Insolvency and Liquidation of Companies

This assignment provides an in-depth examination of company insolvency and liquidation, covering topics such as indicators of insolvency, directors' duties to prevent insolvent trading, and consequences for breaching section 588. It also discusses alternative arrangements prior to liquidation, including receivership, voluntary administration, and deed of arrangement.

LAW20004- Company Law
Week 1:
• Outline the historical development of corporations law in
Australia
The name corporation is derived from the Latin word corpus, meaning body.
➢ A corporation is a body of persons but with its own legal identity and long-
term existence and ownership of property separate from and beyond the life of
any individual.
➢ Australia was initially comprised of six separate British colonies; each with
their own parliament and law-making powers. Each colony's set of laws were
based on the Companies Act 1862 (UK).
➢ In 1901 the colonies agreed to unite into a federation of states to form the
nation of Australia. Even so, each state still controlled its own corporations
law. For a long time companies had to register separately in each state and
each state had its own stock exchange.
➢ The Corporations Act 2001 reinstated the jurisdiction of the Federal Court
resulting in one centralised set of laws for the whole of Australia. This has
been essential in providing a consistent environment for Australian businesses
to function within.
➢ The Corporations Act makes a formal distinction between ownership and
control of companies.
➢ The corporation Act and company constitutions give shareholders significant
rights.
• Explain the key milestones that contributed to the development of
company law in Australia
• Federation of Australia
• Corporations Act (2001) (Links to an external site.)Links to an external
site.2
• Australian Securities and Investments Commission (Links to an
external site.)Links to an external site. (ASIC; pp. 10–14)3
• The takeovers panel (Links to an external site.)Links to an external
site. (pp.15-16)4
• Australian Securities Exchange (Links to an external site.)Links to an
external site. (ASX; pp. 14-15)5
• Australian Prudential Regulation Authority (Links to an external
site.)Links to an external site. (APRA)6
• Australian Accounting Standards Board (Links to an external
site.)Links to an external site. (AASB; p. 17)7
• Financial regulation (pp. 16–18)
• Describe the essential characteristics of a company.

• Companies come in all shapes and sizes, from your local small business to
large multinational corporations. They may exist for an extensive range of
purposes, have a variety of shareholders, undertake differing activities and
have variable employee numbers.
• Even so, all companies have some essential core characteristics.
• The modern limited liability company has shaped the way that modern society
functions.
• It allows for the pooling of large sums of capital from investors who buy
shares, for use by entrepreneurs and managers to develop businesses.
• These businesses are the main drivers of employment and wealth in our
society.
• The limited liability company (pp. 29-32)
• The company as a separate legal entity (pp. 33-39)
• Application to subsidiaries (pp. 39–41)
• The corporate 'veil' (pp. 41-42)
• How statute law allows the 'veil' to be lifted (pp. 42-46)
WEEK 2:
1. Understand the differences between different company types.
2. Understand what the company constitution is.
3. Be aware that a constitution with an objects clause, memorandum of
association and articles of association has not been required since 1988.
4. Understand what replaceable rules are. Understand the nature of the ‘contract’
that they create.
5. Understand how replaceable rules can be changed.
Public and Private Companies:
The Corporations Act (2001) makes a distinction between a public company and a
private company (known as a Proprietary Limited company - Pty Ltd). There are strict
requirements for public companies. The act requires all companies to be registered
with ASIC and keep a registered business office.
Public Companies Private Companies
Public companies must be listed on the
stock exchange (ASX) - a licensed
public market - where shares are issued
for sale to the public.
Private companies are not listed on the
stock exchange. They must not engage in
public fundraising – s113(3)

What types of companies operate in Australia?
• Characteristics of public and private companies (pp. 85-92)
The Corporations act imposes greater disclosure obligations on public companies
because they may raise money from large numbers of people. Family run businesses
are usually able to raise funds from their own internal sources or from lenders.
Both public and private must have at least 1 member s114. Section 113 specifies 50 as
the maximum number of non-employee shareholders of a private company. Public has
no limit.
Private companies are prohibited by s113(3) from engaging in any activity that would
require disclosure to investors under Ch6D. this means that private companies cannot
raise funds by offering its shares or debentures to a large number of people. Public
companies that wish to issue shares, debentures or other securities must comply with
the fundraising provisions CH 6D.
• Companies limited by shares (pp. 80-81)
Most common type of company. A company limited by shares is defined in s9 as a
company formed on the principle of having the liability of its members limited to the
amount, if any, unpaid on the shares respectively held by them.
Public companies must comply with
ASX listing rules – s793C (regular
disclosures).
Private companies are not required to
prepare annual reports and audits (unless
the members request otherwise – s292
but they must still prepare profit and loss
statements
Public companies must hold an Annual
General Meeting (AGM) and publish an
Annual Report for members with a
statement of audited Financial Accounts
s301
Private companies do not have to hold
Annual Meetings.
Public companies must appoint a
Company Secretary as administrator
204A
Private companies are not required to
appoint a Company Secretary as
administrator.
Public companies must have a minimum
of three directors.
Private companies only need one
director and one member. Resolutions
can be passed by the signing of
circulating documents s 249A
For a public company, s203D and s203E
require an ordinary resolution of
members for the removal of any
directors; they cannot be removed by
other directors.
Private companies do not require an
ordinary resolution of members for the
removal of directors.

The issue price for a share is determined by agreement between the company and the
investor. Shares may be issued on the basis that the investor pays the entire issue price
in one instalment. Referred to as fully paid shares- shareholder that has these has no
liability to contribute any further amounts to the company.
Partly paid shares- shareholder only pays part of the issue price immediately. Liable
to pay the balance of the issue price if the company makes the call.
The shareholders of a company limited by shares have limited liability, creditors of
such a company do not have access to the personal property of the shareholders in
order to satisfy their debts.
Therefore s148(2) requires the word “limited” or “ltd” as a part of and at the end of its
name. This shows possible creditors that the liability of the shareholders in limited
and debts of the company can only be satisfied from the assets of the company.
• Companies limited by guarantee (pp. 81-84)
A company whose members have their liability limited to the amounts that they have
undertaken to contribute to the property of the company in the event of it being
wound up: s9.
They do not have a share capital so members do not contribute capital while the
company is operating. Still maintain the advantages of being legal entities with the
liability of their members limited to the amount of the guarantee. However if a
company cant meet its liabilities, its members are liable to pay up to the amount
specified as the members’ guarantees: s 517.
The limitation of this type of company is that it does not raise initial or working
capital from its members. Very rarely used for this reason. Used for non-profit
organisations (charities, sporting organisations).
Past members of the company may also be liable if the assets of the company are
insufficient to meet its debts and the present members are unable to meet the
company’s liabilities. Past members only have to contribute to debts from the time
they were involved as members, not debts since they have left.
Companies limited by guarantee do not have share capital so they can not be private
companies, have to be public.
• Unlimited companies (p. 84)
An unlimited company is defined in s 9 as a company whose members have no limit
placed on their liability to the company.
Members are liable in a winding up for the debts of the company without limit if the
company has insufficient assets to meet its debts. Similar to a partnership in a way,
however is considered a separate legal entity.
• No liability companies (pp. 84-85)
A no liability company must:
• Have a share capital
• State in its constitution that its sole objects are mining purposes
• Have no contractual right under its constitution to recover calls made on its
shares from a member who fails to pay a call.

A no liability company is prohibited from engaging in activities that are outside its
mining purposes objectives s 112(3). The name must contain “no liability” or “NL”
s148(4).
Shares in a no liability company are issued on the basis that if a company is wound
up, any surplus must be distributed among the shareholders in proportion to the
number of shares held by them irrespective of the amounts paid up.
• Large and small private companies (pp. 90-92).
Under s 45A(2) a private company is regarded as a small private company for a
financial year if it satisfies at least 2 of the following criteria:
1. The consolidated operating revenue for the financial year of the company and the
entities it controls in less than $25 million;
2. The value of the consolidated gross assets at the end of the financial year of the
company and the entities it controls is less than 12.5 million;
3. The company and the entities it controls have fewer than 50 employees at the end
of the financial year.
The first 2 criteria are calculated in accordance with applicable accounting standards s
45A(6).
In counting employees for purposes of the s 45A definition, part-time are taken into
account as an appropriate fraction of a full-time equivalent s 45A(5).
The main advantages of the small private companies are:
• They are subject to fewer requirements in relation to preparation, lodgement
and audit of financial reports.
• Not required to prepare annual financial reports or appoint an auditor.
Significant saving costs. (the only need to provide them is if the shareholders
vote for them, or they are asked by ASIC).
• They are required to prepare profit and loss statements for taxation purposes.
• Company audits (p. 89).
• Public companies and large private companies must appoint an independent
auditor to audit their financial reports. In some circumstances ASIC may
relieve a large private company from the requirement to appoint an auditor.
Trustee Companies: (page 98-99)
• The development of Equity Law in the 16th century saw the creation of the Law
of Trusts for charitable institutions.
• The concept of a trust has expanded and is widely used in modern business and
corporations.
• In a trust, a trustee is appointed to hold and manage property on behalf of
beneficiaries.
• A trustee can be liable for shortfalls in the trust funds.
• As companies are considered a separate legal entity they can act as a trustee of a
managed fund. Companies are used because of their limited liability, tax benefits
and perpetual succession.

The company constitution and replaceable rules
• Initially an Australian company had to submit a written constitution when
applying for registration. In order to achieve greater uniformity and improvements
in standards of governance the Corporations Act now defines a set of default
internal governance rules s 134. These rules are called ‘replaceable rules’ and are
set out in s 141 of the act.
• These rules make the requirement for a constitution for new companies obsolete.
Some are mandatory, some only apply to public companies and some only apply
to private companies. Most rules however can be replaced thereby allowing a
company to develop its own constitution based on the default rules s 135.
• If a company no longer wishes to follow its own rules it needs to follow the
appropriate process to change them. A special resolution must be passed to alter
the rules in the constitution. S9 defines a ‘special resolution’ as one which is
passed by at least 75% of the votes of members entitled to cast a vote.
Additionally, any changes made to their rules or constitution should be ‘fair’.
• The company constitution (pp. 108-110)
Prior July 1998- all companies were required to have a constitution consisting of two
documents: the memorandum of association and the articles of association.
Companies formed after July 1998 have a choice regarding the rules governing their
internal administration. Under s 134 those rules may comprise a constitution specially
drafted to suit a company’s particular needs, or the replaceable rules in the
Corporations Act or a combination of both. Post 1998 consists of one document.
Companies may adopt a constitution in any of the following three ways:
1. A new company may adopt a constitution on registration if the persons named in
the application for the company’s registration as having consented to become
members, agree in writing to the terms of the constitution before the application is
lodged
2. A company that is registered without a constitution may adopt one by passing a
special resolution
3. A court order is made under s 233 that requires the company to adopt a
constitution.
Public companies that have a constitution are required to lodge a copy with ASIC.
Contents of constitution:
There are no mandatory content requirements for constitutions.
The constitution is a contract between:
• The company and each member
• The company and each director
• The company and the company secretary, and
• A member and each other member.
A company can adopt a constitution before or after registration. If it is adopted before
registration, each member must agree (in writing) to the terms of the constitution. If a

constitution is adopted after registration, the company must pass a special resolution
to adopt the constitution.
The following companies must be governed by a constitution:
• 'No Liability' public companies
• 'special purpose companies' that want a reduced annual review fee.
A private company (that is a special purpose company) must have a constitution. It
doesn’t need to be lodged with us, but a copy must be kept with the company's
records.
A company must provide a current copy of the constitution to any member who
requests it within seven days. If a fee is charged, the constitution must be provided
within seven days of payment.
Section 112 requires the constitution of a no liability company to state that its sole
objects are mining purposes and that the company has no contractual right to recover
calls made on its shares from a shareholder who fails to pay them.
Replaceable rules (pp. 105-108)
• Replaceable rules are in the Corporations Act and are a basic guide
for managing your company. If you're a private company, they can be an easy
way to manage your company's governance.
• Replaceable rules do not apply to a private company if the same person is
the sole director as well as the sole shareholder.
• Most companies can choose to use the rules to guide their internal governance.
However, a company with a single member and single director who is the
same person cannot use the rules. Of course, not all companies do choose to
use them. They may wish to draft a constitution.
• However, in these instances, the rules can guide the drafting because they
describe the kinds of rules and provide the essential standards that any
constitution needs.
• While the rules are available to all companies, typically proprietary companies
choose to use them. Public companies are larger entities with the resources
required to both draft a constitution and keep it current.
• The greatest advantage of the rules is that a company who uses them is always
up to date with developments and changes in regulation. If the government
amends the rules, their organisation is automatically on top of, and can
implement these developments. That saves the time and expense of modifying
a constitution. As smaller businesses have fewer resources than larger ones,
this is particularly beneficial.
• The rules are also popular for small companies in the setting up phase because
they are a relatively inexpensive means of acquiring rules for internal
governance. Of course, they likely need a lawyer to explain the rules to them.
Nonetheless, they do not have to pay for a precisely drafted constitution.
• Alteration of the constitution and replaceable rules (pp. 119-123)
• A company can change or repeal its constitution by passing a special
resolution. A special resolution needs at least 28 days notice for publicly listed

companies and 21 days notice for other company types. For the resolution to
pass, at least 75% of the votes cast must be in favour.
• Section 136(3) recognises that a company’s constitution may contain
provisions that restrict the company’s ability to modify or repeal its
constitution by imposing further requirements for such alterations over and
above a special resolution. E.g. greater majority than 75%, and obtaining the
consent of a particular person.
WEEK 3:
1. Understand the concept of the “directing mind and will” of a company.
2. Be familiar with Turquand’s case and the ‘indoor management’ rule to protect
outsiders.
3. Be familiar with the statutory assumptions presented in sec 128 and 129.4.
Understand the powers of directors to bind the company in contracts with
outsiders.
4. Be familiar with:
• Direct Authority
• Implied Authority
• Customary Authority
• Apparent authority
The Directing mind and will of a company. (129-131)
• A company can enter into contracts and property dealings as if it were a real
person s124. However the separate legal entity of a company is a legal fiction
and it needs a board of directors to manage its affairs, a constitution and rules
by which to operate and agents to carry out its relations with outsiders. This
creates problems for those who make agreements with the company.
• A company does not have a guilty mind and cannot be put in prison, therefore
the law has developed ways in which those who manage the company can be
held liable as the ‘directing mind and will of the company’.
Who is the directing mind and will? (pp. 131-135)
• A company may be likened to a human being. It has a brain that controls what
it does. It also has hands that act in accordance with directions from the centre.
• The directing mind of the company could be considered to be various people.
It could be considered to be the director or directors/ senior management or in
some cases the company secretary.
• Ascertaining who is the directing mind and will of a large corporation is
generally more difficult than in the case of a company with few directors and
shareholders. In large corporations, control of he company’s business is
typically delegated to a large number of executive and managers in the
organisational hierarchy. The actions and intentions of senior management are

relevant to determining the state of mind of a corporation and more than one
person may be regarded as its directing mind and will.
How does a company undertake relations with outsiders?
• Historically, a company’s objects clause was the most important part of its
‘Memorandum of Association’ in its constitution. It set out the nature and
scope of the company’s business objectives. If a company officer or agent
entered into a contract or property transaction that was outside the scope of its
objects clause then the company could argue that the transaction was not
binding. It could claim that the transaction was outside the powers set out in
the constitution and therefore ultra vires or out of power.
• This biased any transaction with outsiders in the company's favour.
Companies could easily get out of contracts with outside businesses by
arguing that there was no proper authority.
Indoor management rule
Persons dealing with a company in good faith should be able to assume that acts
within its constitution and powers have been properly and duly performed and should
not be bound to inquire whether acts of internal management have been validly
executed. This is given legal force through the indoor management rule.
▪ It is a rule designed for the protection of those who are entitled to assume,
just because they cannot know, that the person with whom they deal has
the authority which he claims
▪ Not applicable when:
▪ Person is aware of irregularities
▪ Persons 'put on inquiry' - ie, if there was something to make a reasonable
person in the position of the person suspicious about a possible regularity,
and investigate the matter further.
▪ The rule cannot benefit the company.
S 128 and 129 are the statutory equivalent with the indoor management rule.
Originally, the rule was not recognised. Cases such as Ernest v Nicholls said the
opposite:
▪ All persons must take notice of the deed and the provisions of the Act - if
they do not chose to acquaint themselves with the powers of the directors,
it is their own fault and if the give credit to an unauthorised person they
must be contended to look to them only, and not to the company at large.
The rule became more recognised in Royal British Bank v Turquand:[6]
▪ Facts: RBB lent money to T (company) on security of bond signed by two
directors and bearing company seal. Company’s deed of settlement
authorised directors to grant bonds only when authorised by resolution of
general meeting of company. Company pleaded that there had been no
such resolution, so the transaction should be voided.
▪ Held (Jervis CJ): parties dealing with companies are bound to read the
statute and the deed of settlement, but are bound to do nothing more.

Finding that authority might be made complete by resolution, he would
have right to infer fact of such as resolution authorising that which on face
of document appeared to be legitimately done - people dealing with a
company have constructive notice of requirements of its memorandum and
articles of association but are not to be affected by irregularities which
take place in internal management of company.
▪ Note: constructive notice is now abolished in relation to company
documents: s 130, 129(1)
Who has the authority to act on behalf of a company?
Companies may directly enter into contracts:
• By use of the company seal s123(1), where two directors or one director and
the company secretary fix the seal, and witness the fixing of the seal.
• Since 1998 the use of a seal has been made optional. Companies may now
enter into a contract using the same procedure as above, but by just a signing
the document rather than fixing the company seal, see s127(1)
But who has the authority to enter into a contract with an outsider?
• A company may give express actual authority to a particular person.
• To do this the board of directors would need to pass a resolution in an
appropriate form. Particular company officers may also enter into a contract
with an outsider using implied authority (based on their role in the business).
People who have implied authority are outlined in the table below.
Managing Director Authority
Managing Director Have all the powers of the company
necessary to deal with the day to day
operations of the company including
delegation to others, employment of
others, the borrowing of money and the
giving of guarantees, in the ordinary
course of business.
CEO A CEO who is not on the board may still
have the same authority as a managing
director.
Individual Director (executive or non-
executive)
Has no usual authority to bind the
company unless they act collectively
with other directors as a board.

• Actual authority (p. 141; pp. 145-146)
• Specific powers, expressly conferred by a principal (often an insurance
company) to an agent to act on the principal's behalf. This power may be
broad, general power or it may be limited, special power.
• An agent receives actual authority either orally or in writing. Written authority
is preferable, as it is somewhat difficult to establish authority that is given
verbally. In a corporation, written express authority includes bylaws and
resolutions from directors' meetings which grant the authorized person
permission to carry out a definite act on behalf of the corporation.
Apparent authority (pp. 141-142; pp. 146-149)
• Apparent authority, is subtler than actual authority.
• This involves an agency relationship being created through the appearance of
authority conferred on the agent. No agreement between the company and agent is
required. The test for apparent authority is where a reasonable person believes the
supposed agent had authority to act. This depends on the circumstances which
give rise to the transaction being entered into.
For apparent authority to exist, the following must occur:
➢ A representation to the other contracting party that the person
purporting to act on the company’s behalf has authority;
➢ This representation must come from the company itself, or from
someone who has actual authority; and
➢ The other contracting person must have relied on the representation.
Chairperson of the board Has the special responsibility of
managing meetings, acting as a
spokesperson for the company and
sometimes is responsible for selecting a
CEO. But, they have no other special
powers.
Company Secretary Is the chief record keeper and
administrative officer and as such has
some special authority to sign contracts
to do with the purchase of administrative
supplies, the hire of cars and the
supervision and employment of
administrative staff. With the assistance
of a director they can use the company
seal.

• For companies involved in heavy contracting, such as the fuel industry,
apparent authority is an important risk that needs to be controlled.
• Companies are advised to continually review who is listed in documents,
websites and the like as having authority to enter into contracts to ensure that
outside parties are not misinformed. While this takes vigilance, the alternative
is binding!
Customary authority (pp. 158-160)
Individual directors:
• Witness the fixing of the company’s common seal (s127(2))
• Sign the company’s negotiable instruments, including cheques: s 198B
• Does not have customary authority to make contracts on the company’s
behalf.
Managing Director:
• Has the customary authority to make any contracts related to the day-to-day
management of the company’s business. This includes engaging persons to do
work for the company.
• Cannot enter a purported sale of the entire business of the company.
The chair:
• The chair has the same customary authority as any other individual director
and consequently does not have the customary authority to contract on the
company’s behalf.
Secretary:
• The customary authority of a company secretary is not as wide as that of a
director. The role is limited to matters of an administrative, internal nature
required for day-to-day running of the company’s affairs such as employing
staff, and ordering cars.
• Does not include authority to mortgage the company’s land.
Statutory Assumptions: s 128
▪ s 128 - entitlement to make assumptions:
▪ (1) & (2) - the effect of these sections is to prevent a company from
escaping liability by arguing that certain formalities were not complied
with.
▪ (3) - States that a person is entitled to make assumptions as outlined in s
129 in relation to dealings with the company even if fraud on part of
company, its officer or agent has occurred.
▪ (4) - They are not, however, allowed to make such an assumption if at the
time of dealings they knew or suspected the assumption was incorrect.

▪ Note: The onus of proof lies on the party seeking to disentitle the reliance
on the assumption: Sofyer v Earlmaze Pty Ltd.
Statutory Assumptions: s129
▪ (1) Constitution and replaceable rules are complied with
▪ Apparently intended to restate the indoor management rule - not under
common law anymore
▪ About ostensible/apparent authority
▪ (2) Person appearing as director or company secretary has been duly appointed
and has authority to exercise powers and perform duties normally exercised by
director or secretary of similar company
▪ Note: Under ss 205A, 205B, Ch 2N ASIC must be updated in regard to
retirement or resignation of a director or secretary, or any changes within
28 days and the company must update annually publicly available info
held for it by ASIC
▪ Accordingly, this section provides a strong incentive upon companies to
update this info with ASIC as 3rd party contractors may invoke the
protection of the assumption in relation to its dealings purportedly made
on the company’s behalf by former directors and secretaries who continue
to be shown as holding office
▪ Can be used with s 127(1)
▪ (3) Person held out by the company as an officer or agent of company has been
duly appointed and has authority to exercise similar powers and perform duties
normally exercised by that kind of officer or agent of a similar company
▪ Four conditions for apparent authority as stated in Freeman v Lockyer are
relevant for determining whether the company has “held out” a person for
purposes of this section.
▪ (4) Proper performance of duties to comapny by offer/agent of company.
▪ This assumption restates the common law presumption of regular and
proper performance of director’s acts: Richard Brady Franks Ltd v
Price (1937).
Holding out
• Is authority always explicitly granted?
• What if a company officer is presented by the company in a way that makes
them appear to have authority?
• This is called 'holding out' and an outsider is entitled to rely on the authority of
agents presented in this manner. Holding out can be a representation by words
or actions or may also be by acquiescence. But if there is a representation it
must be by someone with real authority. A person without authority cannot
confer authority on himself or herself.
• Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB
480

➢ In this case Kapoor acted as the Managing Director but without formal
appointment, he was allowed to act as MD with informal approval by
the board. He engaged a firm of architects but the other directors
refused to accept the contract. The court held that there was a ‘holding
out’ by the board, creating apparent authority.
• Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146
➢ This case is an exception to Turquands Rule and the assumptions in s
129.In this case the company seal was fixed to a bank loan by Sturgess
(a director) and his son (who purported to act as company secretary).
The other directors knew nothing of these actions. The court held that
the circumstances were suspicious and should have alerted the bank to
make inquiries. See s 128(4).
Week 4:
1. Understand how outsiders are protected under statutory provisions (s 131 and
s 133) if they enter into contract with a promoter.
2. Understand the disclosure requirements for capital fundraising through public
share offerings (s700- s741), particularly for an IPO.
3. Understand requirements for issuing a full prospectus (s 710)
4. Know what alternative documents can be used (s 708) including
• Short form Prospectus (s 712)
• Offer Information Statement (s 714/715)
• Profile Statements (s 721)
• Small scale Offerings (s 708)
5. Be familiar with potential liability for omissions/ misleading information in
disclosure documents (s 728/729), and potential defenses (s 731 and 733 (1)).
6. Be aware of the different kinds of shares- ordinary shares is an internal matter
for the company and should be set out in the company rules (s 254A (2) and G
(2)).

7. Know that minority shareholders must be treated fairly in relation.
Promoters:
A promoter is someone who does the preliminary work required to initiate and form a
new company.
There are two main types of promoters: active promoters and passive promoters.
1. Active promoters are individuals who take the necessary steps to form the new
company; initiating registration, raising capital and issuing a prospectus.
2. A passive promoter is a person who takes no active role in these steps, but
who stands to profit from them.
Promoters' fiduciary duties (p. 169)
Once a person is deemed a promoter, they have various duties. They stand in a
fiduciary relationship with the company and must act in the bona fide interests of the
company and not their own personal interest (Erlanger v New Sombrero Phosphate
(1878) 3 App Case 1218). The promoter’s fiduciary duties include:
▪ Not making a profit at the expense of the company
▪ Making full disclosure of any interest in any contract entered into by the
company
▪ Disclosing company profits to representatives of potential investors
▪ Acting honestly and with reasonable skill, care, and diligence.
• Liability of promoters (p. 173)
(1) For non-disclosure. In case a promoter fails to make full disclosure at the time
the contract was made, the company may either: (i) rescind the contract and
recover the purchase price where he sold his own property to the company, or
(ii) recover the profit made, even though rescission is not claimed or is
impossible, or (iii) claim damages for breach of his fiduciary duty. The
measure of damages will be the difference between the market value of the
property and the contract price.
(2) Under the companies act. (i) Promoter is liable to the original allotment of
shares for the mis-statements contained in the prospectus. It is clear that his
liability does not extend to subsequent allotments. He may also be imprisoned
for a term which may extend to 2 years or may be punished with fine up to
Rs50,000 for such untrue statements in the prospectus (Ss.62 and 63). (ii) In
the course of winding up of the company, on an application made by official
Liquidator, the court may make a promoter liable for misfeasance or breach of
trust (s.543). The court may also order for the public examination of the
promoter (Ss.478 and 519).
Where there is more than one promoter, they are jointly and severally liable

and if one of them is sued and pays damages, he is entitled to claim
contribution from other or others. However, the death of a promoter does not
relieve his estate from liability arising out of abuse of his fiduciary position.
Remedies for breach of promoters duties (pp. 171-173)
The remedies available when a promoter breaches their duties are similar to those
available when a director breaches their duties, and include:
▪ Rescission—the company may rescind the contract made by the promoter
when the promoter has a personal interest in the contract and when the parties
can still be returned to their pre-contractual position (Erlanger v New
Sombrero Phosphate [1878] 3 App Case 1218); damages may also be
recoverable.
▪ Recovery of secret profit—a secret profit may be recovered by the use of a
con- structive trust whereby the court holds that any profit or benefit obtained
by the promoter was obtained in their position as a constructive trustee on
behalf of the company.
▪ Forfeiture—a promoter may forfeit any position they hold in the company (for
example, their election as director).
Fundraising (181-182)
• The fundraising and disclosure requirements that regulate the offer of shares in
Australia are contained in Chapter 6D of the Act. The general proposition is
that a person must not make an offer of securities or distribute an application
form
for an offer of securities that needs disclosure to investors until a disclosure
document (such as a prospectus) for the offer has been lodged with the
Australian Securities and Investments Commission (“ASIC”) unless such an
offer is exempted from disclosure.
• We note, however, that a proprietary company is prohibited by the Act from
engaging in any activity that requires disclosure
to investors under Chapter 6D. Therefore, a proprietary company may only
raise funds from investors in Australia through the offers of securities that are
exempted from disclosure.
Share offerings
Section 708 of the Act sets out a number of different types of offers of securities that
do not need disclosure and include:
• Small scale offerings (“personal” offers of a body’s securities where no more
than 20 investors acquire securities and no more than $2 million is raised by
the issue of securities in any 12 month period);
• Offers to sophisticated investors (eg. investors who pay a minimum of
$500,000 upon the acceptance of an offer or investors who, as it appears from
a certificate given by a qualified accountant no more than 6 months before the
offer is made, have net assets of at least $2,500,000 or have had a gross
income for each of the last two financial years of at least $250,000);

• Offers to professional investors (eg. financial services licensees, listed entities,
trustees of super funds which have net assets of at least $10 million and other
persons who control at least $10 million);
• Certain offers made through a financial service licensee;
• Offers to certain people who are associated with the issuing body (such as
senior managers); and
• Certain offers to present holders of securities in the issuing body.
This is not an exhaustive list of the relevant exceptions. As referred
to above, a proprietary company will be prohibited from raising any funds from
investors in Australia where none of the exceptions apply.
Disclosure (pp. 183-189)
• If a disclosure document is required in respect of a particular offer of
securities, the general rule is that a prospectus must be prepared for the offer
unless an offer information statement can be used.
• A prospectus is the principal and most common type of disclosure document
although there are different varieties of prospectus including a full prospectus,
a short form prospectus and a special prospectus for continuously quoted
securities (which is also known as a transaction specific prospectus).
Full Prospectus (pp. 190-193)
• A full prospectus will be required, for example, where a company seeks to list
on a stock exchange. The Act contains a general disclosure requirement for
full prospectuses which provides that a prospectus must contain all of the
information that investors and their professional advisors may reasonably
require to make an informed assessment of:
➢ the rights and liabilities attaching to the securities offered; and
➢ the assets and liabilities, financial position and performance, profits
and losses and prospects of the body that is to issue the securities.
• The prospectus must contain this information to the extent to that relevant
persons involved in the preparation of the prospectus actually know the
information or ought reasonably to have obtained the information by making
inquiries. In addition to the general disclosure requirement, the Act also sets
out a number of specific requirements for particular information to be
disclosed.
Prospectus often contain information about the following matters:
• Description of the business and its structure, strategy and plans
• Financial information
• Information about prospects
• Risks
• Description of important contracts
• Use of proceeds
• Background of senior managers and directors and details of their remuneration
• Dividend policy

• Major shareholders and related party transactions
Short form prospectus (p. 194)
A short form prospectus is the same as a full prospectus except that it incorporates
certain documents already lodged with ASIC by reference in the prospectus.
Therefore, rather than setting out all of the details of a document in the prospectus, the
prospectus may simply refer to a document that has been lodged with ASIC. The
prospectus must adequately identify the document and provide sufficient information
about the contents of it to allow a person to decide whether or not to obtain a copy of
it.
The primary use of short form prospectuses is for very large distributions to
unsophisticated investors.
Profile statement (p. 194)
Offer information statement (pp. 194-195)
An offer information statement is a disclosure document that may be used by a body
where the amount of money to be raised, when added to all amounts previously raised
by the body under an offer information statement, is $10 million or less.
There is no general disclosure test for offer information statements. Instead the Act
lists specific information that must be included, such as a description of the nature of
the securities and a description of what the funds raised will be used for. An offer
information statement must also include a copy of an audited financial report with a
balance date no greater than 6 months old.
Small scale offerings (p. 186)
The small scale offering exception (known as the “The 20/12 rule”) is contained in
section 708(1) of the Act. The provision provides that a disclosure document is not
required if a person makes a personal offer of Securities that results in Securities
being issued or transferred to 20 or fewer persons with no more than $2 million being
raised in any rolling 12 month period. The 20/12 rule provides that:
An offer by a body to issue securities will breach the 20 investor ceiling if:
• It results in the number of people to whom securities of the body have been issued
exceeding 20 in any 12 month period; and
• A body makes offers that results in a breach of the $2 million ceiling if the body
issues securities exceeding $2 million in any 12 month period.
The 20/12 rule also applies to transfers of existing Securities.
Rights issue (p. 189)
• A rights issue is an invitation to existing shareholders to purchase additional
new shares in the company. More specifically, this type of issue gives existing
shareholders securities called "rights," which, well, give the shareholders the
right to purchase new shares at a discount to the market price on a stated
future date. The company is giving shareholders a chance to increase
their exposure to the stock at a discount price.
• But until the date at which the new shares can be purchased, shareholders may
trade the rights on the market the same way that they would trade ordinary
shares. The rights issued to a shareholder have a value, thus compensating
current shareholders for the future dilution of their existing shares' value.

• Troubled companies typically use rights issues to pay down debt, especially
when they are unable to borrow more money. But not all companies that
pursue rights offerings are shaky. Some with clean balance sheets use rights
issues to fund acquisitions and growth strategies. For reassurance that it will
raise the finances, a company will usually, but not always, have its rights
issue underwritten by an investment bank.
Offers exempted from disclosure rules (pp. 186-189)
A disclosure document is not required when:
• An offer is a personal offer, and if:
• Offers or invitations have been made to fewer than 20 persons in the previous 12
months, and
• The new offer will not result in more than $2 million being raised in that 12
months (see sections 708(1)–(7));
Note: You must not advertise the offer when you rely on this exemption
• The offers are made to specified people who are presumed not to need disclosure
because of their financial capacity, experience, association
with the issuer or wholesale status (see sections 708(8)–(12));
• The offers are made to current holders of the securities (see sections 708(13)–
(14A));
• No money or other form of payment is payable for the securities (see sections
708(15)–(16));
• Other disclosure regimes under the Corporations Act apply (that is schemes of
arrangement and takeovers) (see sections 708(17) and (18));
• The offers are made to creditors under a deed of company arrangement, if certain
conditions are met (see section 708(17A));
• The offer of debentures is made by certain types of financial institutions (see
section 708(19)).
Liability for misstatements or omissions of information (pp. 201-204)
Section 728 prohibits the offer of securities where there is a misstatement or omission
from the disclosure document or where a new circumstance has arisen since the
disclosure document was lodged that would require disclosure.
Where a person suffers loss or damage because of a contravention of s 728, that
person can recover the amount of loss or damage from a person who is referred to in
the table in s 729(1), namely:
➢ The person making the offer;
➢ Each director of the company or body making the offer;
➢ A person named in the disclosure document with their consent as a
proposed director;
➢ An underwriter;
➢ A person named in the disclosure document with their consent as
having made a statement that is included in the disclosure document or
on which a statement in the disclosure document is made; and

➢ A person involved in a contravention of s 728(1).
The above persons also have a duty to inform the offerrer about any deficiencies in
the document: s 730.
Defenses
Those persons have a number of defences available to them to avoid liability where
there is a misleading or deceptive statement in the disclosure document:
• A due diligence defence is available under s 731 where the person has made all
inquiries that were reasonable in the circumstances and, after doing so, believed
on reasonable grounds that the statement was not misleading or deceptive.
• s 732 lack of knowledge defence applies where a person proves that they did not
know that the statement was misleading or deceptive.
• A defence is available where a person has placed reasonable reliance upon
information given to them by someone other than a director, employee or agent of
the company: s 733(1).
• A defence is available where a person named in a disclosure document as being a
proposed director or underwriter or as making a statement has publicly withdrawn
their consent to being named in the disclosure document in this way: s 733(2).
• A defence is also available where the person proves that they were unaware of a
new matter that has arisen since the disclosure document was made: s 733(4).
The nature of shares
A shareholder acquires a “proportional interest” in the net worth of the company (e.g.
the equity capital). They do not own the property and assets of the company. Shares
are bought, sold and transferred through an electronic system- CHESS (Clearing
House Electronic Subregister System). Companies can issue different classes of
shares. For example:
1. Ordinary Shares have normal voting, dividend and winding up rights, and pre-
emptive rights to any stock offerings.
2. Preferential shares usually have limited voting rights and winding up rights, but
have the benefit of receiving a fixed rate of return when dividends are paid.
The creation of different classes of shares with different rights are an internal matter
for the company and therefore must be clearly set out in the constitution and company
rules s254A(2) and 254G(2)) which can only be changed by special resolution of
members.
• CHESS
If you buy or sell financial products such as shares in a listed company, you must
exchange the title or legal ownership of those financial products for money. This
exchange is called settlement.
For financial products traded on the Australian Securities Exchange, settlement is
effected by a world-class computer system called CHESS, which stands for the
Clearing House Electronic Sub-register System.

CHESS is operated by the ASX Settlement Pty Limited (ASX Settlement), a wholly
owned subsidiary of the ASX. ASX Settlement authorises participants such as
brokers, custodians, institutional investors, settlement agents and so on to access
CHESS and settle trades made by themselves or on behalf of their clients.
In summary, CHESS performs two major functions for ASX.
• It facilitates the clearing and settlement of trades in shares, and
• It provides an electronic sub-register for shares in listed companies.
Minority Shareholders
• The minority shareholder generally does not have the right to appoint a
director and generally has little say in the operation of the Company or the
distribution of any profits. If they do not have a director, their rights to peruse
the books and records of the Company can also be quite limited.
• That being said, the fact remains that a minority shareholder still has an
interest in the Company that cannot be ignored. That Shareholder must still be
afforded all of the rights attaching to their shares under the constitution and
the Corporations Act 2001 (Cth). For instance, if all shareholders own the
same class of shares, majority shareholders cannot issue themselves dividends
without issuing the same dividend per share to minority shareholders.
• However, majority shareholders are often able to control the operation of the
Company to derive extra benefit to themselves without doing something as
blatantly obvious as issuing inequitable dividends. Often directors will be paid
fees or family members employed such that funds of the Company are moved
to the benefit of the majority shareholders.
• The Corporations Act 2001 (Cth) recognises that minority shareholders are at
a distinct disadvantage and as such includes provisions for the protection of
minority shareholders.
• Section 232 of the Act allows a court to grant relief to a minority shareholder
if it is of the opinion that:
• (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 shareholders or a class of
shareholders of a company,
• is either:

• (a) contrary to the interests of the shareholders as a whole; or
• (b) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a
shareholder or shareholders whether in that capacity or in any other capacity.
• The ‘company’s affairs’ includes conduct of the directors, majority
shareholders, substantial shareholders as well as the company itself.
• Examples of oppressive and unfair conduct may include improper diversion of
the Company’s business to another entity, payment of excessive remuneration
to a controller or associate, improper share transactions (such as issue of extra
shares or uncommercial terms), exclusion from Company decisions, denial of
access of Company information, improper use of funds or any other
oppressive conduct.
Class rights and variations
There are rules which define how the rights of a particular shareholder class can be
changed. Any variation of minority shareholders class rights must be fair. Their rights
are protected under s246B. These protections prevent changes that involve a variation
of the strict legal rights of a particular class of shareholder, such as voting rights for
directors or rights to a dividend as set out in the constitution.
Protection of shareholders under s 246B (p. 223)
The class rights provisions in s246B-246G are designed to strengthen the rights of
holders of particular classes of shares where the directors or controlling shareholders
seek to vary or cancel those rights. Section 246B is the key provision. It aims to
ensure that holders of a class of shares approve any proposal to vary the rights
attaching to their class of shares.
Case:
Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512
(Lipton, Herzberg and Welsh, Company Law, Chapter 8, p. 226)
Greenhalgh held a substantial holding in the company. When differences arose
between the parties involved, the company acted to subdivide all its ordinary shares 5
to 1. This resulted in the other shareholders owning an equal number of shares to
those already held by Greenhalgh, thereby diluting his voting power. Greenhalgh
argued that the voting rights attached to his shares were varied without the consent of
the holders of those shares. The court held this was not a valid variation.

WEEK 5
1. Understand the “Indoor Management Rule” (including the Trevor v Whitworth
case) and should be aware that this is now incorporated into s.259A of the
Corporations Act.
2. Know that there are now 3 exemptions in the Act to this rule as long as they
are fair and reasonable to all shareholders and do not materially prejudice
creditors (s 256B(1)).
3. Have a good understanding of what the courts would consider as fair. You
should be familiar with the Vacola case the Winpar case.
4. Be aware that there are three kinds of reductions in capital which are exempt
from s.256 B requirements. These include:
• Buy backs (you should be able to explain the 10/12 rule)
• Financial assistance (be familiar with the ASIC v Adler’s case)
• Payment of dividends (s254T)
The Capital Maintenance Rule:
Share buy-backs, financial assistance and dividends
• What if a company does not have the capital it needs? What options are
available in regards to raising capital for a new project? When can a company
draw on its initial capital? What about shareholders - can they still be paid
dividends if the company is not turning a profit?
Exemptions – buy-backs and financial assistance
• There are some reductions in capital that are exempted from the capital
maintenance rule. Under s257A a company is permitted to reduce its capital to
buy back some of its own shares. There are a variety of reasons a company
may do this, such as:
1. tax advantages to the shareholders
2. to reduce the impact of company debt
3. to increase the value and earnings of shares, in recessionary conditions
4. to prevent a takeover.
• A company may also reduce its capital to provide financial assistance.
Financial assistance is where a company lends money to an individual so that
the money may be used to acquire shares in the company. For a company to
undertake a financial assistance program it must meet certain specific
conditions.
The Rule in Trevor v Whitworth is now in the Corporations Act
• Sec 259A incorporates the capital maintenance rule as a general rule – a
company must not acquire shares in itself.

• But because of modern economic circumstances and corporate activities the
Act allows exemptions to the capital maintenance rule and self-acquisition. A
reduction in capital is now permitted if it does not materially prejudice
creditors.
• Sec 256B(1) A company may not reduce its share capital in a way not
otherwise authorised by law if the reduction is
• – fair and reasonable to the company’s shareholders as a “whole”.
• - does not materially prejudice the company’s ability to pay its creditors.
• Sec 256C - a reduction must receive approval by shareholders.
Share buy-back (pp. 235–240)
• Since 1998 s 257A -permits a share buy back. A company may want to buy
back some of its own shares for a variety of reasons:
• Tax advantages to the shareholders.
• To reduce the impact of company debt.
• To increase the value and earnings of shares, in recessionary conditions.
• To prevent a takeover.
• ‘Equal buy-backs’ is one of five different kinds of permitted share buy backs.
• The general rule is that a Co can buy back up to 10% of its shares within 12
months. No shareholder approval is needed for this
• The shares are then cancelled –s 257H and ASIC must be notified in 28 days.
• Equal access means that the same % is bought back from each ordinary share
holder on the same terms - s 257B(2),(3).
• When exceeded there must be an ordinary resolution passed by shareholders at
a general meeting giving its approval.
• In a Group as a general rule, the issue or transfer of shares by a company into
another entity such as a subsidiary, partnership or trust which it controls, will
be void as an indirect self-acquisition. – s 259C(1) unless wholly owned and
there is no un-fair discrimination to shareholders.
• Indirect self-acquisitions (pp. 240-241)
Financial assistance (pp. 241–245)
• Financial assistance is where a Company lends money to an individual to be
used to acquire shares in the Company.
• Before 1998 it was prohibited unless their was shareholder approval, now
under s 260A -260D the same protection for creditors and shareholders applies
but there have been modifications to make it the same as other capital
reductions, so as to give Company’s more flexibility.
• The assistance must not materially prejudice the interests of the Company, its
shareholders and its ability to pay its creditors. – s 260A(1)(a)

• It has prior shareholder approval – 260B or
• It is exempted under 260C eg, an employee share scheme.
Payment of dividends
• Companies are also permitted to reduce their capital in order to pay out
dividends.
• A dividend is where a company returns profits to its shareholders in the form
of cash or bonus shares. There are strict conditions for the payment of
dividends.
• A company must not pay a dividend unless:
1. The company assets exceed its liabilities before the dividend is paid. There must
also be sufficient excess to pay the dividend.
2. The payment is fair and reasonable to shareholders as a whole.
3. It does not materially prejudice creditors.
Payment of dividends (pp. 278-280)
• A dividend is where a company returns profits to its shareholders in the form
of cash or bonus shares. Dividends can be interim or final at the end of the
financial year, without prior shareholder declaration.
• S 254U, 254 W(1) – It is the directors who have the power to fix the time and
size of the payment of dividends. Directors can decide not to pay a dividend
and the shareholders cannot force payment.
• Prior to June 2010 – a dividend could only be paid out of profits as distinct
from the sale of fixed assets. The case law revolved around differing legal
definitions and accounting methods of determining the meaning of “profits”.
• In Ammonia Soda v Chamberlain (1918) 1 Ch 266, a dividend can be paid out
of a current profit despite previous years of losses.
Improper payment of dividends (pp. 280–281)
S 254 T was amended in June 2010 making most of the case law irrelevant.
• (1) a company must not pay a dividend unless:
• The Company assets exceed its liabilities before the dividend is paid and there
is sufficient excess to pay the dividend.
• The payment is fair and reasonable to shareholders as a whole.
• It does not materially prejudice creditors.
• If the payment does not satisfy the capital reduction rules in s 256B(1) then
the Company is in breach of s 254D. The dividend will still stand but the
directors may be liable for a civil penalty s 256D(2),(3), s 1317E.
• The directors may also be in breach of their insolvency duties s 588G.
• They may also contravene s 254T(1)(c) and breach their fiduciary duty and
duty of care, and be personally liable.

Injunctions, Imputation Credits
• Shareholders and creditors may also be able to apply to the court for an
injunction to stop the payment of a dividend because it is unfair, or materially
prejudices the Company.- s 1324
• Imputation credits can be attached to dividends (as franked credits) to
overcome the problem of the unfair double taxing of company profits.
Australian resident shareholders can get a tax credit offset.
ASIC v Adler (2002) NSWSC 171
• This case involved the founding CEO of HIH Insurance (Williams), which
grew to be one of Australia’s largest insurers. Williams purchased AFI
Insurance for $590 million from Adler in 1998 with a misleading prospectus
that fooled shareholders and investors. By 2000 HIH was insolvent with debts
of $5 billion. At the same time he gave $10 million to Adler (who was also a
director of HIH). This money was distributed through Adler’s Company in
order for him to buy shares in HIH ($4 million). Although Adler kept most of
the money for his own purposes the aim of the loan from Williams was to prop
up the failing share price of HIH, which it failed to do.
• HIH and its subsidiaries were materially prejudiced in breach of s260A. Both
Williams and Adler were found to be in breach of the Act (civil penalties) and
of their duties as directors. They were also sentenced to prison for dishonesty.
Re Fowlers Vacola Manufacturing Co Ltd (1966) VR 97
• In this case a share capital reduction involved a benefit payment only to the
ordinary shareholders of the company and not to the preference shareholders.
It was held that this was not valid because fairness would require at least equal
treatment for preference shareholders the same as for the ordinary
shareholders.
Trevor v Whitworth (1887) 12 App Cas 409
• In this case a money market manager who acted as a foreign exchange dealer
for an electronics company with usual authority to enter into contracts with
banks, lost $50 million. The court held that the company was bound by the
contracts because of the usual implied authority that was attached to the
money manager’s powers in the company.
Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) NSWCA 427
• In this case a cancellation of minority shares for reasonable consideration had
the effect of giving the majority shareholder 100% control and extra benefits
arising from that control. The minority shareholder argued that this was not
fair. The court disagreed and said that all the shareholders had received
reasonable benefits.

Week 6:
1. Be able to explain how directors are appointed and the various
categories of directors.
2. Understand why it is important to have a balance between executive and
non-executive directors on the board of a public company.
3. Outline some of the powers of directors.
4. Explain the disqualification and termination of directors.
5. Explain the various special positions of directors and their powers.
6. Understand who can call directors meetings and what the quorum is.
7. Outline the statutory requirements for the remuneration of directors (s
202, s 296(1) and s 300).
8. Explain the '2 Strikes' process (s 249L, s 250R, s 250SA and s 250W).
9. Explain the power of the Board to make business/management
decisions.
What is a company director? (314)
Section 9 in the Corporations Act dictionary and defines a director of a company or
other body as:
a) Person who:
a. Is appointed to the position of a director; or
b. 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:
a. They act in the position of a director; or

b. The directors of the company or body are accustomed to act in
accordance with the person's instructions or wishes.
According to the note in the s9 definition of director, the following provisions of the
Corporations Act are examples of a contrary intention where a de facto director or
shadow director would not be included in the term “director”:
➢ S249C (power to call meetings of a company’s members)
➢ S 251A (3) (signing minutes of meetings); and
➢ S 205B (notice to ASIC of change of address)
There are a number of different types of directors including executive directors, non-
executive directors, de facto directors and shadow directors. There are also a number
of special positions a director can hold within a company. These include the managing
director (otherwise known as a CEO), the chairperson and the governing director.
Special Position Role
Managing Director (or CEO)
page 316
Also an employee (executive director) responsible
for the day-to-day oversight and management of the
company on behalf of the board. In charge and
responsible for the senior executives employed to
manage the company.
The Chairperson page 316 Usually a senior and experienced director who is
responsible for the functioning of the board and its
committees, and for mentoring younger directors.
Governing Director Often found in small private companies (such as a
family company). A governing director is appointed
to the position and can have:
1. Tenure for life
2. Full control and management powers
3. Ownership of a class of shares with the heaviest
voting power.
Can appoint, limit and remove other directors, and
nominate a successor.
Nominees (319) A director who is nominated to represent large
shareholders.

• De Facto directors (pp. 314-315)
A director includes persons who act in the position of a director even though they
have not been appointed to that position: s 9. Such people are referred to as “de facto”
directors.
A de facto director is not formally appointed but carries out all the duties of and
makes decisions as a director. He may also sign company documents and be treated as
a director by the other directors.
A person may be regarded as a de facto director if the person is the driving force
behind the company business despite not having been appointed to that position, or
continues to participate in the management of the company after the expiration of the
term of appointment as a director as if still a director: Corporate Affairs Commission
v Drysdale (1978) 141 CLR 236.
• Shadow directors (pp. 315-316)
The s 9 definition of director also includes persons who act as “shadow” directors.
These are persons whose instructions or wishes are customarily followed by the
directors of a company. A person is not regarded as a director merely because the
directors act on advice given by the person in the performance of functions attaching
to the person’s professional capacity, or the person’s business relationship with the
directors.
A creditor may also be a shadow director of a company where the directors of the
company are accustomed to act in accordance with the creditor’s instructions or
wishes as to how they should act. However a creditor will not be a shadow director
merely because the directors of the company feel obliged to comply with conditions
imposed by that creditor in commercial dealings with the company: Buzzle
Operations Pty Ltd v Apple Computer Australia Pty Ltd (2010) NSWSC 233.
Determining whether a person is a shadow director or not is important where statutory
duties are imposed on “directors”. This occurs in s 588G which imposes a duty to
prevent insolvent trading. A shadow director may breach this duty and be held liable
even though that person has not been validly appointed.
Under some circumstances, even if you are not formally appointed as a director, you
may still be subject to the same duties and liabilities as a director.
For example, if you act as a director or give instructions to the appointed directors on
how they should act, you may be considered a ‘shadow director’.
Shadow directors can still be liable for breaches of the laws relating to directors’
duties, even though they were never formally appointed as a director of the company.
A shadow director is a person whose instructions and decisions the other directors
accept and implement unlike a de facto director he may not carry out those actions
himself. A shadow director often acts behind the scenes, which may be because there
is a reason why they cannot be formally appointed.
Differences between de facto and shadow directors
Associates Associate directors with no voting rights can be
appointed, so they can observe the workings of the
board.

The major differences between a de facto director and a shadow director are outlined
in the official transcript of Ultraframe (UK) Ltd v Fielding and others. A person may
be both a de facto and a shadow director at the same time. Whether a person who was
appointed a director of a company which was a corporate director of another company
could be considered a de facto director of the second company was analysed in a more
recent case, Revenue and Customs Commissioners v Holland and another [2010] 1
W.L.R. 2793.
• Executive and non-executive directors (pp. 317-318)
The boards of many companies, particularly large listed companies, often comprise of
executive and non-executive directors. The courts acknowledge that the two types of
directors have different roles and functions within the company.
Executive directors are full time employees to whom the board has delegated
significant management and administrative functions. The company’s chief executive
officer (CEO) or managing director is the leader and most senior member of the
management team. Executive directors, other than the CEO, may include the
company’s chief finance officer.
Non-executive directors are not directly involved in the day-to-day management of
the company’s business. They have part-time, intermittent role in the company that is
usually performed at periodic board meeting and at meeting of board committees of
which non-executive directors are members. Non-executive directors have important
roles as members of board committees and in monitoring the activities of the
management team headed by the CEO.
It is a question of fact whether a person is an executive director or a non-executive
director: AIG Australia Ltd v Jaques (2014) VSCA 332. The essential element of the
distinction is whether the director is performing executive functions in the
management and administration of the company. A person is regarded as an executive
director if the evidence shows that the company has conferred executive powers in
relation to management and administration on the person. In the absence of some
further authority conferred upon a director by the company, be it under a contract of
employment, a services agreement, or via an express delegation or acquiescence in a
director’s exercise of executive powers, the director should generally be treated as a
non –executive director.
• Committees (p. 327)
The boards of larger organisations often delegate work to committees of directors to
more effectively deal with complex or specialised issues and to use directors’ time
more efficiently. Committees make recommendations for action to the full board,
which retains collective responsibility for decision making.
Section 198D of the Corporations Act 2001 (‘the Act’) allows boards to delegate
some of their powers to a committee of directors unless the company’s constitution
disallows it. The delegation must be recorded in the minute book.
Section 190 provides that, when directors delegate a power under section 198D of the
Act, they remain responsible for the exercise of the power by the delegate as if it had
been exercised by the directors themselves. There is a limited exception where the
director who delegates will not be held responsible if that director believed:

• On reasonable grounds at all times that the delegate would exercise the power
in conformity with the duties imposed by the Act and the company's
constitution; and
• On reasonable grounds and in good faith (and after making proper inquiries if
the circumstances so required) that the delegate was reliable and competent in
relation to the power delegated (see s 190(2) of the Act).
Section 189 gives authority for the rest of the board to reasonably rely on the
information or advice given by a committee so long as it is independently assessed by
the board and is relied upon in good faith. However, this delegation of authority does
not lessen the board’s overall duties and responsibilities.
The audit committee is one area where there are some mandatory requirements.
First, ASX Listing Rule 12.7 requires that a company which was included in the S&P
All Ordinaries Index at the beginning of its financial year must have an audit
committee during that year.
Second, if the company was included in the S&P ASX 300 Index at the beginning of
its financial year, it must also comply with the best practice recommendations set by
the ASX Corporate Governance Council in relation to composition, operation and
responsibility of the audit committee for the whole of that financial year, unless it had
been included in that Index for the first time less than three months before the
beginning of that financial year.
A company that is included in the S&P ASX 300 Index for the first time less than
three months before the first day of its financial year but did not comply with the best
practice recommendations at that date must take steps so that it complies with those
recommendations within three months of the beginning of the financial year.
Some of the recommendations under Principle 4 which must be complied with
include:
• Structure – at least three members, only non-executive directors, majority of
independent directors, independent chair who is not chair of the board;
• Charter – the committee should have a formal charter;
• Meetings – the committee should meet often enough to undertake its role
effectively;
• Minutes – minutes should be kept and circulated to the full board.
There are similar requirements for institutions which are regulated by APRA (see for
example Prudential Standard CPS 510 'Governance, effective from 1 January 2013).
The main functions of the audit committee include:
• To ensure the adequacy and integrity of the company's financial reporting
systems;
• To monitor and evaluate the adequacy of internal accounting controls;

• To review and agree on the audit plan;
• To oversee the appointment, performance and independence of the external
auditor.
• The board of directors
A board of directors (B of D) is a group of individuals, elected to
represent stockholders. A Board’s mandate is to establish policies for corporate
management and make decisions on major company issues. Every public company
must have a board of directors. Some private and non-profit organizations also have a
board of directors.
In general, the Board makes decisions as a fiduciary on behalf of share holders. Issues
that fall under a Board's purview include the hiring and firing of executives, dividend
policies, options policies, and executive compensation. In addition to those duties, a
board of directors is responsible for helping a corporation set broad goals, supporting
executive duties, and ensuring the company has adequate, well-managed resources its
disposal.
The structure and powers of a Board are determined by an organization’s bylaws.
Bylaws can set the number of Board members, the manner in which the Board is
elected (e.g. by a shareholder vote at an annual meeting), and how often the Board
meets. While there is no set number of members for a Board, most range from 3 to 31
members. Some analysts believe the ideal size is seven.
The board of directors should be a representation of both management and share
holder interests and consist of internal and external members.
An inside director is a member, who has the interest of major shareholders, officers,
and employees in mind, and whose experience within the company adds value. An
insider director is not compensated but are often already C-level executives, major
shareholders, or stakeholders, such as union representatives.
Independent or ‘outside’ directors are not involved in the inner workings of the
company. These member are reimbursed and usually get additional pay for attending
meetings. Ideally an outside director brings an objective view to goal-setting and
settling any company disputes. It is considered critical to strike a balance between
internal and external directors on a board.
The executive board consists of insiders elected by employees and shareholders and is
headed by the CEO or managing officer. This board is in charge of the daily business
operations of the company.
• Powers of directors (pp. 321-324)
The Corporations Act 2001 specifies four main duties for directors:
• Care and diligence - to act with the degree of care and diligence that a
reasonable person might be expected to show in the role (s 180). The same
duty is imposed on directors at common law. The business judgment rule
(discussed below) provides a “safe harbour” for a director in relation to a
claim at common law or under s 180.
• Good faith - to act in good faith in the best interests of the company and for a
proper purpose (s 181), including to avoid conflicts of interest, and to reveal

and manage conflicts if they arise. This is both a duty of fidelity and trust,
known as a ‘ fiduciary duty’ imposed by general law and a duty required in
legislation.
• Proper use of position - to not improperly use their position to gain an
advantage for themselves or someone else or to the detriment to the company
(s 182).
• Proper use of information - to not improperly use the information they gain
in the course of their director duties to gain an advantage for themselves or
someone else or to the detriment to the company (s 183).
• Director's meetings (pp. 324-327)
The primary reason for holding meetings is to allow the board to make decisions.
However, meetings also serve a range of other important functions, providing a forum
where:
• Board members are regularly brought together to focus on their roles and
responsibilities, identify problems and plan for the future.
• Members are encouraged and motivated.
• Ideas are shared and discussed and then discarded, improved or implemented.
• Tasks are allocated and reported on.
• Regular updates about relevant issues are provided.
• Members can get to know each other, professionally and personally.
Board members will be involved in a range of meetings during their term. This help
sheet primarily discusses ordinary meetings, but other meetings include:
• Annual General Meetings – used to recap on the year's progress, chart a
direction for the future and elect new members or office bearers.
• Extraordinary meetings – held between general meetings when urgent
decisions need to be made.
• Committee meetings – held regularly or as the need arises to consider
particular issues.
• Retreats – held away from the boardroom, often for a full day or weekend,
and designed to allow board members to take part in deeper discussions about
a particular issue or directions and future plans.
Meeting structure
As mentioned above, meetings can vary markedly from board to board. Some are
quite formal, adhering to strictly defined rules and ensuring all members are addressed
by their correct titles ("President Smith," "Madam Chair," and so on). Others are far
less formal – usually it will depend on the make-up and function of the board, how it
was set up and how it has evolved.
• Meetings can be held in a boardroom, or in a more social setting such as a
member's house or even a local restaurant.

• Decisions may be made through a range of means, by formal voting or a more
informal show of hands or verbal agreement.
• Some meetings are held behind closed doors and are subject to strict rules of
confidentiality; others are fully open to the public. Even open meetings may
sometimes move into confidential mode, asking observers to leave while
certain sensitive issues are discussed.
The agenda
The agenda is the list of things that will be discussed during the meeting. It is usually
sent to board members well in advance of the meeting to ensure everyone has a
chance to read and digest it before the meeting starts.
Some more sophisticated agendas go further than a simple list, also providing
supporting information (explanations, related documents, etc.), as well as details
about who will address each item, recommendations for action and how much time
each item is expected to take up.
The minutes (326)
The minutes are the official record of the actions and decisions of the board. They are
taken every meeting and approved the next time the board meets. Generally, meeting
minutes will include:
• The date and time of the meeting (including start and finishing times).
• Attendees (including absences and apologies – and noting when people have
left and re-entered the meeting).
• A summary of the main points made during the discussion of each item.
• The result of each item discussed (decisions made or deferred, sometimes also
including the number of votes for and against).
The minutes are sometimes approved without much thought, or even having not been
read by board members. This is a dangerous practice indeed. The minutes show who
voted for what and what action the board has committed itself to – and they may be
referred to as the official record days and weeks and even years after a decision has
been made. They should therefore not be treated lightly.
Motions and resolutions (325)
A "motion" is a proposal for action. "Moving" a motion merely means putting the
proposal forward to be voted on. Sometimes motions are amended or reworded before
being put to the vote. If the motion is approved by the board, it is referred to as a
"resolution" (i.e. the board's decision), which can be legally binding.
Quorum (326)
The word "quorum" refers the minimum number of board members who have to
present for the board to legally transact business. Your organisation's constitution
should spell out what numbers are required for meetings to take place.

The role of the chair
Board meetings cannot take place without a board chair. The role of the chair is to
ensure the meeting is conducted efficiently and that meeting rules are adhered to. The
chair should facilitate discussions, keep members on track and the meeting on time.
When a topic has been fully discussed, the chair will often summarise the points and
put the motion to the board for a decision or vote.
Appointment, disqualification and removal of directors
Under section 201A a private company must have at least one director whereas a
public company must have a minimum of three directors. There are strict rules which
govern both how directors are appointed and also who can be appointed. Once
appointed directors may be either disqualified (under section 206) or terminated from
their positions. Common reasons for disqualification include conviction of a serious
crime or bankruptcy.
• Appointment of directors (pp. 327-329)
A company can appoint a director by resolution at a general meeting (s 201G). A
board may occasionally need to appoint a director to retain a quorum or to fill a casual
vacancy. This may be provided for in the constitution but is also allowed under s
201H of the Act (this is a replaceable rule), or they can use a combination of both.
In proprietary companies, the appointment has to be confirmed by a resolution of the
company within two months otherwise the appointment ceases at the end
of this period. Public companies must confirm the appointment by a resolution of
shareholders at the next annual general meeting (AGM) or the appointment ceases at
the end of the AGM.
The director of a proprietary company who is the sole director and shareholder may
appoint another director by recording the appointment and signing the record (s 201F)
Once a director has given his or her formal consent, the company usually sends a
letter of appointment signed by the chairman. This is not formally required by the Act
but is an opportunity for the company to provide more information to the new board
member.
According to s 205B, ASIC must be notified within 28 days of an appointment being
made, whether as a director or an alternate director. ASIC must be given the director’s
personal details, defined in s 205B (3) as the given and family names, all of their
former given and family names, as well as date and place of birth and residential
address. Any changes to these details must also be supplied to ASIC within 28 days.
• Disqualification from being a director (pp. 329-335)
Section 206A
A person who is disqualified from managing corporations under this Part commits an
offence if they:
• (a) Make, or participate in making, decisions that affect the whole, or a
substantial part, of the business of the corporation; or
• (b) Exercise the capacity to affect significantly the corporation's financial
standing; or

• (c) Communicate instructions or wishes (other than 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) to
the directors of the corporation:
i. (i) Knowing that the directors are accustomed to act in accordance
with the person's instructions or wishes; or
ii. (ii) Intending that the directors will act in accordance with those
instructions or wishes.
It is a defence to the contravention if the person had permission to manage the
corporation under either section 206F or 206G and their conduct was within the terms
of that permission.
Section 206B: Convictions.
206B(1)
A person becomes disqualified from managing corporations if the person:
a) Is convicted on indictment of an offence that:
i. Concerns the making, or participation in making, of decisions that affect
the whole or a substantial part of the business of the corporation; or
ii. Concerns an act that has the capacity to affect significantly the
corporation's financial standing; or
b) Is convicted of an offence that:
i. Is a contravention of this Act and is punishable by imprisonment for a
period greater than 12 months; or
ii. Involves dishonesty and is punishable by imprisonment for at least 3
months; or
c) Is convicted of an offence against the law of a foreign country that is
punishable by imprisonment for a period greater than 12 months.
206B(2) The period of disqualification under subsection (1) starts on the day the
person is convicted and lasts for:
a) If the person does not serve a term of imprisonment — 5 years after the day on
which they are convicted; or
b) If the person serves a term of imprisonment — 5 years after the day on which
they are released from prison.
206B(3) Bankruptcy or personal insolvency agreement.
A person is disqualified from managing corporations if the person is an undischarged
bankrupt under the law of Australia, its external territories or another country.
206B(4) A person is disqualified from managing corporations if:

a. The person has executed a personal insolvency agreement under:
i. Part X of the Bankruptcy Act 1966; or
ii. A similar law of an external Territory or a foreign country; and
b. The terms of the agreement have not been fully complied with.
Section 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:
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.
ASIC’s power of disqualification and failed companies: Section 206D and 206F
Section 206D of the Act broadly states that the Court may disqualify a person from
managing corporations for up to 20 years if within 7 years they have been an officer
of 2 or more corporations that have been wound up and that the person has been
wholly or partly responsible for the insolvency of the corporations.
ASIC may disqualify a person from managing corporations for up to 5 years if within
7 years they have been an officer of 2 or more corporations that have been wound up
in insolvency and those companies have been unable to return at least 50 cents in the
dollar to the ordinary unsecured creditors.
In determining whether a disqualification is justified, ASIC must have regard as to
whether the 2 or more failed corporations were related to one another and also the
persons conduct, and whether the disqualification is in the public interest and any
other appropriate matters.
ASIC can apply for court orders disqualifying a person from managing corporations
for up to 20 years if they have been an officer of two or more companies that have
failed within the last 7 years, and the way in which the companies were managed
contributed to the failures.
Court power to grant leave
1) A person who is disqualified from managing corporations may apply to the
Court for leave to manage:
a. Corporations; or
b. A particular class of corporations; or

c. A particular corporation;
If the person was not disqualified by ASIC:
1) The person must lodge a notice with ASIC at least 21 days before
commencing the proceedings. The notice must be in the prescribed form.
2) The order granting leave may be expressed to be subject to exceptions and
conditions determined by the Court.
Note: If the Court grants the person leave to manage the corporation, the person may
be appointed as a director (see section 201B) or secretary (see section 204B) of a
company.
(3) The person must lodge with ASIC a copy of any order granting leave within
14 days after the order is made.
(4) On application by ASIC, the Court may revoke the leave. The order revoking
leave does not take effect until it is served on the person.
iii. Termination of director appointments (pp. 335-337)
How does a director resign?
Directors resign by giving written notice to the company’s registered office (s 203A
(replaceable rule) Corporations Act 2001). Alternatively, they can give written notice
of the resignation to ASIC. However, this must be accompanied by the letter of
resignation given to the company (s 205A (1), (2)). The company must give notice to
ASIC of a director’s resignation within 28 days unless the director has given the
notice to ASIC discussed above.
It is very important for a director seeking to resign to follow the formalities.
Otherwise, for example, if the company becomes insolvent while the director's name
is still 'on the record', then the director may face legal action for insolvent trading or
other provisions under the Corporations Act 2001.
What is the rule as to rotation of directors in listed companies?
A director of a listed public company (other than a managing director) must not hold
the position of director (without re-election) past the third annual general meeting
following the director’s appointment or three years (whichever is longer) (ASX Listing
Rule 14.4).
How is a director removed in a public company?
Members can remove a director by resolution (s 203D (1)). This is despite anything in
the company’s constitution, an agreement between the company and the director or an
agreement between any or all members of the company and the director. If a director
is the representative of a particular class of shareholders or debenture holders, the
resolution to remove the director does not take effect until a replacement
representative has been appointed.
The board or other directors cannot remove a director. This prevents a majority of
public company directors from removing a director without the agreement of

shareholders. Any resolution, request or notice of any of the directors of a public
company which purports to remove another director is void (s 203E). This means that
so called 'pre-nuptial agreements', where it is said that a director will resign if other
directors request it, are not legally effective.
Notice of intention to move the resolution must be given to the company at least two
months before the meeting is to be held (s 203D(2)). However, if the company calls a
meeting after the notice of intention is given, the resolution can still be passed even if
less than two months’ notice is given. The director in question must be given a copy
of the notice as soon as practicable after it is received (s 203D (3)).
The director is entitled to put his or her case to members (s 203D (4)). A director can
do this by (a) giving the company a written statement which the company must
circulate to members and (b) speaking to the motion at the meeting. The written
statement is to be circulated to the members by:
• Sending a copy to everyone to whom notice of the meeting is sent if there is
time to do so; or
• If there is not time to send a copy as above - having the statement distributed
to members attending the meeting and read out at the meeting before the
resolution is voted on.
The written statement does not have to be circulated if it is more than 1,000 words
long or defamatory.
The removal of a director who is not performing is a difficult task and can be
damaging to the organisation. In general, it will be the chairman's task to ask that
director to consider his or her position on the board. However, there have been high
profile cases of a director refusing to leave a board even though this was the wish of
the remaining directors. In some of those cases, large shareholders have become
involved and the director has left. In the end, if there can be no resolution reached on
the board, then it is a decision for the shareholders and a general meeting must be
called.
How is a director removed in a proprietary company?
A proprietary company may by resolution remove a director from office and may by
resolution appoint another person as a director instead (s 203C, Corporations Act
2001).
A director may also be removed by a majority of directors if the constitution allows it.
In doing this, and if the person is an executive director, the company needs to be
mindful of the terms of employment for that director, unfair dismissal laws and
natural justice requirements.
Director's remuneration and benefits

There are a series of rules that govern decisions regarding both the remuneration and
other benefits received by company directors. Shareholders in a listed company have
the right to know the remuneration and other benefits which are paid. This
information must be made available to shareholders via a remuneration report.
Shareholders also have the right to reject or accept changes to the remuneration paid
to the directors (this is accomplished via a vote).
• Remuneration for board members (p. 337)
What is the difference between directors’ fees and executive remuneration?
The wider community and the media often seem to be confused about directors’ fees
and executive remuneration. There are significant differences between the two.
• Directors may be paid fees in return for the services provided in governing an
organisation but only if their shareholders approve a resolution to pay them.
The board presents what they think is an appropriate pool of fees for the board
as a whole to shareholders at a general meeting. The fees, if approved,
represent the upper limit that can be paid to the board. The board then decides
how the pool is split between individual directors. This is the amount paid to
non-executive directors. Shareholders only have to be approached when the
board wants to increase the pool – it is not an annual requirement.
• Executive remuneration refers to salaries and bonuses paid to executive as
senior company employees and forms part of the executive’s employment
contract with the organisation. The board of directors determines executive
remuneration and bonuses. Some senior executives will also be directors (ie
executive directors) and they will usually receive no extra fee for serving on
the board.
Listed Companies – Remuneration Report
Under sec 300A of the Corporations Act 2001, listed companies must present a
remuneration report to shareholders at every annual general meeting showing the
board's policies for determining the nature and amount of remuneration paid to key
management personnel (which includes any director), the relationship between the
policies and company performance, an explanation of performance hurdles and actual
remuneration paid to key management personnel.
• Remuneration reports (pp. 338-340)
• Section 300A(2) of the Corporations Act previously required a company that
is a "disclosing entity" to provide prescribed information about the
remuneration of its key management personnel as part of the company's
annual directors' report. This was despite the heading to section 300A
suggesting that the legislature may only have intended the provision to apply
to listed companies.
• This anomaly in the legislation has now been corrected by clarifying that the
remuneration reporting requirements under section 300A of the Corporations
Act apply only to disclosing entities which are listed. This change means that

companies which are disclosing entities by virtue of having a wide base of
shareholders, but which are not listed, will no longer be required by the
Corporations Act to report on the remuneration of their key management
personnel. This change will apply in relation to the current financial year.
The directors' report for a financial year for a company must also include (in a
separate and clearly identified section of the report):
a. Discussion of board policy for determining, or in relation to, the nature and
amount (or value, as appropriate) of remuneration of the key management
personnel for:
i. The company, if consolidated financial statements are not required; or
ii. The consolidated entity, if consolidated financial statements are
required; and
b. Discussion of the relationship between such policy and the company's
performance; and
c. If an element of the remuneration of a member of the key management
personnel for the company, or if consolidated financial statements are required,
for the consolidated entity is dependent on the satisfaction of a performance
condition. Details of that performance condition must be set out together with
an explanation of why it was chosen: s300A(1)(ba)
• The two strikes and re-election process (pp. 340-341)
The Corporations Act 2001 was amended from 1 July 2011 to provide for the 'two
strikes' rule in relation to the remuneration report. At the annual general meeting, the
shareholders must vote approval or otherwise of the remuneration report. The first
strike is when a company’s remuneration report receives a ‘no’ vote of 25 % or more.
Where this occurs, the company’s subsequent remuneration report must explain
whether shareholders’ concerns have been taken into account, and either how they
have been taken into account or why they have not been taken into account.
The ‘second strike’ occurs where the company’s subsequent remuneration report
receives a ‘no’ vote of 25 % or more. Where this occurs, shareholders will vote at the
same annual general meeting to determine whether the directors will need to stand for
re-election within 90 days. If this resolution passes with 50 % or more of eligible
votes cast, then the ‘spill meeting’ will take place within 90 days. At the spill meeting,
those individuals who were directors when the report was considered at the most
recent annual general meeting will be required to stand for re-election (other than the
managing director, who is permitted to continue to run the company).
WEEK 8:
1. Be able to explain what is meant by the term 'fiduciary duty'.

2. Be able to explain s 181 and how 'good faith', 'proper purpose' and 'best
interests' are applied. They should be familiar with case examples such as:
Park Daily News, Whitehouse v Carlton and the Howard Smith case.
3. Understand the 'but for test' where there appear to be 'mixed purposes'.
4. Be able to explain s 182 (improper use of position) and how it was derived
from Regal Hastings v Gulliver.
5. Be able to explain other contraventions that might flow from the duty in s 182.
This includes conflicts of interest s 191, s 194 and s 195.
6. Be able to explain 'Related Party' transactions s 208 – 229, and the
requirement of shareholder approval.
7. Be able to explain s 183 (improper use of information). They should also be
familiar with ASIC v Vizard and insider trading provisions (sec 1042).
8. Understand conflict of interest and disclosure of material interest provisions (s
191(1) and s 194).
9. Be aware of the full range of civil and criminal penalties particularly the effect
of s 184. Students should understand how these penalties are applied e.g. ASIC
v Adler.
Directors' duty to act in good faith and in the best interests of the company
Directors are under a duty to act in good faith and in the best interests of the company.
These duties have been incorporated into statute law. S181 states that: 'A director or
other officer of a corporation must exercise his or her powers and discharge his or
her duties in good faith, in the best interests of the corporation for a proper purpose.'
So what is meant by 'good faith'? (397)
Good faith means to act honestly but also to be seen to be acting honestly. The courts
will decide there has been a breach of duty even if the director has an honest belief
that they were acting in good faith in the best interests of the company if 'no
reasonable director could have reached that conclusion'.
What does 'in the best interests of the company' mean?
While the company is solvent then the best interests of the company will be those of
the shareholders as a whole. When it is insolvent it is what is in the best interests of
creditors.
• Directors' duties (p. 397)
There are numerous and important legal responsibilities imposed on directors under
the Corporations Act 2001 and other laws, including the general law.
Of these duties, some of the most significant are:
• To act in good faith in the best interests of the company and for a proper
purpose
• To exercise care and diligence
• To avoid conflicts between the interests of the company and your personal
interests

• To prevent the company trading while insolvent (i.e. while it is unable to pay
its debts as and when they fall due)
• If the company is being wound up, to:
o Report to the liquidator on the affairs of the company
o Help the liquidator (e.g. by giving the liquidator the company books
and records that you may have in your possession).
• What is 'in the best interests of the company'? (pp. 398-401)
• The duty to act in good faith in the best interests of the company requires
directors to act honestly, for the benefit of all shareholders. It is closely related
to the obligation to act for a proper purpose. If a director exercises their power
for personal profit, they have typically acted for an improper purpose and
failed to show good faith for the best interests of the company.
• While the duty to act in good faith originates in equity, it has also been
enshrined in the Corporations Act 2001 (Cth).
Equity
• This duty stems from the fiduciary obligations found in equity. This obligation
requires a person in a fiduciary capacity to act in a position of trust for the
benefit of the beneficiary. As the relationship between a company and a
director is regarded to be a fiduciary one, this obligation extends to directors.
• Even though the duty focuses on honest actions and genuine beliefs, the test
for breach of it is not entirely subjective. An honest director could still fail to
fulfil their obligations even if they believed that their actions were in the best
interests of the company.
• If a court is required to determine if a director has failed to act in good faith in
the best interests of the company, it uses a test that is both objective and
subjective. If a director genuinely believed their actions were in the best
interests of the company, the court will not refute that assertion by evaluating
the commercial value of the act itself. However, it will look for independent,
objective evidence that the director truly held that belief.
Statute
• The Corporations Act 2001 (Cth) also requires directors (and officers) to
discharge their duties in good faith in the best interests of the corporation.
• The legislative obligation is substantially similar in content and scope to its
equitable counterpart. As such, the statutory duty closely resembles equitable
notions of it. Case law precedent also applies.
Directors' duties to exercise powers for proper purpose
A range of powers are conferred onto company directors. Directors are bound by duty
to ensure they use these powers for "a proper purpose". It is possible for a director to
have breached this duty even if they believed that their actions were in the best
interests of the company. This can become especially confusing where there appears
to be more than one purpose that is motivating the directors in their actions. In cases
where there are mixed purposes the courts have developed a test called the ‘but for’
test: would the directors have taken their action ‘but for’ some other purpose not

related to the best interests of the company? The answer will reveal the ‘real
motivating’ purpose and if it is improper then the directors are in breach of s181.
• What is a proper purpose? (pp. 407-414)
To act for proper purposes (also s 181 of the Corporations Act) means that directors
must not do something that a reasonable person would perceive to be contradictory to
the aims or actions of the company; not to use the their position as a directors for
personal gain (s 182(1) of the Corporations Act). Directors must not improperly use
their position to gain an advantage for themselves or for any other person, or to cause
detriment to the company. This duty requires that directors must not misuse their
position as a director for personal gain or for third parties; not to make improper use
of information gained whilst acting as a director for personal advantage or for the
detriment or disadvantage of the company (s 183(1) of the Corporations Act).
Directors must not improperly use information obtained by virtue of their position to
gain an advantage for themselves or for another person, or to cause detriment to the
company.
To disclose to the other directors, any material personal interest in a transaction
involving the company. In order to determine whether an interest is material, it must
be shown that there was a substantial likelihood that, under all the circumstances, the
interest would have assumed actual significance in the deliberations of the directors
about the matter; not to cause the company to conduct its affairs or to act or refrain
from acting in such a manner that is either:
o Contrary to the interest of the shareholders as a whole; or
o Oppressive to, unfairly prejudicial to, or unfairly discriminatory
against one or more shareholders (s 232 of the Corporations Act);
To account for profit which arise by reason of and in the course of the director’s office
where:
o The benefit was obtained in circumstances where a conflict or the
significant possibility of a conflict existed between the director’s duty
to the company and the director’s personal interests; or
o The benefit was obtained or received by use or by reason by the office
of director or of the opportunity or knowledge resulting from that
position; to prevent the company from trading if it has become
insolvent (s 558G of the Corporations Act). Insolvent means that a
company is not able to pay its debts as and when they become due.
A director would fail this duty if he was a director at the time that:
• The company incurred a debt;
• The company was insolvent at that time or became insolvent as a result of
incurring the debt; and
There were reasonable grounds to suspect the company is or would become insolvent
and the director was aware at the time that there were such grounds for suspecting
insolvency or a reasonable person in a like position in the company’s circumstances
would have been so aware;
If there is a relationship of confidence and trust between directors and shareholders,
the directors also have additional duties to the individual shareholders. This will

depend on the special circumstances and nature of the relationship in each case, but
will generally arise where there is:
1. Dependence on information and advice;
2. The existence of a relationship of confidence;
3. The transaction is of particular significance to the shareholder; or
4. Positive action is taken by or on behalf of the directors to promote the
transaction.
• Statutory duties to act in good faith and for a proper purpose (pp. 414-416)
The legal duties and responsibilities of directors are:
• To act with reasonable care and diligence (s 180(1) of the Corporations Act).
The standard of care required is the degree of care and diligence which a
reasonable person would exercise if they were a director in the company’s
circumstances. Accordingly, in certain circumstances, the directors must
exercise their powers and discharge their duties with the degree of care and
diligence that a reasonable person would exercise if they were a director of a
company in the company’s circumstances, and occupied the office held by, and
had the same responsibilities within the company as, the directors. The
business judgement rule may offer protection to directors for breach of this
duty in (see section 6 below);
• To act in good faith in the best interest of the company (s 181 of the
Corporations Act). Directors must exercise their powers and discharge their
duties in good faith in he best interest of the company. Directors must avoid
conflicts of interest and disclose and manage conflicts if they arise. The duty
to act in good faith also requires that directors act honestly and in a manner
motivated by the company’s best interests as would be determined by an
intelligent director in the director’s position; to act for proper purposes (also s
181 of the Corporations Act).
• Consequences of contravening s 181 (pp. 416-417)
• In addition, directors and other officers of companies must exercise their
powers and discharge their duties in good faith in the best interests of the
corporation and for a proper purpose [s 181]. They are prohibited from
improperly using their position to gain an advantage for themselves or
someone else or to cause detriment to the corporation [s 182] and are
prohibited from using information obtained as a consequence of their role with
the company to gain an advantage for themselves or someone else or to cause
detriment to the corporation [s 183]. These last two provisions also apply to
employees of the company.
• All of the provisions give rise to civil obligations. They are also civil penalty
provisions. In a case where a court determines that a civil penalty provision
has been contravened, it must make a declaration to that effect and may order
the person pay the Commonwealth a pecuniary penalty of up to $200,000 and
may order the person compensate the company for any loss as a result of the
contravention [Part 9.4B]. The court may also disqualify the person from
managing corporations for a period the court considers appropriate [s 206C].
• The Corporations Act 2001 (Cth) also sets out criminal offences where a
director or other officer acts recklessly or is intentionally dishonest in their

failure to exercise their powers and discharge their duties in good faith and in
the best interests of the company or for a proper purpose. Similarly, criminal
offences are created where a person recklessly or intentionally dishonestly
misuses their position or information they have gained through their position
with the company [s 184].
Conflicts of interest and disclosure
Directors have a fiduciary duty not to make undisclosed personal profits from their
position. This applies even where the contract is fair, or the company has not suffered
any loss and may in fact have benefited from the directors’ actions. Under s182
directors or officers or employees cannot use their position to gain advantage for
themselves through conduct that is inconsistent with the proper discharge of their
duties.
• Improper use of position (pp. 436-441)
To be found in breach of this duty, the person involved must be a director of the
company. ‘Officers’ and ‘employees’ of the company must also comply with this duty
under the Act.
• Following the decision in R v Byrnes (1995) 183 CLR 501, it is the ‘intent’ or
‘purpose’ of the director to gain an advantage or cause detriment to the
company that is important. It does not matter if the end result of a transaction
is that the company does not suffers actual ‘damage’ or alternatively, that there
are no real benefits or advantages that flow to a director. Keep in mind that
subjective intent to obtain an advantage or cause detriment to the company is
not always required. In determining whether there has been an impropriety,
the Court looks to the viewpoint of a ‘reasonable person’ of a person in the
same situation Forkserve Pty Ltd v Jack (2001) 19 ACLC 399; [2000] NSWC
106.
• If a corporate opportunity is presented to the company, a director may not take
advantage of it for personal gain, unless the company decides not to pursue it
and, the director notifies the board and shareholders and is given permission
participate in the transaction. Following the decision in Regal (Hastings) Ltd
v Gulliver [1967] 2 AC 134 whether or not the company tends to use the
corporate opportunity is irrelevant.
• Contraventions that may be applied for improper use of position
• If a Court is satisfied that a person has contravened a civil penalty provision, it
may make a declaration of contravention. Once a declaration has been made
by the court, ASIC may then seek a pecuniary penalty order. A financial
penalty of up to $200,000 may be payable to the Commonwealth if ordered by
a Court in certain circumstances. There may be further actions that could be
taken for breach of fiduciary duties.
• Improper use of information (pp. 450-454)

• The law has recognised the issue that directors can use information gained
from their position for their own personal gain. To address this problem, the
result is that directors have a duty not to make improper use of
information. This duty exists under both the general law and s 183 of the Act.
This duty overlaps with the duty not to make improper use of position, duty to
avoid conflicts of interest. Fiduciary duties to act in the best interests of the
company and not to make a secret profit are also related.
Case:
• A well-known case example that illustrates a breach of the duty to not
improperly use information is ASIC v Vizard [2005] FCA 1037; (2005) 145
FCR 57. Stephen Vizard was a former non-executive director of Telstra. In
short, Vizard used information that he obtained through his position as a
director of Telstra to buy shares in three IT companies which Telstra had also
expressed interest in. Vizard admitted the breach and was ordered to pay a
civil penalty of $390,000. He was also disqualified from being a company
director for 10 years.
Statutory Duty
S 183(1) of the Act provides that 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:
• Gain an advantage for themselves;
• Gain an advantage for someone else or;
• Cause detriment to the corporation.
It does not matter if the director actually made a profit from the improper use of
information. The duty applies to ‘other officers’ or ‘employees’ of a corporation, as
well as the directors. The duty continues even after the person stops being an officer
or employee of the corporation.
Penalties for Breach of Duty
Similar to the other directors’ duties we have discussed, penalties for breaching the
duty not to improperly use information are serious:
• Civil penalty of up to $200,000;
• Declaration of a contravention s 1317E;
• Criminal liability if dishonesty can be shown;
• Compensation for any loss suffered; and
• Disqualification from being a director
• Shareholder approval for related party transactions (pp. 428-433)

Chapter 2E of the Corporations Act covers ‘related party benefits’ – designed to
protect the interests of a company’s members/shareholders as a whole, by requiring
member/shareholder approval before giving financial benefits which could otherwise
endanger those interests (Section 207 of the Act).
Section 208 requires, for a public company, that:
a) Member/shareholder approval must be obtained before giving a financial
benefit to a director or related party; or
b) The benefit must fall within an exception set out in Sections 210 ~ 216.
Members’/Shareholders’ Meeting
Sections 217 ~ 224 set out the procedures for obtaining member/shareholder approval
at an Extraordinary General Meeting, which include:
• Prepare meeting documents, including Notice of Meeting and an Explanatory
Statement, and probably an Independent Expert’s Report
• Lodge meeting materials with ASIC at least 14 days before the Notice is
despatched to members/shareholders
• At the EGM the related party, on any associate of that party, cannot vote. The
term ‘associate’ is discussed and defined in Sections 10 ~ 17.
Proprietary Companies
Proprietary companies (unless subsidiaries of public companies) are not governed by
the ‘related party benefits’ provisions of the Act, but nevertheless directors of such
companies must be mindful of their fiduciary duties, obligations and restrictions in
relation to pecuniary and other benefits that may be derived from their position.
Exceptions to Member/Shareholder Approval
Most relevant, the exception in Section 210 provides that:
a) Where any benefit would be reasonable in the circumstances if the public
company and the director/related party were dealing at arm’s length and/or on
commercial terms; or
b) The terms are less favourable to the director/related party than the terms
referred to in paragraph (a); then member/shareholder approval is not required.
Other exceptions include reasonable remuneration payments to directors, director
insurance, and small amounts given to directors/related parties.
Section 213 deals with ‘small amounts’. Member/shareholder approval is not required
for a financial benefit to a director/related party if the total amount(s)/value(s) in a
financial year does not (for each director/related party) exceed, in aggregate, $5,000
as prescribed by Regulation 2E.1.01.
‘Related party’ is defined in Section 228 to include:
• A director of the company and any controlling entity
• Spouses

• Parents and children (of both directors and/or spouses)
• An entity controlled by any of the above
• Any other entity acting in concert with a related party.
WEEK 9:
1. Understand a director's statutory duty of skill, care and diligence (s 180(1)).
2. Understand the Business Judgment Rule defence (s 180(2)).
3. Be familiar with each of the historical cases presented. Students should also
understand how these cases demonstrate how the standards for directors have
changed through time.
4. Know that civil penalties apply to breaches of s 180.
5. Be familiar with the key cases presented in this section: especially ASIC v
Healey 2011 ( Centro case)
Duty of care, skill and diligence
Directors are under a duty to exercise a reasonable degree of care, skill and diligence.
These requirements are incorporated into s180(1) which states that:
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.
In the early common law development of the law of negligence the ‘standard of care’
depended on the ‘reasonable foreseeability test’. This test assessed the likelihood of
injury or harm, the degree of risk, the circumstances and the industry standards. It
asked what would a reasonable man in the same circumstances foresee? In the
application of the duty of care to directors it began as a very subjective test of what
the directors' skills actually were. Through time this has developed to become a more
objective test as to what the expected skills should be.
Consequences for directors who breach their duties
There are serious penalties for directors who breach their duty of care, skill and
diligence. S180(2) sets out a defence for directors and business officers who make
decisions which may breach their duties of care. This is referred to as the "business
judgment rule" and states that:
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.
Key case
ASIC v Healey (Centro Properties Group) [2011] FCA 717
In this case the directors of Centro Properties Group were found to have breached
their duty of care.
The Centro board delegated the preparation of the 2007 financial report to the CEO,
the CFO and accounting staff who prepared consolidated balance sheets. These failed
to disclose $2 billion of short term debt by re-classifying it as a non-current liability
and guarantees of $1.75 billion. The directors failed to question the absence of this
debt when the board gave approval to the report.
The CFO admitted the allegations, but the non-executive directors argued that they
were entitled to rely on the financial advice given by others when it related to
complex financial accounts and statements. There was no known rule of law that as
non-executive directors they were required to search for financial errors. The court
acknowledged that there was no dishonesty involved, but there was a breach of duty
of care by all directors.
ASIC argued that the directors did have some knowledge of the use of guarantees and
the debt situation and therefore with that knowledge ‘a reasonable person’ in the
directors’ position when looking at the accounts would have seen something wrong
and made further inquiries, which they did not do. The court agreed with ASIC.
The court held that: all directors including non-executive directors had a duty of care
and diligence to ask questions and make further inquiries about company financial
statements so that they had a reasonable understanding of the financial affairs of the
company.
The court decided that as there was no dishonesty, the directors were experienced and
well regarded and had already suffered substantial damage to their reputations
because of the court case, there was no reason to impose any civil penalties on them
for their breach of the duty of care.
• Statutory defence – the business judgment rule (pp. 487-489)
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.
• Reliance on others (pp. 489-491)
Directors may have a defence when they have relied on someone else's information in
acting in a certain way. The defence is provided for in s 189 which specifies that a
director will not be in breach if:
1. A director relies on information, or professional or expert advice, given or
prepared by:
▪ An employee of the corporation whom the director believes on reasonable
grounds to be reliable and competent in relation to the matters concerned;
or
▪ 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
▪ Another director or officer in relation to matters within the director's or
officer's authority; or
▪ A committee of directors on which the director did not serve in relation
to matters within the committee's authority; and
2. The reliance was made:
▪ In good faith; and
▪ After making an independent assessment of the information, having
regard to the director's knowledge of the corporation and the complexity
of the structure and operations of the corporation.
• Penalties for breaches of s 180 (page 492)
Contravention of the s 180 (1) duty of care and diligence has different consequences.
Section 180(1) is a designated civil penalty provision under s 1317E. A person who
contravenes a civil penalty provision may be ordered to pay a pecuniary penalty of up
to $200,000 under s 1317G; compensation to the corporation for damage suffered by
it under s 1317H; or be disqualifies from management under s 206C.
Contravention of s 180(1) is not a criminal offence as criminal liability requires the
existence of dishonesty- an active awareness of wrongdoing. Since the concepts of
negligence and failure to exercise sufficient care and diligence do not involve
dishonesty, contravention of s180(1) is deliberately excluded from s 184, which
provides for criminal offences where other directors’ duties are breached dishonestly.

WEEK 10
1. Understand the requirements for members meetings including:
a. Different meeting types.
b. That they must be for a proper purpose (NRMA v Parker 1986).
c. What the minimum number of attendees is.
d. Notice requirements (s 249T; Fraser v NRMA 1995).
e. Voting and the use of proxy votes (s 249 X, s 250 and ASIC v Whitlam
2003)
2. Understand members' rights at an annual general meeting including:
a. Members' right to ask questions.
b. Members' right to make statements.
c. Members' right to put resolutions.
d. Members' right to call meetings.
e. Members' right to inspect company books.
3. Requirements regarding notification of meetings and meeting proceedings.
4. Understand what an invalid meeting is and know the potential resolutions (s
1322; Bell resources v Turnbridge 1988).
5. Be familiar with members remedies including remedies for:
a. Oppressive and unfair conduct (s 232).
b. Derivative action against the directors by a member (s 236 and s 237),
the leave of the court (s 237(1)), and pre-conditions (s
237(2); Charlton v Baber 2003).
c. Derivative Action by a member against a third party, rational belief and
the rebuttable presumption requirements (s 237(3)).
Members' meetings: types of meetings
Company meetings should have a proper purpose whether it be to provide information
to members, elect directors or pass resolutions. Shareholder meetings are formal
gatherings with the purpose of making decisions regarding the company. Meetings
should be chaired by the chairperson of the board or another director elected by the
board. Meetings cannot be chaired by the managing director. The minimum number
required for a valid members’ meeting is two (s249T). S249B provides an exception
for one-member propriety companies.
Types of meetings include: Page 561-565

Class Meetings
Class meetings are those meetings, which are held by the shareholders of a particular
class of shares e.g. preference shareholders or debenture holders.
Class meetings are generally conducted when it is proposed to alter, vary or affect the
rights of a particular class of shareholders. Thus, for effecting such changes it is
Annual General
Meeting
Must be held by public companies (optional for a private
company). As a general rule the meeting is called by the
directors and the agenda is set by the directors. The
purpose of this meeting is for members to elect directors,
receive the directors’ report and financial reports and to
approve both the appointment and remuneration of the
auditors and the remuneration of directors (s250R)
First AGM must be held 18 months after its registration
(s250N(1))
Thereafter, an AGM must be held at least once in every
calendar year and within 5 months after the end of a
company’s financial year: s 250N(2).
Default in holding an AGM is an offence of strict liability:
s 250N (2A).
Requested Meeting Members may request a meeting be held. A group of 100
members or more or alternately a group of members with
5% or more of the votes can make a written signed
request. The board should hold a meeting at the company’s
expense (s249D(1))within 21 days.
Alternatively, if the directors fail to call a meeting then
members with more than 50% of the votes can call a
meeting at the expense of the company (s249E) members
with 5% of the votes can call a meeting at their own
expense (s249F).
Extraordinary
Meeting
In a public company an individual director has the right to
call a meeting of the company’s members in spite of
anything to the contrary in the company’s
constitution s249CA rule is controversial because it could
lead to abuse by a director who wants to disrupt the
decisions of the board.
Invalid Meeting A meeting may be deemed to be invalid. Meetings and the
resolutions passed will not be invalid unless a court
determines that the irregularity has caused a substantial
injustice to the rights of shareholders or creditors (s1322).

necessary that a separate meeting of the holders of those shares is to be held and the
matter is to be approved at the meeting by a special resolution.
For example, for cancelling the arrears of dividends on cumulative preference shares,
it is necessary to call for a meeting of such shareholders and pass a resolution as
required by Companies Act. In case of such a class meeting, the holders of other class
of shares have no right to attend and vote.
• Misleading information
When directors want to call a general meeting of the shareholders, they
have disclosure obligations- they have to inform the shareholders of what the
meeting is about. There are three sources to this duty:
1. Statutory – s 249L (b) - state the general nature of the business of a meeting as
outlined in s 249L(b).
2. Common law - frame proper notices: the notice to the shareholders must make
a sufficient statement of the objects and general nature of the meeting.
a. A meeting is only competent to deal with business which is properly
notified to members in the notice convening it: Holmes v Life Funds of
Australia Ltd [1971].
b. This is because it is on the basis of this notice that members make their
decision as to whether to participate in the meeting: Devereaux Holdings
Pty Ltd v Parry Corp Ltd (1985).
c. Notice need not be meticulously precise, but must give fair and
reasonable intimation of what is proposed to be dealt with in
meeting: Devereaux.
d. Equity - equitable duty to provide members with information material to
their deliberations: case law is predominantly concerned with the
fullness, fairness and clarity of directors’ disclosure in general meeting -
failure may vitiate decisions taken in those meetings.
Notice must be given at least 21 days before the meeting: s 249H.
Directors are under an equitable duty to make full disclosure of facts within their
knowledge which are material to decision before shareholders, including whether/not
to attend the meeting: Bulfin v Benarfield’s Ltd (1938).
The information must be provided in an easy-to-read manner so that it can be read ‘on
the run’ (ordinary people could read it by scanning it or quickly): Devereaux.
▪ Shareholders are not assumed to be conversant in business or finance.
There are standards of clarity and simplicity of expression.
▪ Need to make full and fair disclosure needs to be balanced against the
need to present a document which is intelligible to its readers.
This was discussed in Fraser v NRMA Holdings:[2]
▪ Facts: the Plaintiffs [Fraser and another] were 2 members of the Defendant
[NRMA]. The Defendant had two organisations: the Association and the
Insurance. A prospectus was sent out to propose to members of the two
companies. Somewhere in the prospectus’ were notices of meetings of the

Association and Insurance convened to consider resolutions to amend the
constitution of each company to give effect to the reconstruction. The Plaintiffs
(who were also directors) applied to the court for a declarations that members of
both companies were not fully and adequately informed of the proposals, and
that the prospectus and the information in it was misleading and deceptive.
▪ Argument: Three principal complaints:
1. The repetition of the phrase ‘Free Shares’ in the prospectus gave the
reader the impression that the shares may be acquired without any
significant loss or outgoing to the offeree who accepts them.
2. The failure of the prospectus to distinguish adequately between the
impact of the proposal upon members of the Association and of
Insurance was misleading.
3. By the use of imprecise language, such as references to “business as
usual”, to leave in a “half-light” the question whether Holdings would
conduct its business, especially its road and travel services, in such a
way as to “affect in any substantial way the extent or costs of services
presently provided to members”
Members' rights at an annual general meeting including:
• Members' right to ask questions
Under Article 5.5(a) of our constitution every shareholder, director and the auditor is
entitled to attend the AGM. Part (b) of that Article also provides that any director is
entitled to speak at an AGM, but is silent on the rights of anyone else [who is entitled
to attend] having any right to speak.
With stock exchange listed companies the auditor is obliged to attend the AGM
(Section 250RA of the Corporations Act); with other companies he is entitled to
attend under Section 249V (and must be sent the Notice of Meeting).
If the auditor is present (at any company’s AGM) then the chairman must allow a
reasonable opportunity for shareholders as a whole to ask him questions on the
conduct of the audit, his report and the company’s accounting policies and practices in
relation to preparing the Annual Financial Report – Section 250T. However, there is
no obligation on the auditor (or directors, for that matter) to answer questions from
shareholders and the ‘right to question’ does not diminish the chairman’s power to run
an orderly meeting as he sees fit. But in practice the chairman must use discretion
appropriate to the situation and should not unreasonably try and stymie discussion on
a fundamentally important or critical matter.
Article 5.13(j) of our constitution states that if a shareholder is present at the AGM the
authority of any proxy he has appointed to speak (or vote) is suspended – mirroring
Section 249Y(3). Again, there is nothing specific about the authority of a proxy to
speak at other times in our constitution, but Section 249Y(1)(a) specifically provides
for this.
Members' right to make statements sec 249P
1. Members may request a company to give to all its members a statement
provided by the members making the request about:
a. A resolution that is proposed to be moved at a general meeting; or

b. Any other matter that may be properly considered at a general
meeting.
2. The request must be made by:
a. Members with at least 5% of the votes that may be cast on the
resolution; or
b. At least 100 members who are entitled to vote at the meeting.
3. The regulations may prescribe a different number of members for the purposes
of the application to:
a. A particular company; or
b. A particular class of company.
Without limiting this, the regulations may specify the number as a percentage of the
total number of members of the company.
4. The request must be:
a. In writing; and
b. Signed by the members making the request; and
c. Given to the company.
5. Separate copies of a document setting out the request may be used for signing
by members if the wording of the request is identical in each copy.
6. The percentage of votes that members have is to be worked out as at the
midnight before the request is given to the company.
7. After receiving the request, the company must distribute to all its members a
copy of the statement at the same time, or as soon as practicable afterwards,
and in the same way, as it gives notice of a general meeting.
8. The company is responsible for the cost of making the distribution if the
company receives the statement in time to send it out to members with the
notice of meeting.
9. The members making the request are jointly and individually liable for the
expenses reasonably incurred by the company in making the distribution if the
company does not receive the statement in time to send it out with the notice
of meeting. At a general meeting, the company may resolve to meet the
expenses itself.
10. The company need not comply with the request:
a. If the statement is more than 1,000 words long or defamatory; or
b. If the members making the request are responsible for the expenses of
the distribution--unless the members give the company a sum
reasonably sufficient to meet the expenses that it will reasonably incur
in making the distribution.
Members' right to put resolutions
1. The following members of a registered scheme may give the responsible entity
notice of a resolution that they propose to move at a meeting of the scheme's
members:

a. Members with at least 5% of the votes that may be cast on the
resolution; or
b. At least 100 members who are entitled to vote at a meeting of the
scheme's members.
2. The regulations may prescribe a different number of members for the purposes
of the application to:
a. A particular scheme; or
b. A particular class of scheme.
Without limiting this, the regulations may specify the number as a percentage of the
total number of members of the scheme.
1. The resolution must be:
a. A special resolution; or
b. An extraordinary resolution; or
c. A resolution to remove the responsible entity of a scheme that is listed
and choose a new responsible entity.
2. The notice must:
a. Be in writing; and
b. Set out the wording of the proposed resolution; and
c. Be signed by the members giving the notice.
3. Separate copies of a document setting out the notice may be used for signing
by members if the wording of the notice is identical in each copy.
4. The percentage of the votes that members have is to be worked out as at the
midnight before the members give the notice.
Members' right to call meetings
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.
Members' right to inspect company books.
• The holders of shares in a company do not generally have an automatic right
of access to the company’s books and records. However, the Corporations
Act 2001(Act) does provide shareholders the right to seek access to books of
the company in certain circumstances. If a shareholder wishes to compel the
company to provide access to the company’s books, an action for an order to
inspect the books can be brought under section 247A of the Act.

• Section 247A empowers the court to make an order authorising the
shareholder, or another person on the shareholder’s behalf, to inspect the
books of the company if the court is satisfied that the shareholder is acting in
good faith and that the inspection is for a proper purpose.
Members' meetings: notice and meeting proceedings
Notice of upcoming meetings must be provided in writing to both shareholders and
members s 249J notice should provide accurate information regarding the meeting
including the nature of the business to be addressed and any potential resolutions.
This informs shareholders of what will be considered at the meeting and allows them
to make an informed decision regarding their attendance. Notice of meetings varies
depending on the company type.
• For private (Pty Ltd) companies 21 days notice is required.
• For public companies 28 days notice is required.
There are also specific rules which outline how a meeting should proceed. These
cover the meeting type, chairing of the meeting, voting and resolutions.
Notice of meetings (pp. 558-570)
• Members of a company must receive adequate notice that a company meeting
is to be held (Corporations Act 2001 (Cth) s 248C), as well as the matters to
be considered at the meeting.
• A notice must be given in writing to individual members.
• A notice can be sent by post, fax, email or any other means permitted by the
company constitution (s 249J).
• If the company has an auditor, they must receive notice of the meeting (s
249K).
According to s 249L of the Corporations Act 2001 (Cth), the notice for a meeting
must state:
• The place of meeting (if the meeting is to be held in two or more places, the
technology that will be used to facilitate this (s 249S))
• The date and time of meeting
• The nature of the business of the meeting
• Details of any special resolutions
• The right to appoint a proxy.
A notice calling for a meeting of members at which there will be either special or
ordinary resolutions must be given 21 days before the meeting (Corporations Act
2001 (Cth) s 249H), or 28 days for a listed company (s 249HA).
The notice period may be longer if the company’s internal rules stipulate this (s
249H(1))
Different periods of time are required for different meetings:
• A longer notice of intention is stipulated for a particular resolution; e.g. two
months’ notice of a meeting by the company to remove a director
(Corporations Act 2001 (Cth) s 203D(2))

• A company can shorten the time required by statute if it is permitted; e.g.
under s 249H(2), if certain conditions are met by whereby all members
entitled to attend an AGM agree beforehand to the shorter notice
• A company cannot reduce the statutory time specified when giving notice of a
meeting to appoint or remove a director (249H(3), or to remove an auditor (s
249H(4))
Prescribed matters to be included in the notice are listed in s 249L of the
Corporations Act 2001 (Cth), and include such details as the time, place and nature of
business, including any special resolutions.
The notice must contain full and fair disclosure about the matters to be considered at
the meeting.
The notice about the nature of business to be discussed at the meeting (s 249L(b))
must be clear and not misleading.
Fraser v NRMA Holdings Ltd (1995) 127 ALR 543
Failure to give accurate information may be considered misleading and deceptive
behaviour under s 18 of the Competition and Consumer Act 2010 (Cth).
Administrative error or procedural irregularity regarding notice will not invalidate the
meeting unless a court is of the opinion that the irregularity has caused or may cause
substantial injustice and cannot be remedied by any order of the court.
The notice of a meeting may contain statutory notices. For example:
• A listed company must inform members that a non-binding resolution to adopt
the remuneration report will be put at the AGM (Corporations Act 2001 (Cth)
s 249L(2)).
• Special resolutions cannot be put without notice (e.g. share buyback (ss 257B,
257C).
• The general business of the meeting should be outlined.
• The notice should give details of any procedure in appointing proxies (s
294L).
Notice of a meeting sent to members must appropriately outline any matters to be
voted on (Corporations Act 2001 (Cth) s 249L(3)).
The notice must be worded and presented in a clear, concise and effective manner,
and contain sufficient information so that a member, on reading the notice, can decide
whether it is in their interest to attend the meeting in order to vote for or against the
resolution.
Residues Treatment and Trading Co Ltd v Southern Resources Ltd (1988) 6 ACLC
913; 14 ACLR 375
The notice period for a meeting can be reduced by agreement of members who hold
95% of the votes that may be cast at the meeting (s 249 H(2)(b)).
Voting and proxy votes (pp. 572-575)
Voting:
• Normally, voting at meetings is ‘one person, one vote’ (Corporations Act 2001
(Cth) s 250E).

• Some classes of shares may not permit a vote.
• The company’s chairperson will have a casting vote.
• Voting is normally by show of hands (s 250J), unless a constitution provides
otherwise.
• A member can demand a formal vote (i.e. a poll) (s 250L).
• A member(s) holding 5% of the votes can demand a poll (s 250K).
Proxies:
• A member of a company may appoint a representative to attend and vote at a
meeting on their behalf.
• A public company must allow a proxy; this is a non- replaceable rule
(Corporations Act 2001 (Cth) s 249X).
If a proxy is appointed (s 249Y(1)), they have the right to:
• Speak at the meeting
• Vote (but only to the extent provided for in the appointment)
• Join in the demand for a poll.
Misuse of proxy votes
Resolutions (pp. 576-578)
Under s 9 of the Corporations Act 2001 (Cth), there are two types of resolution:
• Ordinary resolutions—matters of less significance can be passed as ordinary
resolutions and require a simple majority vote by 51%of attending voters (or
proxies) to be passed.
• Special resolutions—matters of serious significance may require a special
resolution. Special resolutions require notice that such a resolution is to be put
and must be passed with a 75% vote by members attending the meeting (or
proxies). Special resolutions are required to change the status of the company
(ss 162–163), or to change the company constitution itself.
A company’s constitution determines whether an ordinary or special resolution is
required.
A one-person company can make and pass a resolution by putting it in writing and
signing the record (Corporations Act 2001 (Cth) s 248B(1)).
Members’ remedies
Oppressive conduct and derivative actions

Oppressive action can be an unfair single act or the passing of a single unfair
resolution. Even though a minority might disagree with a decision that does not mean
that it is unfair. An objective test must be applied. The directors might make a
decision in good faith for a proper purpose but it might be one that a reasonable
director would think is unfair. Unfairness is ultimately determined by an objective
commercial assessment - ‘no reasonable director would act in that way’.
Winding up
Based on s 461 a court can order the winding-up of a company where either the
directors have acted in their own interests or for oppression and unfair conduct. The
court must be of the opinion that the winding-up is just and equitable. The grounds for
winding up a company can be interpreted broadly and may involve a breakdown in
mutual trust and confidence, a deadlock, fraud, misconduct or oppression.
• Oppression and unfair conduct (pp. 642-654)
• Remedies for oppression (pp. 654-657)
• Winding up (p. 657; p. 663)
• Members' right to inspect books (pp. 669-672)
• Leave of court for action against a director or a third party
• Derivative actions by members
• Invalid meetings
Cases:
Whitlam v ASIC (2003) NSWCA 183
Page 574
In this case the chairman (Whitlam) received 4,000 proxy votes from a proposal to
increase the remuneration of the directors. He failed to sign the voting papers against,
as is normally required to validate the votes.
He was charged with abusing his position under s 250 and s 182. When the case was
appealed it was found that it could not be proved that it was deliberate.
Foss v Harbottle (1843) 2 Hare 461; 67 ER 189
Pages 673-674.
In this case the court ruled that the Company was the proper plaintiff in court actions
NOT the members or a single member.
Section 236 overcomes the limitations of this common law rule by enabling a member
to bring an action on behalf of the company where the company is unwilling to do so.
Fraser v NRMA Holdings (1995) 13 ACLC 132 A
Page 570
In this case a statement to shareholders in a prospectus for the creation of a new
company (due to de-mutualisation of the NRMA Association) implied that existing
mutual members would be given “free” shares (mentioned 117 times in the
documents) when in fact they were to be given at cost.

As the shares were not in fact free this was held by the court to be misleading
information.
WEEK 11:
1. Know the definition of “insolvency” and should be familiar with the 14
Indicators of Insolvency (listed by the Judge in ASIC v Plymin 2003).
2. Be able to explain director’s duty to prevent insolvent trading (sec 588G and
588E).
3. Be able to explain the 5 criteria of defences for directors that breach these
duties (sec 588H).
4. Should be familiar with important case examples of how the defences apply
e.g. ASIC v Plymin (2003) and ASIC v Elliot 2004 and Metro Fire Systems
1997.
5. Should be able to explain Liquidation ( Compulsory and Voluntary) and the
role of the Liquidator.
6. Be familiar with the powers of the liquidator.
7. Have an understanding of the alternative arrangements available to companies
prior to liquidation including:
• Receivership
• Voluntary Administration
• Deed of Arrangement.
Insolvency
Insolvency is defined in s95A of the Corporation Act. It states that:
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.
This definition can be applied to a company using a ‘cash flow test’ and by its balance
sheet of current assets and its current and future liabilities.
Key case
ASIC v Plymin (Water Wheel Case no 1) (2003) 175 FLR 124
In the ASIC v Plymin (Water Wheel Case no 1) (2003) 175 FLR 124 case the court
defined the 14 indicators of insolvency.3 In an examination of the company’s affairs

the existence of any one or more of these indicators is evidence to a court of possible
insolvency. These indicators ensure that no director can claim that they did not know
what insolvency looks like. The 14 indicators are the following:
1. Continuing losses.
2. Liquidity ratio below.
3. Overdue Commonwealth and state taxes.
4. Poor relationship with present bank.
5. No access to alternative finance.
6. Inability to raise further capital.
7. Suppliers asking for cash on delivery.
8. Creditors being paid outside normal terms.
9. Issuing of post-dated cheques.
10. Dishonoured cheques.
11. Special arrangements with some creditors.
12. Solicitors' letters of demand and warrants.
13. Rounding off of specific debts.
14. Inability to provide financial information.
Directors' duty to prevent insolvent trading
Under s588G the Corporations Act directors have a duty to prevent the company from
trading while insolvent. The section was inserted into the Act in 1992 and replaced
and reformed earlier sections. It aims to deter unreasonable business risk taking,
protect existing creditors and the wider community and stop companies in trouble
from piling up more debts which they are unable to pay.
• Directors duty to prevent insolvent trading (pp. 508-515)
• Defences for directors (pp. 515-520)
• Consequences for directors who breach Sec 588 (pp. 520-523)
Liquidation
There are two kinds of liquidation (or winding up):
• Voluntary - performed by members if the company is still solvent (s491) by
creditors if it is insolvent (s439C) In voluntary liquidation the liquidator is
appointed by the members or creditors and their remuneration is determined by a
committee of members or creditors or the court (s495)
• Compulsory - by court order (s459A) usually when the company is already
insolvent. In a compulsory liquidation the liquidator is appointed by the
court (s472)
The liquidator takes control and oversees the orderly sale of company assets, payment
of creditors and de-registration of the company.
• What is liquidation? (pp. 883-884)

• Compulsory liquidation (pp. 884-887)
• Voluntary liquidation (pp. 898-900)
• Effects of winding up (pp. 900-902)
• Powers of the liquidator (pp. 911-917)
Alternative arrangements prior to liquidation
• What is receivership? (p. 811)
• What is voluntary administration? (pp. 836-839)
• What is a deed of arrangement? (pp. 860-870)
Receivership Receivership is where a creditor (such as a bank that has
given the company a loan) can appoint an insolvency
expert to act in their interests and enforce their rights
over secured property by taking possession of it. The
creditor can then sell it to claim back the money that is
owed by the company. The board remains in place. A
receiver can also be appointed as a manager and can take
control of the company.
Voluntary
Administration
A company can call for the voluntary appointment of an
insolvency expert as administrator to take control of the
company (s435A) This is only a temporary short term
solution whereby the administrator investigates the
affairs of the company and explores ways of
rehabilitating the company, selling it or winding it up.
Deed of arrangement Can be recommended by a voluntary administrator at the
final meeting with creditors as a possible solution rather
than liquidation (s439A)
The directors reach a settlement with creditors where the
creditors agree to accept part payment of their debt. The
agreement is then approved by a court as a binding deed
of arrangement (s439C)