Laws4112 (2014) Exam Notes (Uq)

This document contains notes prepared
by a student for the mid-semester and

final exams for the course LAWS4112
Corporate Law, taught at the University of
Queensland in Semester 1 of 2014.
LAWS4112
Corporate
Law Notes
Semester 1 2014 UQ
T C

NOTE: These are student notes for the course LAWS4112 Corporate Law at the University of Queensland from Semester 1
2014. The accuracy, comprehensiveness, and completeness of the notes should not be relied upon. Note also that the
Corporations Act 2001 (Cth) is amended frequently. The author is in no way affiliated with, or employed by, the University
of Queensland. These notes may be used and modified for personal educational purposes.

Contents
I. Taxonomy and Typology of Business Structure ................................................................................... 5
A. Non-Corporate Structures .............................................................................................................. 5
B. Company Structures ....................................................................................................................... 5
1) Proprietary Companies ............................................................................................................... 5
2) Public Companies ........................................................................................................................ 7
3) Taxonomy Six Types of Australian Companies ......................................................................... 7
C. Registration of Companies .............................................................................................................. 8
II. Corporate Personality, Civil and Criminal Liability .............................................................................. 9
A. Limited Liability ............................................................................................................................... 9
B. Separate Legal Entity ...................................................................................................................... 9
C. Piercing the Veil at Common Law ................................................................................................. 10
1) Fraud ......................................................................................................................................... 10
2) Avoidance of Existing Legal Obligations ................................................................................... 10
3) Under-Resourced ...................................................................................................................... 11
D. Corporate Groups ......................................................................................................................... 12
1) Definition and Rules .................................................................................................................. 12
2) Separate Legal Entity Groups ................................................................................................. 13
E. Tort Liability .................................................................................................................................. 14
1) Subsidiaries and Lifting the Veil ................................................................................................ 14
2) Tort Liability for Corporations ................................................................................................... 15
F. Criminal Liability ............................................................................................................................ 16
III Internal Structure and Corporate Constitution................................................................................. 18
A. Replaceable Rules ......................................................................................................................... 18
B. Corporate Constitution ................................................................................................................. 20
1) Constitution Rules ..................................................................................................................... 20
2) Adoption of Constitution .......................................................................................................... 21
3) Alteration of the Constitution ................................................................................................... 21
C. Statutory Contracts ....................................................................................................................... 22
D. Organs and Division of Power ...................................................................................................... 25
1) General Meeting ....................................................................................................................... 25
2) Board of Directors ..................................................................................................................... 27
IV Corporate Contracting ...................................................................................................................... 31
A. Corporate Capacity ....................................................................................................................... 31
B. Direct Contracting ......................................................................................................................... 31


C. Agent ............................................................................................................................................. 32
a) Actual (express or implied) Authority ....................................................................................... 32
b) Apparent or Ostensible Authority ............................................................................................ 33
V Directors Duties ................................................................................................................................ 37
A. Application of the Duties .............................................................................................................. 37
1. Who Owes the Duty? ................................................................................................................ 37
2. To Whom is the Duty Owed? .................................................................................................... 39
B. Common Law Duties of Care, Skill, Diligence, and Delegation/Reliance ...................................... 39
1. Care ........................................................................................................................................... 39
2. Skill ............................................................................................................................................ 39
3. Diligence .................................................................................................................................... 40
4. Delegation and Reliance ........................................................................................................... 40
C. The Statutory Duties of Care under s 180 ..................................................................................... 41
1. The General Standard of Care ................................................................................................... 41
2. The Standard of Care: Non-Executive Directors versus Executive Directors ............................ 42
3. Delegation and Reliance under Statute .................................................................................... 43
4. The Statutory Business Judgement Rule ................................................................................... 44
D. Duties of Good Faith and Proper Purpose .................................................................................... 45
1. 181(1)(a) The Duty to Act in Good Faith in the Interests of the Company ............................... 47
2. 181(1)(b)The Duty to Act for a Proper Purpose ........................................................................ 49
E. Fiduciary Duties ............................................................................................................................. 51
1. No-Conflict Rule: Directors must not have a personal interest (or engagement with a third
party) which conflicts with their duty to the company except with the companys fully informed
consent .......................................................................................................................................... 51
2. Misappropriation Rule: Directors must not misappropriate the companys property for their
own or a third partys benefit ....................................................................................................... 56
3. No Profit Rule: Directors must not misuse their position for their own or a third partys
advantage except with the companys fully informed consent .................................................... 57
D. Statutory duty not to profit from position or information ........................................................... 59
1. Use of Position .......................................................................................................................... 59
2. Use of Information .................................................................................................................... 61
3. Statutory Treatment of Benefits to Related Parties ................................................................. 62
E. Enforcement of Directors Duties ................................................................................................. 63
1. Enforcement by ASIC ................................................................................................................. 63
2. Enforcement by the Board ........................................................................................................ 66
F. Exoneration and ratification of Directors Duties ......................................................................... 66


1. Exoneration by the Court .......................................................................................................... 66
2. Ratification by the General Meeting ......................................................................................... 69
G. Statutory Limitations on Exemption, Indemnity, and Insurance .................................................. 70
VI Minority Protection .......................................................................................................................... 73
A. Statutory Derivative Actions ......................................................................................................... 73
1. Application for Leave ................................................................................................................ 73
2. Prior Ratification, Costs, and ASIC ............................................................................................. 76
B. Section 1324 Injunctions ............................................................................................................... 77
1. Power to Grant Injunctions ....................................................................................................... 77
2. Standing for s 1324 Injunctions................................................................................................. 78
C. Members Personal Actions .......................................................................................................... 79
1. General Rule as to members personal actions ......................................................................... 79
2. Actions to enforce the constitution .......................................................................................... 79
3. Actions to enforce mere procedural irregularities ................................................................... 80
4. Actions for diminished value of shares ..................................................................................... 80
5. Actions for breach of fiduciary duty owed directly to the member ......................................... 80
6. Statutory members personal rights ......................................................................................... 81
D. Fraud on the Minority (Equitable Limitation on the Power of the Majority) ............................... 81
1. The general rule of majority rule .............................................................................................. 81
2. Equitable limitations to majority rule ....................................................................................... 82
3. Statutory limitations on majority rule ...................................................................................... 84
E. Winding Up ................................................................................................................................... 85
A. Grounds for Winding Up and Standing ..................................................................................... 85
B. Self-interested director grounds under sub-s (e) ..................................................................... 86
C. Just and equitable grounds under sub-s (k) ............................................................................ 86
D. Discretion of the Court ............................................................................................................. 87
F. The Oppression Action .................................................................................................................. 87
A. Standing .................................................................................................................................... 87
B. Grounds of Opression ............................................................................................................... 88
C. Oppression Remedies ............................................................................................................... 92
VII Insolvency ........................................................................................................................................ 94
A. Determining Insolvency ................................................................................................................ 94
B. Liquidation .................................................................................................................................... 94
1. Routes to Liquidation (Part 5.4Winding Up in Insolvency) ................................................... 94
2. Effect of appointment of liquidator ........................................................................................ 100


3. Role of the Liquidator and Process of Liquidation .................................................................. 101
4. Statutory Actions by Liquidator .............................................................................................. 102
5. Order of Priority ...................................................................................................................... 118
6. Deregistration ......................................................................................................................... 120
C. Receivership ................................................................................................................................ 120
1. Powers of the Receiver and Appointment .............................................................................. 120
2. Receivers Duties ...................................................................................................................... 122
3. Priority of Receiver .................................................................................................................. 123
D. Administration ............................................................................................................................ 123
1. Entering Administration .......................................................................................................... 123
2. Assuming Control .................................................................................................................... 124
3. Enforcement of Charges under Administration ...................................................................... 125
4. Investigation of Affairs (Division 4Administrator investigates company's affairs) ............. 126
5. Decision Making Stage (Division 5Meeting of creditors decides company's future) .......... 127
6. Entering a Deed of Company Arrangement (Division 10Execution and effect of deed of
company arrangement) .............................................................................................................. 128
7. Variation of Deed (Division 11Variation, termination and avoidance of deed) .................. 129


I. Taxonomy and Typology of Business Structure
A. Non-Corporate Structures
Sole trader
No separation between the traders personal and business assets.
Trader is liable personally, and subject to unlimited liability by default.
Partnership
Relationship between a number of persons (intermediate between a sole trader and a company)
Partnership Act persons carrying on business contractual and fiduciary relationship.
The terms are fixed by the Act, or by an express partnership deed/agreement (a contract of the
uttermost good faith fiduciary duties owed, each the agent for the other and the actions of
one are binding on the others).
NOT a separate legal person, the partners bear unlimited liability.
There are no publicity requirements.
Limits on size: s 115(1) Corporations Act 2001 20 members (but see also Corporations
Regulations 2A.1.01(3) for specific exceptions by profession).

Incorporated Association
These are clubs or associations which choose to incorporate, to provide a less cumbersome
corporate structure, being a separate legal person with limited liability.
State law (Incorporated Associations Act 1981 (Qld)), not carried on for profit of members,
and governed largely along same lines as proprietary companies.
B. Company Structures
1) Proprietary Companies
Definition
Proprietary company: Defined in s 113(1) as having no more than 50 non-employee
shareholders (this still allows some separation of ownership and control).
Small proprietary company: s 45A(2)must satisfy two of the following:
(a) the consolidated revenue for the financial year of the company and the entities
it controls (if any) is less than $25 million;
(b) the value of the consolidated gross assets at the end of the financial year of the
company and the entities it controls (if any) is less than $12.5 million; or


(c) the company and the entities it controls (if any) have fewer than 50 employees
at the end of the financial year.
Large proprietary company: s 45A(3)must satisfy two of the following:
(a) the consolidated revenue for the financial year of the company and the entities
it controls (if any) is $25 million or more;
(b) the value of the consolidated gross assets at the end of the financial year of the
company and the entities it controls (if any) is $12.5 million or more;
(c) the company and the entities it controls (if any) have 50 or more employees at
the end of the financial year.
Shareholding Requirements
Section 113(3): cannot make an offer that needs disclosure under Chapter 6Dand
essentially cannot offer shares to the public
Section 708: Can make offers to existing employees and shareholders and personal offers
which provides some scope to raise finance from investors without incurring the cost of
preparing a disclosure document, or prospectus
Section 165: Breach of that limitation is a criminal offence, which does not invalidate the
transaction but ASIC may require it to convert to a public company under
ASIC may impose a similar requirement if the company exceeds 50 non-employee
shareholders.
Rules relating to Control
Minimum of one director (compared to three for public companies): s 201A
Sole member-director (provisions made for this under s 198E(1),allowing that person to
manage the business/exercise all powers; and ss 248B and 249Bact as general meeting
passing all resolutions provided all are recorded and signed.
Appoint a secretary not required (s 204A)an officer of the co who deals with ASIC, often
combined with the role of general counsel.
No need for an AGM (public company with more than one member must hold first one
within 18 months of incorporation to allow members to consider audited accounts)
Small proprietary companies (defined in s45A):
Not required to produce annual financial reports or appoint an auditor unless
shareholders holding 5% require it, or ASIC directs it to (ss 293-4); and
Must maintain written financial records that correctly record its position and would
enable true and fair financial reports to be prepared and audited, and to maintain
them for 7 years (s 286).
Large proprietary and public companies:
Must produce an audited financial report and directors report on an annual basis.
Aim of this distinction is to prevent public companies running business through a
subsidiary and evading disclosure rules, and to allow small companies to avoid the
estimated $60000 cost of producing an audited annual report.
Removal of directors: s 203D(1) does not applyshareholders do not have a legally-
entrenched right to remove directors
Note that the constitution/shareholder agreement can entrench a director provided
they replace the replaceable s 203C rule that the general meeting can remove the
directors. This reflects the fact that proprietary companies are often like


incorporated partnerships with the shareholders participating in risk-bearing and
management.
No automatic rule that one director cannot remove another: s 203E does not apply
(although proprietary companies must still make positive provision in their constitution if
directors are to be enabled to do this)
Pty Ltd or Proprietary Limited: must be included at the end of their name: ss 148 and 149.
Directors have the power to refuse to register a transfer of shares for any reason: A
replaceable rule under s 1072Galthough equitable and statutory duties may require them
to act for a proper purpose when exercising this power.
Conversion to Public Company
Sections 162-3: Must pass a special resolution (75% in favour) and lodge application with
ASIC.
Note how the requirement of special resolution protects the shareholders.
2) Public Companies
Public companies
Subject to stricter regulationseparation of ownership and control; the price for being able
to offer shares to the public.
Definitions of public offer contained in ch 6D
Disclosure is required in the form of a prospectus or other disclosure document filed with
ASIC, with certain carve-outs available for small-scale offerings, sophisticated investors,
existing investors etc.
Listed companies
Subject to an additional layer of regulation over and above public companies:
Soft law in the form of the ASX Principles of Corporate Governance (with which they
must comply or explain)
Quasi-soft law in the form of listing rules made by ASX with authority under CA.
NOTE that not all public companies are listed.
3) Taxonomy Six Types of Australian Companies
1. Proprietary companies limited by shares pty
The vast majority of companies in Australia, eg, four friends example, both small
and large proprietary companies
2. Proprietary companies unlimited by share capital
Unlimited liability (unusual)
3. Public companies limited by shares ltd
Eg, large companies (though some proprietary companies may be large)
4. Public companies limited by guarantee
5. Public companies unlimited by share capital


Only applies if a company is unable to meet liabilities on winding up
6. No liability public company
Confined to pure mining companies. The type of company was introduced in
Victoria, which subjected NL companies to far-reaching information disclosure
obligations: the Mining Companies Act 1871). There is no liability for the balance of
the share.
C. Registration of Companies


II. Corporate Personality, Civil and Criminal Liability
A. Limited Liability
516 Company limited by shares

*+ if the company is a company limited by shares, a member need not contribute more than the
amount (if any) unpaid on the shares in respect of which the member is liable as a present or past
member.

B. Separate Legal Entity
Salomon v Salomon & Co Ltd [1897] AC 22 [House of Lords]

FACTS: Salomon set up company, and sold his shoe manufacturing business to it, being the
majority shareholder and a secured creditor (10,000 debenture). The company entered
liquidation with 6000 available. Broderips (first ranking) claim was 5,000, followed by
Salomons 10,000 debenture, with unsecured creditors owed 8,000.
ISSUES: Who was paid out from the assets?
Was Salomon entitled to monies after Broderip paid?
Personally liable for the remainder?
Was the company agent for Salomon?
LOWER COURTS:
Held for liquidatorSalomon & Co Ltd Co was agent for Salomon, and a fraud;
Court of Appealalso held for liquidatorcompany was conducting business as
Salomons trustee.
HOUSE OF LORDS:
The company was a separate legal entity, irrespective of size or ownership.
Salomon was entitled as a secured creditor to receive 1,000 after Broderip was paid.
Salomon was not personally required to indemnify the company for debts owing, he had
the limited liability of shareholder.

Implications
Macaura v Northern Assurance Co Ltd [1925] AC 619
FACTS: Macaura owned land, with timber plantation, transferred business into company, which
ran the business of felling and milling timber Fire destroyed all timber. Attempted to claim on
insurance in his personal name.
HELD: Macaura was a separate legal entity, and could not claim on the personal insurance.
RULE: Property owned by company does not belong to its members, even where they have given
it to the company in exchange for shares.

Lee v Lees Air Farming [1961] AC 12
FACTS: Lee was a pilot, conducting areal top dressing business, formed company to run this


business. Lee was killed in an accident, wife made a compensation claim as an employee of the
company.
HELD: Company can make contracts with shareholders, even controlling ones.
OUTCOME: This depended upon whether Lee was a worker within the meaning of the act.
Company was a separate legal entity, thus Lee could enter into a contract of employment with
the company. Thus the wife could make the claim.

Additional implications:
Company can be a debtor or creditor of member or director.
Company can be liable in tort, either directly or, more commonly, vicariously. Williams v Natural
Life Health Foods (1998) 2 All ER 577.
Company can act as trustee.
Causes of action belong to the company and not to the members individually.
Company is party to contracts, not its directors or members.
Company are persons under s6 of the Income Tax Assessment Act 1936, although shareholders
receiving dividends will receive credit for tax paid by the company.

C. Piercing the Veil at Common Law
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549, 567 (Rogers AJA)
HELD: *T+here is no common, unifying principle, which underlies the occasional decision of
courts to pierce the corporate veil.

1) Fraud
The court will lift the veil where a company is used to perpetrate a fraud:
Re Darby [1911] 1 KB 95
FACTS: Company set up and had asset transferred at over value. Company was then floated
and controllers made large profit at the expense of shareholders.
HELD: Veil was lifted to remedy fraud.

Re H [1996] 2 BCLC 500
FACTS: Defendants had been using companies to defraud tax office.
HELD: Tax office was allowed to treat entire group as one entity.

2) Avoidance of Existing Legal Obligations
The court will lift the veil where companies are used to evade existing legal obligations:
Gilford Motor Co Ltd v Horne [1933] Ch 935
FACTS: Promised not to set up competing business, but in fact set up company which solicited
former customers. This was a use of a company in order to avoid a contractual agreement not


to solicit clients.
HELD: Injunction allowed, preventing both the company and himself from dealing with former
customers of the business.

Jones v Lipman [1962] 1 WLR 832.
FACTS: To avoid an order for specific performance, the seller of land transferred the land to a
company which he had incorporated.
HELD: He had done so as a device or a sham in order to avoid completing the contract. Order
for performance made against the company and the person.

Adams v Cape Industries [1990] 2WLR 657
HELD: As a matter of law, a court may not lift the corporate veil against a defendant company
the member of a corporate group merely because the corporate structure has been utilised so
as to ensure legal liability falls upon one member of the group and not the defendant
company.
NOTE: Whether or not this is desirable, the right to use a corporate structure in this manner is
inherent in the corporate law.

Note regarding the remedies imposed:
Yukong Lines of Korea v Rendsburg Investments (No 2) [1988] 1 WLR 294 (Toulson J); ANZ Executors
& Trustee Co Ltd v Qintex Australia Ltd [1991] 2 Qd R 360 (McPherson J)
NOTE: Note that in both cases an order was made against the company as well as the wrongdoer
in control of it, suggesting that the veil has not really been lifted in these cases:
NOTE: Arguably this is recognising the separate legal entity doctrine but acknowledging
company is involved in the fraud. Essentially this is judges arguing we do not lift the veil.

3) Under-Resourced
Where companies are under-resourced, the court might conclude that the company is the agent of
its controller, or is a sham or device, justifying the lifting of the corporate veil:
Re FG (Films) Ltd [1953] 1 WLR 483
FACTS: A movie company held only 100 pounds of capital and could not have funded a movie.
HELD: If capital is so manifestly short, it could be argued that the company is an agent of the
parent.
OUTCOME: FG was an agent of the parent company as there were insufficient funds in the
company to actually make movies thus it was a sham device. Order was given against the
parent company.

Smith, Stone & Knight Ltd v Birmingham Corporation [1939] 4 All ER 116
FACTS: Birmingham Corporation, a local council, compulsorily acquired premises owned by
the Birmingham Waste Co Ltd which was a wholly owned subsidiary of Smith, Stone & Knight


Ltd. The Waste Company had no staff, no separate books and on the evidence it was treated
like one of Smith, Stone & Knight's departments. Accordingly a claim for compensation for
loss of business was made by Smith, Stone & Knight Ltd. Birmingham Corporation argued that
Smith, Stone & Knight Ltd could not succeed because the loss had been sustained by the
waste companya separate legal entity.
HELD: Compensation was payable as the Waste Company was carrying on no business of its
own but was in fact carrying on the Smith, Stone & Knight business as agent for them.
ATKINSON J: Held that six factors must be proven in order to show the requisite agency
relationship to lift the corporate veil:
(1) Profits of the subsidiary must be treated as profits of the holding company;
(2) Those conducting the subsidiary's business must be appointed by the holding
company;
(3) The holding company must be the head and brain of the trading venture;
(4) The holding company must be in control of the venture and must decide what
capital should be spent and what should be done;
(5) The profits made by the subsidiary's business must be made by the holding
company's skill and direction; and
(6) The holding company must be in constant and effective control.

DHN v Borough of Tower Hamlets (1976) 3 All ER 462
NOTE: Factually similar to Smith, Stone & Knight Ltd later described as turning on specific
statutory interpretationOften the reality is that the subsidiary IS an agent for the holding
company.

D. Corporate Groups
1) Definition and Rules
9 Definitions
"holding company" , in relation to a body corporate, means a body corporate of which the first body
corporate is a subsidiary.
"wholly-owned subsidiary" , in relation to a body corporate, means a body corporate none of whose
members is a person other than:
(a) the first-mentioned body; or
(b) a nominee of the first-mentioned body; or
(c) a subsidiary of the first-mentioned body, being a subsidiary none of whose members is a
person other than:
(i) the first-mentioned body; or
(ii) a nominee of the first-mentioned body; or
(d) a nominee of such a subsidiary.


46 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); or
(b) the first body is a subsidiary of a subsidiary of the other body.

50 Related bodies corporate
Where a body corporate is:
(a) a holding company of another body corporate; or
(b) a subsidiary of another body corporate; or
(c) a subsidiary of a holding company of another body corporate
the first-mentioned body and the other body are related to each other.
NOTE: Where companies are related, they must produce consolidated accounts, and a number
of regulations which we will look at later (such as financial assistance and companies acquiring
shares in themselves) also apply to related companies.
NOTE: Section 50AA refers to the broader notion of control by one entity of another in the sense
of capacity to determine the outcome of decisions about the second entitys financial and
operating policies
This broader concept of control is used in Pt 2E of the Corporations Act 2001 which deals
with financial benefits by a public company and extends to controlled as well as related
bodies corporate.
2) Separate Legal Entity Groups
Companies in group remain separate entities:
Industrial Equity v Blackburn (1977) 137 CLR 567
FACTS: The court had to determine whether the profits available for dividend should constitute
the profits of the holding company, or the profits of the group as per the consolidated accounts.
HELD: The court applied the separate legal entity doctrine and treated the profits of the holding
company as distinct from the profits of the other companies in the group.


Walker v Wimborne (1976) 137 CLR 1 (Mason J)
FACTS: The directors of a company nearing insolvency began to make payments to other
companies in group.
HELD: Directors owe their duties to that company alone because it is a separate legal entity from
the other companies in the group. If they consider the interests of other companies in the group,
they will be liable.

Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952
FACTS: The directors of a subsidiary acted to benefit the holding company. The payment meant
that the whole group remained viable.
HELD: There was no breach in the circumstances: If the transaction waswhen viewed
objectivelyin the interests of the company, then no consequences would flow from the breach
of duty.
NOTE: The interests of one member of a group of companies may lie in the continued viability of
other members of the group.

Statutory Liability of Holding Company for Insolvent Trading of Subsidiary:
See below, part VII.B.4(b) Action against Parent Company 588VX
E. Tort Liability
1) Subsidiaries and Lifting the Veil
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549
FACTS: Tort claim sought to be brought against Hardie Pty Ltd, for the actions of Malu Mining
Pty Ltda wholly owned subsidiary of Hardie Pty Ltd which, prima facie, had limited liability
under s 516.
ISSUE: Was Hardie Pty Ltd liable for torts committed by the subsidiary?
Was Malu Mining Pty Ltd the agent of Hardie Pty Ltd? Court rejected this argument.
Should the veil be lifted in the case of tort creditors?
HELD: Majority held that the veil could possibly lifted:
(1) It is not possible to say what evidence would ultimately suffice to make out a case;
(2) Only the High Court (and perhaps not even it) can alleviate the consequences of the
decision in Salomon so as to adapt the principle of limited liability to the economic
realities of today;
(3) Arguable that employees have equal opportunity with a contracting corporation in
determining whether or not to enter the employer/employee relationship out of which
the injury arises;
(4) However, whilst employee may be able to choose whether or not to be employed by
the corporation, generally speaking, they have no real input in determining how the
business will be conducted and whether reasonable care will be taken for their safety.

Adams v Cape Industries plc [1990] Ch 433


NOTE: The UK Court of Appeal examined similar questions but refused to lift the veil.

Arguments (economic) for Lifting the Veil for Subsidiary Tort Liability:
1. Torts are externalities which must be internalized for the assumption of efficiency to hold. If this
does not happen, the parent will obtain the benefits of the activities (in the form of dividends)
but will not bear all the costs of the activity.
2. Tort creditors cannot bargain ex ante with the tortfeasor, cannot obtain guarantees from the
parent, and do not have the opportunity to check its solvency.
3. It will be appreciated that as Rogers noted in Briggs these arguments do not apply quite as
strongly to employees as other tort victims (who are also in a contractual relationship with the
company).
4. Reputation may compel companies to satisfy contractual liability, and it may also encourage
companies which are not in their end game to satisfy employee claims in order to maintain
their reputation for fair dealing with their employees.
5. If a company does not put insurance in place then there might be a case for lifting the veil on the
basis that the company is acting opportunistically in transferring risk of reasonably foreseeable
losses to tort creditors (analogous to incurring contractual debts when insolvent): Millon,
Piercing the Corporate Veil. Financial Responsibility, and the Limits of Limited Liability (Working
Paper No 8, Wash and Lee, 2006) 4258.
6. Limited liability should instead be limited to situations in which shareholders have managed the
business with due regard for bargained-for expectations and potential victims of reasonably
foreseeable accidents.

2) Tort Liability for Corporations
Civil Wrongs may be primary or derivative: Primary as though the actual corporate entity
committed the wrong; or derivate where the act or omission was made by a natural person:
NOTE: Vicarious liability of the company as employera tort committed by an employee in the
scope of the employment, encompassing negligent and deliberate torts.
Lennards Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 [House of Lords]
FACTS: Lennard owned ship and was active director of company and manager of ship. The ship
was carrying oil owned by Asiatic Petroleum Co Ltd, but the ship was unseaworthy, caught fire,
and the cargo was destroyed. Merchant Shipping Act s 502Owner of ship not liable for any loss
or damage occurring without the owners fault or privvity.
ISSUE: Lennards Carrying Co Ltd sought to avoid liability by stating that it was the fault of
Lennard, who knew of the fault, not the company.
HELD: Lennards Carrying Co Ltd was primarily liability: Lennards fault was attributed to the
company and thus unable to rely upon s 502.
THE DIRECTING MIND AND WILL TEST: (Haldane Vc)
a corporation is an abstraction. It has no mind of its own any more than it has a body of
its own; its active and directing will must consequently be sought in the person of
somebody who for some purposes may be called an agent, but who is really the
directing mind and will of the corporation, the very ego and centre of the personality of
the corporation.


NOTE: Senior managers in this position not only act for the company, they act as the company
itself.

F. Criminal Liability
A company may be subject to primary criminal liability where the offence is committed by its
directing mind.
The prosecution must show that the natural person in question had the requisite mens rea for
the offence, and this is then attributed to the company.
Tesco Supermarkets v Nattrass [1972] AC 153
FACTS: Local manager charged for soap at the regular price, not the discounted price.
NOTE: Statute provided a defence where:
The commission of the offence was due to default of another person or mistake; and
The company took all reasonable precautions and exercised all due diligence to avoid
the commission look at the systems the company had in place.
HELD: Tesco was not liable as could not argue store manager was directing mind and will of
companystore manager controlled by the company not the other way around. Further,
defence available as Tesco had done all it could do to implement a proper system.
NOTE: Under this approach, the larger the company, the less likely the company will be liable.

Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 (Privy Council)
HELD: Although the offence was concealed from the company directors, the actions of the
relevant officer were attributed to the company. (Hoffmann L):
Primary rules of attribution: Will generally be found in its constitution and will say
things such as the decisions of the board in managing the companys business shall be
the decisions of the company. Primary rules of attribution may not expressly stated
but implied by law, such as the unanimous decision of all the shareholders in a solvent
company shall be the decision of the company.
General rules of attribution: Like agency and vicarious liability (these will rarely apply to
criminal liability unless the statute expressly says so),
Special rules of attribution: Required when a rule of law expressly or impliedly provides that the
primary and general rules do not apply. This turns on the courts interpretation of the statute,
applying the usual canons of interpretation, taking into account the language of the rule (if it is a
statute) and its content and policy.

Criminal Code (Cth)
Section 1308A Corporations Act 2001Criminal Code (Cth) applies to offences under the
Corporations Act 2001 (except for offences under Ch 7 (Financial services and markets) where s
769B(3) attributes intention with regard to action within the actual or apparent authority of a
director, employee or agent to the company essentially vicarious liability in order to satisfy
any mental element).
Section 12.1(2): Companies may be found guilty of offences, including those punishable by


imprisonment (even though a company cannot be imprisoned) fines can be imposed for such
offences.
Physical Elements: Will be attributed to the corporation where the offence is committed by an
employee, agent or officer acting within the persons actual or apparent scope of employment
or authority (12.2).
Mental Elements: Attributed where the corporation has expressly, tacitly or impliedly
authorised or permitted the commission of the offence (12.3(1)), and this can be established in
a number of situations. For instance, proof that a corporate culture existed within the company
that encouraged or tolerated failure to comply with the statutory provision in question.


III Internal Structure and Corporate Constitution
A. Replaceable Rules
Corporations Act 2001 Ch 2BBasic features of a company; PART 2B.4Replaceable Rules and
Constitution
135 Replaceable rules

Companies to which replaceable rules apply

(1) A section or subsection (except subsection 129(1), this section and sections 140 and 141) whose
heading contains the words:

(a) replaceable ruleapplies as a replaceable rule to:

(i) each company that is or was registered after 1 July 1998; and

(ii) any company registered before 1 July 1998 that repeals or repealed its
constitution after that day; and

(b) replaceable rule for proprietary companies and mandatory rule for public companies
applies:

(i) as a replaceable rule to any proprietary company that is or was registered after 1
July 1998; and

(ii) as a replaceable rule to any company that is or was registered after 1 July 1998
and that changes or changed to a proprietary company (but only while it is a
proprietary company); and

(iii) as a replaceable rule to any proprietary company that is or was registered
before 1 July 1998 that repeals or repealed its constitution after that day; and

(iv) as an ordinary provision of this Act to any public company whenever registered.

The section or subsection does not apply to a proprietary company while the same person is both its
sole director and sole shareholder.

Company's constitution can displace or modify 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.

141 Table of replaceable rules
Provisions that apply as replaceable rules
Officers and Employees
1 Voting and completion of transactions--directors of proprietary companies 194


2 Powers of directors 198A
3 Negotiable instruments 198B
4 Managing director 198C
5 Company may appoint a director 201G
6 Directors may appoint other directors 201H
7 Appointment of managing directors 201J
8 Alternate directors 201K
9 Remuneration of directors 202A
10 Director may resign by giving written notice to company 203A
11 Removal by members--proprietary company 203C
12 Termination of appointment of managing director 203F
13 Terms and conditions of office for secretaries 204F
Inspection of books
14 Company or directors may allow member to inspectbooks 247D
Director's Meetings
15 Circulating resolutions of companies with more than 1director 248A
16 Calling directors' meetings 248C
17 Chairing directors' meetings 248E
18 Quorum at directors' meetings 248F
19 Passing of directors' resolutions 248G
Meetings of members
20 Calling of meetings of members by a director 249C
21 Notice to joint members 249J(2)
22 When notice by post or fax is given 249J(4)
22A When notice under paragraph 249J(3)(cb) is given 249J(5)
23 Notice of adjourned meetings 249M
24 Quorum 249T
25 Chairing meetings of members 249U


26 Business at adjourned meetings 249W(2)
27 Who can appoint a proxy
[replaceable rule for proprietary companies only]
249X
28 Proxy vote valid even if member dies, revokes appointment etc. 250C(2)
29 How many votes a member has 250E
30 Jointly held shares 250F
31 Objections to right to vote 250G
32 How voting is carried out 250J
33 When and how polls must be taken 250M
Shares
33A Pre-emption for existing shareholders on issue of shares
in proprietary company
254D
33B Other provisions about paying dividends 254U
34 Dividend rights for shares in proprietary companies 254W(2)
Transfer of shares
35 Transmission of shares on death 1072A
36 Transmission of shares on bankruptcy 1072B
37 Transmission of shares on mental incapacity 1072D
38 Registration of transfers 1072F
39 Additional general discretion for directors of proprietarycompanies to refuse
to register transfers
1072G

B. Corporate Constitution
1) Constitution Rules
Constitution often adopted because some of the replaceable rules will be unsuitable.
Public company must have a constitution: ASX Listing Rule 15.11.
NOTE: Prior to Company Law Review Act 1998companies required to have
Memorandum and Articles on registration. A "sample set" of Articles ("Table A") was
provided.
Companies registered before 1 July 1998 often have written constitution, made up of
the Memorandum and Articles.


2) Adoption of Constitution
Corporations Act 2001 s 136 Constitution of a company

(1) A company adopts a constitution:

(a) on registrationif each person specified in the application for the company's
registration as a person who consents to become a member agrees in writing to the terms of
a constitution before the application is lodged; or

(b) after registrationif the company passes a special resolution [s 975 per cent vote]
adopting a constitution or a court order is made under section 233 that requires the
company to adopt the constitution.

3) Alteration of the Constitution
A company may modify or repeal constitution by special resolutions 136(2).
136 Constitution of a company

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

(3) The company's constitution may provide that the special resolution does not have any effect
unless a further requirement specified in the constitution relating to that modification or repeal has
been complied with.

(4) Unless the constitution provides otherwise, the company may modify or repeal a further
requirement described in subsection (3) only if the further requirement is itself complied with.

Repeal may mean that new or default replaceable rules will apply: see ss 136(5) and 139.
Alteration may result in the breach of separate contracts made on the previous terms of the
constitution.
Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399; 132 ALR
FACTS: Medical Defence Union provided indemnity insurance to doctors, including Bailey. Tort
claim made against BaileyMedical Defence Union paying costs. Members voted to change
Constitution, reducing the amount of insurance cover to which doctors were entitled.
ISSUE: Did the change in the Constitution affect the statutory contract? Was the insurance
available under s 140, or was there a separate or special side contract?
HELD: (Minority):
Rights to insurance were not insider rights, as they did not concern the governance of
the Medical Defence Union. Section 140 is limited to regulations which apply alike to all
shareholders.
HELD: (Majority):
(1) Non-members could have cover before they became members, therefore there was
a side contract.
(2) The precise terms of any special contractand the effect of any change to the
constitution on that contractare questions of construction for the court.


(3) The parties could not have intended the contract to vary with the Constitution.
Changes in the constitution would therefore only apply prospectively. Baileys contract
began when he applied to become a member. Insurance cover continued as long as he
paid his subscription each year new contract each year. If the articles changed, the
change would effect the renewal of the contract the following year only.
NOTE: Minority and majority agreed that Bailey was covered however difficulties in this case
arise regarding whether this should be s 140 or special contract.

Company cannot be deprived of its statutory power to alter its constitution by contracting that it
will not change its constitution.
Russell v Northern Bank [1992] 3 All ER 161
HELD: Members can make a contract between themselves, has all the features of a regular
contract, will not automatically bind new members.

Bushell v Faith [1970] AC 1099
HELD: The constitution can also be entrenched by using weighted voting rights.
NOTE: Constitution can make for modification or repeal to be conditional on compliance with
further requirements s 136(3)-(4).
NOTE: Modifications cannot be oppressive or unfairly prejudicial to a member 140(2), variations
of class rights have to comply with a special procedure prescribed by s 246B.
C. Statutory Contracts
The replaceable rules and/or Constitution are a statutory contract, providing the legal basis for
enforcement of the company constitution.
Corporations Act 2001 s 140 Effect of constitution and replaceable rules

(1) A company's constitution (if any) and any replaceable rules that apply to the company have
effect as a contract:

(a) between the company and each member; and

(b) between the company and each director and company secretary; and

(c) between a member and each other member;

under which each person agrees to observe and perform the constitution and rules so far as they
apply to that person.

Outsiders cannot enforce rights under the statutory contract and members are bound or entitled
only in their capacity as members.
Eley v Positive Life Assurance Co Ltd [1875] 1Ex D 20
FACTS: Articles of Association drafted by Eley (a shareholder) which provided that he could not
be dismissed as company solicitor (although he had no service contract with the company).
Removed as solicitor, and tried to enforce Articles.
HELD: The Articles conferred no rights upon Eley in any capacity other than that of a member
and that these rights were not affected by the companys actions. In order for outsiders to


enforce rights, they require a normal contract.
AFFIRMED: Marketing Advisory Services (MAS) v Football Tasmania Ltd [2002] 42 ACSR 128.
Hickman v Kent or Romney Sheep Breeders Association [1915] 1 Ch 881
HELD: (Astbury J):
[A]n outsider to whom rights purport to be given by the articles in his capacity as such
outsider, whether he is or subsequently becomes a member, cannot sue on those
articles treating them as contracts between themselves and the company to enforce
those rights ...
No right merely purporting to be given by any article to a person, whether a member or
not, in a capacity other than that of a member, as, for instance, as solicitor, promoter,
director, can be enforced against the company ... .

Members are bound by the statutory contract in any disputes arising in relation to the affairs of
the association.
Hickman v Kent or Romney Sheep Breeders Association [1915] 1 Ch 881
FACTS: The Company's Articles provided for any disputes between members and the company to
be referred to an arbitrator before court proceedings could begin. Hickman began a court action
without referring the dispute to an arbitrator.
HELD: The Company successfully obtained a stay of proceedings.

Remedy for breach of the constitution by the company is injunction or declaration, not damages.
Corporations Act 2001 s 563A Postponing subordinate claims

(1) The payment of a subordinate claim against a company is to be postponed until all other debts
payable by, and claims against, the company are satisfied.

(2) In this section:

"subordinate claim" means:

(a) a claim for a debt owed by the company to a person in the person's capacity as a
member of the company (whether by way of dividends, profits or otherwise); or

(b) any other claim that arises from buying, holding, selling or otherwise dealing in shares in
the company.

Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15
HELD: Section 563A postpones claims by a shareholder owed by a company to a person in the
persons capacity as a member of the company until after other creditors have been paid.
APPLIED: Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317.

Sons of Gwalia Ltd v Margaretic (2007) 81 ALJR 525
FACTS: Margaretic bought shares in company which became insolvent and brought an action for
misleading and deceptive conduct (1041H Corporations Act 2001). The shares were bought from
the secondary market (as was the case in Houldsworth and Webb). If successful, would have had


a claim for damagesowed to Margaretic in his capacity as a member.
HELD: A claim brought by a member against the company under s 1041H for false and
misleading conduct did not fall within s563A, and thus could recover along with unsecured
creditors.
NOTE: Decision was influenced by the terminology of the consumer and investor protection
statutes (which applied to the whole investing public, whether they were members or not at the
time they relied on the statement made by the company) rather than an application of
Houldsworth. It therefore does not clarify which rights will be considered outsider rights.
NOTE: This case has been overruled by the legislature: the Corporations Amendment (Sons of
Gwalia) Bill 2010.

One shareholder should be able to recover damages from another shareholder however members
are confined to enforcing personal rights under s 140(1).
This includes the right to vote and right to a dividend if one is declared.
Kraus v JG Lloyd Pty Ltd [1965] VR 232
HELD: A member was able to obtain a declaration that a director was no longer entitled to act
because the term had exceeded that permitted by the Articles. An injunction was ordered:
(1) Preventing the director from acting; and
(2) Preventing another director from treating as a director; and
(3) Requiring a General Meeting be called to enable the shareholders to elect new
directors in accordance with the articles.
NOTE: While the court insisted that the plaintiffs personal rights had been infringed by this, it
gave no further details.

A member will not be able to complain of mere procedural irregularitiesi.e. failure to give
notice, defects in forum requirements for meetings.
Corporations Act 2001 s 1322 Irregularities

(3) A meeting is not invalidated only because of the accidental omission to give notice of the
meeting .

(3AA) A meeting is not invalidated only because of the inability of a person to access the notice of
meeting .

(3A) If a member does not have a reasonable opportunity to participate in a meeting of members,
or part of a meeting of members, held at 2 or more venues, the meeting will only be invalid on that
ground if:

(a) the Court is of the opinion that:

(i) a substantial injustice has been caused or may be caused; and

(ii) the injustice cannot be remedied by any order of the Court; and

(b) the Court declares the meeting or proceeding (or that part of it) invalid.


(3B) If voting rights are exercised in contravention of subsection 259D(3) (company controlling
entity that holds shares in it), the meeting or the resolution on which the voting rights were
exercised will only be invalid on that ground if: [as above]

Re Pembury Pty Ltd (1991) 4 ACSR 759
HELD: The irregularity does not have to be accidental or inadvertent, but can still be declared
invalid if a deliberate irregularity causes injustice. There must be a nexus between the
irregularity complained of and the prejudice.

Re P W Saddington and Sons Pty Ltd (1990) 2 ACSR 158; McGellin v Mount King Mining NL (1998) 144
FLR 288
HELD: If directors where aware and deliberately causing procedural breaches, this is not a mere
procedural irregularity. Note the long distance travelled to meetings in the cases.

Validation of other, non-procedural irregularities is possible under 1322(4), although note the
requirement in 6(a) that the court should not make an order unless satisfied that those
concerned acted honestly and that it is just and equitable that the order be made.
Rights which belong to the company must be enforced by the company.
Directors can sue under 140(1) to enforce rights (probably).
D. Organs and Division of Power
1) General Meeting
a) Majorities
Ordinary majority
Requires a simple majority of votes cast at common law in accordance with the company
Constitution and the Corporations Act 2001.
Special majority
Defined in s 9 to mean 75% of the votes of those entitled to vote.
Used to protect minorities.
b) Powers
Power Section Resolution
Appointment/removal of directors (pty) 203C (replaceable) Ordinary
Appointment/removal of directors (pub) 203D Ordinary
Alterations of the constitution 136(2) Special
Consolidating or subdividing companys shares 254H Ordinary
Reducing the companys issued share capital 256B/256C Ordinary
Altering rights attached to shares Pt 2F.2
Altering companys status Pt 2B.7
elective buy-backs or buy-backs exceeding the 10/12
limit
257C Ordinary
Certain management decisions where there is a
conflict of interests
Pt 2D.2, Ch 2E
Sale of the companys main undertaking ASX Listing Rules 11.2


Significant change to activities ASX Listing Rules 11.1

c) Voting Procedures
Voting is typically performed by a show of hands.
250J How voting is carried out (replaceable rulesee section 135)

(1) A resolution put to the vote at a meeting of a company's members must be decided on a show of
hands unless a poll is demanded.

250L When a poll is effectively demanded

(1) At a meeting of a company's members, a poll may be demanded by:

(a) at least 5 members entitled to vote on the resolution; or

(b) members with at least 5% of the votes that may be cast on the resolution on a poll; or

(c) the chair.

Informal voting
Re Express Engineering Works Ltd [1920] Ch 466; Re Duomatic [1969] 2 Ch 365
HELD: Members can vote informally if all agree.

Re Compaction Systems Pty Ltd (1976) 2 NSWLR 477
HELD: This does not apply if any member is excluded from the meeting, even if they are not
entitled to vote.
NOTE: Section 1322 may make the informal resolution valid in any event if there is no prejudice.

Bodikian v Sproule [2009] 72 ACSR 598
NOTE: Informal voting rule may not apply where there is a statutory requirement to hold a
meeting (as opposed to a replaceable rule requiring that a meeting be held).

NOTE: Section 249X allows a member to appoint a proxy to vote at the general meeting.
d) Types of General Meeting
There are two types of general meeting: the AGM (Annual General Meeting) and the EGM
(Extraordinary General Meeting).
Public companies must hold AGMs because they have an important corporate governance
function (they give shareholders the opportunity to call directors to account): s250N.
Proprietary companies do not have to, although their constitution may oblige them to.
Requirements:
Both board and auditors must (in many cases) be present at the AGM.
Annual reports must be made to the AGM (both financial and directors reports) by
public companies and large proprietary companies.


Small proprietary companies are exempt unless 5% of shareholders request it or ASIC
directs it (293-4).
Listed companies have more frequent disclosure obligations: they must prepared half-
year financial report and directors report under s302 and note also their obligations of
continuous disclosure to the market under the ASX Listing Rules, Chapter 3.
e) Calling General Meetings
Rule Section
Calling of meetings of members by a director (replaceable) 249C
Calling of meetings of members of a listed company by a director 249CA
Calling of general meeting by directors when requested by members 249D
Failure of directors to call general meeting 249E
Calling of general meetings by members 249F
Calling of meetings of members by the Court 249G
PurposeA meeting of a company's members must be held for a proper
purpose
249Q

f) Notice of General Meetings
Period: ss 249H and 249HA21 Days
Means/to whom: ss 249J and 249K
Contents: s 249L (AND ss 249O, 249P)
Fiduciary duty of directors to inform members, and common law right to receive truly
informative notice, s 52 TPA
Fraser v NRMA Holdings Ltd (1995) 127 ALR 543
FACTS: Challenge to the demutualization of NRMA. It was initially owned by its members,
transferred to a corporate entity who then issued shares. Two directors challenged arguing that
majority of directors were putting out misleading statements about benefits of demutualization
without showing negative
HELD:
(1) When directors are causing corporation to communicate to shareholders, they have
a fiduciary duty in giving notice of the meeting.
(2) Must provide such information as to fully and fairly inform shareholders of the detail
of the meeting.
(3) Information must be such to enable members to judge whether or not to attend the
meeting and vote or leave the matter to the majority attending the meeting.

2) Board of Directors
a) The directors have general power to manage the company.
Corporations Act 2001

198A Powers of directors (replaceable rulesee section 135)

(1) The business of a company is to be managed by or under the direction of the directors.

Note: See section 198E for special rules about the powers of directors who are the single
director/shareholder of proprietary companies.


(2) The directors may exercise all 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.

Note: For example, the directors may issue shares, borrow money, and issue debentures,
employing people, suing in the companys name, deciding whether to defend proceedings,
making contracts.

198D Delegation

(1) Unless the company's constitution provides otherwise, the directors of a company may delegate
any of their powers to:

(a) a committee of directors; or

(b) a director; or

(c) an employee of the company; or

(d) any other person.

198E Single director/shareholder proprietary companies

Powers of director

(1) The director of a proprietary company who is its only director and only shareholder may exercise
all 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. The business of the company is to be managed
by or under the direction of the director.

Note: For example, the director may issue shares, borrow money and issue debentures.

AWA Ltd v Daniels [1992] 7 ACSR 759
HELD: A board's functions, apart from statutory ones, are said to be usually four-fold:
(1) to set goals for the corporation;
(2) to appoint the corporation's chief executive;
(3) to oversee the plans of managers for the acquisition and organisation of financial
and human resources towards attainment of the corporation's goals; and
(4) to review, at reasonable intervals, the corporation's progress towards attaining its
goals...

b) Board Composition
Numbers
Minimum number of directors (s201A):
Proprietary company: 1
Public company: 3 (2 ordinarily resident in Australia)
Maximum number? Usually stated in constitution.


Who can be a director? Corporations Act: ss. 201A-B, D:
Natural person (some companies can be directors of other companies, i.e. de facto and
shadow directors), over 18 years old (201B); signed consent (201C)
Not disqualified (201B)
Some must ordinarily reside in Australia (at least 2 directors of public company; and at
least one director of proprietary company: s 201A(1) and (2)))
Who is not the auditor of the company, and hasnt been the auditor or a member of the
audit firm for the last 2 years: s324CI (does not apply to small proprietary companies)
Minimum shareholding? Check constitution this may be the case in order to incentivize
the directors.
c) Directors Rules



IV Corporate Contracting
A. Corporate Capacity
124 Legal capacity and powers of a company
s124(1) states that companies have the legal capacity and powers of an individual, but note that
powers set out therein include additional powers that are not applicable to humans security
interests and issuing shares.
s124(2) provides that a companys capacity to do something is not affected by the fact that it is
not in the companys interests to do that thing.

125 Constitution may limit powers and set out objects

(1) If a company has a constitution, it may contain an express restriction on, or a prohibition of, the
company's exercise of any of its powers. The exercise of a power by the company is not invalid
merely because it is contrary to an express restriction or prohibition in the company's constitution.

(2) If a company has a constitution, it may set out the company's objects. An act of the company is
not invalid merely because it is contrary to or beyond any objects in the company's constitution.
NOTE: Breach of constitutional limitations by directors is an irregularity which may be a breach
of their duty of care and skill or their fiduciary duty to act in good faith for a proper purpose
(given that the company constitution defines and sets limits to the companys interests).
NOTE: Ratification of the breach by the shareholders in general meeting is possible unless the
interests of creditors intrude: Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722.
B. Direct Contracting
A company contracts directly if the contract is made by one of its organs.
127 Execution of documents (including deeds) by the company itself

(1) A company may execute a document without using a common seal if the document is signed by:

(a) 2 directors of the company; or

(b) a director and a company secretary of the company; or

(c) for a proprietary company that has a sole director who is also the sole company
secretary--that director.

Note: If a company executes a document in this way, people will be able to rely on the assumptions
in subsection 129(5) for dealings in relation to the company.

(2) A company with a common seal may execute a document if the seal is fixed to the document and
the fixing of the seal is witnessed by:

(a) 2 directors of the company; or

(b) a director and a company secretary of the company; or


(c) for a proprietary company that has a sole director who is also the sole company
secretary--that director.

Note: If a company executes a document in this way, people will be able to rely on the assumptions
in subsection 129(6) for dealings in relation to the company.

(3) A company may execute a document as a deed if the document is expressed to be
executed as a deed and is executed in accordance with subsection (1) or (2).

(4) This section does not limit the ways in which a company may execute a document
(including a deed).
NOTE: Section 198E(1)Sole director/shareholder is the organ of the company
C. Agent
a) Actual (express or implied) Authority
Actual authority is an internal matter, and can be express or implied.
126 Agent exercising a company's power to make contracts

(1) A company's power to make, vary, ratify or discharge a contract may be exercised by an
individual acting with the company's express or implied authority and on behalf of the company. The
power may be exercised without using a common seal.

(2) This section does not affect the operation of a law that requires a particular procedure to be
complied with in relation to the contract.
i) Express Authority
Express actual authority may arise by expressly giving an individual power to enter into particular
contracts or to carry out certain tasks.
ii) Implied Authority
Implied actual authority arises from the conduct and the circumstances, based upon the usual and
incidental authority incurred.
Position Rule
Managing Director Managing director can have powers delegated under 198C and can also be
appointed under s201J.
Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68
Usual authority to deal with everyday matters, to supervise the
daily running of the co, to supervise the other managers and
indeed, generally, be in charge of the business of the company.
Individual Director Individual director has no usual authority to bind the company: Northside
Developments Pty Ltd v Registrar General (1990) 170 CLR
Individual
Chairperson
Individual chair has no usual authority to bind the company: State Bank of
Victoria v Parry (1990) 2 ACSR 15
Company
Secretary
Company secretary keeps records and ensures company performs statutory
functions (s 188).

Previously limited to clerical duties; now has usual authority to enter


administrative contracts: Panorama Developments (Guilford) Ltd v Fidelis
Furnishing Fabrics Ltd (1971) 2 QB 711 and Donato v Legion Cabs (Trading) Co-
op Society Ltd (1966) 2 NSWR 583
Executives below
board level
AWA Ltd v Daniels (1992) 7 ACSR 759
HELD: The authority of executives below board level will depend on their
particular position.
Other Agent Hely-Hutchison v Brayhead (1968) 1 QB 549
HELD: Implied actual authority can also arise by the acquiescence of the
board or other person with actual authority:
(1) Acquiescence requires consent of all board members; and
(2) Communication of that consent to each other and to the agent.

b) Apparent or Ostensible Authority
Four Elements to be satisfied before a contract can be enforced against a company where the
purported agent did not have actual authority.
Freeman & Lockyer v Buckhurst Properties (Mangal) Ltd (1964) 2 QB 480
(I) Representation: Representation must have been made to the contractor that the agent had
authority to enter on behalf of the company a contract of the kind sought to be enforced
(II) Authority to Represent: That representation must have been made by a person or persons
who had actual authority to manage the business generally (normally the board) or specific
matters to which the contract relates:
a. (eg MD or company secretary or some other agent to whom authority has been
delegated, whether expressly or impliedly): per Diplock LJ, the making of such a
representation is itself an act of management of the company's business. In all the
cases reviewed in Freeman, the representation was made by conduct in permitting
the agent to act in the management and conduct of part of the business of the
company.
(III) Inducement: Contractor induced by the representation to enter the contract (this will not
apply where the contractor knows of facts which suggest that the apparent agent did not
have authority, because then they will not have relied on the representation).
(IV) Reasonable Inquiry: A fourth condition laid down by Diplock LJ relating to capacity no longer
applies. However some commentators take the view that there is a fourth condition that
apparent authority will not operate if the third party knows something which would put a
reasonable person on inquiry as to whether the person with whom they are dealing lacks
authority. Alternatively, this might simply be an aspect of inducement: if the contractor
knows about the lack of authority then the representation will not be an inducement. If the
contractor ought to know about the lack of authority then it will be difficult to persuade the
court that he relied on the representation.

Application of the Freeman Test
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) 2 QB 480
FACTS: Contract made, architects used sued for payment.
HELD: Apparent authority as knowledgeable silence given by board. The company was bound
under the contracts.

Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR


72
FACTS: Director Bruce Jr has authority to act as managing director, however did not have actual
authority. Held out authority to buy machinery.
HELD: Apparent authority cannot derive from a person who only has apparent authority.
NOTE: This principle may be relaxed, see s 129(3).
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35
FACTS: Letters of indemnity, where a bank would indemnify the ship charterer in respect of loss
or damage that the charterer might sustain as a result of delivering cargo to someone without
documentation. This was made by the banks guarantee and loan department. Lacked express
actual authority.
HELD: court held that bank made a representation about the authority of Ms Dhiri to issue
indemnities, through equipping her with a certain title (manager of the Documentary Credit
Department), status and facilities, and also by failing to establish proper safeguards to protect
itself and outsiders with whom it dealt- from unauthorised conduct. Court looked at failure of
the bank to protect itself by putting in protective standards.

Corporations Act 2001Part 2b.2Assumptions People Dealing With Companies Are Entitled To
Make
128 Entitlement to make assumptions

(1) A person is entitled to make the assumptions in section 129 in relation to dealings with a
company. The company is not entitled to assert in proceedings in relation to the dealings that any of
the assumptions are incorrect.

(2) A person is entitled to make the assumptions in section 129 in relation to dealings with another
person who has, or purports to have, directly or indirectly acquired title to property from a
company. The company and the other person are not entitled to assert in proceedings in relation to
the dealings that any of the assumptions are incorrect.

(3) The assumptions may be made even if an officer or agent of the company acts fraudulently, or
forges a document, in connection with the dealings.

(4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they
knew or suspected that the assumption was incorrect.

129 Assumptions that can be made under section 128

Constitution and replaceable rules complied with

(1) A person may assume that the company's constitution (if any), and any provisions of this
Act that apply to the company as replaceable rules, have been complied with.

Director or company secretary

(2) A person may assume that anyone who appears, from information provided by the
company that is available to the public from ASIC, to be a director or a company secretary of
the company:


(a) has been duly appointed; and

(b) has authority to exercise the powers and perform the duties customarily
exercised or performed by a director or company secretary of a similar company.

Officer or agent

(3) A person may assume that anyone who is held out by the company to be an officer or
agent of the company:

(a) has been duly appointed; and

(b) has authority to exercise the powers and perform the duties customarily
exercised or performed by that kind of officer or agent of a similar company.

Proper performance of duties

(4) A person may assume that the officers and agents of the company properly perform
their duties to the company.

Document duly executed without seal

(5) A person may assume that a document has been duly executed by the company if the
document appears to have been signed in accordance with subsection 127(1). For the
purposes of making the assumption, a person may also assume that anyone who signs the
document and states next to their signature that they are the sole director and sole
company secretary of the company occupies both offices.

Document duly executed with seal

(6) A person may assume that a document has been duly executed by the company if:

(a) the company's common seal appears to have been fixed to the document in
accordance with subsection 127(2); and

(b) the fixing of the common seal appears to have been witnessed in accordance
with that subsection.

For the purposes of making the assumption, a person may also assume that anyone who
witnesses the fixing of the common seal and states next to their signature that they are the
sole director and sole company secretary of the company occupies both offices.

Officer or agent with authority to warrant that document is genuine or true copy

(7) A person may assume that an officer or agent of the company who has authority to issue
a document or a certified copy of a document on its behalf also has authority to warrant that
the document is genuine or is a true copy.

(8) Without limiting the generality of this section, the assumptions that may be made under


this section apply for the purposes of this section.

130 Information available to the public from ASIC does not constitute constructive notice

A person is not taken to have information about a company merely because the information is
available to the public from ASIC.

The Indoor Management RuleNot entitled to make assumptions if had knowledge that the
assumption
Houghton v Nothard Lowe and Wills Ltd (1927) 1 KB 246
HELD: A mere constitutional or statutory power to appoint agents will not suffice to trigger the
Turquand rule; the company must do something to create an impression that the person was its
agent or that approval was given.

Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146
FACTS: Group of companies controlled by R, Northside purported to give mortgage over land to
bank, in order to secure loan to companies owned by R. Witnessed by R (director) and G
(secretary). Board had not delegated or authorized transaction. G had never formally been
appointed as secretary. Financial difficulties, sought to enforce loan. Argued that mortgage was
invalid as had not been approved by Northside.
HELD: Mortgage invalid. Numerous reasons given. All agreed that the out on inquiry section
applied the bank officers could see that the loan was being made to companies unrelated the
group and Northside did not own any shares, and was taking on a large amount of risk for no
apparent benefit. The bank should have made inquiries to satisfy themselves that the mortgage
had been entered into correctly.
Story v Advance Bank Australia Ltd (1995) 31 NSWLR 7
FACTS: Bank lent Ss company $1M arranged by S. As security, bank obtained mortgage over
house property. The loan monies were used partly for personal purposes, the rest for business
purposes. Executed under seal, witnessed by Mr and Mrs S her signature was forged. Company
collapsed, bank sought to enforce.
HELD: Mortgage document not properly executed, and the put on notice exception did not
apply. Company did have interest in loan. On this basis, northside can be distinguished.


V Directors Duties
A. Application of the Duties
1. Who Owes the Duty?
a) General Law Duties
CAC (NSW) v Drysdale (1978) 141 CLR 236; 22 ALR 161; 3 ACLR 760
HELD: Fiduiariesdirectors and senior executive officers.
NOTE: Content may vary depending on the nature of the office and service contract; also applies
to persons who knowingly assume office of director without having been properly appointed.

b) Statutory Duties
Directors
"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.

Standard Chartered Bank of Australia Ltd v Antico (1995) 18 ACSR 1
FACTS: Hodgson was influenced by Pioneers effective control in the context of the size of other
shareholdings (which were small). Note also Pioneers actual exercise of management and
financial control over Giant and Pioneers requirement that Giant produce financial reports in
line with own requirements.
HELD: Although a body corporate cannot be a director, it can be a shadow director. One
company was shadow director of another company.
NOTE: This is important because shadow directors and officers are subject to s180-3 duties,
while the duty not to trade while insolvent imposed by s588G insolvent trading duty only
extends to directors (including shadows and de factos) but not officers.

Officers
"officer" of a corporation means:

(a) a director or secretary of the corporation; or


(b) a person:

(i) who makes, or participates in making, decisions that affect the whole, or a
substantial part, of the business of the corporation; or

(ii) who has the capacity to affect significantly the corporation's financial standing;
or

(iii) in accordance with whose instructions or wishes the directors of the corporation
are accustomed to act (excluding advice given by the person in the proper
performance of functions attaching to the person's professional capacity or their
business relationship with the directors or the corporation); or

(c) a receiver, or receiver and manager, of the property of the corporation; or

(d) an administrator of the corporation; or

(e) an administrator of a deed of company arrangement executed by the corporation; or

(f) a liquidator of the corporation; or

(g) a trustee or other person administering a compromise or arrangement made between
the corporation and someone else.

ASIC v Adler (2002) 41 ACSR 72; 20 ACLC 576, 599 (Santow J)
FACTS: HIHC (a wholly owned subsidiary of HIH) paid $10m in June 2000 to Pacific Eagle Equity
(PEE). Adler, although a director of HIH, was not a director of HIHC.
HELD: Adler was an officer of HIHC, see s 9a person who has the capacity to affect
significantly the corporations financial standing. He participated in how funds in the group were
invested. He also had the capacity to significantly affect HIHCs financial standing.

Morley v ASIC [2010] NSWCA 331
HELD: Morley (CFO) and Shafron (Co-Secretary and General Counsel) of James Hardie Industries
Ltd were considered to be officers of the company.

Specific Duties Owed by Directors and Officers
Duty Section Persons under Duty
Duty of care 180 (1) Directors and officers
Duty of good faith 181 Directors and officers
Duty not to make improper use of position 182 Directors, officers and employees
Duty not to make improper use of information 183 Directors, officers and employees
Duty to disclose material personal interests 191 Directors only
Duty to avoid insolvent trading 588G Directors only


2. To Whom is the Duty Owed?
The Company as a Separate Legal Entity
Percival v Wright (1902) 2 Ch 421
HELD: Duties are owed to the company as a separate legal entity. Generally, this means they can
only be enforced by the company and not by individual shareholders.

Individual Shareholders
Peskin v Anderson (2001) 1 BCLC 372, (2001) BCC 874; Allen v Hyatt (1914) 30 TLR 444; Coleman v
Myers (1977) 2 NZLR 225
HELD: Directors may come to owe a duty of care to persons other than the company, for
example if they assume responsibility to individual shareholders.

Glavanics v Brunninghausen (1996) 19 ACSR 204 (2203); (1999) 32 ACSR 294, 304, 312
FACTS: Company, two directors and shareholders, B and Gone had secured deal to sell
company to third party. Offered a very high price for the business. Bought out other director
without disclosing the high price to be sold.
HELD: One was directly reliable to the other, it was more akin to a partnership and thus the duty
was owed.
NOTE: This case is confined to its own facts.

The Test:
(1) Shareholder dependency;
(2) Relationship of trust and confidence (or position of advantage);
(3) Significant transaction; and
(4) Positive action taken by directors.

B. Common Law Duties of Care, Skill, Diligence, and Delegation/Reliance
Re Cardiff Savings Bank [1892] 2 Ch 100 (Marquess of Bute's Case)
HELD: The directors duties imposed by the general law are of a low standard, and are subjective,
thus depending upon the facts of each individual case.

1. Care
Re City Equitable Fire Insurance Company Ltd (1925) Ch 407, 428-9 (Romer J)
HELD: Requirement to take such care as a reasonable person would take on their own behalf.

2. Skill
Re City Equitable Fire Insurance Company Ltd (1925) Ch 407, 428-9 (Romer J)
HELD: Conduct should be assessed against a skill standard: What would a reasonable person
with the knowledge and experience of the defendant have done in the circumstances if acting on
his own behalf?


Re Brazilian Rubber Plantations and Estates Ltd (1911) 1 Ch 425
HELD: No requirement that directors bring particular skills, but if they possess them, they should
use them for the benefit of the company.

Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, 117
FACTS: Board of Victorian Safety Council included a number of high profile doctors, lawyers,
etc Board member named Friedrich apparently ran/controlled the company. Company
became bankrupt and Friedrich disappeared. The remaining directors pleaded ignorance and
stated that they left the running to Friendrich.
HELD: The board members were liable, even though they did not act as Friedrich did.
RULE: An objective standard of skill, albeit rather minimal, is expected of executive directors
in relation to financial affairs of the company.
NOTE: Controversial decision, made under the influence of s 588G (Director's duty to
prevent insolvent trading by company).

3. Diligence
Re City Equitable Fire Insurance Company Ltd (1925) Ch 407 (Romer J)
HELD:
(1) Directors are not bound to give continuous attention to the affairs of the company.
(2) His duties are of an intermittent nature to be performed at periodical board
meetings, and at meetings of any committee of the board upon which he happens to be
placed.
(3) He is not, however, bound to attend all such meetings, though he ought to attend
whenever, in the circumstances, he is reasonably able to do so.

Minimum standards on directors to:
(1) Obtain a basic understanding of their companys business and be familiar with the
fundamentals of the companys business;
(2) Keep informed the activities of the company continuing obligation;
(3) Monitor the companys activities (although detailed inspection of day-to-day activities
not required) and regularly attend board meetings;
(4) Maintain familiarity with the companys financial status by a regular review of financial
statements, ie, monitor the companys financial position.

4. Delegation and Reliance
Re City Equitable Fire Insurance Company Ltd (1925) Ch 407 (Romer J)
HELD: For all duties that may be properly delegated, in the absence of grounds for suspicion, a
director is justified in trusting another to perform the duties honestly.
APPLIED/APPROVED: Dorchester Finance v Stebbings (1989) BCLC 498; AWA Ltd v Daniels (1992)
7 ACSR 759, 868 (Rogers CJ); Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993) 11 ACSR 785, 856-
8.
NOTE: Daniels v Anderson (1995) 37 NSWLR 438 was widely viewed as having imposed a stricter
standard on non-executives and this led to a statutory restatement of the rules on delegation
and reliance.


C. The Statutory Duties of Care under s 180

180 Care and diligencecivil obligation only

Care and diligencedirectors and other officers

(1) A director or other officer of a corporation must exercise their powers and discharge their duties
with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation's circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as,
the director or officer.

Note: This subsection is a civil penalty provision (see section 1317E).

1. The General Standard of Care
Vines v ASIC (2007) 62 ACSR 1; [2007] NSWCA 75
HELD: Objective standard of care.

ASIC v Rich (2003) 44 ACSR 341 at 352
HELD: The statutory responsibilities of a director include:
(1) arrangements flowing from the experience and skills that the director brought to his
or her office, and also any arrangements within the board or between the director and
executive management affecting the work that the director would be expected to carry
out.
(2) The precise duty of care flowing from these arrangements would be subject, of
course, to a minimum standard of care and diligence set by the statute in reflection of
the common law position.

ASIC v Adler [2002] 41 ACSR 72 [372] (Santow J)
HELD:
(1) Adler in breach of s 180(1)Caused the $10m to be invested prejudicially to HIHCs
interests: Did not follow the proper procedures in taking it to HIH investment
committee;
(2) Williams (former CEO) in breach of s 180(1)Also avoided the companys proper
safeguards and allowed the investment to continue;
(3) Fodera (former CFO) in breach of s 180(1)Failed to take steps to investigate the
investment.

ASIC v Macdonald [No 11] (2009) 71 ACSR 368 [259][261], [333] (Gzell J)
(1) Failure by the non-executive directors to discharge their monitoring role amounted to a
breach of their duty under s 180(1), stating (261) that:
It was part of the function of the directors in monitoring the management of the
company to settle the terms of the draft ASX announcement to ensure that it did not
assert that the Foundation had sufficient funds to meet all legitimate compensation


claims.
(2) US directors (Gillfillan and Koffel) participated in the relevant meeting by telephone but the
draft ASX announcement was neither provided nor read to them and breached s 180(1) by
voting in favour of the resolution:
Applying an objective test under s 180(1), Gzell J concluded (261) that their failure to
request a copy of the draft ASX announcement dealing with such a significant matter in
the life of JHIL, to familiarise themselves with its terms, or to abstain from voting was
inconsistent with the actions of a reasonable person in their shoes with their
responsibilities.

Morley v ASIC (2010) 247 FLR 140 ; [2010] NSWCA 331 [831]
(1) If Australian directors had voted in favour of the Draft ASX Announcement Resolution at the
February board meeting, they would have been in breach of their duty of care and diligence
since the draft announcement was misleading.
(2) [867] The US directors who attended the meeting by telephone, would have breached their
duty of care and diligence because they would have heard the discussion and were not excused
from understanding the need not to issue misleading statements to the market and other
interested stakeholders.
(3) Market reaction to the announcement to them was critical. This was a matter within the
purview of the Boards responsibility: what should be stated publicly about the way in which
asbestos claims would be handled by the James Hardie group for the future [261].

Vines v ASIC (2007) 62 ACSR 1; [2007] NSWCA 75
FACTS: Takeover of GIO by AMP in 2000. Proceedings against, amongst others, Vines (CFO)
under previous 180(1): Regarding preparation of a profit forecast for the company which failed
to take into account certain matters (Vines against the takeover in forecast).
HELD: In first instance, found that Vines had breached duties of standard of care without taking
positive steps to inform of the assumptions underlying the forecast. He had a supervisory and
operational responsibility there were signals which would have led a reasonable person to
ensure that the forecast was accurate. This was on the basis of his special capabilities as CFO.

2. The Standard of Care: Non-Executive Directors versus Executive Directors
Position is not settled in the case law.
ASIC v Macdonald [No 11] [2009] NSWSC 287 [250] (Gzell J)
HELD: The law has not yet established the extent to which the position of a non-executive
director shapes the content of the duty of care.
OUTCOME: Statement to stock exchange was a breach made by the executive and non-
executive directors.

The standard is not that of a manager but is proactive.
AWA v Daniels (1992) 7 ACSR 759, 865-9 (Rogers CJ)
FACTS: AWA (plaintiff company) suffered a loss when one of its employees, Koval (foreign
exchange transactions), covered up a fraud reporting gains when he was actually making losses.
Koval operated without effective control or supervision.
ISSUES: AWA claimed that the auditor was negligent in failing to detect the loss. The auditor


counterclaimed that it was the clients responsibility to manage its employees.
HELD: AWAs contributory negligence reduced the auditors liability. The CEO as an executive
director had breached his common law duty of care, and his negligence was attributed to AWA.
...The board of a large public corporation cannot manage the corporation's day to day
business. The directors rely on management to manage the corporation. ... A non-
executive director does not have to turn him or herself into an auditor, managing
director, chairman or other officer to find out whether management are deceiving him or
her ... .
Daniels v Anderson (1995) 37 NSWLR 438
RULE: Non-executives to take a more proactive approach to monitoring by referring to what
they ought to know: [I]n our opinion the responsibilities of directors require that they take
reasonable steps to place themselves in a position to guide and monitor the management of the
company.
NOTE: The distinction between the standard owed by executive and non-executive directors was
rejectedthe standard is objective.

3. Delegation and Reliance under Statute
189 Reliance on information or advice provided by others

If:

(a) a director relies on information, or professional or expert advice, given or prepared by:

(i) an employee of the corporation whom the director believes on reasonable
grounds to be reliable and competent in relation to the matters concerned; or

(ii) a professional adviser or expert in relation to matters that the director believes
on reasonable grounds to be within the person's professional or expert competence;
or

(iii) another director or officer in relation to matters within the director's or officer's
authority; or

(iv) a committee of directors on which the director did not serve in relation to
matters within the committee's authority; and

(b) the reliance was made:

(i) in good faith; and

(ii) after making an independent assessment of the information or advice, having
regard to the director's knowledge of the corporation and the complexity of the
structure and operations of the corporation; and

(c) the reasonableness of the director's reliance on the information or advice arises in
proceedings brought to determine whether a director has performed a duty under this Part
or an equivalent general law duty;


the director's reliance on the information or advice is taken to be reasonable unless the contrary is
proved.

198D Delegation

(1) Unless the company's constitution provides otherwise, the directors of a company may delegate
any of their powers to:

(a) a committee of directors; or

(b) a director; or

(c) an employee of the company; or

(d) any other person.

Note: The delegation must be recorded in the company's minute book (see section 251A).

(2) The delegate must exercise the powers delegated in accordance with any directions of the
directors.

(3) The exercise of the power by the delegate is as effective as if the directors had exercised it.

Permissible delegation by non-executives and reliance upon management and/or experts:
ASIC v Macdonald [No 12] (2009) 259 ALR 116 (Gzell J)
HELD: The matter of the ASX announcement before the board was not an appropriate matter
for delegation or reliance upon management, co-directors, or outside experts.
NOTE: [I]t is the emphatic nature of the draft ASX announcement *with use of the term fully-
funded+ that is at fault. And that is not a matter for reliance upon management or outside
experts. Furthermore, a more emphatic reason for its rejection was that the boards task of
approving the draft ASX announcement involved no more than an understanding of the English
language used in the document.

4. The Statutory Business Judgement Rule

Business judgment rule

(2) A director or other officer of a corporation who makes a business judgment is taken to meet the
requirements of subsection (1), and their equivalent duties at common law and in equity, in respect
of the judgment if they:

(a) make the judgment in good faith for a proper purpose; and

(b) do not have a material personal interest in the subject matter of the judgment; and


(c) inform themselves about the subject matter of the judgment to the extent they
reasonably believe to be appropriate; and

(d) rationally believe that the judgment is in the best interests of the corporation.

The director's or officer's belief that the judgment is in the best interests of the corporation is a
rational one unless the belief is one that no reasonable person in their position would hold.

Note: This subsection only operates in relation to duties under this section and their equivalent
duties at common law or in equity (including the duty of care that arises under the common law
principles governing liability for negligence)it does not operate in relation to duties under any
other provision of this Act or under any other laws.


"business judgment" means any decision to take or not take action in respect of a matter relevant to
the business operations of the corporation.

Business judgement:
ASIC v Fortescue Metals Group Ltd [No 5] (2009) 27 ACLC 1
HELD: The failure of a company to comply with disclosure obligations is not a decision related to
business operationsthis is a decision not to comply with a requirement of the law.

Burden of proof:
ASIC v Adler (2002) 41 ACSR 72 (Santow J)
HELD: The burden of proof is on the defendant who wishes to benefit from the application of the
statutory business judgement rule.

ASIC v Macdonald [No 11] (2009) 71 ACSR 368 [542] (Gzell J)
HELD: The requirements for the operation of the business judgment rule in s 180(2) are
cumulative. The short answer is that there was no evidence that Mr Macdonald rationally
believed that a business judgment was in the best interests of the corporation. He gave no
evidence. In the absence of evidence that Mr Macdonald had a belief that a business judgment
was in the best interests of JHIL, his appeal to s 180(2) must fail.

Rational belief interests of the company:
ASIC v Rich (2009) NSWSC 1229 at [7253][7289] (Austin J)
HELD: Under s 180(2)(d), a directors belief that a particular course of action was within the
interests of the company must be supported by an identifiable and arguable chain of reasoning,
even if that reasoning is not convincing to a judge.

D. Duties of Good Faith and Proper Purpose
Re Smith and Fawcett Ltd [1942] Ch 304
HELD: The directors of a company must act bona fide in what they considernot what a court


may consideris in the interests of the company, and not for any collateral purpose.

181 Good faithcivil obligations

Good faithdirectors 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 1: This subsection is a civil penalty provision (see section 1317E).

Note 2: Section 187 deals with the situation of directors of wholly-owned subsidiaries.

(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1: Section 79 defines involved. [Broad definition and covers all forms of complicity]


184 Good faith, use of position and use of informationcriminal offences


(1) A director or other officer of a corporation commits an offence if they:

(a) are reckless; or

(b) are intentionally dishonest;

and fail to exercise their powers and discharge their duties:

(c) in good faith in the best interests of the corporation; or

(d) for a proper purpose.

Note: Section 187 deals with the situation of directors of wholly-owned subsidiaries.

*+

Good faith cf proper purpose:
Re Smith and Fawcett Ltd [1942] Ch 304 (Buckley J)
HELD: Action taken for improper purposes will be voidable, and can be challenged by the
company, or (exceptionally among the duties owed by directors to companies) by individual
shareholders if it also affects their personal right not to have their voting interest diluted.


Residues Treatment and Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569
HELD: In these circumstances, ratification by the majority in general meeting will not operate to
bar an individual shareholders personal action.

1. 181(1)(a) The Duty to Act in Good Faith in the Interests of the Company
The test consists of a subjective and an objective inquiry:
Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239 (Owen J)
HELD: The test is largely (though by no means entirely) subjective:
(1) [T]he objective considerations relate back to the question whether the directors
honestly believed the transaction to be in the best interests of the company, not to
whether (regardless of what the directors believed) it did not benefit the company.
(2) The objective aspect of the test leaves open an avenue for judicial intervention if, on
consideration of the surrounding circumstances (objectively viewed), the assertion of
directors that their conduct was bona fide in the best interests of the company and for
proper purposes should be doubted, discounted or not accepted.
TEST: The courts will take account of what the directors say influenced their actions but it is up
to the Court to weigh this evidence objectively.
AFFIRMED: Westpac Banking Corp v Bell Group Ltd (No 3) [2012] WASCA 157

Hutton v West Cork Railway Co (1883) 23 Ch D 654, 671 (Bowen LJ)
HELD: Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the
affairs of the company, and paying away its money with both hands in a manner perfectly bona
fide yet perfectly irrational.

Westpac Banking Corp v Bell Group Ltd (No 3) [2012] WASCA 157
HELD: Objective test applied in cases where clear directors had not considered the interests of
the company at all: Would an intelligent, honest person in the position of the directors have
reasonably believed that the transaction was one for the benefit of the co, bearing in mind the
cos creditors?
NOTE: See also Linton v Telnet Pty Ltd (1999) 30 ASCR 465.

NOTE: The Charterbridge Corp Ltd v Lloyds Bank Ltd (1970) Ch 62 corporate groups exception.
Interests of the company:
Interests of: Rule:
Existing and future
members
Ngurli Ltd v McCann (1953) 90 CLR 425
HELD: Existing members includes both majority and minority
shareholders, so a decision in favour of the majority at the expense of
the minority will breach this duty.
Companys creditors 598 Action by liquidator for misapplication of corporate assets

588G Director's duty to prevent insolvent trading by company

Westpac Banking Corp v Bell Group Ltd (No 3) [2012] WASCA 157


HELD: directors have a duty to avoid acting contrary to the interests
of creditors where the company is insolvent or nearing insolvency.

Grove v Flavel [1986] 43 SASR 469
HELD: Note that this is a duty to consider, but not necessarily to give
priority to, the interests of creditors, at least until the company
becomes insolvent.
Employees Hutton v West Cork Railway Co (1883) 23 Ch D 654 (Bowen LJ);
Woolworths Ltd v Kelly (1991) 4 ACSR 431, 446 (Mahoney JA)
HELD: The general rule is that a director may only consider an
employees interests insofar as those interests alight with those off
the companys interests.

Parke v Daily News (1962) Ch 927 (Plowman J)
FACTS: A company which was being wound up was proposing to make
ex gratia payments to its employees out of the proceeds of the sale of
its business.
HELD: This was not within the interests of the company and thus the
payment could not be made in circumstances where the company had
no future.
Nominee directors Bennetts v Board of Fire Commrs of NSW (1967) 87 WN (pt1) NSW 307
HELD: A nominee director must act in the best interests of the
company he directs rather than the best interests of his appointor.

Scottish Co-op Wholesale Society v Meyer (1959) AC 324
HELD: Where the interests of their appointor and the company
conflict, directors must either prefer the companys interests or
resign.
Corporate groups Charterbridge Corp Ltd v Lloyds Bank Ltd (1970) Ch 62 (Pennicuick J)
HELD: Where the directors fail subjectively to consider the interests of
the separate entity in a corporate group, an objective test will apply
asking whether an intelligent and honest person in the position of the
directors could reasonably have believed that the transaction was for
the benefit of the separate entity.
APPLIED: Farrow Finance Company Ltd (in liq) v Farrow Properties Pty
Ltd (in liq) (1997) 26 ACSR 544, 581.

Walker v Wimborne (1976) 137 CLR 1
HELD: Each company in a corporate group is a separate legal entity,
and the directors must consider the interests of their company alone.

Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952 (Clarke
and Cripps JJA)
FACTS: Directors paid funds to make payments on loans of other
companies in the group to avoid their insolvency and the derivative
adverse effects upon the company.
HELD: If the transaction was, objectively viewed, in the interests of
the company, then no consequences would flow from the breach.
Such an inquiry would not require the court to consider how the


hypothetical honest and intelligent director would have acted. Viewed
objectively, the transaction had derivative benefits for the individual
company.

2. 181(1)(b)The Duty to Act for a Proper Purpose
The test for proper purpose
Re Smith and Fawcett Ltd [1942] Ch 304 Lord Greene
HELD: Directors should exercise their powers not for any collateral purpose. They must have
regard to those considerations, and those considerations only, which the articles on their true
construction permit them to take into consideration

Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821 (Privy Council) (Lord Wilberforce)
TEST: A two stage test: it is then necessary to examine the substantial purpose for which it
was exercised, and to reach a conclusion whether that purpose was proper or not [which] has
to be as to the side of a fairly broad line on which the case falls.
FACTS: Ampol held 55% of Miller. Directors of Miller favoured Howard (which offered more
money than Ampol). Directors of Miller issued shares which reduced combined shareholding of
Ampol to minority.
ISSUE: Howard challenged validityMiller argued that company was in urgent needs of funds,
i.e. reason of issue was to raise money needed.
HELD: Purpose was to dilute shareholding. Issuing shares for takeover purposes is an improper
purpose. Shares had to be returned: Rectification ordered.
(1) What is the power in question and what are the proper/legal purposes for which that
may be used?(Question of law);
(2) What was the actual or substantial purpose for which the director exercised the
power?(Question of fact: Examine the facts of the case and the intentions of the
director).

(1) What is the power in question and what are the proper/legal purposes for which that may be
used?
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, 292
HELD: If the constitution does not deal with the matterexpressly or impliedlythen the court
will have to draw its own conclusions based on the structure of the company etc
OUTCOME: Merely conferring the powers of the board on the governing director does not of
itself change the permissible purposes for the use of a power.

Power and Proper Purpose Authority
Provision of an employee share planto provide
employees with financial incentives to work in
the interests of the company
Mills v Mills (1938) 60 CLR 150
Enter into a joint venture with another company
by issuing shares to that companywhere this
ensures long term stability for the company
issuing the shares
Darvall v Nth Sydney Brick and Tile Co Ltd (1989)
16 NSWLR 260


Power and Improper Purpose Authority
Issuing sharesto dilute the shareholding of a
member
Kokotovich Constructions Pty Ltd v Wallington
(1995) 17 ACSR 478; Howard Smith Ltd v Ampol
Petroleum Ltd (1974) AC 821
Issuing sharesto enable directors to maintain
control of the company
Mills v Mills (1938) 60 CLR 150
Using company moneyto fund re-election
campaign
Advance Bank of Australia Ltd v FAI Insurances
Ltd (1987) 2 NSWLR 464
FACTS: Incumbent directors of Bank engaged
public relations firm to influence directors to
discourage voting for FAI directors. The
directors were sued for not acting with
proper purpose.
HELD: Evidence was that the Bank directors
had acted bona fide in attempting to
maintain control and believing that
involvement of FAI was negative for the
company; however the way they had gone
about that process was unreasonable: This
was an improper purpose.
Entering into contract to purchase landto fund
the acquisition of a business by the vendor
Permanent Building Society (in liq) v Wheeler
(1994) 11 WAR 187
FACTS: Society purchased land from Tower
in order to fund Towers acquisition of JCLD.
Wheeler and another director indirectly own
and hold shares in JCLD.
HELD: The directors acting with an improper
purpose, benefiting JCLD to Societys
detriment.

(2) What was the actual or substantial (mixed) purpose for which the director exercised the
power?
Substantial Object Test
Mills v Mills (1938) 60 CLR 150, 186 (Dixon J)
HELD: The court should look for the substantial object the accomplishment of which formed the
real ground of the boards action.
But For Test
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, 294
TEST: But for the improper purpose, would the directors have exercised the power?
FACTS: Hotel owned by Whitehouse family. Three classes of shares: Class A (Mr Whitehouse
unrestricted voting), Class B (Mrs Whitehousevoting allowed after Mr Whitehouses death),
and Class C (Childrenprofit but cannot vote). After divorce, Mr Whitehouse issued Class B
shares to sons to ensure control of company after Mr Whitehouses death.
ISSUE: Falling out with sons, Mr Whitehouse uses Hotel to challenge the issue of the shares
made by himself claiming they were made for an improper purpose.


HELD: Mr Whitehouses purpose in making the issue was to dilute Mrs Whitehouses control of
the company. This was an improper purpose. But for the improper purpose, Mr Whitehouse
would not have made the issue.

Darvall v North Sydney Brick and Tile Co Ltd (1989) 16 NSWLR 260
HELD: The court will not invalidate the decision if they believe it had a legitimate commercial
motivation.
There is a distinction in principle between a transaction for the purpose of defeating a
takeover bid and one prompted by the takeover offer but, in the end, entered into
because the directors believe it to be in the interests of the company as a whole.
NOTE: (Mahoney JA) If an improper purpose merely affected the timing of the implementation
of a decision, rather than the decision itself, then the decision would not be voidable.
NOTE: (Kirby P, in dissent) Combined the substantial purpose and but for testsapplied in
Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478; Permanent Building Society
(in liq) v Wheeler (1994) 11 WAR 187.

Effect of improper transaction:
Hogg v Cramphorn (1967) Ch 254
HELD: Where action was for an improper purpose, transaction will be voidable at the election of
the company if the third party has notice of the abuse of power unless ratified by the general
meeting.
APPLIED: Bamford v Bamford (1968) 2 All ER 655; Winthrop Investments Ltd v Winns Ltd (1975) 2
NSWLR 666 (Helsham J).

Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285
OBITER: A voidable allotment for an improper purpose can possibly be later ratified by the board
acting for a proper purpose, although the court did not explain the basis for this.

E. Fiduciary Duties
1. No-Conflict Rule: Directors must not have a personal interest (or engagement with a third
party) which conflicts with their duty to the company except with the companys fully
informed consent

Common Law Rule
Woolworths Ltd v Kelly (1991) 22 NSWLR 189; 4 ACSR 431
HELD: A director must make disclosure to the company where they have a direct personal
interest in the transaction going ahead.
NOTE: The disclosure must be to the general meeting, but company constitutions commonly
allow disclosure to the board.

Permanent Building Society (in liq) v McGee (1993) 11 ACSR 260
FACTS: Defendant Wheeler chairman of Society and of Capital, with controlling interest in that
company. Directors of Society sought to make loan to Capital. Wheeler disclosed interest and did


not vote, knowing that Capital could not repay loan.
HELD: There was a breach of fiduciary duty. It was not enough to merely disclose in these
circumstances, there was a duty to take positive steps to protect the interests of Society, which
included disclosing the specific knowledge.

London and Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd (1891) WN 165
HELD: The no-conflict rule is not an absolute rule against competing directorships, however in
these circumstances, a breach of the no-conflict rule is likely.

Fitzsimmons v The Queen (1997) 23 ACSR 355 (Owen J)
FACTS: Fitzsimmons director of Duke, a company in financial difficulties. Transaction in which Kia
Ora would purchase shares in Duke. Fitzsimmons appointed director of Kia Ora and participated
in decision to enter transaction with Duke, remaining silent as to the risk of loss.
HELD: Where there is a competing directorship, the minimum action required is to disclose the
conflict of interest and refrain from deliberation or voting on the conflicted transaction.
NOTE: Conflict between fiduciary duty to Kia Ora and duty of confidence to Duke. It is not the
existence of conflicting duties but pursuit of one duty at the expense of the other which must be
avoided.

Notice and Disclosure under the Corporations Act 2001 (Cth)
191 Material personal interestdirectors duty to disclose

Director's duty to notify other directors of material personal interest when conflict arises

(1) A director of a company who has a material personal interest in a matter that relates to
the affairs of the company must give the other directors notice of the interest unless
subsection (2) says otherwise.

(1A) For an offence based on subsection (1), strict liability applies to the circumstance, that
the director of a company has a material personal interest in a matter that relates to the
affairs of the company.

Note: For strict liability, see section 6.1 of the Criminal Code.

(2) The director does not need to give notice of an interest under subsection (1) if:

(a) the interest:

(i) arises because the director is a member of the company and is held in
common with the other members of the company; or

(ii) arises in relation to the director's remuneration as a director of the
company; or

(iii) relates to a contract the company is proposing to enter into that is
subject to approval by the members and will not impose any obligation on
the company if it is not approved by the members; or


(iv) arises merely because the director is a guarantor or has given an
indemnity or security for all or part of a loan (or proposed loan) to the
company; or

(v) arises merely because the director has a right of subrogation in relation
to a guarantee or indemnity referred to in subparagraph (iv); or

(vi) relates to a contract that insures, or would insure, the director against
liabilities the director incurs as an officer of the company (but only if the
contract does not make the company or a related body corporate the
insurer); or

(vii) relates to any payment by the company or a related body corporate in
respect of an indemnity permitted under section 199A or any contract
relating to such an indemnity; or

(viii) is in a contract, or proposed contract, with, or for the benefit of, or on
behalf of, a related body corporate and arises merely because the director is
a director of the related body corporate; or

(b) the company is a proprietary company and the other directors are aware of the
nature and extent of the interest and its relation to the affairs of the company; or

(c) all the following conditions are satisfied:

(i) the director has already given notice of the nature and extent of the
interest and its relation to the affairs of the company under subsection (1);

(ii) if a person who was not a director of the company at the time when the
notice under subsection (1) was given is appointed as a director of the
company--the notice is given to that person;

(iii) the nature or extent of the interest has not materially increased above
that disclosed in the notice; or

(d) the director has given a standing notice of the nature and extent of the interest
under section 192 and the notice is still effective in relation to the interest.

Note: Subparagraph (c)(ii)the notice may be given to the person referred to in this subparagraph by
someone other than the director to whose interests it relates (for example, by the secretary).

(3) The notice required by subsection (1) must:

(a) give details of:

(i) the nature and extent of the interest; and

(ii) the relation of the interest to the affairs of the company; and


(b) be given at a directors' meeting as soon as practicable after the director becomes
aware of their interest in the matter.

The details must be recorded in the minutes of the meeting.

Effect of contravention by director

(4) A contravention of this section by a director does not affect the validity of any act,
transaction, agreement, instrument, resolution or other thing.

Section does not apply to single director proprietary company

(5) This section does not apply to a proprietary company that has only 1 director.

194 Voting and completion of transactionsdirectors of proprietary companies (replaceable
rulesee section 135)

If a director of a proprietary company has a material personal interest in a matter that relates to the
affairs of the company and:

(a) under section 191 the director discloses the nature and extent of the interest and its
relation to the affairs of the company at a meeting of the directors; or

(b) the interest is one that does not need to be disclosed under section 191;

then:

(c) the director may vote on matters that relate to the interest; and

(d) any transactions that relate to the interest may proceed; and

(e) the director may retain benefits under the transaction even though the director has the
interest; and

(f) the company cannot avoid the transaction merely because of the existence of the
interest.

If disclosure is required under section 191, paragraphs (e) and (f) apply only if the disclosure is made
before the transaction is entered into.

Note: A director may need to give notice to the other directors if the director has a material personal
interest in a matter relating to the affairs of the company (see section 191).

195 Restrictions on votingdirectors of public companies only

Restrictions on voting and being present

(1) A director of a public company who has a material personal interest in a matter that is


being considered at a directors' meeting must not:

(a) be present while the matter is being considered at the meeting; or

(b) vote on the matter.

(1A) Subsection (1) does not apply if:

(a) subsection (2) or (3) allows the director to be present; or

(b) the interest does not need to be disclosed under section 191.

Note: A defendant bears an evidential burden in relation to the matter in subsection (1A), see
subsection 13.3(3) of the Criminal Code.

(1B) An offence based on subsection (1) is an offence of strict liability.


Participation with approval of other directors

(2) The director may be present and vote if directors who do not have a material personal
interest in the matter have passed a resolution that:

(a) identifies the director, the nature and extent of the director's interest in the
matter and its relation to the affairs of the company; and

(b) states that those directors are satisfied that the interest should not disqualify the
director from voting or being present.

Participation with ASIC approval

(3) The director may be present and vote if they are so entitled under a declaration or order
made by ASIC under section 196.
NOTE: Unless a public companys constitution provides otherwise, disclosure to the general
meeting is required, see above.
Effect of non-disclosure:
Camelot Resources Ltd v McDonald (1994) 14 ACSR 437, 443
HELD: Failure to comply with the constitution in this regard, eg, if the constitution requires
disclosure to the board, will normally make the contract voidable at the option of the company.

193 Interaction of sections 191 and 192 with other laws etc.

Sections 191 and 192 have effect in addition to, and not in derogation of:

(a) any general law rule about conflicts of interest; and

(b) any provision in a company's constitution (if any) that restricts a director from:


(i) having a material personal interest in a matter; or

(ii) holding an office or possessing property;

involving duties or interests that conflict with their duties or interests as a director.

2. Misappropriation Rule: Directors must not misappropriate the companys property for
their own or a third partys benefit
Common Law Rule:
Mordecai v Mordecai (1988) 12 ACLR 751
HELD: Damaging the property of the company for a directors own benefit is a misappropriation of
the companys property.

Cook v Deeks [1916] 1 AC 554
RULE: Directors and officers cannot take advantage of an opportunity or information that
belongs to the company without the prior approval of the company.
HELD: A contract not yet concluded was treated as the property of the company and the
directors were found to have misappropriated that property.
NOTE: If directors misappropriate property, the general meeting cannot ratify that breach.

Directors cannot take remuneration or other benefits from the company unless authorised by law,
the constitution, or the fully informed general meeting:
202A Remuneration of directors (replaceable rulesee section 135)

(1) The directors of a company are to be paid the remuneration that the company determines by
resolution.

Note: Chapter 2E makes special provision for the payment of remuneration to the directors of public
companies.

(2) The company may also pay the directors' travelling and other expenses that they properly incur:

(a) in attending directors' meetings or any meetings of committees of directors; and

(b) in attending any general meetings of the company; and

(c) in connection with the company's business.
NOTE: Director remuneration is different from executive pay (which is set by the board under
s 198A or the Remuneration Committee of listed companies). In this latter context, recall s 300A,
s 250R and s 250SA (for listed companies); LR 10.17, 10.19.


3. No Profit Rule: Directors must not misuse their position for their own or a third partys
advantage except with the companys fully informed consent
The Strict Common Law Rule:
Furs Ltd v Tomkies (1936) 54 CLR 582
FACTS: Tomkies (managing director) negotiating sale of business, making limited disclosure of
the fact that the purchaser intended to engage his services after the sale. In fact, the sale
rendered worthless Furs processes, benefiting Tomkies.
HELD: As full disclose had not been made to the Furs general meeting, there was no ratification:
Tomkies had profited from his capacity as managing director and was liable to make an account
of profit to the company.
NOTE: If had made loss, would be liable to make equitable compensation instead.

Regal (Hastings) Ltd v Gulliver (1942) 1 All E R 378; (1967) 2 AC 134
RULE: There is a strict rule that a director must not make a profit out of property acquired by
reason of his relationship to the company of which he is a director. Directors are liable to
account where:
(1) What the directors did was so related to the affairs of the company that it can
properly be said to have been done in the course of their management and in utilisation
of their opportunities and special knowledge as directors; and
(2) What they did resulted in a profit to themselves.
FACTS: Regal sought to establish subsidiary and purchase cinemas but lacked funds to do so.
Directors personally purchased shares in subsidiary. The Regal group and cinemas later
controlled by third party. Regal used to sue previous directors for breach of no-profit rule.
HELD: The directors, because of their position, had the opportunity to purchase the shares in the
subsidiary. This was a breach of the no-profit rule.
NOTE: It was open to the general meeting to ratify the breach. The directors should have put the
funds to Regal to invest in the subsidiary. The inability of the company to exploit an opportunity
is irrelevant.

Relaxation of the Strict Common Law Rule:
Boardman v Phipps (1967) 2 AC 46, 124 (Lord Upjohn)
HELD: There must be a real sensible possibility of conflict for the director to have breached the
fiduciary duty to not profit.
APPLIED: Queensland Mines Ltd v Hudson (1978) 18 ALR 1.

Chan v Zacharia (1984) 154 CLR 178, 199 (Deane J)
HELD: There must be a significant possibility of conflict.

The requirement of causation:
Regal (Hastings) Ltd v Gulliver (1942) 1 All E R 378; (1967) 2 AC 134 (Lord Russell)
HELD: Liability in equity to account in no way depends on whether the profit would or should
otherwise have gone to the plaintiff or whether the plaintiff has in fact been damaged or
benefited by his action.


Gemstone Corporation of Australia Ltd v Grasso (1994) 13 ACSR 695 (Prior J)
HELD: The judge was in error in finding no breach of a fiduciary obligation until a loss was
caused and that no loss was caused.

Contra:
Chan v Zacharia (1984) 154 CLR 178 (Deane J)
HELD: The principle is not, however, completely unqualified . [L]iability to account will not
arise in circumstances where it would be unconscientious to assert it or in which there is no
possible conflict between personal interest and fiduciary duty and it is plainly in the interest of
the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights or
benefits which he is absolutely precluded from seeking or obtaining for the person to whom the
fiduciary duty is owed.

Resignation as a defence to breach of the rule:
Industrial Development Consultants v Cooley (1972) 1 WLR 443
HELD: Where a director discovers the opportunity in their capacity as a director and
subsequently resigns to take advantage of the opportunity, this is a breach of the no-profit rule.
This is an embarkation upon a deliberate policy and course of conduct which places personal
interests in conflict with the pre-existing and continuing duty to the company.

Canadian Aero Service v OMalley [1973] 40 DLR (3d) 371 (Supreme Court of Canada) (Laskin J)
HELD: Resignation from the company would not protect the director where the resignation may
fairly be said to be prompted or influenced by a wish to acquire for himself the opportunity
sought by the company, or where the opportunity came to him by virtue of his position with the
company rather than fresh initiative.

Natural Extracts Pty Ltd v Stotter (1997) 24 ACSR 110, 141
FACTS: Director acquired new business as a result of position within a company and operated
business honestly, working hard.
HELD: This was a breach of fiduciary duty and the business was held on constructive trust
despite the efforts of the director. Equitable allowance was made for the director for time and
effort expended.

Framlington Group plc v Anderson (1995) 1 BCLC 475 (Blackburne J)
HELD: In the absence of special circumstances, like a prohibition in a service contract, a director
commits no breach of duty merely because, while a director, he takes steps so that, on
ceasing to be a director he can immediately set up business in competition with that company
or join a competitor of it. Nor is he obliged to disclose to that company that he is taking those
steps.
NOTE: This is provided that there is no actual competitive activity, such as, for instance,
competitive tendering or actual trading, while he remains a director (Balston Ltd v Headlines
Filters Ltd [1990] FSR 385).

Opportunities in private capacity:


Regal (Hastings) Ltd v Gulliver (1942) 1 All E R 378; (1967) 2 AC 134, 149 (Lord Russell)
HELD: The general rule is that there will only be a breach of duty where the directors has
obtained a profit by reason and only by reason of the fact that they were directors of Regal and
in the course of execution of that office.

SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552 (Cooper J)
HELD: Where an opportunity arises in personal circumstances, a director will not be liable where
there is not a sufficient temporal and causal connection between the obligations and the
opportunity.
NOTE: This is a question of fact, looking at the time and place of conversation, and the proximity
of circumstances to the directors role, noting that a director can always make disclosure.

Availability of a defence of fair dealings:
HELD: The breach of duty can be ratified by the general meeting, and it is not open to a director
to exploit the opportunity and attempt to prove that the transaction was fair.

D. Statutory duty not to profit from position or information
79 Involvement in contraventions

A person is involved in a contravention if, and only if, the person:

(a) has aided, abetted, counselled or procured the contravention; or

(b) has induced, whether by threats or promises or otherwise, the contravention; or

(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or
party to, the contravention; or

(d) has conspired with others to effect the contravention.

1. Use of Position
182 Use of positioncivil obligations

Use of positiondirectors, other officers and employees

(1) A director, secretary, other officer or employee of a corporation must not improperly use their
position to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

Note: This subsection is a civil penalty provision (see section 1317E).



Note 1: Section 79 defines involved.




(2) A director, other officer or employee of a corporation commits an offence if they use
their position dishonestly:

(a) with the intention of directly or indirectly gaining an advantage for themselves,
or someone else, or causing detriment to the corporation; or

(b) recklessly as to whether the use may result in themselves or someone else
directly or indirectly gaining an advantage, or in causing detriment to the
corporation.

R v Byrnes (1995) 130 ALR 529
FACTS: Directors in question, without the authority of the board, affixed company seal to
guarantee to another company of the board.
HELD: Impropriety or dishonesty is not required, and improper use is judged on an objective
basis. The state of mind may be relevant in determining whether use of position is improper
where there is an abuse of power.
OUTCOME: Breach, even though honest but mistaken belief that were acting for the benefit of
the company.

R v Daswani (2005) 53 ACSR 675
FACTS: An officer of the company utilised company funds to finance personal expenditures and
to escape creditors.
HELD: This was an improper use of position.

ASIC v Australian Investors Forum Pty Ltd [No 2] (2005) 53 ACSR 305
HELD: An issue of shares for the purpose of maintaining control of the general meeting was
considered an improper use of position.

ASIC v Forge [2002] NSWSC 760
FACTS: Eight transactions involving payments for management consultancy fees and unsecured
loans to Mr Forge and another.
HELD: The payments were being treated as if they were the defendants private funds. The
benefits were obtained for the defendants themselves and this was an improper use of position.


ASIC v Adler [2002] NSWSC 171
FACTS: HIHC gave financial benefit off 10M to PEE, an entity controlled by Adler. Of the sum,
4M was used to purchase shares in HIH with representation that these were personal funds
in order to prop up share price. Balance used to purchase worthless stocks owned by Adler.
HELD: Improper use of position as officer HIHC of the company. Former CEO also found to
have breached s 182 as had improperly misused position to gain advantage for Adler.

2. Use of Information
183 Use of informationcivil obligations

Use of informationdirectors, other officers and employees

(1) A person who obtains information because they are, or have been, a director or other officer or
employee of a corporation must not improperly use the information to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

Note 1: This duty continues after the person stops being an officer or employee of the corporation.



Note 1: Section 79 defines involved.




(3) A person who obtains information because they are, or have been, a director or other
officer or employee of a corporation commits an offence if they use the information
dishonestly:


corporation.

Grove v Flavel (1986) 11 ACLR 161
HELD: Grove obtained information in capacity as director that company had liquidity problems,
and used this to protect himself to the possible detriment off other creditors. This was a


contravention.

ASIC v Vizard (2005) 54 ACSR 394
HELD: Director of Telstra traded in shares in which Telstra had an interest on the basis of
information acquired by virtue of position. Three separate breaches, as a result $390,000
penalty paid.

3. Statutory Treatment of Benefits to Related Parties
Chapter 2ERelated party transactions
Section Rule
208 Member approval is required before a public company or a company it controls can give a
financial benefit to a related party.
228 Defines related party to include:
(1) Controlling entities;
(2) Directors and their spouses;
(3) Relatives of directors and spouses;
(4) Entities controlled by other related parties;
(5) Related party in previous 6 months;
(6) Entity has reasonable grounds to believe it will become related party in future;
(7) Acting in concert with related party.
229 Gives examples of financial benefit and offers guidance to the courts in determining
whether a financial benefit is given:

(2) Giving a financial benefit includes the following:
(a) giving a financial benefit indirectly, for example, through 1 or more interposed
entities;
(b) giving a financial benefit by making an informal agreement, oral agreement or
an agreement that has no binding force;
(c) giving a financial benefit that does not involve paying money (for example by
conferring a financial advantage).
(3) The following are examples of giving a financial benefit to a related party:
(a) giving or providing the related party finance or property;
(b) buying an asset from or selling an asset to the related party;
(c) leasing an asset from or to the related party;
(d) supplying services to or receiving services from the related party;
(e) issuing securities or granting an option to the related party;
(f) taking up or releasing an obligation of the related party.
210-216 Exceptions:

210 Arm's length terms
211 Remuneration and reimbursement for officer or employee [See, Adler]
212 Indemnities, exemptions, insurance premiums and payment for legal costs for officers
213 Small amounts given to related entity
214 Benefit to or by closely-held subsidiary
215 Benefits to members that do not discriminate unfairly
216 Court order


230 General duties still apply

A director is not relieved from any of their duties under this Act (including sections 180
and 184), or their fiduciary duties, in connection with a transaction merely because the
transaction is authorised by a provision of this Chapter or is approved by a resolution of
members under a provision of this Chapter.

217-227 Set out requirements for the approval process. Note that certain people are excluded
from voting by 224(1): related parties who might receive a benefit and their associates
which are defined in 10-17 to include those acting in concert 15(1).

Division 3Procedure for obtaining member approval

217 Resolution may specify matters by class or kind
218 Company must lodge material that will be put to members with ASIC
219 Requirements for explanatory statement to members
220 ASIC may comment on proposed resolution
221 Requirements for notice of meeting
222 Other material put to members
223 Proposed resolution cannot be varied
224 Voting by or on behalf of related party interested in proposed resolution
225 Voting on the resolution
226 Notice of resolution to be lodged
227 Declaration by court of substantial compliance
209 The validity of the transaction is not affected, and the public company or entity is not
guilty of an offence; however a person who is involved (defined in s79) in the
contravention of s 208 by a public company contravenes a civil penalty provision.

Re HIH Insurance Ltd (in prov liq) (2002) 41 ACSR 72, 1723 (Santow J)
HELD: Payment of $10M by HIHC to PEE, a company controlled by Adler amounted to a financial
benefit to PEE, Adler and a company controlled by Adler.

E. Enforcement of Directors Duties
1. Enforcement by ASIC
1317E specifies civil penalty provisions:
Section Provision
181 Good faithcivil obligations
182 Use of positioncivil obligations
183 Use of informationcivil obligations
NOTE: ASIC cannot enforce common law duties.
Process of enforcement:
Process Provision
Declaration of 1317J Who may apply for a declaration or order


Contravention Application by ASIC

(1) ASIC may apply for a declaration of contravention, a pecuniary penalty
order or a compensation order.
Pecuniary penalty
order
1317G Pecuniary penalty orders

Corporation/scheme civil penalty provisions

(1) A Court may order a person to pay the Commonwealth a pecuniary
penalty of up to $200,000 if:

(a) a declaration of contravention by the person has been made
under section 1317E; and

(aa) the contravention is of a corporation/scheme civil penalty
provision; and

(b) the contravention:

(i) materially prejudices the interests of the corporation or
scheme, or its members; or

(ii) materially prejudices the corporation's ability to pay its
creditors; or

(iii) is serious.
Disqualifying Order 206C Court power of disqualification--contravention of civil penalty
provision

(1) On application by ASIC, the Court may disqualify a person from managing
corporations for a period that the Court considers appropriate if:

(a) a declaration is made under:

(i) section 1317E (civil penalty provision) that the person has
contravened a corporation/scheme civil penalty provision;

(b) the Court is satisfied that the disqualification is justified.

(2) In determining whether the disqualification is justified, the Court may
have regard to:

(a) the person's conduct in relation to the management, business or
property of any corporation; and

(b) any other matters that the Court considers appropriate.
Compensation order 1317H Compensation orderscorporation/scheme civil penalty provisions
Compensation for damage suffered

(1) A Court may order a person to compensate a corporation or registered


scheme for damage suffered by the corporation or scheme if:

(a) the person has contravened a corporation/scheme civil penalty
provision in relation to the corporation or scheme; and

(b) the damage resulted from the contravention.
Criminal Proceedings:


(1) A director or other officer of a corporation commits an offence if they:

(a) are reckless; or

(b) are intentionally dishonest;

and fail to exercise their powers and discharge their duties:

(c) in good faith in the best interests of the corporation; or

(d) for a proper purpose.

Note: Section 187 deals with the situation of directors of wholly-owned subsidiaries.


(2) A director, other officer or employee of a corporation commits an offence if they use
their position dishonestly:


corporation.


(3) A person who obtains information because they are, or have been, a director or other
officer or employee of a corporation commits an offence if they use the information
dishonestly:


corporation.


2. Enforcement by the Board
Statutory Duties:
1317J Who may apply for a declaration or order

Application by corporation

(2) The corporation, or the responsible entity for the registered scheme, may apply for a
compensation order.

Note: An application for a compensation order may be made whether or not a declaration of
contravention has been made under section 1317E.
NOTE: If no declaration of contravention has been made, the corporation will have to prove the
breach of duty by the director/s.
General Law Duties:
NOTE: The board can enforce the common law and equitable duties owed to the corporation as
a separate legal entity as an aspect of the general management power under s 198A(1).
F. Exoneration and ratification of Directors Duties
1. Exoneration by the Court
Relief against proceedings generally:
1318 Power to grant relief

(1) If, in any civil proceeding against a person to whom this section applies for negligence, default,
breach of trust or breach of duty in a capacity as such a person, it appears to the court before which
the proceedings are taken that the person is or may be liable in respect of the negligence, default or
breach but that the person has acted honestly and that, having regard to all the circumstances of the
case, including those connected with the person's appointment, the person ought fairly to be
excused for the negligence, default or breach, the court may relieve the person either wholly or
partly from liability on such terms as the court thinks fit.

(2) Where a person to whom this section applies has reason to apprehend that any claim will or
might be made against the person *+ the Court has the same power to relieve the person as it
would have had under subsection (1) *+.

(3) Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge after
hearing the evidence may, if he or she is satisfied that the defendant ought pursuant to that
subsection to be relieved either wholly or partly from the liability sought to be enforced against the
person, withdraw the case in whole or in part from the jury and forthwith direct judgment to be
entered for the defendant on such terms as to costs or otherwise as the judge thinks proper.

(4) This section applies to a person who is:

(a) an officer or employee of a corporation; or

(b) an auditor of a corporation, whether or not the person is an officer or employee of the


corporation; or

(c) an expert in relation to a matter:

(i) relating to a corporation; and

(ii) in relation to which the civil proceeding has been taken or the claim will or might
arise; or

(d) a receiver, receiver and manager, liquidator or other person appointed or directed by the
Court to carry out any duty under this Act in relation to a corporation.

Relief against civil penalties:
1317S Relief from liability for contravention of civil penalty provision


"eligible proceedings" :

(a) means proceedings for a contravention of a civil penalty provision (including proceedings
under section 588M, 588W, 961M, 1317GA, 1317H, 1317HA or 1317HB); and

(b) does not include proceedings for an offence (except so far as the proceedings relate to
the question whether the court should make an order under section 588K, 1317H, 1317HA
or 1317HB).

(2) If:

(a) eligible proceedings are brought against a person; and

(b) in the proceedings it appears to the court that the person has, or may have, contravened
a civil penalty provision but that:

(i) the person has acted honestly; and

(ii) having regard to all the circumstances of the case (including, where applicable,
those connected with the person's appointment as an officer, or employment as an
employee, of a corporation or of a Part 5.7 body), the person ought fairly to be
excused for the contravention;

the court may relieve the person either wholly or partly from a liability to which the person would
otherwise be subject, or that might otherwise be imposed on the person, because of the
contravention.

(3) In determining under subsection (2) whether a person ought fairly to be excused for a
contravention of section 588G, the matters to which regard is to be had include, but are not limited
to:


(a) any action the person took with a view to appointing an administrator of the company or
Part 5.7 body; and

(b) when that action was taken; and

(c) the results of that action.

(4) If a person thinks that eligible proceedings will or may be begun against them, they may apply to
the Court for relief.

(5) On an application under subsection (4), the Court may grant relief under subsection (2) as if the
eligible proceedings had been begun in the Court.

(6) For the purposes of subsection (2) as applying for the purposes of a case tried by a judge with a
jury:

(a) a reference in that subsection to the court is a reference to the judge; and

(b) the relief that may be granted includes withdrawing the case in whole or in part from the
jury and directing judgment to be entered for the defendant on such terms as to costs as the
judge thinks appropriate.

(7) Nothing in this section limits, or is limited by, section 1318.

Applicant bares onus to have relief granted:
ASIC v Adler (No 5) [2002] NSWSC 483 (Santow J)
HELD: The burden of proof lies with the applicant to prove the conduct was honest in the
circumstances and that relief ought to be granted.
NOTE: The fact that the court finds that a director did not act dishonestly does not enliven the
jurisdiction to provide relief where no evidence is given to establish the honesty of the director.

ASIC v Macdonald (No 12) [2009] NSWSC 714 [22] (Gzell J)
HELD: In my view a person acts honestly for the purposes of ss 1317S(2) and 1318(1), in the
ordinary meaning of that term, if that persons conduct is without moral turpitude in the sense
that it is:
(1) Without deceit or conscious impropriety;
(2) Without intent to gain improper benefit or advantage; and
(3) Without carelessness or imprudence at a level that negates the performance of the
duty in question.
NOTE: That conclusion may be drawn from evidence of the persons subjective intent. But a lack
of such subjective intent will not lead the court to conclude that a person has acted honestly if a
reasonable person in that position would regard the conduct as exhibiting moral turpitude.

Deputy Commissioner of Taxation v Dick (2007) 226 FLR 388 [78]
HELD: These provisions do not exonerate the applicant by removing the breach or
contravention but operate as a dispensing power to excuse the applicant.
APPLIED: ASIC v Healey (No 2) (2011) 196 FCR 430 [86].


ASIC v Whitlam (No 2) (2002) 20 ACLC 1333
HELD: Partial relief may be granted.

2. Ratification by the General Meeting
(i) The general rule
HELD: The company in general meeting can authorise or ratify a breach of duty by ordinary
resolution.
NOTE: Once a breach is ratified, the company can no longer bring proceedings, although
ratification will not prevent minority shareholders from bringing a statutory derivative action on
behalf of the company.

(ii) Limits to the availability of ratification
Breaches of statutory duties may not be ratified:
Forge v ASIC (2004) 213 ALR 574 [370][404] (McColl JA)
HELD: The shareholders cannot remove the declaration of contravention by ratifying the
original acts. Once a declaration of contravention is made, the Court is entitled to act upon its
finding to grant the relief ASIC seeks.
NOTE: *E+ven if the shareholders could, contrary to what I have already found, ratify the private
law breaches of the directors duties, the ratification resolutions were ineffective to cure the
breaches of statutory duty.

Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737, 772 (Debelle J)
NOTE: It is arguable that the shareholders ratification can prevent the company from bringing
proceedings in the future, but cannot prevent ASIC from bringing civil penalty proceedings etc in
the public interest.
NOTE: A general meeting resolution to ratify could be taken into account in considering relief
under s 1317S as evidence that the director has acted honestly and ought to be granted relief.
SEE ALSO: Angas Law Services v Carabelas [2005] 226 CLR 507, 523 (Gleeson CJ and Heydon J).

Ratification without full disclosure will not be valid:
HELD: Ratification will not be effective if full information and disclosure is not provided to the
general meeting or board as the case may be.

Ratification is not possible where the interests of creditors are so affected:
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722
HELD: Where a company is insolvent or nearing insolvency, the interests of the creditors intrude
and any breach of duty which may prejudice the interests of the creditors is no longer capable of
ratification by the general meeting.


Ratification is not possible where it would constitute a misappropriation of company resources:
Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791
HELD: Ratification is not possible where it would constitute a misappropriation of company
resources.

Ratification is not possible where this would constitute fraud upon the minority:
Miller v Miller (1995) 16 ACSR 73, 89
HELD: Ratification is not available where it would constitute:
(1) A fraud on the minority (Ngurli Ltd v McCann (1953) 90 CLR 425); or
(2) Defeated a members personal right (eg not to have their interest diluted for an
improper purpose) (Residues Treatment and Trading Co Ltd v Southern Resources Ltd
(No 4) (1988) 14 ACLR 569) ; or
(3) Was oppressive or where the majority in general meeting acted for the same
improper purpose as directors (Residues).

Cook v Deeks (1916) 1 AC 554 (Privy Council)
FACTS: Three of the four directors formed new company and entered a new construction
contract with a client previously contracting with the old company. The three majority directors
then ratified their breaches.
HELD: It is not possible to use control over the general meeting to ratify breaches of duties. The
parties in breach will be ordered to make an account of profits, with a constructive trust
imposed upon the benefits so obtained.
NOTE: The oppression remedy did not exist at the time of the case.

G. Statutory Limitations on Exemption, Indemnity, and Insurance
199A Indemnification and exemption of officer or auditor

Exemptions not allowed

(1) A company or a related body corporate must not exempt a person (whether directly or
through an interposed entity) from a liability to the company incurred as an officer or
auditor of the company.

When indemnity for liability (other than for legal costs) not allowed

(2) A company or a related body corporate must not indemnify a person (whether by
agreement or by making a payment and whether directly or through an interposed entity)
against any of the following liabilities incurred as an officer or auditor of the company:

(a) a liability owed to the company or a related body corporate;

(b) a liability for a pecuniary penalty order under section 1317G or a compensation
order under section 961M, 1317H, 1317HA or 1317HB;


(c) a liability that is owed to someone other than the company or a related body
corporate and did not arise out of conduct in good faith.

This subsection does not apply to a liability for legal costs.

When indemnity for legal costs not allowed

(3) A company or related body corporate must not indemnify a person (whether by
agreement or by making a payment and whether directly or through an interposed entity)
against legal costs incurred in defending an action for a liability incurred as an officer or
auditor of the company if the costs are incurred:

(a) in defending or resisting proceedings in which the person is found to have a
liability for which they could not be indemnified under subsection (2); or

(b) in defending or resisting criminal proceedings in which the person is found guilty;
or

(c) in defending or resisting proceedings brought by ASIC or a liquidator for a court
order if the grounds for making the order are found by the court to have been
established; or

(d) in connection with proceedings for relief to the person under this Act in which
the Court denies the relief.

Paragraph (c) does not apply to costs incurred in responding to actions taken by ASIC or a
liquidator as part of an investigation before commencing proceedings for the court order.

Note 1: Paragraph (c)This includes proceedings by ASIC for an order under section 206C,
206D, 206E or 206EAA (disqualification), section 232 (oppression), section 961M, 1317E,
1317G, 1317H, 1317HA or 1317HB (civil penalties) or section 1324 (injunction).

Note 2: The company may be able to give the person a loan or advance in respect of the legal
costs (see section 212).

(4) For the purposes of subsection (3), the outcome of proceedings is the outcome of the
proceedings and any appeal in relation to the proceedings.

199B Insurance premiums for certain liabilities of director, secretary, other officer or auditor

(1) A company or a related body corporate must not pay, or agree to pay, a premium for a contract
insuring a person who is or has been an officer or auditor of the company against a liability (other
than one for legal costs) arising out of:

(a) conduct involving a wilful breach of duty in relation to the company; or

(b) a contravention of section 182 or 183.

This section applies to a premium whether it is paid directly or through an interposed entity.


(2) An offence based on subsection (1) is an offence of strict liability.

NOTE: Accordingly a company may pay insurance premiums for the liability of directors in
negligence.
199C Certain indemnities, exemptions, payments and agreements not authorised and certain
documents void

(1) Sections 199A and 199B do not authorise anything that would otherwise be unlawful.

(2) Anything that purports to indemnify or insure a person against a liability, or exempt them from a
liability, is void to the extent that it contravenes section 199A or 199B.


VI Minority Protection
A. Statutory Derivative Actions
1. Application for Leave
236 Bringing, or intervening in, proceedings on behalf of a company

(1) A person may bring proceedings on behalf of a company, or intervene in any proceedings to
which the company is a party for the purpose of taking responsibility on behalf of the company for
those proceedings, or for a particular step in those proceedings (for example, compromising or
settling them), if:

(a) the person is:

(i) a member, former member, or person entitled to be registered as a member, of
the company or of a related body corporate; or

(ii) an officer or former officer of the company; and

(b) the person is acting with leave granted under section 237.

(2) Proceedings brought on behalf of a company must be brought in the company's name.

(3) The right of a person at general law to bring, or intervene in, proceedings on behalf of a company
is abolished.

Note 3: This section does not prevent a person bringing, or intervening in, proceedings on their own behalf in
respect of a personal right.

237 Applying for and granting leave

(1) A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to
intervene in, proceedings.

(2) The Court must grant the application if it is satisfied that:

(a) it is probable that the company will not itself bring the proceedings, or properly take
responsibility for them, or for the steps in them; and

(b) the applicant is acting in good faith; and

(c) it is in the best interests of the company that the applicant be granted leave; and

(d) if the applicant is applying for leave to bring proceedingsthere is a serious question to
be tried; and

(e) either:

(i) at least 14 days before making the application, the applicant gave written notice
to the company of the intention to apply for leave and of the reasons for applying;


or

(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.

(a) Probability that company will not take action
CLERP, Proposals for Reform Directors' Duties and Corporate Governance (Report No 3, 1997) 6.34
The applicant must show that either:
(1) They have requested that the company bring proceedings and that the company
declined the request; or
(2) The alleged wrongdoer has a dominant influence on the board of directors.

(b) Good faith
Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313, 320 (Palmer J)
HELD: Where there is real injury to be suffered, and a remedy would address that harm, then
that is sufficient to constitute good faith for the purposes of s 237(2)(b).
TEST: Good faith involves two interrelated factors:
(1) Whether the applicant honestly believes that a good cause of action exists which has
reasonable prospects for success; and
(2) Whether the applicant seeks to bring the action for any collateral purpose.

Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534 (Barrett J)
HELD: A collateral purpose was found where the applicant was attempting to force the directors
to pay dividends by commencing proceedings.

Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661
HELD: There will be a collateral purpose generally where the applicant seeks to further their own
interests and not the interests of the company as a whole. It is an indicator of a lack of good
faith where the shareholders interest in the company is not benefitted but the successful
outcome of the case.
EXAMPLE: A creditor who brings the action for the purpose of placing the company in a better
position to repay debts to the creditor is not acting in good faith.

(c) Best interests of the company
237 Applying for and granting leave

(3) A rebuttable presumption that granting leave is not in the best interests of the company arises if
it is established that:

(a) the proceedings are:

(i) by the company against a third party; or

(ii) by a third party against the company; and

(b) the company has decided:


(i) not to bring the proceedings; or

(ii) not to defend the proceedings; or

(iii) to discontinue, settle or compromise the proceedings; and

(c) all of the directors who participated in that decision:

(i) acted in good faith for a proper purpose; and

(ii) did not have a material personal interest in the decision; and

(iii) informed themselves about the subject matter of the decision to the extent they
reasonably believed to be appropriate; and

(iv) rationally believed that the decision was in the best interests of the company.

The director's belief that the decision was in the best interests of the company is a rational
one unless the belief is one that no reasonable person in their position would hold.

(4) For the purposes of subsection (3):

(a) a person is a third party if:

(i) the company is a public company and the person is not a related party of the
company; or

(ii) the company is not a public company and the person would not be a related
party of the company if the company were a public company; and

(b) proceedings by or against the company include any appeal from a decision made in
proceedings by or against the company.

Note: Related party is defined in section 228.

ASIC v Rich [2009] NSWSC 1229
HELD: If the directors have taken a good faith business judgement, it is unlikely that the courts
will give leave to an applicant to bring a derivative action.

Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661
HELD: Where a company is in liquidation, an applicants personal interests may preclude the
possibility that the action is in the interests of the company.

(d) Serious question to be tried
Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534 (Barrett J)
HELD: The applicant does not have to prove the substantive issues, only that proceedings should


be commenced. Where the litigation is frivolous or vexatious, there is no serious question to be
tried.

(e) Notice of the proceedings to the company
CLERP, Proposals for Reform Directors' Duties and Corporate Governance (Report No 3, 1997) 6.49
Failure by the company to take action to address the applicants concerns prior to application for
leave may support a conclusion that it is not probable that the company will take action under
sub-s (a).

2. Prior Ratification, Costs, and ASIC
Ratification:
239 Effect of ratification by members

(1) If the members of a company ratify or approve conduct, the ratification or approval:

(a) does not prevent a person from bringing or intervening in proceedings with leave under
section 237 or from applying for leave under that section; and

(b) does not have the effect that proceedings brought or intervened in with leave under
section 237 must be determined in favour of the defendant, or that an application for leave
under that section must be refused.

(2) If members of a company ratify or approve conduct, the Court may take the ratification or
approval into account in deciding what order or judgment (including as to damages) to make in
proceedings brought or intervened in with leave under section 237 or in relation to an application
for leave under that section. In doing this, it must have regard to:

(a) how well-informed about the conduct the members were when deciding whether to
ratify or approve the conduct; and

(b) whether the members who ratified or approved the conduct were acting for proper
purposes.

Costs:
242 Power of the Court to make costs orders

The Court may at any time make any orders it considers appropriate about the costs of the following
persons in relation to proceedings brought or intervened in with leave under section 237 or an
application for leave under that section:

(a) the person who applied for or was granted leave;

(b) the company;

(c) any other party to the proceedings or application.


An order under this section may require indemnification for costs.

Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732
HELD: The court maintains a broad discretion as to costs under the section.
NOTE: It is rare for costs to be ordered against the company for the proceedings, and unheard of
for a costs indemnity to be ordered.
ASIC:
Australian Securities and Investments Commission Act 2001 (Cth)

50 ASIC may cause civil proceeding to be begun

Where, as a result of an investigation or from a record of an examination (being an investigation or
examination conducted under this Part), it appears to ASIC to be in the public interest for a person to
begin and carry on a proceeding for:

(a) the recovery of damages for fraud, negligence, default, breach of duty, or other
misconduct, committed in connection with a matter to which the investigation or
examination related; or

(b) recovery of property of the person;

ASIC:

(c) if the person is a companymay cause; or

(d) otherwisemay, with the person's written consent, cause;

such a proceeding to be begun and carried on in the person's name.

B. Section 1324 Injunctions
1. Power to Grant Injunctions
1324 Injunctions

(1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted,
constitutes or would constitute:

(a) a contravention of this Act; or

(b) attempting to contravene this Act; or

(c) aiding, abetting, counselling or procuring a person to contravene this Act; or

(d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to
contravene this Act; or

(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the
contravention by a person of this Act; or


(f) conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be
affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate,
restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the
Court it is desirable to do so, requiring that person to do any act or thing.

(10) Where the Court has power under this section to grant an injunction restraining a person from
engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may,
either in addition to or in substitution for the grant of the injunction, order that person to pay
damages to any other person.
NOTE: Section 135(3): A failure to comply with the replaceable rules as they apply to a company
is not of itself a contravention of this Act (so the provisions about criminal liability, civil liability
and injunctions do not apply).
2. Standing for s 1324 Injunctions
1324 Injunctions

(1A) For the purposes of subsection (1):

(a) a contravention of this Act affects the interests of a creditor or member of a company if
the insolvency of the company is an element of the contravention; and

*+

This subsection does not limit subsection (1) in any way.

Broken Hill Proprietary Co Ltd v Bell Resources Ltd (1984) 8 ACLR 609, 613
HELD: There is a relatively low threshold for standing: Applicants simply have to show that their
interests have been affected in a way which goes beyond those of the general public. There is no
need to show any special injury specifically to personal or proprietary rights.

Mesenberg v Cord Industrial Recruiters Pty Ltd (Nos 1 & 2) (1996) 19 ACSR 483, 4889 (Young J)
HELD: The courts must be careful to ensure that s 1324 is not used to undermine the rule in Foss
v Harbottle (1843) 67 ER 189.
NOTE: Young J suggested in obiter that not every minor breach should give rise to a cause of
action, and that in particular s 1324 should not apply to s 181 breaches.

Premier Gold NL v Ocean Resources NL (1994) 14 ACSR 695
NOTE: The courts have taken a liberal approach to standing but have refused a remedy where
the plaintiff is seeking to usurp the board of directors 198A management function in keeping
with general principles.

Idameneo (No123) Pty Ltd v Symbion Health Ltd (2007) 64 ACSR 680
HELD: A shareholder was successfully able to rely upon the section to enforce a breach of the
statutory provisions on capital reduction.


C. Members Personal Actions
1. General Rule as to members personal actions
140 Effect of constitution and replaceable rules

Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 12 ACLR 739, 7435 (Young J)
HELD: A member qua member has rights which are either:
(1) Personal rights covering the incidents of his shares; or
(2) Constitutional rights to have the company function properly in accordance with the
basic statutory scheme. Any other rights are not within [s140] and must be the subject
of an extrinsic contract.

2. Actions to enforce the constitution
The courts take a restrictive approach to interpreting members personal contractual rights to
have the companys business conducted in accordance with the constitution:
Norths Ltd v McCaughan Dyson Capel Cure Ltd (1988) 12 ACLR 739, 7435 (Young J)
HELD: The courts will look at the circumstances of every case and ask whether the individual has
a personal right to enforcement, bearing in mind the rule in Foss v Harbottle.
NOTE: Company law has to have scope to reflect differences [in the size and nature of
companies+, and if this means that the qua member and qua director is not drawn in quite
the same place every time, but varies from case to case, the judges are not necessarily applying
a rule inconsistently: they may be demonstrating that it is wrong to regard the concept of a
membership right as having a unique content, and showing that it has the flexibility to meet
the reality of the circumstances before them.

Examples of constitutional rights:
Pender v Lushington (1877) 6 Ch D 70
HELD: A member has a personal right to have his or her votes at the general meeting counted.

Kaye v Croydon Tramways Company [1898] 1Ch 358
HELD: A member has a personal right to receive proper, informative notice of meetings.

Link Agricultural Pty Ltd v Shanahan (1998) 28 ACSR 498
HELD: A member has a personal right to have the appointment of a director made in accordance
Stanham v National Trust of Australia (NSW) (1989) 15 ACLR 87, 90 (Young J)
NOTE: If one elevated every matter in the articles of association of a company to the status of a
contractual right vested in each and every member the rule in Foss v Harbottle (1843) 2 Hare
461 would be able to be completely disregarded. The whole effect of that rule, despite the
growth of exceptions, is that ordinarily the court does not interfere at the suit of a member with
an alleged wrong done with respect to administration of the company. True it is that it is
sometimes difficult to draw the line between an individual right and a representative right: see
eg Kraus v JG Lloyd Pty Ltd [1965] VR 232; nonetheless the rule for the most part prevails.


with the constitution.

3. Actions to enforce mere procedural irregularities
1322 Irregularities

(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.

MacDougall v Gardiner (1875) 1 Ch D 13
HELD: As a general rule, members cannot enforce mere procedural irregularities.

Ryan v South Sydney Junior Rugby League Club Ltd (1974) ACLR 486
NOTE: The pragmatic approach discussed in North may elevate apparently procedural
requirements into enforceable personal rights.

4. Actions for diminished value of shares
General rule:
Prudential Assurance Co Ltd v Newman Industries [No 2] (1982) 1 Ch 204
HELD: Where shareholders suffer an indirect loss in the form of a diminution of the value of their
shareholdings there is no personal right to action as this would create a risk of double recovery.
Such loss is merely reflective of the loss recoverable by the company.

Exception to the rule:
Johnson v Gore-Wood (2002) 2 AC 1, 356
HELD: There are two circumstances in which a shareholder may be able to sue in their personal
capacity as a member:
(1) Where the company has no cause of action there may be a personal right to recovery
as there is no risk of double recovery: George Fischer (Great Britain) Ltd v Multi
Construction Ltd [1995] 1 BCLC 260.
(2) Where the shareholder suffers a loss distinct from the company, caused by a breach
of duty owed directly to the shareholder, there will be a personal right to recovery:
Heron International Ltd v Lord Grade [1983] BCLC 244.

Dilution by board:
Southern Resources Ltd v Residues Treatment and Trading Company Ltd (1990) 3 ACSR 207
HELD: Where shares have been allotted for an improper purpose and which dilute the members
shareholding in the company, the members may have a personal right.

5. Actions for breach of fiduciary duty owed directly to the member
Brunninghausen v Glavanics (1999) 46 NSWLR 538
FACTS: A dispute arose between two directors of a quasi-partnership type company. One


director bought out other director, but for less than what business was sold for.
HELD: There was a fiduciary relationship between the director and director-shareholder
(member). The general rule is that fiduciary duties are owed by directors to the company only
however an individual fiduciary duty may be owed where:
(1) The director deals directly with a shareholder for the purchase or sale of shares; and
(2) There are only a few members and shareholders, relations between whom are not
impersonal, but are close.
NOTE: The dependency of the shareholder upon the director for accurate information in this
case was critical to establishing the duty. The failure to reveal the negotiations for the sale of the
business amounted to a breach of the duty.

6. Statutory members personal rights
249F Calling of general meetings by members

(1) Members with at least 5% of the votes that may be cast at a general meeting of the company
may call, and arrange to hold, a general meeting. The members calling the meeting must pay the
expenses of calling and holding the meeting.

(2) The meeting must be called in the same way--so far as is possible--in which general meetings of
the company may be called.

(3) The percentage of votes that members have is to be worked out as at the midnight before the
meeting is called.

173 Right to inspect and get copies

Right to inspect

(1) A company or registered scheme must allow anyone to inspect a register kept under this
Chapter. If the register is not kept on a computer, the person inspects the register itself. If
the register is kept on a computer, the person inspects the register by computer.

251B Members' access to minutes

(1) A company must ensure that the minute books for the meetings of its members and for
resolutions of members passed without meetings are open for inspection by members free of
charge.

D. Fraud on the Minority (Equitable Limitation on the Power of the Majority)
1. The general rule of majority rule
Peters American Delicacy Co Ltd v Heath [1939] 61 CLR 457 (Dixon J)
HELD: The general rule is that shareholders do not owe a fiduciary duty when voting.
The shareholders are not trustees for one another, and, unlike directors, they occupy no
fiduciary position and are under no fiduciary duties. They vote in respect of their shares,
which are property and the right to vote is attached to the share itself as an incident of
property to be enjoyed and exercised for the owners personal advantage.


North-West Transportation Company Ltd v Beatty (1887) 12 App Cas 589
HELD: Shareholders in the general meeting may vote in a self-interested manner.

2. Equitable limitations to majority rule
(a) General principles
The test for fraud on the minority:
Pavlides v Jensen (1956) Ch 565
HELD: Where the majority passes a resolution that no reasonable person would consider within
the range of permissible uses of majority power, having regard to the purposes of the company,
an individual member has an equitable right to apply to the court to have the resolution set
aside.
NOTE: Any member, even one without voting power in the circumstances may challenge a
majority decision on this basis.

(b) Constrains upon alteration of the constitution
RecallA company may alter its constitution under ss 135136.
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656
HELD: The general rule is that amendments to a companys constitution will be valid where
bona fide in the interests of the company as a whole.

Gambotto v WCP Ltd [1995] 182 CLR 432

FACTS:
Ninety-nine per cent of WCP shares where owned by Industrial Equity Ltd. Gambotto was a
minority shareholder of WCP holding 0.9 per cent. Industrial wanted to make WCP a wholly
owned subsidiary because of administrative benefits and tax savings (which were significant).
Meeting of WCP, at which shareholders amended constitution, inserting a provision allowing a
member of WPC with at least 90 per cent of shares to acquire the shares of other members
compulsorily at a price of $1.80 per share. At the meeting, the resolution was passed
unanimously (75 per cent majority required) though Gambotto did not attend the meeting.

ISSUE:
Gambotto commenced litigation on the basis that the amendment amounted to unjust
oppression. Note that the shares were valued at $1.36 upon independent evaluation.

COURT OF APPEAL:
Held that WCP could alter the constitution.

Peters American Delicacy Co Ltd v Heath [1939] 61 CLR 457 (Dixon J)
HELD: Fraud on the minority is a means of securing some personal or particular gain, whether
pecuniary or otherwise, which does not fairly arise out of the subjects dealt with by the power
and is outside and even inconsistent with the contemplated objects of the power.


HIGH COURT:
The amendment was not valid. There are two types of amendments to be distinguished by the
circumstances in which they are valid:
CATEGORY 1: Amendments to allow an expropriation of shares by the majority, or the
expropriation of valuable proprietary rights attaching to the shares will be valid if (the
onus laying upon the majority):
(a) Made for a proper purpose. This would include to prevent harm being done
to the company (Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995)
17 ACSR 303), to prevent a minority shareholder from competing with the
company, or to allow company to comply with regulations (for example,
requiring a certain percentage of Australian ownership). Expropriate the
minority's shareholding for the purpose of aggrandizing the majority is not a
valid purpose; and
(b) Fair in all the circumstances. There must be no oppression and there must
be procedural fairness and substantive fairness (regarding the price paid). A fair
price by itself does not make the amendment fair.
CATEGORY 2: All other amendments to the constitution giving rise to a conflict of
interests will be prima facie valid unless:
(a) Not made for a proper purpose; or
(b) Oppressive; or
(c) Ultra vires.

Legislative response:
Part 6A.1Compulsory Acquisitions and Buy-Outs Following Takeover Bid

[A person who has acquired 90% of a companys shares following a takeover may expropriate out
the remaining 10% of shareholdings.]

Part 6A.2General Compulsory Acquisitions and Buy-Outs

[A person who has crossed the 90% threshold other than by means of a takeover has a right to
expropriate the remaining shareholdings, subject a number of strict conditions.]

Where will Gambotto apply?
Arakella Pty Ltd v Paton (2004) NSWSC 13 [137] (Austin J)
HELD: The principles in Gambotto will only apply in any case to the extent that there is no other
mechanism to protect the minority interest (for example, provision on the reduction of capital
under 256C).

Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd (2006) QSC 358
FACTS: Bundaberg Sugar (a co-operative) wanted to change constitution to remove member
who was no longer contributing to the production without compensation.
NOTE: The constitution allowed directors to differentiate between producers of sugar and non-
producers.
HELD: The purpose of the amendment was proper as Bundaberg Sugar would lose co-operative


status and tax benefits if it had non-supplier members. Continued shareholding would be
detrimental to the company. However, failure to provide compensation made the amendment
oppressive and thus invalid.

Other circumstances:
Where the majority attempts to alter the constitution in order to remove other valuable
property rights attaching to shares (for example, voting rights, or rights to dividends) in
circumstances where this falls short off expropriation.

3. Statutory limitations on majority rule
See above, V.F.3. Statutory Treatment of Benefits to Related Parties.
Requirement of approval of capital reduction:
256C Shareholder approval

Ordinary resolution required for equal reduction

(1) If the reduction is an equal reduction, it must be approved by a resolution passed at a
general meeting of the company.

Special shareholder approval for selective reduction

(2) If the reduction is a selective reduction, it must be approved by either:

(a) a special resolution passed at a general meeting of the company, with no votes
being cast in favour of the resolution by any person who is to receive consideration
as part of the reduction or whose liability to pay amounts unpaid on shares is to be
reduced, or by their associates; or

(b) a resolution agreed to, at a general meeting, by all ordinary shareholders.

If the reduction involves the cancellation of shares, the reduction must also be approved by
a special resolution passed at a meeting of the shareholders whose shares are to be
cancelled.

Major business changes:
ASX Listing Rules

11.2 ASX Change Involving Main Undertaking

A resolution for shareholders to approve sale of companys main undertaking must include a voting
exclusion statement excluding the votes of A person who might obtain a benefit, except a benefit
solely in the capacity of a holder of ordinary securities, if the resolution is passed.


E. Winding Up
A. Grounds for Winding Up and Standing
461 General grounds on which company may be wound up by Court

(1) The Court may order the winding up of a company if:

(e) directors have acted in affairs of the company in their own interests rather than in the
interests of the members as a whole, or in any other manner whatsoever that appears to be
unfair or unjust to other members; or

(f) affairs of the company are being conducted in a manner that is oppressive or unfairly
prejudicial to, or unfairly discriminatory against, a member or members or in a manner that
is contrary to the interests of the members as a whole; or

(g) an act or omission, or a proposed act or omission, by or on behalf of the company, or a
resolution, or a proposed resolution, of a class of members of the company, was or would be
oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or
members or was or would be contrary to the interests of the members as a whole; or

(k) the Court is of opinion that it is just and equitable that the company be wound up.

462 Standing to apply for winding up

(1) A reference in this section to an order to wind up a company is a reference to an order to wind
up the company on a ground provided for by section 461.

(2) Subject to this section, any one or more of the following may apply for an order to wind up a
company:

(c) a contributory; []

(5) Except as permitted by this section, a person is not entitled to apply for an order to wind up a
company.

9 Dictionary

"contributory" means:

(a) in relation to a company (other than a no liability company):

(i) a person liable as a member or past member to contribute to the property of the
company if it is wound up; and

(ii) for a company with share capital--a holder of fully paid shares in the company;
and

(iii) [alleged contributories prior to final determination].


B. Self-interested director grounds under sub-s (e)
Re Cumberland Holdings (1976) 1 ACLR 361
HELD: It is not necessary that all directors act in that way. Further the two limbs of sub-s (e) are
given a broad interpretation, (for example, if unfair and unjust to a significant section of other
members).
NOTE: This is more likely to be utilised where in corporate group situations where the director of
one company acts in the interests of another company in the group.

C. Just and equitable grounds under sub-s (k)
Loch v John Blackwood Ltd (1924) AC 783
HELD: It may be just and equitable to wind up a company where there is a justifiable lack of
confidence in the management of the companys affairs.

Macquarie University v Macquarie University Union Ltd (No 2) (2007) FCA 844
HELD: It may be just and equitable to wind up a company where there has been serious fraud,
misconduct, or oppression by the company, but removal of the directors will likely only lead to
their re-appointment.

Clarke v Bridges (2004) FCA 394
HELD: It may be just and equitable to wind up a company where there is a management
deadlock and breakdown of communication.

Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 5 ACSR 296, 300 (Young J)
HELD: It may be just and equitable to wind up a company where the companys objects become
impossible.
NOTE: Companies typically have more than one purpose, so a company will not be wound up
where it continues with some object.

Re Tivoli Freeholds Ltd [1972] VR 445
FACTS: Company conducts entertainment business. Controlling member used funds to engage in
corporate raiding. Minority member argued that failure of substratum of the companyoutside
of the purposes for which the company was formed.
HELD: Where there has been a failure of substratum, the company may be wound up.

Ebrahimi v Westbourne Galleries Ltd (1973) AC 360
FACTS: Two men ran company and allowed son to join resulting in three shareholders holding
one third each. The father/son removed the over director and paid all the profits out.
NOTE: There was an informal understanding that none of the would be removed from the
board.
HELD: Special considerations apply to quasi-partnership companies. The majority had acted in
accordance with their strict legal rights, but equitable considerations demanded the winding up
of the company on the basis of mutual trust and agreement between the directors as to the
management off the company and as to certain restrictions on the transfer of shares.


D. Discretion of the Court
467 Court's powers on hearing application

(4) Where the application is made by members as contributories on the ground that it is just and
equitable that the company should be wound up or that the directors have acted in a manner that
appears to be unfair or unjust to other members, the Court, if it is of the opinion that:

(a) the applicants are entitled to relief either by winding up the company or by some other
means; and

(b) in the absence of any other remedy it would be just and equitable that the company
should be wound up;

must make a winding up order unless it is also of the opinion that some other remedy is available to
the applicants and that they are acting unreasonably in seeking to have the company wound up
instead of pursuing that other remedy.

ASIC v ABC Fund Managers [No 2] (2002) 20 ACLC 120
NOTE: If company is solvent, a strong case has to be made because winding up is a drastic step.
Where oppression remedies and winding up are available to a claimant, it will generally be
unreasonable to pursue winding up where the company is solvent.

Nilant v RL & KW Nominees Pty Ltd (2007) WASC 105
HELD: There must be exceptional circumstances for winding up to be ordered where there are
oppression remedies also available. Where the companys affairs are a mess and insolvency is
likely, winding up may be the more appropriate remedy as a liquidator can conduct an inquiry
which a court may not.

F. The Oppression Action
A. Standing
231 Membership of a company

A person is a member of a company if they:

(a) are a member of the company on its registration; or

(b) agree to become a member of the company after its registration and their name is
entered on the register of members; or

(c) become a member of the company under section 167 (membership arising from
conversion of a company from one limited by guarantee to one limited by shares).

234 Who can apply for order

An application for an order under section 233 in relation to a company may be made by:


(a) a member of the company, even if the application relates to an act or omission that is
against:

(i) the member in a capacity other than as a member; or

(ii) another member in their capacity as a member; or

(b) a person who has been removed from the register of members because of a selective
reduction; or

(c) a person who has ceased to be a member of the company if the application relates to the
circumstances in which they ceased to be a member; or

(d) a person to whom a share in the company has been transmitted by will or by operation
of law; or

(e) a person whom ASIC thinks appropriate having regard to investigations it is conducting or
has conducted into:

(i) the company's affairs; or

(ii) matters connected with the company's affairs.

Note 1: If an application is made under this section, in certain cases the court may order that the company be
wound up in insolvency (see section 459B).

Note 2: For selective reduction, see subsection 256B(2).

Majority shareholders:
Vujnovich v Vujnovich (1990) BCLC 227
HELD: There is nothing to prevent a majority shareholder bringing an action for oppression.

Subsequent members:
Re Spargos Mining NL (1990) 3 ACSR 1
FACTS: The applicant had not been personally oppressed, but had bought shares after
oppressive conduct had occurred (at a price reflective of the oppressive conduct).
HELD: The applicant had standing to bring proceedings for oppression

Equity of applicant:
Re RA Noble & Sons (Clothing) Ltd (1983) BCLC 273
HELD: There is no requirement of clean hands for the applicant, although the applicants conduct
may affect the remedy awarded by the court.

B. Grounds of Opression
232 Grounds for Court order


The Court may make an order under section 233 if:

(a) the conduct of a company's affairs; or

(b) an actual or proposed act or omission by or on behalf of a company; or

(c) a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

(d) contrary to the interests of the members as a whole; or

(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or
members whether in that capacity or in any other capacity.

For the purposes of this Part, a person to whom a share in the company has been transmitted by will
or by operation of law is taken to be a member of the company.

Note: For affairs, see section 53.

(a) The test for oppression
The standard required:
Elder v Elder & Watson 1952 SC 49, 55 (Lord Cooper)
HELD: Broad interpretation of oppression: a visible departure from the standards of fair dealing,
and a violation of the conditions of fair play on which every shareholder who entrusts his money
to a company is entitled to rely.

ONeill v Phillips [1999] 2 All ER 961
HELD: The assessment looks at the time of the conduct, and not on what becomes known
subsequently. Fairness will be assessed in light of the context of the situation. For example, what
is fair between commercial partners may not be fair between members of a family company.

The reasonable director test:
Wayde v New South Wales Rugby League Ltd (1985) 59 ALJR 798
FACTS: League administered rugby competition in NSW. The constitutional objective of the
League was to promote the best interests of the game. The board had authority to decide
which clubs may participate in the league. Board decided there were too many teams in
competition, and excluded one club. That club, as a member, brought an action under s 232.
TEST: Was the decision made by the directors a decision that no board of directors acting
reasonably would have made?
HELD: The actions of the directors did discriminate, but it did not amount to a breach of s 232.
This was a reasonable decision considering the constitutional objectsit was in the interests of
the game to reduce the number of clubs in the League.


Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
HELD: The test of fairness is an objective one, and is a question of commercial fairness judged
objectively as a commercial bystander.

The conduct relevant to the enquiry:
Thomas v HW Thomas Ltd (1884) 2 ACLC 610
HELD: It is not necessary for the complainant to point to actual irregularity or prove that
directors acted dishonestly or with intention of oppressing the memberIt is a question of the
impact or effect that the actions of the directors or majority members have upon the
complainant.

Limits of oppression:
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25 [72] (French CJ)
HELD: What oppression should generally be treated as a compound statement considering
whether something is unjustly detrimental to interests of a member. The imposition of limits on
the remedy should be approached with caution.

(b) Breaches of duties
Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324
FACTS: Directors allowed the companys business to decline and diverted the subsidiarys
business to parent company they controlled.
HELD: This was oppression as there was a breach of fiduciary duty amounting to an improper
diversion of business.

Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452
HELD: Misappropriation of company assets at the expense of the minority is oppressive conduct.

Re Spargos Mining NL (1990) 3 ACSR 1
FACTS: Two companies were taken over by Group, the boards thereafter being controlled by
representatives of the Group. Both had substantial assets at time of acquisition however the
directors commenced a series of transactions in which the funds were channelled out of the
companies to the Group. For example, loans were madewithout repayment or security.
HELD: There were multiple breaches of directors duties as the decisions were made for the
benefit of related companies. This amounted to oppression.

(c) Processes of management and buy-outs
Re G Jeffery (Mens Store) Pty Ltd (1984) 2 ACLC 421 (Crockett J)
FACTS: The brother of the managing director sought a winding up order or order for purchase of
his shares upon becoming dissatisfied with his shareholding and sought to leave the company.
HELD: A refusal to buy out a member does not of itself amount to oppression. Mere
dissatisfaction with the management or with being locked-in not sufficient, there was no
oppression, nothing unfair, nor any discrimination.


NOTE: The consequence is that there is no unilateral right of exit at a fair price for a minority
shareholder in the absence of unfair prejudice.

ONeill v Phillips (1999) 2 All ER 961
HELD: If it can be shown there is an informal understanding that majority will not remove
minority, it may be oppressive for the majority to do so. This will require:
(1) An informal understanding proven on facts;
(2) An exclusion from management; and
(3) An absence of reasonable offer to buy the shares.
NOTE: Where a fair price is offered, it may be difficult to establish oppression.

John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Aasia) Pty Ltd (1991) 6 ACSR 63
HELD: It was oppressive for the managing director to restrict speakers time at meetings, and to
made major decisions without the board of directors.

Re Back 2 Bay 6 Pty Ltd (1994) 12 ACSR
HELD: Denial of access to information or withholding information about the companys affairs
constitutes oppressive conduct.

Hogg v Dymock (1993)11 ACSR 610
FACTS: A tourist venture was through a proprietary company which was owned by three
directors: Mrs Hogg (holding one share and employed by the company as managing director),
and Mr and Mrs Dymock (holding one share jointly). Disagreements arose between the parties,
and Mr and Mrs Dymock purported to appoint themselves as managing directors and dismissed
Mrs Hogg.
HELD: There was a common expectation of continuing involvement, and dismissal was therefore
oppressive and was an improper exclusion from management.

Shirim Pty Ltd v Fesena Pty Ltd (2000) 35 ACSR 221; Re Elgindata Ltd (1991) BCLC 959
HELD: Mere negligence, or mere mismanagement are not, without more, oppressive. However,
if occurring as part of a broader pattern of incompetence, there may be oppressive conduct.

(d) Payment of dividends and remuneration
Re G Jeffery (Mens Store) Pty Ltd (1984) 2 ACLC 421 (Crockett J)
FACTS: The brother of the managing director sought a winding up order or order for purchase of
his shares upon becoming dissatisfied with his shareholding and sought to leave the company.
HELD: The majority shareholder paid himself very generously, but it was found that this was not
excessive. The business was run very conservatively with the company was retaining profits
rather than paying dividends. For this to be oppressive, it must be shown that not paying the
dividend is outside of the business judgment rule.

Thomas v HW Thomas Ltd (1884) 2 ACLC 610
HELD: A conservative dividend policy is not of itself not oppressive where agreed to by other
members. However, unfairly restricting dividends or diverting profits to executive remuneration


(causing low returns for shareholders) may be oppressive conduct.

Re City Meat Company Pty Ltd (1983) 8 ACLR 673
FACTS: A company provided a lack of dividends where part of majority planned to conduct the
company in their own interests.
HELD: The dividends were miserable with no proportion to the companys profits. Directors
paid themselves profits by remuneration; however this is not a problem while all members are
directors. The majority shareholder had taken active steps to ensure the exclusion of minority,
and using control to benefit themselves but keeping dividends very low amounted to
oppression.

Shamsallah Holdings Pty Ltd v CBD Refrigeration and Airconditioning Services Pty Ltd (2001) 19 ACLC
517
FACTS: A conservative dividend policy continued despite increasing profits.
HELD: Expert evidence regarding the salaries of the directors concluded that the remuneration
was not oppressive. However, the directors should have reviewed the dividend policy to ensure
it was still relevant. A failure to review the policy in light of changing circumstances while
continuing to raise their director remuneration was found to be oppressive.

Sanford v Sanford Courier Service Pty Ltd (1987) 10 ACLR 549
HELD: Low dividend payments due to excessive remigration to directors in the form of director's
fees may be oppressive.

C. Oppression Remedies
233 Orders the Court can make
(1) The Court can make any order under this section that it considers appropriate in relation to the
company, including an order:
(a) that the company be wound up;
(b) that the company's existing constitution be modified or repealed;
(c) regulating the conduct of the company's affairs in the future;
(d) for the purchase of any shares by any member or person to whom a share in the
company has been transmitted by will or by operation of law;
(e) for the purchase of shares with an appropriate reduction of the company's share capital;
(f) for the company to institute, prosecute, defend or discontinue specified proceedings;
(g) authorising a member, or a person to whom a share in the company has been
transmitted by will or by operation of law, to institute, prosecute, defend or discontinue
specified proceedings in the name and on behalf of the company;
(h) appointing a receiver or a receiver and manager of any or all of the company's property;
(i) restraining a person from engaging in specified conduct or from doing a specified act;


(j) requiring a person to do a specified act.
Order that the company be wound up
(2) If an order that a company be wound up is made under this section, the provisions of this
Act relating to the winding up of companies apply:
(a) as if the order were made under section 461; and
(b) with such changes as are necessary.
Order altering constitution
(3) If an order made under this section repeals or modifies a company's constitution, or
requires the company to adopt a constitution, the company does not have the power under
section 136 to change or repeal the constitution if that change or repeal would be
inconsistent with the provisions of the order, unless:
(a) the order states that the company does have the power to make such a change
or repeal; or
(b) the company first obtains the leave of the Court.

Basis for valuation:
O'Neill v Phillips [1999] 1 WLR 1092
HELD: Buy-outs are generally caused by a breach of duty, where a company is being run in the
interest of the majority at the expense of the minority. Shares have to be valued at the time
before the breaches had been occurred, id est, the value of shares if the oppressive conduct had
not occurred.
NOTE: This can be very difficult to determine as a matter of fact.

CVC/Opportunity Equity Partners Limited v Almeida (2002) 2 BCLC 108 [36][49] (Lord Millett)
HELD: Where the member was excluded against his will, the shares should normally be valued
without discount.

Equity of applicant:
Re RA Noble & Sons (Clothing) Ltd (1983) BCLC 273
HELD: There is no requirement of clean hands for the applicant, although the applicants conduct
may affect the remedy awarded by the court.


VII Insolvency
A. Determining Insolvency
95A Solvency and insolvency
(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when
they become due and payable.
(2) A person who is not solvent is insolvent.

The commercial viability test:
Austin Australia Pty Ltd v De Martin Gasparini Pty Ltd [2007] NSWSC 1238
HELD: Whether a company is solvent is a question of fact in light of commercial realities and in
all of the circumstances. The onus is generally upon the company to prove that it was not
insolvent. Indicators of insolvency include:
A history of dishonoured checks;
Suppliers insisting on cash on delivery terms;
The issue of post-dated or round sum checks;
Special arrangements with creditors;
An inability to produce timely audited accounts;
Unpaid group and/or payroll tax;
Unpaid super contributions or workers compensation premiums;
Demands from bankers to reduce the companys overdraught and other evidence of
deteriorating relations with bankers;
Receipt of letters of demands, statutory demands, and other court processes for debt;
Cession of trading; and
A lack of assets, or where a receiver or debenture holder has taken control of company
assets.

Re New World Alliance Pty Ltd (rec and mgr apptd) (1994) 51 FCR 425, 4356
HELD: Section 95A requires the court to ascertain what are the companys existing debts, debts
due in the near future, the date each will be due for payment, the companys present and
expected cash resources, and the dates which items will be received.

B. Liquidation
1. Routes to Liquidation (Part 5.4Winding Up in Insolvency)
(a) Members Voluntary Liquidation
Step 1: Directors declaration and statement of solvency:
494 Declaration of solvency
(1) Where it is proposed to wind up a company voluntarily, a majority of the directors may, before
the date on which the notices of the meeting at which the resolution for the winding up of the
company is to be proposed are sent out, make a written declaration to the effect that they have
made an inquiry into the affairs of the company and that, at a meeting of directors, they have
formed the opinion that the company will be able to pay its debts in full within a period not


exceeding 12 months after the commencement of the winding up.
(2) There must be attached to the declaration a statement of affairs of the company showing, in the
prescribed form:
(a) the property of the company, and the total amount expected to be realised from that
property; and
(b) the liabilities of the company; and
(c) the estimated expenses of winding up;
made up to the latest practicable date before the making of the declaration.
(3) A declaration so made has no effect for the purposes of this Act unless:
(a) the declaration is made at the meeting of directors referred to in subsection (1); and
(b) the declaration is lodged before the date on which the notices of the meeting at which
the resolution for the winding up of the company is to be proposed are sent out or such
later date as ASIC, whether before, on or after the first-mentioned date, allows; and
(c) the resolution for voluntary winding up is passed within the period of 5 weeks after the
making of the declaration or within such further period after the making of that declaration
as ASIC, whether before or after the end of that period of 5 weeks, allows.

Step 2: Commencement by special resolution (within five weeks of Step 1):
491 Circumstances in which company may be wound up voluntarily
(1) Subject to section 490, a company may be wound up voluntarily if the company so resolves by
special resolution.

Step 3: Appointment of liquidator, liquidators report, and remuneration:
495 Liquidators
(1) The company in general meeting must appoint a liquidator or liquidators for the purpose of
winding up the affairs and distributing the property of the company and may fix the remuneration to
be paid to him, her or them.
(2) On the appointment of a liquidator, all the powers of the directors cease except so far as the
liquidator, or the company in general meeting with the consent of the liquidator, approves the
continuance of any of those powers.
(5) Before remuneration is fixed under subsection (1), the liquidator or liquidators, or the proposed
liquidator or proposed liquidators, must:
(a) prepare a report setting out:
(i) such matters as will enable the members to make an informed assessment as to
whether the proposed remuneration is reasonable; and
(ii) a summary description of the major tasks likely to be performed by the liquidator
or liquidators, or the proposed liquidator or proposed liquidators, as the case may


be; and
(iii) the costs associated with each of those major tasks; and
(b) table the report at the relevant general meeting.

(b) Creditors Voluntary Liquidation in Insolvency
Step 1: Meeting of creditors where members resolution to liquidate but directors declaration
discloses insolvency:
496 Duty of liquidator where company turns out to be insolvent
(1) Where a declaration has been made under section 494 and the liquidator is at any time of the
opinion that the company will not be able to pay or provide for the payment of its debts in full
within the period stated in the declaration, he or she must do one of the following as soon as
practicable: *+
(c) convene a meeting of the company's creditors;
and if he or she convenes such a meeting, the following subsections apply.
(5) The creditors may, at the meeting convened under subsection (1), appoint some other person to
be liquidator for the purpose of winding up the affairs and distributing the property of the company
instead of the liquidator appointed by the company.

Step 2: The creditors may determine the liquidators remuneration:
499 Liquidators
(3) The remuneration to be paid to the liquidator may be fixed:
(a) if there is a committee of inspectionby that committee; or
(b) by resolution of the creditors.

NOTE: Meeting of creditors may decide to liquidate where administration:
439C What creditors may decide
At a meeting convened under section 439A, the creditors may resolve:
(c) that the company be wound up.

(c) Compulsory Liquidation in Insolvency
Step 1: Creditors and others may apply for liquidation (some only with leave):
459P Who may apply for order under section 459A
(1) Any one or more of the following may apply to the Court for a company to be wound up in
insolvency:


(a) the company;
(b) a creditor (even if the creditor is a secured creditor or is only a contingent or prospective
creditor);
(c) a contributory;
(d) a director;
(e) a liquidator or provisional liquidator of the company;
(f) ASIC;
(g) a prescribed agency.
(2) An application by any of the following, or by persons including any of the following, may only be
made with the leave of the Court:
(a) a person who is a creditor only because of a contingent or prospective debt;
(b) a contributory;
(c) a director;
(d) ASIC.
(3) The Court may give leave if satisfied that there is a prima facie case that the company is
insolvent, but not otherwise.
(4) The Court may give leave subject to conditions.
(5) Except as permitted by this section, a person cannot apply for a company to be wound up in
insolvency.

Step 2: On application under s 459P, court may order liquidation within 6 months:
459A Order that insolvent company be wound up in insolvency
On an application under section 459P, the Court may order that an insolvent company be wound up
in insolvency.

467 Court's powers on hearing application
(1) Subject to subsection (2) and section 467A, on hearing a winding up application the Court may:
(a) dismiss the application with or without costs, even if a ground has been proved on which
the Court may order the company to be wound up on the application; or
(b) adjourn the hearing conditionally or unconditionally; or
(c) make any interim or other order that it thinks fit.

459R Period within which application must be determined
(1) An application for a company to be wound up in insolvency is to be determined within 6 months


after it is made.

Step 3: Presumptions made in applications:
459C Presumptions to be made in certain proceedings
(1) This section has effect for the purposes of:
(a) an application under section 234, 459P, 462 or 464; or
(b) an application for leave to make an application under section 459P.
(2) The Court must presume that the company is insolvent if, during or after the 3 months ending on
the day when the application was made:
(a) the company failed (as defined by section 459F) to comply with a statutory demand; or
(b) execution or other process issued on a judgment, decree or order of an Australian court
in favour of a creditor of the company was returned wholly or partly unsatisfied; or
(c) a receiver, or receiver and manager, of property of the company was appointed under a
power contained in an instrument relating to a circulating security interest in such property;
or
(d) an order was made for the appointment of such a receiver, or receiver and manager, for
the purpose of enforcing such a security interest; or
(e) a person entered into possession, or assumed control, of such property for such a
purpose; or
(f) a person was appointed so to enter into possession or assume control (whether as agent
for the secured party or for the company).

Statutory Demand Procedure:
(1) 459E Creditor may serve statutory demand on company$2,000 statutory minimum debt
required (s 9);
(2) 459F When company taken to fail to comply with statutory demand21 days then deemed
insolvent;
(3) Creditor may then apply under s 465A for a liquidation order;
(4) 459G Company may applyfor the demand to be set aside within 21 days of service;
(5) 459J Setting aside demand on other groundsset aside where defect and substantial
injustice or other grounds;
(6) 459H Determination of application where there is a dispute or offsetting claimwhere a
genuine dispute with off-setting effect, court may offset the demand by that amount;
(7) 459S Company may not oppose application on certain groundsCompany cannot raise same
grounds to oppose liquidation application as raised to attempt to defend statutory demand
without leave (and where proof of solvency).

Step 4: Appointment of independent and non-disqualified liquidator by court:
472 Court to appoint official liquidator


(1) On an order being made for the winding up of a company, the Court may appoint an official
liquidator to be liquidator of the company.
(2) The Court may appoint an official liquidator provisionally at any time after the filing of a winding
up application and before the making of a winding up order or, if there is an appeal against a
winding up order, before a decision in the appeal is made.

532 Disqualification of liquidator
(2) Subject to this section, a person must not, except with the leave of the Court, seek to be
appointed, or act, as liquidator of a company:
(a) if the person, or a body corporate in which the person has a substantial holding, is
indebted in an amount exceeding $5,000 to the company or a body corporate related to the
company; or
(b) if the person is, otherwise than in his or her capacity as liquidator, a creditor of the
company or of a related body corporate in an amount exceeding $5,000; or
(c) if:
(i) the person is an officer or employee of the company (otherwise than by reason of
being a liquidator of the company or of a related body corporate); or
(ii) the person is an officer or employee of any body corporate that is a secured party
in relation to property of the company; or
(iii) the person is an auditor of the company; or
(iv) the person is a partner or employee of an auditor of the company; or
(v) the person is a partner, employer or employee of an officer of the company; or
(vi) the person is a partner or employee of an employee of an officer of the
company.

(d) Compulsory liquidation on grounds other than insolvency
461 General grounds on which company may be wound up by Court
(1) The Court may order the winding up of a company if:
(a) the company has by special resolution resolved that it be wound up by the Court; or
(c) the company does not commence business within one year from its incorporation or
suspends its business for a whole year; or
(d) the company has no members; or
(e) directors have acted in affairs of the company in their own interests rather than in the
interests of the members as a whole, or in any other manner whatsoever that appears to be
unfair or unjust to other members; or
(f) affairs of the company are being conducted in a manner that is oppressive or unfairly
prejudicial to, or unfairly discriminatory against, a member or members or in a manner that


is contrary to the interests of the members as a whole; or
(g) an act or omission, or a proposed act or omission, by or on behalf of the company, or a
resolution, or a proposed resolution, of a class of members of the company, was or would be
oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or
members or was or would be contrary to the interests of the members as a whole; or
(h) ASIC has stated in a report prepared under Division 1 of Part 3 of the ASIC Act that, in its
opinion:
(i) the company cannot pay its debts and should be wound up; or
(ii) it is in the interests of the public, of the members, or of the creditors, that the
company should be wound up; or
(k) the Court is of opinion that it is just and equitable that the company be wound up.
(2) A company must lodge a copy of a special resolution referred to in paragraph (1)(a) with ASIC
within 14 days after the resolution is passed.

2. Effect of appointment of liquidator
(a) Limits on the powers of company
471A Powers of other officers suspended during winding up
(1) While a company is being wound up in insolvency or by the Court, a person cannot perform or
exercise, and must not purport to perform or exercise, a function or power as an officer of the
company.
NOTE: Exceptions apply for actions with approval from the court or liquidator.
NOTE: The limitation includes the power to launch an appeal against the making of the winding
up order.
468 Avoidance of dispositions of property, attachments etc.
(1) Any disposition of property of the company, other than an exempt disposition, made after the
commencement of the winding up by the Court is, unless the Court otherwise orders, void.

468A Effect of winding up on company's members
[Employment contracts with the company are automatically terminated and transfers of shares
without liquidator consent are also void.]

(b) Proceedings of the company
471B Stay of proceedings and suspension of enforcement process
While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a
company is acting, a person cannot begin or proceed with:
(a) a proceeding in a court against the company or in relation to property of the company; or


(b) enforcement process in relation to such property;
except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

(c) Liabilities of the company
SECURED CREDITORS: Floating charges attach to collateral and unregistered but registrable
charges will be invalid against the liquidator unless the time allowed for registration has not
expired. Note that charges may be subject to challenge, and circulating security interests are
postponed by claims of employees under s 561.
471C Secured creditor's rights not affected
Nothing in section 471A or 471B affects a secured creditor's right to realise or otherwise deal with
the security interest.

UNSECURED CRDITORS: Unsecured creditors must follow collective enforcement procedure with
right to prove claim (553 Debts or claims that are provable in winding up) unless the creditor can
proceed with the leave of court under 471B. Liquidator beings claim on behalf of all creditors
who are entitled to a proportion of the proceeds.
3. Role of the Liquidator and Process of Liquidation
Process of liquidation:
(1) Take possession of the companys assets: s 478(1)
(2) Directors to report to liquidator: 475(1)
(3) Liquidator to lodge preliminary report within two months: 476
(4) Liquidator to lodge audited accounts within six months with ASIC: 539
(5) Report any misfeasance by directors to ASIC (which may take action): 533
(6) Bring statutory actions: 477(2)(a)
(7) Realise company assets
(8) Distribute the liquidated company assets among the creditors and others with legitimate
claims against the company
(9) Distribute any surplus funds amongst the members
(10) Bring about deregistration of the company

Powers of the liquidator:
477 Powers of liquidator
(1) Subject to this section, a liquidator of a company may:
(a) carry on the business of the company so far as is necessary for the beneficial disposal or
winding up of that business; and
(b) subject to the provisions of section 556, pay any class of creditors in full; and
(c) make any compromise or arrangement with creditors or persons claiming to be creditors
against the company or whereby the company may be rendered liable; and


*+
(2) Subject to this section, a liquidator of a company may:
(a) bring or defend any legal proceeding in the name and on behalf of the company; and
(b) appoint a solicitor to assist him or her in his or her duties; and
(c) sell or otherwise dispose of, in any manner, all or any part of the property of the
company; and
(ca) exercise the Court's powers under subsection 483(3) (except paragraph 483(3)(b)) in
relation to calls on contributories; and
(d) do all acts and execute in the name and on behalf of the company all deeds, receipts and
other documents and for that purpose use when necessary a seal of the company; and
(f) draw, accept, make and indorse any bill of exchange or promissory note in the name and
on behalf of the company; and
(g) obtain credit, whether on the security of the property of the company or otherwise; and
(h) take out letters of administration of the estate of a deceased contributory or debtor, and
do any other act necessary for obtaining payment of any money due from a contributory or
debtor, or his or her estate, that cannot be conveniently done in the name of the company;
and
(k) appoint an agent to do any business that the liquidator is unable to do, or that it is
unreasonable to expect the liquidator to do, in person; and
(m) do all such other things as are necessary for winding up the affairs of the company and
distributing its property.

4. Statutory Actions by Liquidator
Re Speedifix Building Products Pty Ltd (1987) 11 ACLR 863
HELD: If the companys assets are inadequate to meet the costs of litigation, the liquidator will
be personally liable for them.

(a) Insolvent Trading 588G
(i) The duty to prevent insolvent trading
(1) This section applies if:
(a) a person is a director of a company at the time when the company incurs a debt; and
(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by
incurring at that time debts including that debt; and
(c) at that time, there are reasonable grounds for suspecting that the company is insolvent,
or would so become insolvent, as the case may be; and


(d) that time is at or after the commencement of this Act.
(1A) For the purposes of this section, if a company takes action set out in column 2 of the following
table, it incurs a debt at the time set out in column 3.
(2) By failing to prevent the company from incurring the debt, the person contravenes this section
if:
(a) the person is aware at that time that there are such grounds for so suspecting; or
(b) a reasonable person in a like position in a company in the company's circumstances
would be so aware.
Note: This subsection is a civil penalty provision (see subsection 1317E(1)).
(3) A person commits an offence if:
(a) a company incurs a debt at a particular time; and
(aa) at that time, a person is a director of the company; and
(c) the person suspected at the time when the company incurred the debt that the company
was insolvent or would become insolvent as a result of incurring that debt or other debts (as
in paragraph (1)(b)); and
(d) the person's failure to prevent the company incurring the debt was dishonest.

No Action of company When debt is incurred
1 paying a dividend when the dividend is paid or, if the company
has a constitution that provides for the
declaration of dividends, when the dividend
is declared
2 making a reduction of share capital to which
Division 1 of Part 2J.1 applies (other than a
reduction that consists only of the
cancellation of a share or shares for no
consideration)
when the reduction takes effect
3 buying back shares (even if the consideration
is not a sum certain in money)
when the buy-back agreement is entered
into
4 redeeming redeemable preference shares
that are redeemable at its option
when the company exercises the option
5 issuing redeemable preference shares that
are redeemable otherwise than at its option
when the shares are issued
6 financially assisting a person to acquire
shares (or units of shares) in itself or a
holding company
when the agreement to provide the
assistance is entered into or, if there is no
agreement, when the assistance is provided
7 entering into an uncommercial transaction
(within the meaning of section 588FB) other
than one that a court orders, or a prescribed
agency directs, the company to enter into
when the transaction is entered into


(ii) Elements of the duty
Debts incurred:
Standard Chartered Bank v Antico (1995) 18 ACSR 1, 57
HELD: For a debt to be incurred requires a positive decision which must be a choice by the
company to do or omit to do something which, as a matter of substance and commercial reality,
renders it liable for a debt that it would not otherwise have been liable.

Hawkins v Bank of China (1992) 26 NSWLR 562
HELD: The debt may be contingent, for example, a guarantee, but must be for a specific amount.

Credit Corp Pty Ltd v Atkins (1999) 17 ACLC 756
HELD: A debt for goods delivered is incurred upon delivery.
NOTE: In Hawkins v Bank of China (1992) 26 NSWLR 562, the debt was incurred when the order
was placed.

Company insolvent at time or made insolvent by debt:
95A Solvency and insolvency
[See above, part VII.A. Determining Insolvency]

588E Presumptions to be made in recovery proceedings
(1) In this section: "recovery proceeding", in relation to a company, means:
(e) proceedings for a contravention of subsection 588G(2) in relation to the incurring of a
debt by the company.
(3) If:
(a) the company is being wound up; and
(b) it is proved, or because of subsection (4) or (8) it must be presumed, that the company
was insolvent at a particular time during the 12 months ending on the relation-back day;
it must be presumed that the company was insolvent throughout the period beginning at that time
and ending on that day.
(4) Subject to subsections (5) to (7), if it is proved that the company:
(a) has failed to keep financial records in relation to a period as required by subsection
286(1); or
(b) has failed to retain financial records in relation to a period for the 7 years required by
subsection 286(2);
the company is to be presumed to have been insolvent throughout the period.


Reasonable grounds for suspecting insolvency:
ASIC v Plymin (2003) VSC 123 [423]
HELD: The liquidator must prove that the director was either subjectively aware, or that a
reasonable person in that position would have been aware. What are reasonable grounds is a
question of fact without reference to hindsight: What would a reasonable and competent
director have suspected about the companys ability to pay debts as the fell due?

Credit Corporation Australia Pty Ltd v Atkins (1999) 17 ACLC 756
HELD: This is to be judged according to a director of ordinary competence who is capable of
having a basic understanding of the companys financial status.

Queensland Bacon Pty Ltd v Rees (1996) 115 CLR 266
HELD: Suspicion requires more than mere speculation, must have a positive feeling of actual
apprehension that there is insolvency.

(iii) Defences to s 588G
Reasonable expectation of solvency:
588H Defences
(2) It is a defence if it is proved that, at the time when the debt was incurred, the person had
reasonable grounds to expect, and did expect, that the company was solvent at that time and would
remain solvent even if it incurred that debt and any other debts that it incurred at that time.

Metropolitan Fire Systems v Miller (1997) 23 ACSR 699, 711
HELD: To suspect something requires a lower threshold of knowledge or awareness than to
expect it The expectation must be differentiated from mere hope in order to satisfy this
defence It implies a measure of confidence that the company is solvent.

Reasonable belief in competent and responsible person:
588H Defences
(3) Without limiting the generality of subsection (2), it is a defence if it is proved that, at the time
when the debt was incurred, the person:
(a) had reasonable grounds to believe, and did believe:
(i) that a competent and reliable person (the other person ) was responsible for
providing to the first-mentioned person adequate information about whether the
company was solvent; and
(ii) that the other person was fulfilling that responsibility; and
(b) expected, on the basis of information provided to the first-mentioned person by the
other person, that the company was solvent at that time and would remain solvent even if it
incurred that debt and any other debts that it incurred at that time.


Absence in management:
588H Defences
(4) If the person was a director of the company at the time when the debt was incurred, it is a
defence if it is proved that, because of illness or for some other good reason, he or she did not take
part at that time in the management of the company.

Federal Commissioner of Taxation v Clarke [1927] HCA 49
HELD: A director cannot plead general non-involvement as a defence, for example failing to
attend board meetings. There must be a good reason for the non-involvement. Simply deferring
to other directors is not enough. Personal circumstances affecting a director may suffice to
enable reliance upon the defence.

All reasonable steps taken:
588H Defences
(5) It is a defence if it is proved that the person took all reasonable steps to prevent the company
from incurring the debt.
(6) In determining whether a defence under subsection (5) has been proved, the matters to which
regard is to be had include, but are not limited to:
(a) any action the person took with a view to appointing an administrator of the company;
and

Elliott v ASIC (2004) 10 VR 369
HELD: Even non-executive directors must not be supine or complacent if they cannot stop a
director from incurring debts. They must resign or appoint an administrator in order to take all
reasonable steps to avoid the insurance of the debts.

General relief from insolvent trading:
1318 Power to grant relief
(1) If, in any civil proceeding against a person to whom this section applies for negligence, default,
breach of trust or breach of duty in a capacity as such a person, it appears to the court before which
the proceedings are taken that the person is or may be liable in respect of the negligence, default or
breach but that the person has acted honestly and that, having regard to all the circumstances of the
case, including those connected with the person's appointment, the person ought fairly to be
excused for the negligence, default or breach, the court may relieve the person either wholly or
partly from liability on such terms as the court thinks fit.


1317S Relief from liability for contravention of civil penalty provision
(1) In this section: "eligible proceedings":
(a) means proceedings for a contravention of a civil penalty provision (including proceedings
under section 588M, 588W, 961M, 1317GA, 1317H, 1317HA or 1317HB); and
(b) does not include proceedings for an offence (except so far as the proceedings relate to
the question whether the court should make an order under section 588K, 1317H, 1317HA
or 1317HB).
(2) If:
(a) eligible proceedings are brought against a person; and
(b) in the proceedings it appears to the court that the person has, or may have, contravened
a civil penalty provision but that:
(i) the person has acted honestly; and
(ii) having regard to all the circumstances of the case (including, where applicable,
those connected with the person's appointment as an officer, or employment as an
employee, of a corporation or of a Part 5.7 body), the person ought fairly to be
excused for the contravention;
the court may relieve the person either wholly or partly from a liability to which the person
would otherwise be subject, or that might otherwise be imposed on the person, because of
the contravention.
(3) In determining under subsection (2) whether a person ought fairly to be excused for a
contravention of section 588G, the matters to which regard is to be had include, but are not limited
to:
(a) any action the person took with a view to appointing an administrator of the company or
Part 5.7 body; and

ASIC v Adler (2002) 41 ACSR 72
HELD: If the court is unable to reach a conclusion as to the appearance of honesty, but cant rule
out dishonesty, the provision will not be applied. The onus is upon the defendant to persuade
the court of their honesty.

ASIC v Macdonald [No 11] [2009] NSWSC 287 (Gazelle J)
HELD: A person acts honestly for the purposes of s 1317S in the ordering meaning of the term if
conduct is without moral turpitude, carelessness or imprudence.


(iv) Remedies for breach of duty
588J On application for civil penalty order, Court may order compensation
(1) Where, on an application for a civil penalty order against a person in relation to a contravention
of subsection 588G(2), the Court is satisfied that:
(a) the person committed the contravention in relation to the incurring of a debt by a
company; and
(b) the debt is wholly or partly unsecured; and
(c) the person to whom the debt is owed has suffered loss or damage in relation to the debt
because of the company's insolvency;
the Court may (whether or not it makes a pecuniary penalty order under section 1317G or an order
under section 206C disqualifying a person from managing corporations) order the first-mentioned
person to pay to the company compensation equal to the amount of that loss or damage.
NOTE: Any money recovered under 588G is available to pay all unsecured creditors, including
those who became creditors while the company was solvent.
588K Criminal court may order compensation

588M Recovery of compensation for loss resulting from insolvent trading
(1) This section applies where:
(a) a person (in this section called the director ) has contravened subsection 588G(2) or (3) in
relation to the incurring of a debt by a company; and
(b) the person (in this section called the creditor ) to whom the debt is owed has suffered
loss or damage in relation to the debt because of the company's insolvency; and
(c) the debt was wholly or partly unsecured when the loss or damage was suffered; and
(d) the company is being wound up;
whether or not:
(e) the director has been convicted of an offence in relation to the contravention; or
(f) a civil penalty order has been made against the director in relation to the contravention.
(2) The company's liquidator may recover from the director, as a debt due to the company, an
amount equal to the amount of the loss or damage.
NOTE: A creditor with the liquidators consent may apply under 588R for compensation under
588M. Creditors who recover in this way retain the compensation, as oppose to the
compensation being made available generally to the creditors.
588Y Application of amount paid as compensation
(1) An amount paid to a company under section 588J, 588K, 588M or 588W is not available to pay a
secured debt of the company unless all the company's unsecured debts have been paid in full.


(b) Action against Parent Company 588VX
588V When holding company liable
(1) A corporation contravenes this section if:
(a) the corporation is the holding company of a company at the time when the company
incurs a debt; and
(c) at that time, there are reasonable grounds for suspecting that the company is insolvent,
or would so become insolvent, as the case may be; and
(d) one or both of the following subparagraphs applies:
(i) the corporation, or one or more of its directors, is or are aware at that time that
there are such grounds for so suspecting;
(ii) having regard to the nature and extent of the corporation's control over the
company's affairs and to any other relevant circumstances, it is reasonable to expect
that:
(A) a holding company in the corporation's circumstances would be so
aware; or
(B) one or more of such a holding company's directors would be so aware;
and
(e) that time is at or after the commencement of this Act.
(2) A corporation that contravenes this section is not guilty of an offence.

588W Recovery of compensation for loss resulting from insolvent trading
(1) Where:
(a) a corporation has contravened section 588V in relation to the incurring of a debt by a
company; and
(b) the person to whom the debt is owed has suffered loss or damage in relation to the debt
because of the company's insolvency; and
(c) the debt was wholly or partly unsecured when the loss or damage was suffered; and
(d) the company is being wound up;
the company's liquidator may recover from the corporation, as a debt due to the company,
an amount equal to the amount of the loss or damage.
(2) Proceedings under this section may only be begun within 6 years after the beginning of the
winding up.

588X Defences


(1) This section has effect for the purposes of proceedings under section 588W.
(2) It is a defence if it is proved that, at the time when the debt was incurred, the corporation, and
each relevant director (if any), had reasonable grounds to expect, and did expect, that the company
was solvent at that time and would remain solvent even if it incurred that debt and any other debts
that it incurred at that time.
(3) Without limiting the generality of subsection (2), it is a defence if it is proved that, at the time
when the debt was incurred, the corporation, and each relevant director (if any):
(a) had reasonable grounds to believe, and did believe:
(i) that a competent and reliable person was responsible for providing to the
corporation adequate information about whether the company was solvent; and
(ii) that the person was fulfilling that responsibility; and
(b) expected, on the basis of the information provided to the corporation by the person, that
the company was solvent at that time and would remain solvent even if it incurred that debt
and any other debts that it incurred at that time.
(4) If it is proved that, because of illness or for some other good reason, a particular relevant director
did not take part in the management of the corporation at the time when the company incurred the
debt, the fact that the director was aware as mentioned in subparagraph 588V(1)(d)(i) is to be
disregarded.
(5) It is a defence if it is proved that the corporation took all reasonable steps to prevent the
company from incurring the debt.
(6) In subsections (2), (3) and (4):
"relevant director" means a director of the corporation who was aware as mentioned in
subparagraph 588V(1)(d)(i).

(c) Misfeasance Proceedings for Breaches of Duties
NOTE: The liquidator will only be able to bring an action for breaches of duties where the breach
has not been ratified. See above, V.F. Exoneration and Ratification of Directors Duties.
(d) Avoidance of Circulating Security Interests
588FJ Circulating security interest created within 6 months before relation-back day
(1) This section applies if:
(a) a company is being wound up in insolvency; and
(b) the company created a circulating security interest in property of the company at a
particular time that is at or after 23 June 1993 and:
(i) during the 6 months ending on the relation-back day; or
(ii) after that day but on or before the day when the winding up began.
(2) The circulating security interest is void, as against the company's liquidator, except so far as it
secures:


(a) an advance paid to the company, or at its direction, at or after that time and as
consideration for the circulating security interest; or
(b) interest on such an advance; or
(c) the amount of a liability under a guarantee or other obligation undertaken at or after that
time on behalf of, or for the benefit of, the company; or
(d) an amount payable for property or services supplied to the company at or after that
time; or
(e) interest on an amount so payable.
(3) Subsection (2) does not apply if it is proved that the company was solvent immediately after that
time.

(e) Voidable Transactions
1
588FA Unfair
preferences
588FB Uncommercial
transactions
588FDA
Unreasonable
director-related
transactions
588FD Unfair loans
to a company
Creditor receives
more under
transaction than
would on winding up
Reasonable person in
companys position
would not have
entered
Reasonable person in
companys position
would not have
conferred the benefit
Interest or charges
are extortionate
2
588FC Insolvent transactions
Was the transaction insolvent?
588B/588E presumptions apply
3
Voidable if occurring within relevant time period
Six months ending on the day of application for winding up order
588FE(2);
Extended to two years where transaction was uncommercial
588FE(3);
Four years if transaction was with a related entity 588FE(4)(6A);
Ten years if transaction intended to defeat creditors 588FE(5).
4
588FF Courts may make orders about voidable transactions
Liquidator can apply for relief;
Court may make a wide range of orders (including transfer of property and payment of
money to the company).
5
588FG Transaction not voidable as against certain persons
Good faith, reasonable grounds, and no benefit received defence

Step 1: Type of Transaction
588FA Unfair preferences
(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only
if:
(a) the company and the creditor are parties to the transaction (even if someone else is also


a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an
unsecured debt that the company owes to the creditor, more than the creditor would
receive from the company in respect of the debt if the transaction were set aside and the
creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because
of an order of an Australian court or a direction by an agency.

588FB Uncommercial transactions
(1) A transaction of a company is an uncommercial transaction of the company if, and only if, it may
be expected that a reasonable person in the company's circumstances would not have entered into
the transaction, having regard to:
(a) the benefits (if any) to the company of entering into the transaction; and
(b) the detriment to the company of entering into the transaction; and
(c) the respective benefits to other parties to the transaction of entering into it; and
(d) any other relevant matter.
(2) A transaction may be an uncommercial transaction of a company because of subsection (1):
(a) whether or not a creditor of the company is a party to the transaction; and
(b) even if the transaction is given effect to, or is required to be given effect to, because of
an order of an Australian court or a direction by an agency.

McDonald v Hanselmann (1998) 28 ACSR 49
FACTS: Company owed money to tax office. A few months before liquidation, the company sold
property to the controlling shareholders son for $46,000. The market value of the property was
estimated to be $58,000.
ISSUE: Liquidators alleged that this was an uncommercial transaction. Was there a bargain of
such magnitude that it could not be regarded as a normal commercial transaction?
HELD: A companys need for immediate liquidity could induce a reasonable person to sell
property for less than its market value. However, letting the property at 21% less than its market
value was too great to justify a conclusion that the transaction was uncommercial. The price
reflected the value of tax owed to the tax office, and it was found that the purpose of the
transaction was to avoid paying the tax office.
OUTCOME: The transaction was uncommercial and the monies were recovered and available for
the unsecured creditors.
NOTE: This money would have gone to the tax office as were at the time treated preferentially,
though this is not the case anymore.

588FDA Unreasonable director-related transactions
(1) A transaction of a company is an unreasonable director-related transaction of the company if,


and only if:
(a) the transaction is:
(i) a payment made by the company; or
(ii) a conveyance, transfer or other disposition by the company of property of the
company; or
(iii) the issue of securities by the company; or
(iv) the incurring by the company of an obligation to make such a payment,
disposition or issue; and
(b) the payment, disposition or issue is, or is to be, made to:
(i) a director of the company; or
(ii) a close associate of a director of the company; or
(iii) a person on behalf of, or for the benefit of, a person mentioned in subparagraph
(i) or (ii); and
(c) it may be expected that a reasonable person in the company's circumstances would not
have entered into the transaction, having regard to:
(i) the benefits (if any) to the company of entering into the transaction; and
(ii) the detriment to the company of entering into the transaction; and
(iii) the respective benefits to other parties to the transaction of entering into it; and
(iv) any other relevant matter.

588FD Unfair loans to a company
(1) A loan to a company is unfair if, and only if:
(a) the interest on the loan was extortionate when the loan was made, or has since
become extortionate because of a variation; or
(b) the charges in relation to the loan were extortionate when the loan was made, or
have since become extortionate because of a variation;
even if the interest is, or the charges are, no longer extortionate.
(2) In determining:
(a) whether interest on a loan was or became extortionate at a particular time as
mentioned in paragraph (1)(a); or
(b) whether charges in relation to a loan were or became extortionate at a particular
time as mentioned in paragraph (1)(b);
regard is to be had to the following matters as at that time:
(c) the risk to which the lender was exposed; and


(d) the value of any security in respect of the loan; and
(e) the term of the loan; and
(f) the schedule for payments of interest and charges and for repayments of
principal; and
(g) the amount of the loan; and
(h) any other relevant matter.

Step 2: Was the transaction an insolvent transaction? (Applies to unfair and uncommercial
transactions only)
588FC Insolvent transactions
A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair
preference given by the company, or an uncommercial transaction of the company, and:
(a) any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into; or
(ii) an act is done, or an omission is made, for the purpose of giving effect to the
transaction; or
(b) the company becomes insolvent because of, or because of matters including:
(i) entering into the transaction; or
(ii) a person doing an act, or making an omission, for the purpose of giving effect to
the transaction.

588E Presumptions to be made in recovery proceedings
(1) In this section: "recovery proceeding" , in relation to a company, means:
(a) an application under section 588FF by the company's liquidator; or
(3) If:
(a) the company is being wound up; and
(b) it is proved, or because of subsection (4) or (8) it must be presumed, that the company
was insolvent at a particular time during the 12 months ending on the relation-back day;
it must be presumed that the company was insolvent throughout the period beginning at that time
and ending on that day.
(4) Subject to subsections (5) to (7), if it is proved that the company:
(a) has failed to keep financial records in relation to a period as required by subsection
286(1); or
(b) has failed to retain financial records in relation to a period for the 7 years required by


subsection 286(2);
the company is to be presumed to have been insolvent throughout the period.

Step 3: Was the transaction within the relevant period?
588FA Unfair preferences
Circumstance Relevant period for transaction
Ordinary 588FE(2)(b)An unfair preference which is an insolvent transaction is
voidable if entered into (i) 6 months before the relation-back day; or (ii) any
time after that day
Related Party 588FE(4)(a)An unfair preference which is an insolvent transaction is
voidable if entered into with (b) a related party (c) during the 4 years before
the relation-back day
Purpose of defeating,
delaying, or
interfering with, the
rights of any or all of
its creditors
588FE(5)(a)An unfair preference which is an insolvent transaction (b)
defeating, delaying, or interfering with, the rights of any or all of its
creditors is voidable when occurring (c) during 10 years ending on the
relation-back day

588FB Uncommercial transactions
Ordinary 588FE(3)(a)An uncommercial transaction which is an insolvent
transaction is voidable if: (b) entered into during the 2 years before the
relation-back day; or

588FE(2)(b)(ii)any time after the relation-back day.
Related Party 588FE(4)(a)An uncommercial transaction which is an insolvent
transaction is voidable if entered into with (b) a related party (c) during the
4 years before the relation-back day
Purpose of defeating,
delaying, or
interfering with, the
rights of any or all of
its creditors
588FE(5)(a)An uncommercial transaction which is an insolvent
transaction (b) defeating, delaying, or interfering with, the rights of any or
all of its creditors is voidable when occurring (c) during 10 years ending on
the relation-back day

588FDA Unreasonable director-related transactions
Ordinary 588FE(6A)(b)(i) during the 4 years ending on the relation-back day; or (ii)
after that day but before winding up.

588FD Unfair loans to a company
Ordinary 588FE (6) The transaction is voidable if it is an unfair loan to the company


made at any time on or before the day when the winding up began.

Relation-back day:
9 Dictionary
"relation-back day", in relation to a winding up of a company or Part 5.7 body, means:
(a) if, because of Division 1A of Part 5.6, the winding up is taken to have begun on the day
when an order that the company or body be wound up was madethe day on which the
application for the order was filed; or
(b) otherwisethe day on which the winding up is taken because of Division 1A of Part 5.6
to have begun.

513A Winding up ordered by the Court
If the Court orders under section 233, 459A, 459B or 461 that a company be wound up, the winding
up is taken to have begun or commenced:
(a) if, when the order was made, a winding up of the company was already in progress--
when the last-mentioned winding up is taken because of this Division to have begun or
commenced; or
(b) if, immediately before the order was made, the company was under administration--on
the section 513C day in relation to the administration; or
(c) if:
(i) when the order was made, a provisional liquidator of the company was acting;
and
(ii) immediately before the provisional liquidator was appointed, the company was
under administration;
on the section 513C day in relation to the administration; or
(d) if, immediately before the order was made, a deed of company arrangement had been
executed by the company and had not yet terminated--on the section 513C day in relation to
the administration that ended when the deed was executed; or
(e) otherwise--on the day when the order was made.

Step 4: What orders may be made?
588FF Courts may make orders about voidable transactions
(1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the
company is voidable because of section 588FE, the court may make one or more of the following
orders:
(a) an order directing a person to pay to the company an amount equal to some or all of the
money that the company has paid under the transaction;


(b) an order directing a person to transfer to the company property that the company has
transferred under the transaction;
(c) an order requiring a person to pay to the company an amount that, in the court's opinion,
fairly represents some or all of the benefits that the person has received because of the
transaction;
(d) an order requiring a person to transfer to the company property that, in the court's
opinion, fairly represents the application of either or both of the following:
(i) money that the company has paid under the transaction;
(ii) proceeds of property that the company has transferred under the transaction;
(e) an order releasing or discharging, wholly or partly, a debt incurred, or a security or
guarantee given, by the company under or in connection with the transaction;
(f) if the transaction is an unfair loan and such a debt, security or guarantee has been
assigned--an order directing a person to indemnify the company in respect of some or all of
its liability to the assignee;
(g) an order providing for the extent to which, and the terms on which, a debt that arose
under, or was released or discharged to any extent by or under, the transaction may be
proved in a winding up of the company;
(h) an order declaring an agreement constituting, forming part of, or relating to, the
transaction, or specified provisions of such an agreement, to have been void at and after the
time when the agreement was made, or at and after a specified later time;
(i) an order varying such an agreement as specified in the order and, if the Court thinks fit,
declaring the agreement to have had effect, as so varied, at and after the time when the
agreement was made, or at and after a specified later time;
(j) an order declaring such an agreement, or specified provisions of such an agreement, to be
unenforceable.
(3) An application under subsection (1) may only be made:
(a) during the period beginning on the relation-back day and ending:
(i) 3 years after the relation-back day; or
(ii) 12 months after the first appointment of a liquidator in relation to the winding
up of the company;
whichever is the later; or
(b) within such longer period as the Court orders on an application under this paragraph
made by the liquidator during the paragraph (a) period.

Step 5: Can the voidable transaction be defended?
588FG Transaction not voidable as against certain persons
[THIRD PARTIES] (1) A court is not to make under section 588FF an order materially prejudicing a
right or interest of a person other than a party to the transaction if it is proved that:


(a) the person received no benefit because of the transaction; or
(b) in relation to each benefit that the person received because of the transaction:
(i) the person received the benefit in good faith; and
(ii) at the time when the person received the benefit:
(A) the person had no reasonable grounds for suspecting that the company
was insolvent at that time or would become insolvent as mentioned in
paragraph 588FC(b); and
(B) a reasonable person in the person's circumstances would have had no
such grounds for so suspecting.
[RECIPIENT PARTY] (2) A court is not to make under section 588FF an order materially prejudicing a
right or interest of a person if the transaction is not an unfair loan to the company, or an
unreasonable director-related transaction of the company, and it is proved that:
(a) the person became a party to the transaction in good faith; and
(b) at the time when the person became such a party:
(i) the person had no reasonable grounds for suspecting that the company was
insolvent at that time or would become insolvent as mentioned in paragraph
588FC(b); and
(ii) a reasonable person in the person's circumstances would have had no such
grounds for so suspecting; and
(c) the person has provided valuable consideration under the transaction or has changed his,
her or its position in reliance on the transaction.

5. Order of Priority
555 Debts and claims proved to rank equally except as otherwise provided
Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally
and, if the property of the company is insufficient to meet them in full, they must be paid
proportionately.

Rank Item Section
1 Expenses of liquidation in preserving, realising or getting in property of
the company, or in carrying on the company's business
655(1)(a)
2 If the Court ordered the winding upnext, the costs in respect of the
application for the order
655(1)(b)
3 Costs for liquidation order if administration ordered then liquidation
begun
655(1)(ba)
4 Certain expenses of an administrator 655(1)(c)
5 Costs of producing accounts and reports for liquidator 655(1)(da)
(db)
6 Other deferred expenses 655(1)( dd)
(df)


7 Wages, superannuation contributions and superannuation guarantee
charge payable by the company in respect of services rendered to the
company by employees before the relevant date

The amount or total paid under paragraph (1)(e) to, or in respect of, an
excluded employee of the company must be such that so much (if any)
of it as is attributable to non-priority days does not exceed $2,000.

"excluded employee" , in relation to a company, means:
(a) an employee of the company who has been:
(i) at any time during the period of 12 months ending
on the relevant date; or
(ii) at any time since the relevant date;
or who is, a director of the company;
(b) an employee of the company who has been:
(i) at any time during the period of 12 months ending
on the relevant date; or
(ii) at any time since the relevant date;
or who is, the spouse of an employee of the kind
referred to in paragraph (a); or
(c) an employee of the company who is a relative (other than a
spouse) of an employee of the kind referred to in paragraph (a).
655(1)(e)

655(1A)

655(2)
8 Amounts due in respect of injury compensation, being compensation
the liability for which arose before the relevant date;
655(1)(f)
9 All amounts due in respect of, employees of the company in respect of
leave of absence
655(1)(g)
10 retrenchment payments payable to employees of the company

"retrenchment payment" , in relation to an employee of a company,
means an amount payable by the company to the employee, by virtue
of an industrial instrument, in respect of the termination of the
employee's employment by the company, whether the amount
becomes payable before, on or after the relevant date.
655(1)(h)

655(2)
11 The above debts and claims must be paid in priority to all other
unsecured debts and claims
655(1)
12 Deferred creditors
13 Debts owed to persons in their capacity as members of the company

"subordinate claim" means:
(a) a claim for a debt owed by the company to a person in the
person's capacity as a member of the company (whether by
way of dividends, profits or otherwise); or
563A(1)

563A(1)


(b) any other claim that arises from buying, holding, selling or
otherwise dealing in shares in the company.
14 Remained paid to members in accordance with the rights attaching to
the various classes of shares (if applicable)

Protection of employee entitlements:
596AB Entering into agreements or transactions to avoid employee entitlements
[It is a criminal offence for a person to enter into an agreement or transaction with the intention of
either preventing the recovery of employee entitlements or of significantly reducing the amount of
entitlements which can be recovered.]

596AC Person who contravenes section 596AB liable to compensate for loss
[A person who contravenes s 596AB can also be ordered to pay compensation even if the criminal
case is not made out provided loss is proved on the balance of probabilities.]

General Employee Entitlements Redundancy Scheme

6. Deregistration
601AA Deregistrationvoluntary

601AB DeregistrationASIC initiated

601AC Deregistrationfollowing amalgamation or winding up

601AH Reinstatement

C. Receivership
1. Powers of the Receiver and Appointment
420 Powers of receiver
(1) Subject to this section, a receiver of property of a corporation has power to do, in Australia and
elsewhere, all things necessary or convenient to be done for or in connection with, or as incidental
to, the attainment of the objectives for which the receiver was appointed.
(2) Without limiting the generality of subsection (1), but subject to any provision of the court order
by which, or the instrument under which, the receiver was appointed, being a provision that limits
the receiver's powers in any way, a receiver of property of a corporation has, in addition to any
powers conferred by that order or instrument, as the case may be, or by any other law, power, for
the purpose of attaining the objectives for which the receiver was appointed:
(a) to enter into possession and take control of property of the corporation in accordance


with the terms of that order or instrument; and
(b) to lease, let on hire or dispose of property of the corporation; and
(c) to grant options over property of the corporation on such conditions as the receiver
thinks fit; and
(d) to borrow money on the security of property of the corporation; and
(e) to insure property of the corporation; and
(f) to repair, renew or enlarge property of the corporation; and
(g) to convert property of the corporation into money; and
(h) to carry on any business of the corporation; and
(j) to take on lease or on hire, or to acquire, any property necessary or convenient in
connection with the carrying on of a business of the corporation; and
(k) to execute any document, bring or defend any proceedings or do any other act or thing in
the name of and on behalf of the corporation; and
(m) to draw, accept, make and indorse a bill of exchange or promissory note; and
(n) to use a seal of the corporation; and
(o) to engage or discharge employees on behalf of the corporation; and
(p) to appoint a solicitor, accountant or other professionally qualified person to assist the
receiver; and
(q) to appoint an agent to do any business that the receiver is unable to do, or that it is
unreasonable to expect the receiver to do, in person; and
(r) where a debt or liability is owed to the corporation--to prove the debt or liability in a
bankruptcy, insolvency or winding up and, in connection therewith, to receive dividends and
to assent to a proposal for a composition or a scheme of arrangement; and
(s) if the receiver was appointed under an instrument that created a security interest in
uncalled share capital of the corporation:
(i) to make a call in the name of the corporation for the payment of money unpaid
on the corporation's shares; or
(ii) on giving a proper indemnity to a liquidator of the corporation--to make a call in
the liquidator's name for the payment of money unpaid on the corporation's shares;
and
(t) to enforce payment of any call that is due and unpaid, whether the calls were made by
the receiver or otherwise; and
(u) to make or defend an application for the winding up of the corporation; and
(w) to refer to arbitration any question affecting the corporation.

Appointment:


(1) Most commonly appointed by a secured creditor who wishes to enforce their security under
the security instrument;
(2) Under s 1323(1)(h) in the course of an ASIC investigation;
(3) Under s 233 as a remedy for oppressionwhere a minority shareholder makes a successful
application.

2. Receivers Duties
Duties relating to the sale of assets:
420A Controller's duty of care in exercising power of sale
(1) In exercising a power of sale in respect of property of a corporation, a controller must take all
reasonable care to sell the property for:
(a) if, when it is sold, it has a market valuenot less than that market value; or
(b) otherwisethe best price that is reasonably obtainable, having regard to the
circumstances existing when the property is sold.
(2) Nothing in subsection (1) limits the generality of anything in section 180, 181, 182, 183 or 184.
NOTE: These duties require advertising, and possibly selling assets collectively or separately.
Other duties owed:
To the Creditor:
Under the laws of contract, tort and fiduciary principles the receiver owes duties to the secured
creditor who appointed them.
To the Company:
The receiver also owes fiduciary duties to the company.
Receiver is also an officer of the company under s 9 and therefore owes statutory duties.

Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676
HELD: The receiver is also required by equity to exercise their powers not only in the interest of
their appointor, but also in good faith in the interests of the company. The receiver should study
the market, sell goods separately, and sell in a way that is efficient. There is no power to
postpone a sale with the hope that market prices will rise.

Liabilities of the receiver:
Breach of duties (general law and statute);
Invalid appointmentpotential liability for trespass (418A receiver can apply for validation of
receivership);
Some contracts created before the receivership;
Contracts created during the receivership.
A receiver is an agent of the company, usually because of provisions in the loan agreement
the company is responsible for the acts and omissions of the receiver.
The receiver is entitled to indemnity out of companys assets for liabilities properly incurred.
NOTE: Receivers are generally indemnified by the creditor appointor.


3. Priority of Receiver
Before a receiver can appropriate the proceeds of the assets which were subject to a circulating
security interest, the receiver must pay certain creditors who have preferential rights ahead of a
circulating security interest (principally employee rights under 556(1)(e), (g) and (h)).
Failure to pay in the correct order will amount to the tort of breach of statutory duty.
Liquidator must stand aside for receiver to satisfy the claim of the secured creditor, who can also
be appointed to a company despite the fact that it is in liquidation.

D. Administration
435A Object of Part
The object of this Part is to provide for the business, property and affairs of an insolvent company to
be administered in a way that:
(a) maximises the chances of the company, or as much as possible of its business, continuing
in existence; or
(b) if it is not possible for the company or its business to continue in existence--results in a
better return for the company's creditors and members than would result from an
immediate winding up of the company.

1. Entering Administration
435C When administration begins and ends
(1) The administration of a company:
(a) begins when an administrator of the company is appointed under section 436A, 436B or
436C;

Entrance by company:
436A Company may appoint administrator if board thinks it is or will become insolvent
(1) A company may, by writing, appoint an administrator of the company if the board has resolved to
the effect that:
(a) in the opinion of the directors voting for the resolution, the company is insolvent, or is
likely to become insolvent at some future time; and
(b) an administrator of the company should be appointed.
(2) Subsection (1) does not apply to a company if a person holds an appointment as liquidator, or
provisional liquidator, of the company.

Entrance by liquidator:
436B Liquidator may appoint administrator
(1) A liquidator or provisional liquidator of a company may by writing appoint an administrator of
the company if he or she thinks that the company is insolvent, or is likely to become insolvent at


some future time.

Entrance by creditor:
436C Secured party may appoint administrator
(1) A person who is entitled to enforce a security interest in the whole, or substantially the whole, of
a company's property may by writing appoint an administrator of the company if the security
interest has become, and is still, enforceable.

2. Assuming Control
437A Role of administrator
(1) While a company is under administration, the administrator:
(a) has control of the company's business, property and affairs; and
(b) may carry on that business and manage that property and those affairs; and
(c) may terminate or dispose of all or part of that business, and may dispose of any of that
property; and
(d) may perform any function, and exercise any power, that the company or any of its
officers could perform or exercise if the company were not under administration.

437B Administrator acts as company's agent
When performing a function, or exercising a power, as administrator of a company under
administration, the administrator is taken to be acting as the company's agent.

437C Powers of other officers suspended
(1) While a company is under administration, a person (other than the administrator) cannot
perform or exercise, and must not purport to perform or exercise, a function or power as an officer
or provisional liquidator of the company.
(1A) Subsection (1) does not apply to the extent that the performance or exercise, or purported
performance or exercise, is with the administrator's written approval.

442C When administrator may dispose of encumbered property
(1) The administrator of a company under administration or of a deed of company arrangement
must not dispose of:
(a) property of the company that is subject to a security interest; or
(b) property (other than PPSA retention of title property) that is used or occupied by, or is in
the possession of, the company but of which someone else is the owner or lessor.


440D Stay of proceedings
(1) During the administration of a company, a proceeding in a court against the company or in
relation to any of its property cannot be begun or proceeded with, except:
(a) with the administrator's written consent; or
(b) with the leave of the Court and in accordance with such terms (if any) as the Court
imposes.

436E Purpose and timing of first meeting of creditors
(2) The meeting must be held within 8 business days after the administration begins.
(4) At the meeting, the company's creditors may also pass a resolution:
(a) removing the administrator from office; and
(b) appointing someone else as administrator of the company.

3. Enforcement of Charges under Administration
440B Restrictions on exercise of third party property rights
[Charges are unenforceable against the company except with the consent of the administrator or
with the leave of the court.]
[Owners and lessors of property used by the company cannot take possession or otherwise recover
the property without the administrators written consent or the leave of the court.]

441A Secured party acts before or during decision period
[A secured creditor with a security interest in the whole, or substantially the whole, of the business
has a decision period of 13 business days to enforce security after appointment of administrator.]

441C Security interest in perishable property
[A secured creditor with security over perishable goods may enforce a charge despite the
appointment of an administrator.]

441B Where enforcement of security interest begins before administration
[A security interest enforced prior to administration may continue to be enforced after the
administration has begun.]


441F Where recovery of property begins before administration
[Owners and lessors who commence enforcement of rights before commencement of
administration may continue to enforce those rights.]

440J Administration not to trigger liability of director or relative under guarantee of company's
liability
[Personal guarantees from directors et cetera in respect of the companys liability may not be
enforced during administration]

4. Investigation of Affairs (Division 4Administrator investigates company's affairs)
38A Administrator to investigate affairs and consider possible courses of action
As soon as practicable after the administration of a company begins, the administrator must:
(a) investigate the company's business, property, affairs and financial circumstances; and
(b) form an opinion about each of the following matters:
(i) whether it would be in the interests of the company's creditors for the company
to execute a deed of company arrangement;
(ii) whether it would be in the creditors' interests for the administration to end;
(iii) whether it would be in the creditors' interests for the company to be wound up.

438B Directors to help administrator
(1) As soon as practicable after the administration of a company begins, each director must:
(a) deliver to the administrator all books in the director's possession that relate to the
company, other than books that the director is entitled, as against the company and the
administrator, to retain; and
(b) if the director knows where other books relating to the company are--tell the
administrator where those books are.
(2) Within 5 business days after the administration of a company begins or such longer period as the
administrator allows, the directors must give to the administrator a statement about the company's
business, property, affairs and financial circumstances.

438D Reports by administrator
[Administrator should report offences, misappropriation and breaches of duty to ASIC]


5. Decision Making Stage (Division 5Meeting of creditors decides company's future)
439A Administrator to convene meeting and inform creditors
(1) The administrator of a company under administration must convene a meeting of the company's
creditors within [20 business days] or extended under subsection (6).
(4) The notice given to a creditor under paragraph (3)(a) must be accompanied by a copy of:
(a) a report by the administrator about the company's business, property, affairs and
financial circumstances; and
(b) a statement setting out the administrator's opinion about each of the following matters:
(i) whether it would be in the creditors' interests for the company to execute a deed
of company arrangement;
(ii) whether it would be in the creditors' interests for the administration to end;
(iii) whether it would be in the creditors' interests for the company to be wound up;
and also setting out:
(iv) his or her reasons for those opinions; and
(v) such other information known to the administrator as will enable the creditors to
make an informed decision about each matter covered by subparagraph (i), (ii) or
(iii); and
(c) if a deed of company arrangement is proposed--a statement setting out details of the
proposed deed.

439C What creditors may decide
At a meeting convened under section 439A, the creditors may resolve:
(a) that the company execute a deed of company arrangement specified in the resolution
(even if it differs from the proposed deed (if any) details of which accompanied the notice of
meeting); or
(b) that the administration should end; or
(c) that the company be wound up.

Voting Procedure:
Corporations Regulations 2001 (Cth)
5.6.19 Voting on resolutions
(1) A resolution put to the vote of a meeting must be decided on the voices [show of hands] unless,
subject to subregulation (5), a poll is demanded, before or on the declaration of the result of the
voices *+.


Corporations Regulations 2001 (Cth)
5.6.21 Carrying of resolutions after a poll has been demanded at a meeting of creditors
(2) A resolution is carried if:

(a) a majority of the creditors voting (whether in person, by attorney or by proxy) vote in
favour of the resolution; and
(b) the value of the debts owed by the corporation to those voting in favour of the
resolution is more than half the total debts owed to all the creditors voting (whether in
person, by proxy or by attorney).

6. Entering a Deed of Company Arrangement (Division 10Execution and effect of deed of
company arrangement)
444A Effect of creditors' resolution
(1) This section applies where, at a meeting convened under section 439A, a company's creditors
resolve that the company execute a deed of company arrangement.
(2) The administrator of the company is to be the administrator of the deed, unless the creditors, by
resolution passed at the meeting, appoint someone else to be administrator of the deed.
(3) The administrator of the company must prepare an instrument setting out the terms of the deed.
(4) The instrument must also specify the following:
(a) the administrator of the deed;
(b) the property of the company (whether or not already owned by the company when it
executes the deed) that is to be available to pay creditors' claims;
(c) the nature and duration of any moratorium period for which the deed provides;
(d) to what extent the company is to be released from its debts;
(e) the conditions (if any) for the deed to come into operation;
(f) the conditions (if any) for the deed to continue in operation;
(g) the circumstances in which the deed terminates;
(h) the order in which proceeds of realising the property referred to in paragraph (b) are to
be distributed among creditors bound by the deed;
(i) the day (not later than the day when the administration began) on or before which claims
must have arisen if they are to be admissible under the deed.
(5) The instrument is taken to include the prescribed provisions, except so far as it provides
otherwise.
NOTE: If company fails to execute the deed within the 15 business days after the creditors
meeting required by 444B(2)(a), the company is deemed to be in creditors voluntary winding
up, s 446A(1)(b), unless it has applied for an extension: s 444B(2)(b).


NOTE: The deed contains the arrangements made between the company and its creditors at the
second meeting, for example:
Debt compromise;
Repayment schedule;
Debt converted into equity;
Creditors to supervise management.
444G Effect of deed on company, officers and members
A deed of company arrangement also binds:
(a) the company; and
(b) its officers and members; and
(c) the deed's administrator.
NOTE: Secured creditors are free to realise their security under s 444D, subject to 444F (Court
may limit rights of secured creditor or owner or lessor).
7. Variation of Deed (Division 11Variation, termination and avoidance of deed)

445C When deed terminates
A deed of company arrangement terminates when:
(a) the Court makes under section 445D an order terminating the deed; or
(b) the company's creditors pass a resolution terminating the deed at a meeting that was
convened under section 445F by a notice setting out the proposed resolution; or
(c) if the deed specifies circumstances in which it is to terminate--those circumstances exist;
or
(d) the administrator of the deed executes a notice of termination of the deed in accordance
with section 445FA;
whichever happens first.

445H Effect of termination or avoidance
The termination or avoidance, in whole or in part, of a deed of company arrangement does not
affect the previous operation of the deed.

Actions by Creditors:
445F Meeting of creditors to consider proposed variation or termination of deed

445A Variation of deed by creditors
A deed of company arrangement may be varied by a resolution passed at a meeting of the


company's creditors convened under section 445F, but only if the variation is not materially different
from a proposed variation set out in the notice of the meeting.

445CA When creditors may terminate deed
The creditors are not entitled to pass a resolution under paragraph 445C(b) unless:
(a) there has been a breach of the deed; and
(b) the breach has not been rectified before the resolution is passed.

445E Creditors may terminate deed and resolve that company be wound up

445B Court may cancel variation

445FA Notice of termination of deed
[Where deed has been administrated fully.]

Action by Court:
445D When Court may terminate deed
(1) The Court may make an order terminating a deed of company arrangement if satisfied that:
(a) information about the company's business, property, affairs or financial circumstances
that:
(i) was false or misleading; and
(ii) can reasonably be expected to have been material to creditors of the company in
deciding whether to vote in favour of the resolution that the company execute the
deed;
was given to the administrator of the company or to such creditors; or
(b) such information was contained in a report or statement under subsection 439A(4) that
accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a report or statement and the omission can reasonably
be expected to have been material to such creditors in so deciding; or
(d) there has been a material contravention of the deed by a person bound by the deed; or
(e) effect cannot be given to the deed without injustice or undue delay; or
(f) the deed or a provision of it is, an act or omission done or made under the deed was, or
an act or omission proposed to be so done or made would be:
(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or


more such creditors; or
(ii) contrary to the interests of the creditors of the company as a whole; or
(g) the deed should be terminated for some other reason.
(2) An order may be made on the application of:
(a) a creditor of the company; or
(b) the company; or
(ba) ASIC; or
(c) any other interested person.

600A Powers of Court where outcome of voting at creditors' meeting determined by related entity
[The court has power to make an order where a vote determined by particular related creditors and
contrary to creditor interests.]

447A General power to make orders
(1) The Court may make such order as it thinks appropriate about how this Part is to operate in
relation to a particular company.
(2) For example, if the Court is satisfied that the administration of a company should end:
(a) because the company is solvent; or
(b) because provisions of this Part are being abused; or
(c) for some other reason;
the Court may order under subsection (1) that the administration is to end.
(3) An order may be made subject to conditions.
(4) An order may be made on the application of:
(a) the company; or
(b) a creditor of the company; or
(c) in the case of a company under administration--the administrator of the company; or
(d) in the case of a company that has executed a deed of company arrangement--the deed's
administrator; or
(e) ASIC; or
(f) any other interested person.

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