Corps Revision Lecture LSS Tutorials. Overview Intro: Formation/Types of Company/Corporate veil/BoD/GM Directors’ duties: DCSD Insolvent trading.

Corps Revision Lecture

LSS Tutorials

Overview Intro: Formation/Types of Company/Corporate veil/BoD/GM Directors’ duties:

DCSD Insolvent trading BF/GF/proper purpose Director must not fetter discretions Conflicts

Related party transactions Financial assistance Consequences of breach/relief from liability Remedies

Derivative/personal actions Oppression

Continuous disclosure requirements

Piercing corporate veil

Insolvent trading s588v-g

Financial assistance s260A

Corporate contracting

3P/company s180-DCSD-business judgment rule-reliance-delegation

S181-GF/proper purpose-collateral purposes?

Conflicts s9, s182/183/191/195, member approval, financial benefit s229

Related party s228/50AA

Directors

SDA s236/s237

Oppression s232/233

Injunction

Winding up

Remedies

Problem Solving 1. Who are the parties and in what capacity can

we advise them?1. Director, officer, shareholder, corporation,

holding co, ASIC, creditors, liquidator, employees

2. What is their complaint?3. Legal issue: breach? 4. Resolve5. Remedies

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

Directors’ duties questions 1. Intro

1. Parties?2. Grievance?

2. Breach of directors duties (analysis)3. Defences/presumptions 4. Consequences of breach/relief from liability5. Remedies

Duty of DCSD s180(1) CL/equity/statute? S180(1) X as a director or other officer, must exercise their powers and

discharge their duties with the degree of care and diligence that RP would exercise if they Were a director or officer of a corp in the corp’s circumstances; and Occupied the office held by, and had the same responsibilities within the corp as X

What would a RP in [D’s] position with [D’s] knowledge and experience, exercising [D’s] responsibility, in that type of company, have done? Daniels; Wheeler (objective test) Size of company? What experience and skills did the director hold himself out to have?

The court in Daniels discussed the following factors: Continuing obligation to keep informed about the company’s business Must generally monitor corporate affairs, policies Familiar with financial status Attend company meetings; bring informed independent judgment to bear on

matters Can’t hide behind duty of confidentiality to one company to avoid obligations to

another

DCSD: defences/presumptions Delegation of powers s190

s198D allows director to delegate powers Director responsible for exercise of power by delegate s190(1) Director not liable if reasonably believed delegate reliable/

competent s190(2) Santow J in Adler factors

Reliance on information and advice from others s189 Reliance presumed reasonable if matter relied upon is within

professional competence; in good faith; Director made independent assessment

Statutory business judgment rule s180(2), (3) Charterbridge Corp v Lloyds Bank Business judgment: any decision to take or not take action in

respect of a matter relevant to the business operations of the corporation s180(3)

S180(2)

DCSD: policy? AWA case p181

Diligence and reliance Executive vs non-executive directors

Rogers CJ Clarke & Sheller JJA

Duty to prevent insolvent trading

Duty holding company to prevent subsidiary company trading while insolvent Div 5

s588V

Holding co liability Duty directors

to prevent insolvent trading Div 3

s588G

Director liability

Insolvent trading1. Does the applicant have standing?

1. Unsecured creditor 2. ASIC3. Liquidator

2. Unsecured creditor – personal claim for debt – is there a HC/SUB relationship s588V?

3. If no HC/SUB relationship – can we find a director liable? s588G

Holding co liability for insolvent trading X can seek compensation from holding co if

can prove company (holding co) contravened s588V

1. Corporation is a holding co of subsidiary s46

2. Subsidiary is insolvent/becomes insolvent by incurring a debt

s95A definition insolvent not being able to pay debts as they fall due

3. Reasonable grounds to suspect the subsidiary is or would be insolvent

Director liability for insolvent trading Directors of co may be liable for debts of co if they permit co to trade while

insolvent s588G Director will be liable for debts of co if:1. Person is director (or shadow director) at the time the debt incurred AND2. Co trades while insolvent AND3. There were reasonable grounds for questioning co solvency or that it

would become insolvent when the debt was incurred AND4. Director was aware that there were grounds for suspecting or a

reasonable person in the position of the director would have been aware of insolvency under test s95A

1. QLD Bacon v Rees2. ASIC v Plymin

Defences s588H1. Expect solvency 2. Reasonable reliance3. Illness4. Director took all reasonable steps to prevent co incurring debt

Consequences of breach

Insolvent trading: policy? Deterring directors from taking business risks Creditor protection Balance between protecting creditors vs

entrepreneurial activity by directors P.61-62 Boros & Duns

Duty of good faith/proper purpose Equity/statutory duty S181(1) a director or other officer must exercise

powers and discharge duties: In good faith in the best interests of the corp; and For a proper purpose

Company’s best interests = shareholders’ best interests EXCEPT: when company is approaching insolvency

creditors best interests (Kinsela) Does not include individual SH interests EXCEPT if it’s a

special fact fiduciary relationship (Coleman v Myers) No special obligation to consider employees (Parke v

Daily News) Corporate group s187?

Duty of good faith/proper purpose cont. Proper purpose? 2 step test: (Howard Smith)

1. What is the legal purpose of the company giving the director the power? (question of law)

2. What is the actual reason that the directors exercised the power? (question of fact)

List potential purposes Courts have 2 different tests (do both):

1. Substantial purpose test (Howard Smith)2. ‘But for’ test (Whitehouse)

Director must not fetter discretions Director retains discretion if makes decision

based on his own judgment and what’s in the best interests of the co

Breach: if director promises always to follow the directions of another person

Thorby

Duty to prevent conflict s182, 183 Duty not to profit from the [position/use of information]

s182/183 Statute broader than fiduciary/equity as it applies to all

employees Advantage extends beyond gains made by the officer to

gains made by 3P Use of position s182

Officer must not improperly use their position to Gain advantage for themselves or someone else; or Cause detriment to the corp

Use of information s183 person who obtains info because they are or have been an

officer must not improperly use information to Gain advantage for themselves or someone else; or Cause detriment to the corp

Related party transactions (public co only) s207/208 Member approval is required for decisions to

give financial benefits to related parties that could endanger SH interests

1. Is the entity a related party? Note: broad definition of related entity

2. Is there a financial benefit? S229 3. Does it fall under an exempt transaction?

S210-2164. If no exceptions apply, must seek member

approval… 5. Disclosure 6. Consequences: civil penalties

Financial assistance s260A ASIC v Adler – Santow J – focus on prejudicial

impact on creditors/SH

Consequences of breach/relief from liability Civil penalty s1317E Criminal penalty Relief/indemnification of directors

Relief by court s1317S, s1318 Ratification at GM

Full and frank disclosure of all material facts to GM + approval 75%: Winthrop Investments v Winns

Indemnification s199A Insurance s199B

Remedies SDA Injunction Oppression Winding up

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

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