Corps Revision Lecture LSS Tutorials

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

Piercing corporate veil Insolvent trading s588v-g Financial assistance s260A Corporate contracting 3P/company s180-DCSD- business judgment rule-reliance- delegation S181-GF/proper purpose-collateral purposes? Conflicts s9, s182/183/191/195, member approval, financial benefit s229 Related party s228/50AA Directors SDA s236/s237 Oppression s232/233 Injunction Winding up Remedies

Problem Solving 1. Who are the parties and in what capacity can we advise them? 1. Director, officer, shareholder, corporation, holding co, ASIC, creditors, liquidator, employees 2. What is their complaint? 3. Legal issue: breach? 4. Resolve 5. Remedies

Intro  SLP – Salomon  Corporate Groups  BoD/GM  Calling a meeting – SH rights

Directors’ duties questions 1. Intro 1. Parties? 2. Grievance? 2. Breach of directors duties (analysis) 3. Defences/presumptions 4. Consequences of breach/relief from liability 5. Remedies

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

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

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

Duty to prevent insolvent trading Duty holding company to prevent subsidiary company trading while insolvent Div 5 s588V Holding co liability Duty directors to prevent insolvent trading Div 3 s588G Director liability

Insolvent trading 1. Does the applicant have standing? 1. Unsecured creditor 2. ASIC 3. Liquidator 2. Unsecured creditor – personal claim for debt – is there a HC/SUB relationship s588V? 3. If no HC/SUB relationship – can we find a director liable? s588G

Holding co liability for insolvent trading  X can seek compensation from holding co if can prove company (holding co) contravened s588V 1. Corporation is a holding co of subsidiary  s46 2. Subsidiary is insolvent/becomes insolvent by incurring a debt  s95A definition insolvent not being able to pay debts as they fall due 3. Reasonable grounds to suspect the subsidiary is or would be insolvent

Director liability for insolvent trading  Directors of co may be liable for debts of co if they permit co to trade while insolvent s588G  Director will be liable for debts of co if: 1. Person is director (or shadow director) at the time the debt incurred AND 2. Co trades while insolvent AND 3. There were reasonable grounds for questioning co solvency or that it would become insolvent when the debt was incurred AND 4. Director was aware that there were grounds for suspecting or a reasonable person in the position of the director would have been aware of insolvency under test s95A 1. QLD Bacon v Rees 2. ASIC v Plymin  Defences s588H 1. Expect solvency 2. Reasonable reliance 3. Illness 4. Director took all reasonable steps to prevent co incurring debt  Consequences of breach

Insolvent trading: policy?  Deterring directors from taking business risks  Creditor protection  Balance between protecting creditors vs entrepreneurial activity by directors  P Boros & Duns

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

Duty of good faith/proper purpose cont.  Proper purpose?  2 step test: (Howard Smith) 1. What is the legal purpose of the company giving the director the power? (question of law) 2. What is the actual reason that the directors exercised the power? (question of fact)  List potential purposes  Courts have 2 different tests (do both): 1. Substantial purpose test (Howard Smith) 2. ‘But for’ test (Whitehouse)

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

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

Related party transactions (public co only) s207/208  Member approval is required for decisions to give financial benefits to related parties that could endanger SH interests 1. Is the entity a related party? Note: broad definition of related entity 2. Is there a financial benefit? S Does it fall under an exempt transaction? S If no exceptions apply, must seek member approval… 5. Disclosure 6. Consequences: civil penalties

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

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

Remedies  SDA  Injunction  Oppression  Winding up

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

Any questions – me 