Corporations Law: Analysis of Austin Pty. Ltd. Fundraising Activities

This report critically analyzes the fundraising operations of Austin Pty. Ltd. under the Corporations Act 2001 (Cth). It examines the company's issuance of a prospectus, highlighting violations of sections 710, 711, 728, and 674, focusing on misleading statements and reliance on inaccurate reports from DB consultants. The analysis identifies potential liabilities for Bob (sales manager), Dendy Securities Ltd (underwriter), DB consultants, and the directors, considering breaches of directors' duties under section 180(1). The report also discusses the role of the Australian Securities Exchange (ASX), the requirements for a prospectus, and the powers of the Australian Securities and Investments Commission (ASIC). Remedies, defenses, and the implications of continuous disclosure obligations are also considered, providing a comprehensive overview of the legal and financial implications of the company's fundraising activities. The report concludes by assessing the potential civil and criminal liabilities under the Corporations Act.

Running Head: CORPORATIONS LAW
CORPORATIONS LAW
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Author Note

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Introduction
This paper will aim to discuss and critically analyze the operations of a company called Austin
Pty. Ltd. in relation to fundraising. In this paper, the provisions of law as provided in the
Corporations Act which have been violated by the Company Austin Ltd while engaging in the
process of fundraising will be discussed and analyzed. In this paper the advice sought by the
parties, in relation to their liabilities will also be considered.
Fundraising can be defined as a process by which a company can raise capital from the public.
For the purpose of raising capital, the company provides the public who invest in the company
equity in the company1. The Corporations Act 2001(Cth) governs the provisions for raising
capital of public companies by the issuance of shares. It has been provided in the Corporations
Act that that a public company in order to issue shares to the public must be registered with the
Australian Securities Exchange. The Australian Securities Exchange (ASX) and the corporate
legislation impose several restrictions on the public companies. It can be stated that public
companies are required to comply with the provisions and restrictions as imposed by the ASX
for the purpose of ensuring that the process of fund raising is lawful and that no penalties are
incurred by the company and the directors.
Requirements of a prospectus
A document which is used to the raise funds from the public can be called a prospectus. Sections
710 and 711 of the Corporations Act contain the specific requirements of a prospectus. It has
been specifically provided in section 708 of the Corporations Act 2001 a few offerings will not
need a prospectus. A prospectus contains all the information relating to the probability of
1 Graw, Parker, Whitford, Sangkuhl and Do, Understanding Business Law 7th ed LexisNexis Butterworths, 2015.

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success of the investment in the company. It can be mentioned that a prospectus must contain
the information which can be relied upon by the investor2. An investor generally decides the
feasibility of the success of the investment by the information provided in the prospectus.
It has been clearly provided in section 674 of the Corporations Act 2001 that several obligations
are imposed on the corporations and companies to operate in accordance with the listing
procedures of the Australian Securities Exchange which mandates companies to make
continuous disclosure of information in relation to the prospectus. It has been further provided in
the aforementioned section that companies must notify ASX, the company operator about all the
information in relation to a particular event or matter. Information which is not generally
available to the people and any information which would be required by a reasonable person to
assess the material effect on the financial position of the disclosing entity must be lodged with
the ASX.
It has been provided in section 710 of the Corporations Act that a prospectus which is used for
the purpose of fundraising must contain all the information which would be reasonably required
by the investors for the purpose of assessing the true financial standings of the company. It has
been further been provided that the information contained in the prospectus should be fit for
reasonable reliance and must be genuine. The information provided in the prospectus must be
obtained after making reasonable enquiries.
In section 728 of the Corporations Act it has been provided that securities must not be offered by
companies which contain statements which are misleading and deceptive in nature or likely to
mislead or deceive the people. In section 728(c) it has been provided that a market operator must
2 Fisher S, Anderson C, Dickfos, Corporations Law - Butterworths Tutorial Series, 4th Edition Butterworths, Sydney
2014

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be notified by the disclosing entity about any new circumstances that have arisen after the
issuance of the disclosure document.
The provisions of section 674 of the Corporations Act 2001 (Cth) which deal with the
provisions of disclosure document had been analyzed in the case Australian Securities and
Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19. The court held
that in this case the directors of the company in consideration had breached the provisions of the
aforementioned section as the information which was provided in the disclosure document. The
courts imposed a civil penalty on the directors for engaging in misleading and deceptive conduct.
Forecast
Section 728(2) of the CA contains the provisions of disclosure of information in relation to
future matters3. Any statement given by any person about future matters would be considered to
be misleading and deceptive if the there are no reasonable grounds to believe that such
statements will come true in the future. In the case of Australian Securities and Investments
Commission v Sino Australia Oil and Gas Limited, the provisions as provided in section 728 of
the CA have been interpreted and analyzed. In the case mentioned above the court held that
misleading or wrong information had been provided in the prospectus which could affect the
price of the shares as assessed by a reasonable person. The courts further held that the director in
consideration was not entitled to claim that he did not understand the contents of the prospects
prior to signing the document. Such director should have appointed a translator to interpret the
statement that had been contained in the prospectus in English. Other cases which involved
3 Corporations Act 2001 (Cth)s 728(2)

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misleading and deceptive conduct include ASIC v Narain [2008] FCAFC 120 AND Australian
Securities & Investments Commission v Axis International Management Pty Ltd [2009] FCA
250.
Advertising
It has been provided in section 734 of the CA that there are certain restrictions which are
imposed upon the advertisement and publicity of offers. However, there is an exception of 20
issues in 12 months. It can be stated in accordance with the provisions of this section that a
person is restricted to engage in advertisement of an offer of shares that require documents of
disclosure. It can be stated that any advertisement which induces others to indulge in the
application of securities must not be made. The courts assess whether an advertisement is related
to the offer of securities by considering the nature of the advertisement and whether the
advertisement was made in the general course of the products of the corporations.
Liability of the parties in this given scenario
By analyzing the facts of the case, it can be stated that the primary parties involved in the given
scenario are; Bob, the sales manager of the company Austin Pty Ltd., the underwriter Dendy
securities Ltd, DB consultants and the company Austin Pty Ltd. It has been provided through the
given case study that the prospectus document which had been issued by the company contained
faulty information about the financial standings for the company. The forward book of orders
showed an excess of 25 million dollars over the next three years. This information can be
considered to be false according and breaching the provisions of section 728 of the CA which
deals with misstatement in the prospectus. It has been further provided that the company Austin
Pty Ltd. completely relied on the report given by DB consultants, which had been inaccurately

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formed. Thus, it can be assessed that this conduct of the company was in breach of the provisions
of section 728(3) of the CA which states that any forecast about future events would be
considered to be misleading and deceptive, if there is no reasonable grounds to believe that such
forecast is going come true in the future.
Further it has been provided in the given case study that the board of directors of the company
Austin Pty Ltd. blindly relied on the advice provided by the DB consultants. However, any
reasonable person acting in the position of the directors would have take reasonable steps to
make own enquiries. Thus their conduct is in breach of the aforementioned section.
In addition it has been provided in section 674 that information which has been provided in the
prospectus must be reliable and correct. The information must be of a nature that investors would
believe to affect the price of security. In this case, it can thus be inferred that the information
which was contained in the forward book of orders fell within the scope of the aforementioned
section and it is clearly evident that this section had been violated in this case.
In accordance with section 728(c) of the CA it can be stated that an organization has the
responsibility to disclose any event which occurs after the prospectus has been lodged with the
regulator if such event is expected to affect the price of the shares4. However, as it has been
provided that the drop in the forward book of orders was noticed after the issue of the prospectus
had been done thus this section would not be applicable. In sections 728 and 674 it has been
provided that any person, who is involved making a company breach the provisions of the
Corporations Act, will be held to be personally liable for breaching the provisions in
consideration. In accordance with the provisions of the section 79 and 9 of the CA it can be
4 Bottomley S, Hall K, Spender P, and Nosworthy B, Contemporary Australian Corporate Law 1st edition 2017
Sydney Cambridge

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stated a person would be considered to have been involved in making a company breach the
provisions of the CA, if such person
 Has aided, abetted or counseled the contravention
 Conspired to give effect to the contravention
 Induced any person to contravene the provisions of the act by a promise or threat
 Has acted in way which has caused the contravention directly or indirectly.
Therefore, in this case it is evident that DB consultant can be held to be liable for making the
company Austin Pty Limited breach the provisions of section 674, 724 of the Corporations Act
2001 (Cth). In this given scenario, it can also be stated that the company Austin breached the
provisions of section 743 as the advertisement given by them was not in general course. It can be
stated that an underwriter is the person who provides guarantee of payment in case the shares of
the company are taken up by the public. It has been provided that an underwriter is liable to
compensate the investors under section 729 of the CA.
Directors’ duties breach
In the given case study, the duties of the directors towards the company can also be analyzed. In
the notable case of ASIC v Sino, it had been provided that breach of sections 728 and 674 of the
CA would result in the breach of section 180(1) of the CA5. In section 180(1) of the CA, it has
been provided that directors of corporations are required to act with due diligence and care while
discharging their duties6. The degree of diligence and care to be maintained by the directors
while discharging their duties is to be analyzed from the perspective of a reasonable person. Any
5 Cassidy J., Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney 2013
6 Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. Oxford 18th edition 2017

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director who breaches the provisions of section 180(1) will incur civil liability under section
1317e of the CA.
Remedies
It can be stated that if any person fails to comply with the provisions of section 674, such person
will be held to have committed an offense under section 1311(10 and such person will be incur a
liability under section 1317 E. Further it has been provided in section 728(3) that the omission of
disclosure of new circumstances which adversely affects the investors would be considered to be
an offense and the person responsible for the omission would be liable to compensate the
investors. A person will incur strict liability offense under section 6.1 of the criminal code or an
absolute liability under section 6.2 of the Criminal Code, if an offense is committed in relation to
the Corporations Act7.
Powers of ASIC
The ASIC can bring a claim of seeking declaration of contravention for civil penalties against the
company and the parties involved under section 1317E.
Defenses
The section 1317s lays down the provisions of relief from the contraventions of civil penalty
provisions. The courts in accordance with this section can pardon the penalty to be imposed on
the directors and officers. Under section 731 of the CA, it has been provided that a person who
took all the reasonable steps to verify the statements in the prospectus is not misleading can be
exempted from liability under section 72 and 729 of the Corporations Act8. This ground of
7Fisher S, Anderson C, Dickfos, Corporations Law - Butterworths Tutorial Series, 4th Edition Butterworths, Sydney
2014
8 Austin R.P. & Ramsay, I., Ford's Principles of Corporations Law, Butterworths, Australia, 16th edition, 2014.

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defense can be sought by the underwriters. The defense of section 189 which allows any person
to rely on the expert information is not applicable in this case as the directors did not take
reasonable steps.
Conclusion
Thus to conclude, it can be said that Bob, DB Consultants and the company Austin in this given
scenario can be held to be liable for the contraventions of the aforementioned sections of the
Corporations Act. The investors can claim compensation under section 1317H and 729 of the
Corporations Act 2001 (Cth).

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Reference List:
Austin R.P. & Ramsay, I., Ford's Principles of Corporations Law, Butterworths, Australia, 16th
edition, 2014.
Bottomley S, Hall K, Spender P, and Nosworthy B, Contemporary Australian Corporate Law 1st
edition 2017 Sydney Cambridge
Cassidy J., Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney
2013
Ciro T, Symes C, Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition
2013
Davenport, S and Parker D, Business and Law in Australia, Thomson Reuters, 2012
Fisher S, Anderson C, Dickfos, Corporations Law - Butterworths Tutorial Series, 4th Edition
Butterworths, Sydney 2014
Graw, Parker, Whitford, Sangkuhl and Do, Understanding Business Law 7th ed LexisNexis
Butterworths, 2015.
Graw, Parker, Whitford, Sangkuhl and Do, Understanding Business Law 7th ed LexisNexis
Butterworths, 2015.
Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. Oxford 18th
edition 2017
Corporations Act 2001 (Cth)

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ASIC v Narain [2008] FCAFC 120
Australian Securities & Investments Commission v Axis International Management Pty Ltd
[2009] FCA 250
ASIC v Sino
Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011]
FCAFC 19