutorials and Student Consultations

 Student Consultations during the non teaching period 6 – 19 April 2020

 MCQ Test 1 – Open until 9pm Sunday 5 April 2020

 Written Assignment
 Revised due date
WELCOME BACK + REMINDERS
 No change to the question
A link to the revision quiz has been made available on Canvas.
Please feel free to complete this in your own time. I will post
the answers at the end of the week

REVISION QUIZ
 Lecture 1
 Foundation principles including key concepts e.g) limited liability, separate legal entity,
Salomon’s Case, types of shares, debt/equity finance
 Lecture 2
 Choice of form of business, types of companies, internal governance, s140 statutory
contract
 Lecture 3
 Decision making in companies, directors, director meetings, director decisions,
variation of class rights
 Lecture 4 (today)
 Member meetings and restrictions on decision making, including procedural
irregularities and the Gambotto principles.

OUR JOURNEY SO FAR

 All public companies must hold an annual general meeting - AGM: s
250N

 Other meetings are called extraordinary general meetings – EGMs

 Rules governing meetings are set out in Corporations Act and the
internal management rules – [RRs] or constitution

TYPES OF MEMBERS’ MEETINGS

 Members’ meetings are usually called by the board of directors
 See s198A(RR) – directors broad powers of management

 Can also be called:

 s 249C [RR] by single director
 Listed company by single director: s 249CA
 Court, on application by a director or member if it is otherwise impracticable: s
249G
 By members
 Requisition by 5%+ members s249D
 s249E – when directors don’t call the meeting

WHO CAN CALL A MEMBERS’ MEETING

 Requisition by 5%+ members: s 249D. Law has changed since 2015.

 Directors need not convene if the purpose is improper: NRMA v Parker

 s 249Q – meetings only for proper purposes: NRMA v Scandrett - motive irrelevant

 S 249E – where directors don’t call meeting

 Direct convening by 5%+ members: s 249F

 Constitution can’t take away these statutory rights to call a shareholders meeting!

WHEN CAN MEMBERS CALL A MEETING

 Who decides the agenda of a members’ meeting?
 Usually the person who convenes the meeting
 Typically (but not always) – this is the board of directors

 Looking exclusively at Members’ Meetings:

 The items on the agenda must fall within the decision-making powers of members
 Remember there are two different ‘organs’ within a company – both are sovereign with
respect to one another

 Members can request the inclusion of resolutions to be put to the members at next
meeting: s 249N
 5% of vote or 100 members

 Co must send out notice of member resolutions, statements – s 249O; 249P

WHO DECIDES THE AGENDA?

 General rule - 21 days.
 Consent to short notice is possible: s 249H – AGM’s where all agree;
EGMs where 95% agree
 S 249H – no short notice where resolution to remove public company
director.

 Listed companies - 28 days: s 249HA

 Notice must be given to members and directors – s 249J; and auditor – s

249K

HOW MUCH NOTICE?

 What the notice of meeting must contain: s 249L
 e.g)
 Place, date and time for the meeting
 General nature of the meeting’s business
 Special resolutions – s 249L(1)(c)

 Must “fully and fairly inform and instruct the shareholder about the matter
on which he or she will have to vote”: Devereaux Holdings

 Need to balance the information presented, to make it accessible; must

not be misleading or deceptive (even if this is unintentional)

WHAT IS ON THE NOTICE?

 Quorum – s 249T [RR]

 Use of technology – s 249S

 Proxies and corporate representatives – s 249X – RR for pty ltds only

 Directors elect the chair of the members’ meeting – s 249U [RR]

 Decision making without a meeting

 In single member companies, resolution is passed by the member recording and signing it
(‘minutes’): s 249B – notice still goes to ASIC
 Proprietary companies may use “flying minutes”, in which all members entitled to vote
must sign a document agreeing to the resolution: s 249A

CONDUCT OF MEETINGS
 Members’ entitlement to vote: s 250E [RR] – one vote per share
 preference shareholders right to vote depends on their defined class rights

 Voting by proxies – s 249Y

 Voting (show of hands and poll) – s250J [RR]; s250K

 Note some limits on member’s right to vote in their own interests – later lectures
eg related party transactions; capital reductions

 Casting vote of chair –s 250E(3) [RR]

 all members entitled to vote must sign a document agreeing to the resolution: s
249A

VOTING
 Section 1322 – outcome of meeting may be valid despite some irregularity (ie failure
to follow required procedure)

 Applies to “proceeding under the Act” – includes directors’ and members’ meetings

 Two different mechanisms

 Automatic validation (valid unless a court says no) or
 Curing declaration (invalid until a court says yes)

 Section 1322(2) - includes absence of quorum, defect of notice or time

 Not invalid unless court is of the opinion that a substantial injustice has resulted or
may result, and declares it invalid

IRREGULARITIES
Irregularities – s1322 CA
(1) In this section, unless the contrary intention appears:
(a) a reference to a proceeding under this Act is a reference to any proceeding
whether a legal proceeding or not; and

(b) a reference to a procedural irregularity includes a reference to:

(i) the absence of a quorum at a meeting of a corporation, at a meeting of
directors or creditors of a corporation, at a joint meeting of creditors and
members of a corporation or at a meeting of members of a
registered scheme;
and
(ii) a defect, irregularity or deficiency of notice or time.

S1322(1)
Irregularities – s1322 CA
(2) A proceeding under this Act is not invalidated because of any procedural irregularity unless
the Court is of the opinion that the irregularity has caused or may cause substantial injustice that
cannot be remedied by any order of the Court and by order declares the proceeding to be invalid.

 1322(2) is the section where complainers on the receiving end of a procedural irregularity can
apply to the court to have the proceeding invalidated.

 eg they didn't get a notice of meeting and if they had, they would have attended, voted against
it etc and THINGS WOULD HAVE BEEN DIFFERENT! ie they have suffered a substantial injustice.

 and the court can't fix the problem by any other means, so the court orders the proceeding to be
invalid and the company has to do whatever it is again.

 Onus on the person arguing invalidity

AUTOMATIC VALIDATION – S1322(2)

 ‘Curing’ declaration

 Section 1322 (4) - (6) – court can declare that an act, matter, or thing, or a proceeding,
is not invalid so long as:
 it is procedural in nature
 the person acted honestly
 it is just and equitable to make the order
 no substantial injustice

 Onus on the person asserting validity

 Substantial injustice:
 Poliwka v Heven Holdings
 MTQ Holdings
 Outcome OF PROCEDURE would have been different …
COURT’S POWER TO VALIDATE
IRREGULARITIES
 Something is already broken (eg the failure in Weinstock v Beck of the
pty co director to be re-appointed 30 years ago in accordance with the
constitutional requirement), and

 THAT PERSON applies to the court to have it declared not invalid.

 It is likely to be part of some other dispute and this section allows the
court to tidy up the failure to do some procedure properly and then the
court can get to the substance of the dispute. In other words, the main
dispute before the court won't turn on 'a technicality'.

HOW DOES 1322(4) WORK?

 Members may exercise voting rights in their own self-interest (even if they are also
directors). But there are limits – called ‘the equitable limitation’:
 to stop unfair exploitation of minority shareholders by majority
 Because it is not always possible for minority shareholders to sell

 Not a positive duty to be ‘good’ or unselfish.

 ASK: do the facts involve a decision by the majority of members that harms the
minority?

 The rule applies slightly differently for:

 cases involving constitutional amendment
 cases not involving constitutional amendment

RESTRICTION ON MEMBER DECISION

MAKING
 Majority unwilling to sue where they are the alleged wrongdoers: Biala v Mallina
Holdings

 Taking the company’s property where the members vote not to sue outsider.
 Menier v Hooper’s Telegraph Works

 Changing the constitution

 Even where s 136 is complied with, amendment may be invalid due to equitable
limitation
 Gambotto v WCP deals with:
 amendments that expropriate shares
 other constitutional amendments that give rise to conflict

WHAT VOTES DOES IT APPLY TO?

 20

 Majority passed a IEL

resolution for compulsory 99.7
acquisition by IEL of other %
shares
 IEL did not vote WC
 Mr Gambotto did not Mr G
P Other
s
attend or vote 0.09
0.21
%
%

GAMBOTTO
 Category 1 amendments: Amendments to allow expropriation of
 minority’s shares; or
 valuable proprietary rights attached to their shares (eg voting or
dividend rights)

 Are only valid if:

 proper purpose, and
 no oppression of minority shareholders

 Proper purpose test is very restrictive – advancing company’s

commercial interests is not enough

GAMBOTTO – CATEGORY 1
 The only “proper purpose” recognised by the court is to
prevent harm to company, eg:
 minority s/h is competing with company
 removal of member is necessary to allow company to
continue in present business

“PROPER PURPOSE”
 Also must show that there was no oppression. This requires:
 procedural fairness – full disclosure and independent
valuation
 substantive fairness – price is fair (may not always be
market value)

NO OPPRESSION OF MINORITY
SHAREHOLDER
 Gambotto equitable limitation on shareholder voting doesn’t apply
where votes taken under statutory reduction of capital
 Winpar Holdings v Goldfields Kalgoorlie

 Overlaps with oppression remedy, considered in Lecture 11

GAMBOTTO AND OTHER AREAS OF LAW

 Other amendments involving a conflict of interest

 Are only valid if :

 done for a company purpose, and
 no oppression of minority shareholders

 More “purposes” are valid here compared with Category 1

GAMBOTTO – CATEGORY 2
 Ensure that you are familiar with the way in which a members’ meeting can be
called – remember that there are various ways in which this can happen – look at
the legislation

 Be familiar with and know the various procedures which must be followed when
calling a members’ meetings – again – look at the legislation.

 Recognise that voting at a meeting can be done by poll or a show of hands –

what is the difference?

 Understand how and when s1322 operates to cure an irregularity. Ensure you are
comfortable with the “test” for substantive injustice

 Understand the principles in the Gambotto decision. Specifically, know how to

use and apply the two ‘tests’ to a factual scenario.

TO SUMMARISE
 Lecture 5
 Transacting by companies
 Guest lecturer – Kayla Milone

4 down….7 to go 

AFTER THE BREAK

BLAW20001
CORPORATE LAW 2020

LECTURE 6
Julian Panetta – [email protected]
GM02, Mezzanine Level, Melbourne Law School
 See Figure 11.1
 Core obligations
 Care and diligence – don’t be lazy
 Loyalty and good faith – don’t be evil
 General law origins
 case law evolution
 gives company right to take action
 Statutory versions as well
 uses cases to explain what the statute requires
 gives company and ASIC right to take action
 ASIC can seek criminal punishment too in some cases

WHAT ARE THE DUTIES?

 Duties are owed by:
 directors
 senior executive officers

 They are in a fiduciary relationship with the company - based on the power they
exercise and the vulnerability of the company to their wrongful actions

 Who are duties owed to?

 the company
 In exceptional circumstances, a duty may be owed to an individual shareholder -
Brunninghausen v Glavanics

 This affects who can enforce the duty

GENERAL LAW (CASE LAW) DUTIES

 Statutory duties apply to “directors” as defined in the
Corporations Act
 this includes “de facto” and “shadow” directors

 Most statutory duties also apply to “officers” (defined in s 9),

but not s 191 or s 588G

 Two statutory duties imposed on employees – s 182 and s

183

WHO OWES THE STATUTORY DUTIES

 Statutory duties
 Can be enforced by ASIC
 Company can also seek compensation

 General law duties are enforced by the company (or liquidator if company is being
wound up)

 Content of duties are the same where they overlap

 So why have both general law and statute?

 Statute allows ASIC to be involved in enforcement
 Different remedies available under statute and general law

WHO ENFORCES THE DUTIES

 Statutory duties are “civil penalty provisions” under Pt 9.4B of the Act

 Following a declaration of contravention, a court may impose:

 pecuniary penalty: s 1317G
 disqualification (banning) order: s 206C
 compensation to company: s 1317H. Company can also seek this.

 Criminal consequences in some cases:

 Not for breach of duty of care
 Yes for breaches of some other duties where done with intentional dishonesty or
recklessness: s 184
 Contravention is an offence – criminal penalty of prison and/or a fine -

CONSEQUENCES OF BREACH OF THE

STATUTORY DUTIES
 Sources of the duty :
 general law negligence cases
 s 180(1) – care and diligence  READ THIS SECTION CAREFULLY
 contract of employment - for executive directors and other executive officers

 A director or other officer breaches this duty if they are “negligent”

 The standard required of director X is the care that

 a reasonable person
 doing X’s job
 in X’s company

 would exercise (a largely “objective” test)

DUTY OF CARE, SKILL AND DILIGENCE

 See Daniels v AWA Ltd

 Every director must :

 obtain a basic understanding of their company’s business
 keep informed about and monitor the company’s activities
 regularly attend board meetings
 monitor the company’s financial position

 Directors with special skills are held to the standard of a person professing to have those skills: ASIC v Vines
– CFO of company

 The more you are involved, the more is expected of you

 Executive directors’ greater involvement in the business of the company leads to an expectation of greater
knowledge, focus and awareness

SO WHAT DO DIRECTORS HAVE TO DO?

 Directors may delegate any of their powers to any person, unless constitution
restricts delegation: s 198D

 If delegate is negligent, director will be liable unless requirements of s 190 satisfied

(eg, director believed on reasonable grounds that delegate was reliable and
competent)

 When a director’s reliance on information provided by employees, professional

advisers, other directors or officers, and board committees, is reasonable

 Set out in s 189 – good faith and independent assessment

 ASIC v Healey

DELEGATION AND RELIANCE DEFENCES

 Major example of breach of duty of care

 Payment by HIHC to PEE

 Look at roles and actions of Adler, Fedora and Williams

 Material prejudice to co’s interests

 Cos had financial problems

 Overlapping duties – same conduct leads to multiple breaches

ASIC V ADLER
 Designed to protect D’s from negligence liability where properly made decisions end
badly

 Says when a director is taken to have met the requirements of s 180(1) ONLY!

 Director is taken to meet the statutory and general law duties of care in connection
with a business judgment if:
 good faith and for a proper purpose
 no material personal interest in subject matter of judgment
 inform themselves
 rationally believe the judgment is in the best interests of the company

 ASIC v Rich

THE BUSINESS JUDGMENT RULE – S180(2)

 Directors have a duty to prevent their company incurring debts when the company is insolvent or would
become insolvent: s 588G  please read this section carefully.

 Duty is owed by “directors” - includes de facto and shadow directors

 Standard Chartered Bank v Antico

 Note 588V for holding companies’ IT liability

 Person was a director when a company incurred a debt

 Company was “insolvent” at that time or became insolvent by incurring that debt

 At the time the debt was incurred, there were reasonable grounds for suspecting insolvency

 Includes “Deemed Debts”  see s588G(1A)  please read this carefully

INSOLVENT TRADING
 Section 95A : insolvency worked out using cash flow test (not balance sheet test)

 Question is: Is the company able to pay all its debts, as and when they become due
and payable?

 So: What cash does company have? What access to finance does company have?

 S 588G(2): Liability is imposed where:

 the director was aware that there were reasonable grounds for suspecting insolvency
(subjective test), or
 a reasonable person doing that director’s job in that company would have been aware that
there were reasonable grounds for suspecting insolvency (objective test)

INSOLVENT TRADING (CONTINUED)

 The debt
 must be for a specific amount
 must be incurred voluntarily by company
 When does a company incur a debt?
 Buys something but doesn’t pay for it yet
 Gets services performed but doesn’t pay yet
 Some actions are deemed to be debts but are not ‘true debts’ – see 588G(1A)
 eg declaring a dividend
 uncommercial transactions
 share capital transactions
 Why deem these as debts? Extends ASIC’s ability to bring action – NB not all debts
are deemed debts!

WHAT DOES “INCUR A DEBT” MEAN

 Director had reasonable grounds to expect, and did expect, that company was solvent
and would remain solvent
 harder to “expect” than to “suspect” - Metropolitan Fire Systems v Miller
 ignorance of company’s finances no excuse

 Delegation and reliance on competent and reliable person: s 588H(3)

 Absence from management, due to illness or other good reason: 588H(4)

 Deputy Commissioner of Taxation v Clark

DEFENCES S588H
 Director took all reasonable steps to prevent the company incurring the debt
 588H(5)+(6)
 appointment of an administrator under voluntary administration (VA) provisions

 Consequences:
 Civil penalty provision
 Pecuniary penalty, disqualification, compensation
 Also, liquidator can seek compensation: s 588M
 Also, an unsecured creditor can seek compensation: s 588S & s588T

 Criminal liability: s 588G(3)

DEFENCES (CONTINUED) & CONSEQUNCES

 MAKING GOOD AND USEFUL NOTES FOR DIRECTOR DUTY QUESTIONS

CONSIDER (AND RESPOND) TO THESE QUESTIONS WHEN YOU READ A HYPOTHETICAL

1. IS A DUTY OWED AND BY WHOM?

 s180? Or General Law?
 Director
 Other officers…
 s588G – Statutory Only
 Directors
 More to come in later weeks

2. HAS THE DUTY BEEEN BREACHED

 s180?
 Apply the test – what “standard” of care is required (objective and subjective tests)
 s588G
 Use the facts to address each of the elements in s588G(1) to establish a breach

PROBLEM SOLVING - A SUGGESTION ONLY

 MAKING GOOD AND USEFUL NOTES FOR DIRECTOR DUTY QUESTIONS

CONSIDER (AND RESPOND) TO THESE QUESTIONS WHEN YOU READ A HYPOTHETICAL

3. ARE THERE ANY DEFENCES?

 s180?
 s190(2) - delegation
 S189(b) – reliance
 S180(2) – business judgment rule
 s588G
 Check the 588H defences

4. WHAT ARE THE CONSEQUNCES FOR THE BREACH (ASSUMING A DEFENCE CAN NOT BE ESTABLISHED)
 s180?
 Civil Penalty Provisions under Pt 9.4B
 s588G
 Civil Penalty Provisions under Pt 9.4B
 Criminal liability – s588G(3)

PROBLEM SOLVING - A SUGGESTION ONLY

1. Is a duty owed and by whom?
 Statutory duty (s180(1) CA) or General Law (common law / equity)
 Owed by directors and officer
2. Has the duty been breached?
 Check the standard of care required (objective and subjective tests)
 Daniels v AWA  minimum standard for all directors
 ASIC v Vines  higher standard based on skills and experience
3. Are there any defences?
 s190(2) – “delegation defences” (note: requirement to make proper inquiry that the delegate was reliable and
competent)
 s189(b) – “reliance defence” (note: reliance must be in good faith and after making an independent
assessment of the information)
 S180(2) – “business judgment rule” (generally say why it DOESN’T apply and why e.g.) “the business
judgment rule will not save the directors from liability under s180(1) because the directors have a conflict of
interest being “x”)
4. WHAT ARE THE CONSEQUENCES?
 Statutory duty - Civil Penalty Provisions under Pt 9.4B
 General Law – compensation / damages etc

DUTY OF CARE PROBLEM SOLVING (AN

EXAMPLE)
 Understand and appreciate how and why we have directors’ duties (in a broad context).

 Appreciate that the duties exist under the general law and the statute.

 Understand the source of the duties (general law or statute) guides us with respect to WHO can
enforce the duty and WHAT remedies are available.

 Understand how the case law is used to give meaning to the statute and to help us establish a
‘breach’

 Recognise the operation and application of s180 including the minimum standard of care, the
defences for breach (“reliance”, “delegation”, “business judgment rule” and the consequences
for breach of duty under the statute and the general law

 Recognise the operation and application of s588G and be able to use the legislation to
establish a breach, impose liability and discuss defences under s588H

TO SUMMARISE
 Lecture 7
 Directors Duties Part II 

6 down…5 to go!

NEXT WEEK
BLAW20001
CORPORATE LAW 2020

LECTURE 7
Julian Panetta – [email protected]
GM02, Mezzanine Level, Melbourne Law School
 MCQ Test 2 is now open
 5% of your mark
 Please ensure you complete it by the due date (see Canvas for more information)
 Assignment Marking (Update)
 100 papers marked, 750 to go!
 We are aiming to return them at the end of Week 9 or early in Week 10
 Questions about course content
 Please make use of the consultations. There are a couple of hours each day of the week.
You may join these without prior appointment.
 Exam Preparation
 Start working on your exam notes (if you haven’t started already)
 There is information on Canvas about making good notes
 Feel free to talk to us during consultations about this as well

HOUSEKEEPING
s181 – Good faith – directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their
duties
(a) In good faith in the best interests of the corporation; and
(b) For a proper purpose
Note: This subsection is a civil penalty provision (see s1317E)

 Director must act in good faith in the best interests of the company, and for a proper purpose
 Two separate issues
 Both are in the statutory duty in s 181
 Two general law duties
 Director must act in good faith ie honestly
 Must do what they genuinely believe is best for the company, not themselves or a
particular stakeholder group
 What are the best interests of the company?

BEST INTERESTS DUTY (OVERVIEW)

 “Good Faith”
 Directors must act “honestly”

 Charterbridge Corp Ltd v Lloyds Bank Ltd

 Not in your textbook but it gives us a really good test

 “The test for ‘good faith’ is whether an intelligent and honest person, in the position of the
company…could…in the whole of the existing circumstances, reasonably believe that the
transactions were for the benefit of the company”

“GOOD FAITH”
 What is the best interests of the company? Look at:-
 Whether the directors have received and personal benefit for their actions
 Whether the directors have acted honestly towards members; and
 Whether the directors have acted honestly towards each other

 Generally, the interests of a solvent company are those of its members

 Directors must look to the company “as a whole”, Greenhalgh v Arderne Cinemas

 Balance competing interests

 Must act fairly but not identically as between members of different classes

 Balance between present and future – preparing for climate change …

WHAT IS IN THE BEST INTERESTS OF THE
COMPANY?
 Generally speaking:
 The interests of a solvent company are those of its members
 Directors must look to the company “as a whole”, Greenhalgh v Arderne Cinemas
 Balance competing interests
 Must act fairly but not identically as between members of different classes
 Balance between present and future – preparing for climate change …

BEST INTERESTS – MEMBERS AS A WHOLE

 When a company is insolvent or “nearing insolvency”, the creditors’ interests become
those of the company: Kinsella; Walker v Wimborne
 For example, not removing assets
 Note this is not a duty enforceable by creditors – it is a duty to the company: Spies v The
Queen

 Walker v Wimborne
 “the directors of a company in discharging their duty to the company must take into
account of the interests of its shareholders and creditors. Any failure by the directors to
take into account the interests of creditors will have adverse consequences for the
company as well as them”

BEST INTEREST - CREDITORS

 Kinsela v Russell Kinsela Pty Ltd (in liquidation)
 The company was facing insolvency
 The directors transferred assets out of the company to keep them beyond the reach of the
creditors
 Because the company was insolvent, the court expanded the ‘interests of the company’ not
only to its members, but to that of its creditors

BEST INTEREST - CREDITORS

 Duty is to each co separately; directors can’t just consider group as a whole
 Walker v Wimborne
 Test: whether an intelligent honest person in the position of the director could have
reasonably believed the decision would benefit the company
 Equiticorp Finance v BNZ
 Section 187 - Subsidiary directors are taken to act in the best interests of the WHOLLY
OWNED subsid where:
 Subsidiary constitution expressly authorises it; and
 They act in good faith in best interests of holding company, and
 Subsid is not insolvent and is not made insolvent by the action

BEST INTEREST – CORPORATE GROUPS

 Can directors take into account the interests of employees, customers, suppliers and
the community?

 Only where benefit comes back to co

 Consider corporate social responsibility – ‘doing well from doing good’

 Outsiders cannot receive priority over interests of members: Parke v Daily News -
payment to departing employees

BEST INTEREST – EMPLOYEES

 What does “proper purpose” mean?
 Sometimes this will be written down or clarified that the company shall engage in certain types of activities.
 However, sometimes it is a bit harder to see exactly what the proper purpose of the company is.

 Let’s look at an example:

 A proper purpose for issuing shares is:-
 Raising capital – the company needs money;
 Employee share schemes
 For acquisitions – corporate acquisitions or assets
 An improper purpose of issuing shares would be:
 To entrench the existing board of directors
 To make the majority member a minority member
 Retaining control
 Retaining your position on the board

 Note: Even if the director’s’ actions are carried out genuinely in good faith in the best interests of the
company, it may still be a breach of duty if the power is not exercised for a proper purpose

DUTY TO ACT FOR A PROPER PURPOSE

 Section 181 - also a general law duty

 Even if director’s actions are in company’s best interests, it may still be a breach of
duty if a power is not exercised for a proper purpose

 See Howard Smith case:

◦ Question of law – for what purpose was the power conferred?
◦ Question of fact – for what purpose was the power exercised?

 Mixed purpose: if more than one, use the “but for” test – Whitehouse v Carlton

 Can’t use company money to campaign for director re-election: Advance Bank v FAI
Insurances

PROPER PURPOSE – THE TESTS

 Lets assume that your company issues shares to Hagrid so as to retain control and
prevent a hostile takeover.

 The question before the court may me, “was the power to issue shares exercised for
a proper purpose”?

 Applying the two-step test from Howard Smith v Ampol Petroleum

 Applying step 1 – the legal purpose to issue shares is given by the directors to raise funds
 Applying step 2 – the actual purpose behind the share issue was to issue the shares To
Hagrid, to retain control and prevent a hostile takeover

 Result – breach of duty. The ACTUAL purpose behind the share issue does not fall within
the LAWFUL purpose

PROPER PURPOSE – THE TESTS (AN

 Whitehouse v Carlton – ‘but for’ test for mixed purpsoes

 Looking again at the power to issue shares, perhaps there is both a ‘proper’ purpose
for doing so and an ‘improper’ purpose.

 To determine if there is a breach of duty, you must apply the ‘but for’ test from
Whitehouse v Carlton to see if the ‘evil’ motive outweighs the ‘proper and lawful’
motive’

 For example:
 “But for”/ or “without” the evil motive, would the company issue shares?

PROPER PURPOSE – MIXED PURPOSES TEST

 Let’s assume you are building you case against the directors for an alleged breach of
s181.

 Is there anything you can do here to argue a defence?

 Note – there are no ‘statutory’ defences’ which can be relied upon (contrast this with
defences for other duties such s180 and s588G)

 What argument could you make?

 Looking at the power to issue shares, you could attempt to defend yourself by arguing that
there were MULTIPLE purposes behind your decision to exercise power

 If the court finds that you were primarily motivated by an evil purpose – you will lose. If the
court finds that you would have issued the shares anyway, despite the evil motive, you will
win.

DEFENCES
 Section 181 is a civil penalty provision

 Also criminal offence: s 184(1) – reckless or intentionally dishonest

 General law remedies also available – see lecture 11

CONSEQUENCES
 Remember we have a 4-step appraoch for responding to director duty questions:
 1. Is a duty owed and by whom?
 Here we are looking at s181
 The statutory duty is owed by directors and other officers
 2. Has the duty been breached?
 Look at the circumstances of what has happened, proper/improper, best interests and good faith
 USE THE CASE LAW!
 3. Are there any defences?
 Whitehouse v Carlton
 You could argue that the PROPER purpose outweighs the IMPROPER purpose
 Court will decide
 4. What are the consequences
 Section 181 is a civil penalty provision
 Also criminal offence: s 184(1) – reckless or intentionally dishonest

PROBLEM SOLVING
 What is a dividend?

 Why pay dividends?

 The legislation helps govern the rules relating to payment of dividends but it is
ambiguous

DIVIDENDS
 S 254T - dividends must NOT be paid unless
 Assets exceed liabilities
 Fair and reasonable to shareholders as a whole
 No material prejudice to ability to pay creditors

 How relevant is co profit? When CAN dividend be paid?

 Problem is – Ch 2J limits returns of capital …

DIVIDENDS – S254T
 s254W
 prescribes the dividend rights of a particular class of shares and you will note that there are differences
here between public companies and proprietary companies
 A replaceable rule
 Need to look at other sections of the Act for guidance e.g) s254U

 s254U
 Givers directors the power to determine that a dividend is payable and fix the amount, time for payment
and method of payment
 Directors are under no obligation to pay dividends

 s254U and s254W provide guidance on how to pay dividends based on the particular company
type.

 However – ALL of this is subject to s254T and to their directors’ duties

DIVIDENDS – S254W, S254U

 s254W and s254U is subject to s254T which tells us when a company must not pay
dividends

 If breached:
 Civil consequences
 Criminal consequences – sch 3 penalty
 Breach of one or more of the general law or statutory directors’ duties as a result of the
payment of the dividend

CONSEQUENCES OF IMPROPER PAYMENT OF

DIVIDENDS
 Understand and appreciate how and why we have the duty to act in good faith, in the best
interests of the company and for a proper purpose.

 Understand what is meant by “good faith”, “best interests” and “proper purpose”

 Be able to apply the relevant tests for determining “proper purpose”

 Be able to raise relevant defences for an alleged breach of the duty

 Be aware of the relevant consequences for a breach of the duty

 Be able to use the ‘4-step method’ to problem solve director duty questions

 Understand the law which governs the payment of dividends including the consequences for
breach.

TO SUMMARISE
 Lecture 8
 Directors Duties Part III 

7 down…4 to go!

NEXT WEEK
BLAW20001
CORPORATE LAW 2020

LECTURE 8
Julian Panetta – [email protected]
GM02, Mezzanine Level, Melbourne Law School
 MCQ Test 2
 Results are now available

 Assignment Marking (Update)

 300 papers marked, 450
 We are aiming to return them at the end of Week 9 or early in Week 10

 Questions about course content

 Please make use of the consultations. There are a couple of hours each day of the week. You may
join these without prior appointment.

 Exam Preparation and guidance on legal writing

 Start working on your exam notes (if you haven’t started already)
 There is information on Canvas about making good notes
 Please refer to the information and resources on Canvas and talk to us if you have any queries.

HOUSEKEEPING
 Requests for tutorial solutions

 Assistance with legal writing and feedback

 Requests for review and feedback on tutorial attempts

 Requests for past exams

 Assistance with making useful exam notes

 Increased engagement during tutorials

 Lecture slides and guides

 Prescribed reading

 Exam information

RESPONDING TO FEEDBACK
 The duties exist under statute and under the common law

 There is a great deal of overlap between the two ‘sources’ of these duties

 Key differences:-
 Who can take take action e.g.) ASIC or the ‘company’
 What remedy is available – Week 11

 What we have looked at:

 Duty of care
 Duty to prevent insolvent trading
 Duty to act in good faith, in the best interests of the company and for a proper purpose

RECAPPING OUR DIRECTORS’ DUTY

JOURNEY
 1. Is a duty owed and by whom?

 2. Has the duty been breached?

 3. Are there any defences?

 4. What are the consequences

PROBLEM SOLVING - A SUGGESTION ONLY

 Director must avoid an actual or substantial possibility of conflict between a personal
interest and the director’s duty to act in the interests of the company

 Unless the permission of the company is obtained or the constitution allows the
director to have personal interest in the transaction – if so, there is no breach of duty.

 Both general law and statutory duties

 Directors need to be aware what is the best for the COMPANY

DUTY TO AVOID CONFLICTS OF INTEREST

 General law conflict rule
 Directors must not place themselves in a position where their personal interests conflict with
their duty to act in the interests of the company UNLESS they have the permission of the
members in the company to do so
 Applies to fiduciaries

 Statute has extra provisions re conflict

 S 191; s 195 – criminal breaches!
 Related party transactions – civil penalty breach; NOT a duty

 Statutory duties apply more widely than general law

 Statute:
 S 182 and 183 – directors, officers and employees
 S 191 – only directors
 Remember different remedies, who can enforce etc.
DIFFERENCES BETWEEN GENERAL LAW AND
STATUTORY DUTY
 A director is not permitted to take benefit personally from their position in the
company if there is also a benefit to the company

 If the director fails to disclose the benefit, they will have breached their duty

 Example:
 Fur Ltd v Tomkies
 A clear-cut case of conflict of interest.
 What Mr Tomkies did, he did for himself and not for the company of which he was a director

UNDISCLOSED PERSONAL PROFITS

 Directors must not take for their own benefit, property, information or corporate
opportunities that belong to the company.

 Examples of corporate opportunities:-

 The company is considering an actual business opportunity; or
 There is a business opportunity that the company might reasonably be expected to be
interested in given its current business

 Examples:-
 Regal Hastings v Gulliver
 Directors will be in breach even if the company itself cannot take up the opportunity, unless the
company agrees.
 Cook v Deeks
 Clear breach of duty to the old company because they had cut the fourth director out which mean
that the company lost out as well

TAKING A CORPORATE OPPORTUNITY

 A director who resigns from a company to take up a corporate opportunity will still be
found to have breached their duty if:-
 Their resignation was influenced by the director’s desire to acquire the opportunity sought
by the company; or
 It was the director’s position with the company that led them to the opportunity

 Example:
 Canadian Aero Services v O’Malley
 Even if the company is not in a position to take up the corporate opportunity, there is still a breach
if the director takes the benefit.

TAKING A CORPORATE OPPORTUNITY – RESIGNING TO TAKE

UP AN OPPORTUNITY
 The general law conflict rule also applies where there is a conflict between the
director’s duty to the company and the directors duty to another company.

 Example:-
 State of South Australia v Marcus Clark
 Refer to figure 14.2

MULTIPLE DIRECTORSHIPS
 The general law duties are broad in who they apply to. They apply to fiduciaries which
are those people in a position of power.

 Statutory duties are very specific in who they apply to.

 Refer to:–
 s182 and s183 – directors, officers and employees
 s191 – only directors

 Note:
 s191; s195 – criminal breaches

 s182 and s183 are closely linked and it is very easy to breach both of them at the
same time and be charged for both.
 Example – ASIC v Vizard

STATUTORY CONFLICT OF INTEREST DUTY

 A number of defences can be raised in response to an allegation of conflict against
the director and these allegations can be overcome by:-

 Seeking approval from the company;

 Members at a general meeting can ratify or approve the actions of directors
 Even if approval is obtained, relief is not always available

 Using the company’s constitution;

 e.g.) incorporating a particular clause

 Disclosing the interest to the company

 see s191
 s191 imposes a duty upon directors of both public and proprietary companies to disclose particular
interests

DEFENCES
 Refer to s191
 This section imposes an obligation on directors who have a material personal interest to give notice
of that interest to the other directors
 Failure to disclose is a breach of duty
 Criminal breach, not a civil penalty provision

 Check (per s191):

 What must be disclosed?
 The nature and extent of the interest and the relation of the interest to the affairs of the company

 What is a ‘material personal interest’?

 Must relate to the ‘affairs’ of the company.
 e.g.) the internal management and proceedings of the company, the ownership of share or other securities
issued by the company, the power of persons to control voting rights or the right to sell shares.

 Exceptions apply – see s191(2)

DISCLOSURE
 Refer to s192
 Can give standing notice of interest

 The notice must:

 Give details of the nature and extent of the interest; and
 It must be given at a directors meeting or to the other directors individually

 If the standing notice is given to the other directors, it must be tabled for discussion
at the next director’s meeting after it is given

HOW DO YOU GIVE NOTICE?

 Proprietary companies
 Refer to s194 (RR)
 PTY LTD company directors can have an interest and vote
 However, this does not permit them to breach their duties to the company

 Public companies
 Refer to s195
 Applies to directors of public companies both listed and unlisted
 A director with a material personal interest in a matter being considered by the board must not be
present or vote at the meeting UNLESS the other directors (or ASIC in limited circumstances), allow
it
 However, this does not permit them to breach their duties to the company
 Attracts criminal liability if breached

RESTRICTIONS ON VOTING
 General law conflict rules:
 Apply broadly to fiduciaries
 Lots of case law here to help you identify when a conflict arises

 Statutory conflict rules:

 Specific in who they apply to (read the relevant sections carefully)
 The statute provides limited guidance on what amounts to a ‘conflict’ so USE THE CASE
LAW as it provides necessary context

 Defences are available

QUICK SUMMARY
 General law duties
 Action may be brought by the company, a liquidator or a member
 Remedies may include:
 Damages
 Compensation
 An account of profits
 A declaration of trust and rescission.

 Statutory duties
 Action may be brought by ASIC
 s182 and s183 are civil penalty provisions – ASIC can seek relief under s1317E
 Criminal sanctions available under s184 if intentional dishonesty and recklessness can be
established
 S191 – attracts criminal liability which can include pecuniary penalties or imprisonment

CONSEQUENCES FOR BREACH OF DUTY

 Chapter 2E
 The prohibition
 Ch 2E prohibits a public company (or an entity that the public company controls) from giving a
financial benefit to a related party unless the financial benefit is exempt or the giving of the
financial benefit is approved by members of the public company.

 5 requirements:
 Public companies, or company (public or pty ltd) controlled by a public company – s 208
 Giving financial benefits - S229
 To related parties – 228
 Okay if member approval given – special rules for this, OR
 The benefit is exempt

RELATED PARTY TRANSACTIONS

 Public company
 This will be obvious to you – look at the name of the company and the indicator “LTD”

 Entities controlled by a public company

 Can include another company (including proprietary companies) – see s9 definition of
‘company’
 Refer to s50AA definition of control

ELEMENT 1 – PUBLIC COMPANY OR AN ENTITY

CONTROLLED BY A PUBLIC COMPANY
 Very broad!
 Refer to s229
 Can include interposed entities (ie, indirectly providing the benefit) – see s229(2)(a)
 Includes buying, selling or leasing assets or services, providing finance or issuing shares - see
s229(3)

ELEMENT 2 – WHAT IS A FINANCIAL BENEFIT?

 Refer to s228
 (1) Entities that control the public company
 (2)(a) – directors of the public company
 (2)(b) – directors of controlling entity
 (2)(d) – spouses of directors of above
 (3) – parents or children of the above
 (4) – entities controlled by any of the above

 Tip:
 Put yourself in the position of the public company (or an entity controlled by the public
company) and ask yourself, has the financial benefit (s229) been given to a person or
persons set out in s228

ELEMENT 3 – WHAT IS A RELATED PARTY

 Refer back to the prohibition in s208

 If member approval has been obtained – no contravention

 If member approval has not been obtained:

 Contravention of s208
 NOT a directors’ duty
 Civil penalty provision by virtue of s209
 Person’s involved in the contravention may face a civil penalty or criminal liability if the
breach involves dishonesty – see s209(3)

ELEMENT 4 – WAS APPROVAL OBTAINED?

 Member approval is not required if one of the s210 – 217 exemptions apply

 Exempt transactions include:

 benefits within wholly-owned groups - 214
 reasonable remuneration for directors - 211
 transactions on arm’s length terms - 210
 benefits to members that are not discriminatory - 215

ELEMENT 5 – EXEMPT TRANSACTIONS

 NOT a directors’ duty

 Company contravenes but has no penalty – that would hurt the shareholders who we
are trying to protect.

 Persons involved in company’s contravention are liable for civil penalty breach:
s209(2)

 This is NOT a breach of duty! Careful in answering exams asking for ‘what duties has
Bob breached …’

 Criminal offence: s 209(3)

CONSEQUENCES
1. Check
 Public or Proprietary Company?
 Key differences – e.g.) s191(2)(b), s194, s195

2. Identify the source of the duty (and check who it applies to and who can enforce it)
 General Law
 Applies to fiduciaries
 Enforceable by the company, liquidators etc.
 Statutory duties
 Can apply to directors, officers and employees but check the legislation (e.g. ss182, 183, 184 (criminal), s191, 192, 193, 194 etc)
 Enforceable by ASIC
 Note: The statute is broader and contain extra provisions/requirements

3. Use the case law where appropriate to help give meaning and context to the statute and/or the factual scenario

4. What are the consequences for breaching the duty?

 General law – e.g) compensation, damages etc
 Statutory duties
 Depends on the section breached
 e.g) s182 and 183 may incur civil penalties or criminal penalties (see s184(2) or (3)

PROBLEM SOLVING – CONFLICTS (A SUGGESTION ONLY)

1. Note
 s208 applies to Public companies or an entity that the public company controls (see 50AA)
 Rationale  to protect public company shareholders

2. Steps to consider:
 s208 - the prohibition against providing a financial benefit to a related party. Has member approval
been given?
 Check – does an exemption apply (see s210 – 217)
 s229 – has financial benefit been given? Use the legislation to guide you here.
 S228 – has the financial benefit been given to a ‘related party’? Use the legislation to guide you.

3. What are the consequences for contravention of s208?

 s209(2) – civil penalty provision – persons involved in the contravention
 s209(3) – criminal liability

PROBLEM SOLVING – RELATED PARTY TRANSACTIONS

 Understand and appreciate the difference between the general law conflict rules and the
statutory conflict rules.

 In particular, ensure you understand

 WHO the rules apply to;
 WHO can take action;
 What remedies are available for a breach

 Be aware of and understand the large body of case law which helps illustrate when the conflict
rules have been breached.

 Understand the various rules relating to disclosure, including the restrictions on voting. Note
that the rules are different for public and proprietary companies.

 Understand the rationale behind Ch 2E and be able to identify when a contravention of s208
may occur.

TO SUMMARISE
 Lecture 9
 Increasing share capital
 Maintenance of capital

8 down…3 to go!

NEXT WEEK
BLAW20001
CORPORATE LAW 2020

LECTURE 9
Julian Panetta – [email protected]
GM02, Mezzanine Level, Melbourne Law School
 MCQ Test 3
 Open 9am Monday 25 May – 9pm Sunday 31 May 2020
 10 questions, 30 minutes, 10%
 Lectures and prescribed readings for topics 1 – 9 (includes this week)

 Assignment Marking (Update)

 700 papers marked, 150 to go!
 Returned early next week (or over the weekend if we get it done sooner)

 Change to course syllabus

 See Canvas for more information

 Assessment
 NO Tutorial attendance mark (removed 5 weeks ago)
 MCQ Quizzes (x3) = 20% (in total)
 Assignment – 15%
 Exam – 65%

HOUSEKEEPING
 Remaining lectures
 Today:
 Increasing share capital and maintenance of share capital
 Next week
 BIG lecture. BIG tute – don’t miss it!
 Record keeping. Information and reporting. Enforcement of duties. Remedies.
 Final Lecture:
 Revision
 Exam information
 Past questions

HOUSEKEEPING (CONTINUED)
 Process of share issue:
 Generally, a decision of the board
 Directors must exercise their share issue power for a proper purpose

 Relevance of directors’ duties

 Everything a director does is subject to his or her directors’ duties
 These are duties which are owed to THE COMPANY

 Other legal requirements?

 Member approval
 Restrictions on WHO the shares can be issued
 Disclosure requirements in Ch 6D

INCREASING SHARE CAPITAL

 See Fig 19.4 on page 428 of CACL.

 Is member approval required?

 Generally speaking, member approval for the issue of new shares is not required – but there
are some exceptions!
 E.g.) Variation of Class Rights, Related Party Transactions etc.

 Are there any restrictions on the types of people to whom shares can be offered?
 Different rules for Public Companies v Proprietary Companies
 Capacity
 Pre-emption rights – see s254D

 Must a disclosure document be prepared and lodged with ASIC under Ch 6D of the Act?

KEY RULES GOVERNING A SHARE ISSUE

 Capital maintenance rules are well-established corporate law principles that have
changed over time

 Broadly speaking – company law prevents a company from reducing its equity capital
while the company is in operation.

 Some exceptions apply, for example:-

 The payment of permitted dividends
 The giving of permitted financial assistance
 Permitted share buy backs
 Permitted reductions of capital

INTRODUCTION
 General principle of company law that a company must maintain its paid up share
capital – the rule in Trevor v Whitworth

 The principle has evolved over time to represent a more modern understanding of the
doctrine

 Extended and modified in Chapter 2J of the Act, dealing with restrictions on:-
 a company paying dividends to its members
 a company acquiring its own shares or those of its controlling entities;
 a company giving financial assistance to a person to acquire shares in the company or its
holding company;
 the ways in which a company can reduce its share capital

MAINTENANCE OF CAPITAL
 Until 2010,the rule was such that dividends could only be paid out of profits.

 Now, under s254T, directors may not pay a dividend unless:

 excess of assets over liabilities immediately before the dividend is declared;
 The payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and;
 the payment of the dividend does not materially prejudice the company’s ability to pay its
creditors.

 Dividend rules can be closely linked to the insolvent trading provisions under the Act to
deem a director liable for a breach of duty

 Consequences for a breach?

 A contravention of s588G(2) is a civil penalty provision – see s1317E
 Criminal liability under s588G(3) if the director acted dishonestly in failing to prevent the company
from declaring or paying the dividend

DIVIDENDS
 Part 2J.2 prohibits:
 A company acquiring shares in itself – s259A
 the issue or transfer of shares to a controlled entity – s259C

 Does not extend to redeemable preference shares

 Exception in s259D

 Rationale for prohibition:-

 The current board and senior management may entrench their control;
 Manipulation of share price;
 Unfair treatment of members

 Consequences for a breach:

 Failure to comply sith s259A or s259B are set out in s259F
 Persons ‘involved in the contravention’ – civil penalty provision – see s259F(2)

SELF-ACQUISITION
 Part 2J.3 (see s260A) only allows a company to ‘financially assist’ the acquisition of
shares in the company or its holding company if:
 it does not materially prejudice the interests of the company, or its shareholders or its
ability to pay its creditors; or
 it is approved by shareholders (s260B); or
 It is exempt

 Figure 20.1 on page 440 of CACL

 Examples of financial assistance:

 Giving a loan
 Giving a guarantee

FINANCIAL ASSISTANCE
 “Material prejudice” – a question of fact to be determined in light of the circumstances

 See ASIC v Adler - the company is impoverished overall by the transaction

 Note – EVERYTHING a director does is subject to his / her directors’ duties

 When member approval is given – see s260B

 Consequences of a breach:-
 See s260D
 Persons “involved in the contravention” – civil penalty provision (s1317E)
 Criminal liability under s260D(3) if the person’s involved in the contravention were
dishonest in their dealings

FINANCIAL ASSISTANCE - CONTINUED

 Buy-backs are allowed by the law in certain circumstances

 The individual shareholder / member has the CHOICE of accepting or refusing

 Certain buy-backs (in particular, large buy-backs and selective buy-backs) must be
approved by members’ resolution

 See s257A of the Act. A company may buy-back its shares if:-
 the buy-back does not materially prejudice the company’s ability to pay its creditors; and
 The company follows the procedures set out in ss 257A – 257J

PERMITTED BUY-BACKS
 Procedural requirements are set out in s257B which contains a very handy table (extracted in Figure 20.1 of CACL)

 Note – with a buy-back, shareholders are not forced to sell their shares, they may choose to do so. Buy-backs
contemplate an OFFER which shareholders may decline.

TYPE PROCEDURE
Minimum holding Cancel shares and notify ASIC
Employee Share Schemes Members’ ordinary required if it is over 10/12. Cancel shares
and notify ASIC
On Market Members’ ordinary resolution required if it is over 10/12.
Cancel shares and notify ASIC.
Equal Access Members’ ordinary resolution required if it is over 10 / 12.
Cancel shares and notify ASIC
Selective Members’ special resolution required. Voting restrictions apply.
Cancel shares and notify ASIC

 Consequences for breach:

 A contravention of s259F
 Consequences set out in s257J – civil penalty provisions (s1317E) – persons ‘ involved in the contravention’ (s259F(2))
 Criminal liability for intentionally dishonest conduct – s259F(3)

PROCEDURES FOR BUY-BACKS

 An alternative to a buy-back

 Reductions of capital may be made to return excess capital, cancel uncalled capital no
longer required or cancel capital no longer represented by assets

 Differ from a buy back in that, once approved, members are bound to participate even if
they do not wish to. In other words, a member’s shares can be cancelled against their will

 Refer to s256B – a company can undertake a reduction of capital provided:-

 It is fair and reasonable to the company’s shareholders as a whole; and
 It does not materially prejudice the company’s ability to pay its creditors; and
 It is approved by shareholders under s256C

 Note that dissenting shareholders have a right to ask the court to review.

PERMITTED REDUCTIONS OF CAPITAL

 When is a reduction ‘fair and reasonable’ to shareholders?
 It depends!
 Consider (for example) – the effect on shareholder rights, the adequacy of the payment (if any)
to shareholders etc.

 What are the requirements for member approval?

 See s256C
 Check to see if it is an ‘equal’ or ‘selective reduction
 See Fig 20.3 on page 448 of CACL

 What are the consequences for a breach?

 If the requirements under s256B have not been met therefore contravening s256B(2)
 Persons ‘involved in the contravention’ – civil penalty provision – see s256D(3)
 Criminal liability under s256D(4) if the contravention involves dishonest conduct

PERMITTED REDUCTIONS OF CAPITAL

(CONTINUED)
 Understand how and why a company may decide to increase its share capital

 Understand the key rules governing a share issue

 Understand the rationale behind the maintenance of capital provisions

 Recognise and appreciate the restrictions imposed on dividend payments

 Understand the rules prohibiting self-acquisition

 Understand the circumstances in which a company may provide financial assistance

 Understand and recognise the differences between buy-backs and permitted reductions of
capital, including the procedures which must be followed to give effect to each

TO SUMMARISE
 Lecture 10
 HUGE lecture
 Record keeping
 Information and reporting
 Enforcement of duties
 Remedies

 Tutorial 9 (Week 10)

 Biggest tute of the semester
 Loads of fun to be had
 Don’t miss it!

9 down…2 to go!

NEXT WEEK
BLAW20001
CORPORATE LAW 2020

LECTURE 10
Julian Panetta – [email protected]
GM02, Mezzanine Level, Melbourne Law School
 MCQ Test 3
 Open 9am Monday 25 May – 9pm Sunday 31 May 2020
 10 questions, 30 minutes, 10%
 Lectures and prescribed readings for topics 1 – 9

 Assignments
 Have been returned
 Attend a feedback session if you have further questions – read the feedback sheet first!

 Lecture 11 (Next Week)

 Revision
 Exam Tips

 Exam
 Information on Canvas
 Content and format – next week

HOUSEKEEPING
 S 232, in respect of:
 the conduct of the company’s affairs, or
 an actual or proposed act or omission by or on behalf of the company, or
 a resolution, or a proposed resolution, of members or a class of members

 Where the conduct complained of is either:

 contrary to the interests of the members as a whole, or
 oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or
members

OPPRESSION REMEDY – PT 2F.1

 A member, even if the oppression relates to
 the member in a capacity other than a member
 another member in their capacity as a member
 S 234(a)

 A person removed from the register of members because of a selective capital

reduction or oppressive behavior
 S 234(b)

WHO CAN APPLY TO THE COURT?

 Wayde v NSW Rugby League : Was directors’ decision one that no board of
directors acting reasonably would have made? Not here

 Look at the unfairness to the member – not enough just to be ‘prejudicial’

 Eg Thomas v HW Thomas – policy of low dividends not oppressive

 Different if there was a change of policy deliberately to exclude someone

WHAT ARE THE TESTS?

 Diversion of business opportunities
 Scottish Cooperative Wholesale v Meyer
 Improper exclusion from management
 Does member have a “reasonable expectation”?
 Hogg v Dymock
 Oppressive conduct of board meetings
 John J Starr Real Estate
 Share issue for improper purpose
 Kokotovich Constructions v Wallington
 Breaches of directors’ duties
 Re Spargos Mining NL
 Sale of company assets at undervalue
 Cassegrain v Gerard Cassegrain

EXAMPLES OF OPPRESSIVE CONDUCT

 Any order “it thinks appropriate”. For example:
 winding up company
 regulating the company’s affairs
 purchase of oppressed member’s shares
 order for the company to start legal proceedings against someone (eg
director)
 Avoids members’ derivative action procedure
 appointment of a receiver
 restraining someone from doing something, or requiring someone to do
something

WHAT ORDERS CAN THE COURT MAKE?

S233
 A member (and some others, eg a creditor, ASIC) can apply to court to have company
wound up where:
 just and equitable (s 461(1)(k)), or
 directors acting in own interests, or unfair or unjust to members (s 461(1)(e)), or
 oppressive, unfairly prejudicial or unfairly discriminatory conduct - (s 461(1)(f))
 Member’s right to apply
 S 462(2)(c) – ‘ a contributory’ – ie, a member per s 515.
 BUT no winding up order under (e) if
 Some other remedy available, AND
 Member acting unreasonably in asking for winding up: s 467(4)

COURT ORDERED WINDING UP – S461

 Deadlock

 Fraud or misconduct
 Loch v John Blackwood

 Failure of substratum
 Re Tivoli Freeholds

 Breakdown in mutual trust

 Ebrahimi v Westbourne Galleries

WINDING UP ON JUST AND EQUITABLE

GROUNDS
 Only deals with breaches of the Corporations Act
 Not breaches of case law
 Not breaches of replaceable rules or constitution – s 135(3)
 Court order re past, present or future conduct
 ‘restraining’ or ‘requiring’ an act; also damages: s 1324(10)
 Who can apply ?
 ASIC, the company or where ‘interests have been affected’
 Eg a creditor – Allen v Atalay but not for damages: McCracken v Phoenix Constructions
 Eg a member – some courts disagree
 eg Airpeak v Jetstream says yes; Mesenberg v Cord says no

 s 1324(1A): special right of members and creditors to sue for share capital breaches where
‘insolvency is an element’

STATUTORY INJUNCTION – S1324

 What is a statutory derivative action (SDA) ?
 An action to enforce a right belonging to the company
 eg to enforce a breach of directors’ duties
 Even though a member brings a derivative action, the action is not for the benefit of the
member - it’s for the company’s benefit
 any remedies go to the company!!

 Deals with “standing” of the applicant - not the “merits” of the case

 Who may apply?

 a member, former member, or person entitled to be registered as a member of the
company or a related company
 an officer or former officer of the company

MEMBERS’ DERIVATIVE ACTION – PART

2F.1A
 Court must grant leave if all of the criteria are met:
 is probable that the company will not take legal action
 applicant is acting in good faith
 is in the best interests of the company for applicant to be granted leave
 serious question to be tried
 Swansson v RA Pratt Properties

 Ratification by members (discussed later in this lecture) does not prevent SDA: s 239

 Who pays the legal costs? Court decides: s 242

WHAT ARE THE CRITERIA FOR AN SDA?

 Arise from general law (case law), both ‘common law’ and ‘equity’.

 So, the right to sue AND the remedy both come from cases …

 What are they?

 Injunction (to stop a future action)
 Compensation or damages
 Account of profits (eg Regal (Hastings))
 Rescission of contract
 Constructive trust

COMPANY REMEDIES – BREACH OF GENERAL LAW

DUTIES
 ‘Breach’ and ‘contravention’ are used interchangeably
 What can be breached/contravened?
 General law – where cases give a right to sue – ‘cause of action’
 Eg general law directors’ duties such as negligence, duty of loyalty
 Breach of contract

 Corporations Act
 Criminal breaches, large and small
 Civil penalty breaches
 Some of the directors’ duties
 Some other breaches eg share capital maintenance breaches
 Civil rights of action
 Eg breach of s 140 contract based on constitution
 Remember, s 232 (oppression) and s 461 (winding up) can be brought even without any statutory or
general law breach

BREACHES, CONTRAVENTIONS & RIGHTS TO

SUE
 Depends on what it is!
 Enforcement by ASIC:
 Criminal actions, big and small
 ‘Civil penalty’ actions – defined in s 1317E

 Enforcement by company
 ‘Civil penalty’ actions
 Civil actions – eg where general law or Corps Act gives company right to sue

 Enforcement by members
 Specific provision under statute
 Eg s 232, s 461, s 140
 NOT criminal actions; NOT civil penalty actions (but see s 1324 …)
 General law rights

WHO BRINGS THESE ACTIONS?

◦ Can be a serious offence:
◦ Eg dishonest breach of directors’ duties: s 184
◦ Can be a small technicality, eg s 254Y
◦ (1) Within 1 month after shares are cancelled, the company must lodge with ASIC a notice in
the prescribed form that sets out:
◦ (a) the number of shares cancelled; and ….
◦ (2) An offence based on subsection (1) is an offence of strict liability.
◦ What is the punishment?
◦ Some maximum penalties are in Schedule 3; actual penalty decided by court; penalty unit is
$210 each eg
 s 184: 2,000 penalty units or 5 years jail or both
 s 254Y: 5 penalty units
Others are called ‘prescribed’ offences
◦ Small breaches where no penalty specified in Sch 3
◦ Defined in s 1311: $1050 fine; penalty notice imposed by ASIC

ASIC CRIMINAL ENFORCEMENT –

‘OFFENCES’
 Action by ASIC or the company.

 Include directors’ duties, insolvent trading, related party transactions, capital maintenance,
financial reporting: s 1317E

 ASIC applies to court for a declaration of contravention

 Civil standard of proof, rules of evidence and procedure

 Court can make these orders on ASIC’s application:

 Pecuniary penalty up to $200,000: s 1317G
 Disqualification order: s 206C
 Compensation order: s 1317H

 Company can also apply for compensation even if no action by ASIC: s 1317H

CIVIL PENALTY PROVISIONS – PART 9.4B

 Not for criminal breaches of the Act

 The court may forgive

 civil penalty breaches, whatever they are – s 1317S
 civil liability – s 1318:
 ‘negligence, default, breach of trust or breach of duty’

 Requirements :
 The officer has acted honestly, and
 Considering all circumstances, it is “fair” for the officer to be excused, wholly or partly,
from liability

CAN THE DIRECTOR BE FORGIVEN FOR THE

BREACH?
 Ordinary resolution of members in general meeting can ratify some breaches of
general law duties
 members must be given full information
 result is director or officer cannot be sued by the company

 Not available for statutory duties:

 Miller v Miller

 Company can’t ratify where

 It is oppressive
 Company is virtually insolvent (Kinsella)
 It breaches the equitable limitation
 Takes away a member’s personal right
 Where company property is being taken by directors or majority members
 Where directors are acting for an improper purpose

RATIFICATION BY THE COMPANY

 Understand WHO, WHEN and HOW to use the oppression remedy and consider WHAT types of orders may be
appropriate.

 Understand how and when to use the s461 court ordered winding-up

 Understand how and when to use the statutory injunction under s1324

 Understand how the SDA operates and when to use it.

 Have an appreciation for the types of remedies available for the company for breaches of the general law
duties

 Understand WHO can bring an action (e.g) ASIC, the Company, Members etc.) and when / why they would do so

 Understand the difference between criminal penalties and civil penalty provisions – including WHO can ask for
these and in what circumstances

 Understand what ratification is and when a director can be forgiven for a breach

TO SUMMARISE
 Lecture 11
 Revision
 Exam Information
 Q&A
 Past Exam Question

10 down…1 to go!

NEXT WEEK
BLAW20001
CORPORATE LAW 2020

LECTURE 10
Julian Panetta – [email protected]
GM02, Mezzanine Level, Melbourne Law School
 MCQ Test 3
 Open 9am Monday 25 May – 9pm Sunday 31 May 2020
 10 questions, 30 minutes, 10%
 Lectures and prescribed readings for topics 1 – 9

 Assignments
 Have been returned
 Attend a feedback session if you have further questions – read the feedback sheet first!

 Lecture 11 (Next Week)

 Revision
 Exam Tips

 Exam
 Information on Canvas
 Content and format – next week

HOUSEKEEPING
 S 232, in respect of:
 the conduct of the company’s affairs, or
 an actual or proposed act or omission by or on behalf of the company, or
 a resolution, or a proposed resolution, of members or a class of members

 Where the conduct complained of is either:

 contrary to the interests of the members as a whole, or
 oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or
members

OPPRESSION REMEDY – PT 2F.1

 A member, even if the oppression relates to
 the member in a capacity other than a member
 another member in their capacity as a member
 S 234(a)

 A person removed from the register of members because of a selective capital

reduction or oppressive behavior
 S 234(b)

WHO CAN APPLY TO THE COURT?

 Wayde v NSW Rugby League : Was directors’ decision one that no board of
directors acting reasonably would have made? Not here

 Look at the unfairness to the member – not enough just to be ‘prejudicial’

 Eg Thomas v HW Thomas – policy of low dividends not oppressive

 Different if there was a change of policy deliberately to exclude someone

WHAT ARE THE TESTS?

 Diversion of business opportunities
 Scottish Cooperative Wholesale v Meyer
 Improper exclusion from management
 Does member have a “reasonable expectation”?
 Hogg v Dymock
 Oppressive conduct of board meetings
 John J Starr Real Estate
 Share issue for improper purpose
 Kokotovich Constructions v Wallington
 Breaches of directors’ duties
 Re Spargos Mining NL
 Sale of company assets at undervalue
 Cassegrain v Gerard Cassegrain

EXAMPLES OF OPPRESSIVE CONDUCT

 Any order “it thinks appropriate”. For example:
 winding up company
 regulating the company’s affairs
 purchase of oppressed member’s shares
 order for the company to start legal proceedings against someone (eg
director)
 Avoids members’ derivative action procedure
 appointment of a receiver
 restraining someone from doing something, or requiring someone to do
something

WHAT ORDERS CAN THE COURT MAKE?

S233
 A member (and some others, eg a creditor, ASIC) can apply to court to have company
wound up where:
 just and equitable (s 461(1)(k)), or
 directors acting in own interests, or unfair or unjust to members (s 461(1)(e)), or
 oppressive, unfairly prejudicial or unfairly discriminatory conduct - (s 461(1)(f))
 Member’s right to apply
 S 462(2)(c) – ‘ a contributory’ – ie, a member per s 515.
 BUT no winding up order under (e) if
 Some other remedy available, AND
 Member acting unreasonably in asking for winding up: s 467(4)

COURT ORDERED WINDING UP – S461

 Deadlock

 Fraud or misconduct
 Loch v John Blackwood

 Failure of substratum
 Re Tivoli Freeholds

 Breakdown in mutual trust

 Ebrahimi v Westbourne Galleries

WINDING UP ON JUST AND EQUITABLE

GROUNDS
 Only deals with breaches of the Corporations Act
 Not breaches of case law
 Not breaches of replaceable rules or constitution – s 135(3)
 Court order re past, present or future conduct
 ‘restraining’ or ‘requiring’ an act; also damages: s 1324(10)
 Who can apply ?
 ASIC, the company or where ‘interests have been affected’
 Eg a creditor – Allen v Atalay but not for damages: McCracken v Phoenix Constructions
 Eg a member – some courts disagree
 eg Airpeak v Jetstream says yes; Mesenberg v Cord says no

 s 1324(1A): special right of members and creditors to sue for share capital breaches where
‘insolvency is an element’

STATUTORY INJUNCTION – S1324

 What is a statutory derivative action (SDA) ?
 An action to enforce a right belonging to the company
 eg to enforce a breach of directors’ duties
 Even though a member brings a derivative action, the action is not for the benefit of the
member - it’s for the company’s benefit
 any remedies go to the company!!

 Deals with “standing” of the applicant - not the “merits” of the case

 Who may apply?

 a member, former member, or person entitled to be registered as a member of the
company or a related company
 an officer or former officer of the company

MEMBERS’ DERIVATIVE ACTION – PART

2F.1A
 Court must grant leave if all of the criteria are met:
 is probable that the company will not take legal action
 applicant is acting in good faith
 is in the best interests of the company for applicant to be granted leave
 serious question to be tried
 Swansson v RA Pratt Properties

 Ratification by members (discussed later in this lecture) does not prevent SDA: s 239

 Who pays the legal costs? Court decides: s 242

WHAT ARE THE CRITERIA FOR AN SDA?

 Arise from general law (case law), both ‘common law’ and ‘equity’.

 So, the right to sue AND the remedy both come from cases …

 What are they?

 Injunction (to stop a future action)
 Compensation or damages
 Account of profits (eg Regal (Hastings))
 Rescission of contract
 Constructive trust

COMPANY REMEDIES – BREACH OF GENERAL LAW

DUTIES
 ‘Breach’ and ‘contravention’ are used interchangeably
 What can be breached/contravened?
 General law – where cases give a right to sue – ‘cause of action’
 Eg general law directors’ duties such as negligence, duty of loyalty
 Breach of contract

 Corporations Act
 Criminal breaches, large and small
 Civil penalty breaches
 Some of the directors’ duties
 Some other breaches eg share capital maintenance breaches
 Civil rights of action
 Eg breach of s 140 contract based on constitution
 Remember, s 232 (oppression) and s 461 (winding up) can be brought even without any statutory or
general law breach

BREACHES, CONTRAVENTIONS & RIGHTS TO

SUE
 Depends on what it is!
 Enforcement by ASIC:
 Criminal actions, big and small
 ‘Civil penalty’ actions – defined in s 1317E

 Enforcement by company
 ‘Civil penalty’ actions
 Civil actions – eg where general law or Corps Act gives company right to sue

 Enforcement by members
 Specific provision under statute
 Eg s 232, s 461, s 140
 NOT criminal actions; NOT civil penalty actions (but see s 1324 …)
 General law rights

WHO BRINGS THESE ACTIONS?

◦ Can be a serious offence:
◦ Eg dishonest breach of directors’ duties: s 184
◦ Can be a small technicality, eg s 254Y
◦ (1) Within 1 month after shares are cancelled, the company must lodge with ASIC a notice in
the prescribed form that sets out:
◦ (a) the number of shares cancelled; and ….
◦ (2) An offence based on subsection (1) is an offence of strict liability.
◦ What is the punishment?
◦ Some maximum penalties are in Schedule 3; actual penalty decided by court; penalty unit is
$210 each eg
 s 184: 2,000 penalty units or 5 years jail or both
 s 254Y: 5 penalty units
Others are called ‘prescribed’ offences
◦ Small breaches where no penalty specified in Sch 3
◦ Defined in s 1311: $1050 fine; penalty notice imposed by ASIC

ASIC CRIMINAL ENFORCEMENT –

‘OFFENCES’
 Action by ASIC or the company.

 Include directors’ duties, insolvent trading, related party transactions, capital maintenance,
financial reporting: s 1317E

 ASIC applies to court for a declaration of contravention

 Civil standard of proof, rules of evidence and procedure

 Court can make these orders on ASIC’s application:

 Pecuniary penalty up to $200,000: s 1317G
 Disqualification order: s 206C
 Compensation order: s 1317H

 Company can also apply for compensation even if no action by ASIC: s 1317H

CIVIL PENALTY PROVISIONS – PART 9.4B

 Not for criminal breaches of the Act

 The court may forgive

 civil penalty breaches, whatever they are – s 1317S
 civil liability – s 1318:
 ‘negligence, default, breach of trust or breach of duty’

 Requirements :
 The officer has acted honestly, and
 Considering all circumstances, it is “fair” for the officer to be excused, wholly or partly,
from liability

CAN THE DIRECTOR BE FORGIVEN FOR THE

BREACH?
 Ordinary resolution of members in general meeting can ratify some breaches of
general law duties
 members must be given full information
 result is director or officer cannot be sued by the company

 Not available for statutory duties:

 Miller v Miller

 Company can’t ratify where

 It is oppressive
 Company is virtually insolvent (Kinsella)
 It breaches the equitable limitation
 Takes away a member’s personal right
 Where company property is being taken by directors or majority members
 Where directors are acting for an improper purpose

RATIFICATION BY THE COMPANY

 Understand WHO, WHEN and HOW to use the oppression remedy and consider WHAT types of orders may be
appropriate.

 Understand how and when to use the s461 court ordered winding-up

 Understand how and when to use the statutory injunction under s1324

 Understand how the SDA operates and when to use it.

 Have an appreciation for the types of remedies available for the company for breaches of the general law
duties

 Understand WHO can bring an action (e.g) ASIC, the Company, Members etc.) and when / why they would do so

 Understand the difference between criminal penalties and civil penalty provisions – including WHO can ask for
these and in what circumstances

 Understand what ratification is and when a director can be forgiven for a breach

TO SUMMARISE
 Lecture 11
 Revision
 Exam Information
 Q&A
 Past Exam Question

10 down…1 to go!

NEXT WEEK