Law of Investments and Financial Markets (LAW2457) - Assessment 2

This assignment solution addresses two legal analysis questions related to the Law of Investments and Financial Markets. The first question critically discusses the statement that "All winding-ups involve insolvent companies," analyzing the Corporations Act, different types of winding-up, and relevant case law to provide a reasoned answer. The second question examines issues of corporate governance and shareholder rights, focusing on a scenario involving dividend payments and the potential for shareholders to take legal action. The analysis includes the application of legal rules, such as the doctrine of separation of powers, and the interpretation of relevant sections of the Corporations Act. Furthermore, the assignment addresses a case regarding the issuance of additional shares, breach of company's constitution, and the protection of minority shareholders, and provides an analysis of the legal implications of this action.

Law of Investments and Financial
Markets
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Table of Contents
Answer 1....................................................................................................................................3
Answer 2....................................................................................................................................5
References..................................................................................................................................7
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Answer 1
In the article, the corporate law issue that has emerged is insolvent trading. It is claimed by
the administrator that Jamie Durie may have traded when his company was insolvent for two
years. According to the corporations act section 588G, insolvent trading is when the director
of a company permits the company to acquire a new debt at the time when the company is
insolvent. In this condition, the director of the company is liable for the incurred new debts.
The law states that the directors are responsible for making sure that the company does not
carry out any type of trade during the period of insolvency.1,2 It has been found that Mr
Cathro wrote to the creditors that there is a possibility of insolvent trading and voidable
transactions by Mr. Durie. Voidable transaction is considered as the payment of money or
transfer of property from the assets of the company to third party at the time of insolvency of
the company.3 It has been found from the documents filed with the corporate regulator that
the administrator thinks that officer of the company have committed offence. A conflict took
place between Mr. Durie and Mr. Curnow in the year 2012 at the time when the company
was under financial pressure. After the termination, Mr. Curnow took legal action against Mr
Durie and the decision of court was in Mr. Curnow’s favour.4 The company had to pay to Mr.
Curnow more than 1 million and, the company had only $1 in bank. This shows that the
company was insolvent in the year 2017.
1 Paul James, Ian Ramsay and Polat Siva, Insolvent Trading – An Empirical Study (2004)
Law.unimelb.edu.au <https://law.unimelb.edu.au/__data/assets/pdf_file/0011/1710020/103-
InsolventTradingfinal2.pdf>.
2 Dissolve, What Is Insolvent Trading? (2012) Dissolve.com.au
<https://www.dissolve.com.au/definitions/insolvent-trading/#Is_a_director_automatically_liable_for_
all_debts_of_a_company>.
3 SV Partners, Guide to Corporate Voidable Transactions - SV Partners (2018) Svpartners.com.au
<https://svpartners.com.au/resource-centre/voidables/guide-to-corporate-voidable-transactions/>.
4 M Evans, Jamie Durie Calls in Attorneys to Dispel Bankrupt Buying and Selling Declare
⋆ Pacific
News (2018) Pacific news <https://pacific.epeak.in/2018/06/22/jamie-durie-calls-in-attorneys-to-
dispel-bancrupt-buying-and-selling-declare/>.
3

In the creditor’s meeting, Mr Cathro told creditors that initially he thought that the company
may have been insolvent since February 28, 2018 but, the tax office revealed that garnishee
notices were actually issued on 24th January, 2018. Garnishee notice is issued by ATO to
third party holding money or owes you money. It requires that liable person to pay money to
ATO in order to satisfy tax debt.5 It was identified that the company may have been insolvent
since September 30, 2018. Hence, this demands for the investigation, in order to identify the
actual date of insolvency of the company.
The lawyer of Mr. Durire stated that the company had sufficient assets at the time the
company defaulted in September 2016. Along with this, other creditors were also paid during
that period. Mr. Durie was funding the debts of the company by repayment of loan account of
director.
This gave rise to confusion about the insolvent trading by Mr. Durie. The activity of asset
sales was also highlighted by Mr Cathro that, Durie sold assets of his company to other
company which was owned by him for $10,000. This may be stated as uncommercial.
Uncommercial means that the actions or the activities performed are not related to trade or
commerce.6 This action evidences the fact that he took this step in order to obtain the
personal benefits. The action of Durie was not in favour of the company which is not
considered as right in terms of law.
It was found by Mr. Cathro that the action by Durie was not appropriate, as he may have been
for consideration less than market value when transaction was entered into. However, he was
not having any proof about the insolvency of the company.
5 Hartingan Law, How Does The ATO Use A Garnishee Notice? (2018) Hartiganlaw.com.au
<http://hartiganlaw.com.au/tax-debt/how-do-garnishee-notices-work/>.
6 John Warde, Uncommercial Transactions (2003) Allens.com.au
<https://www.allens.com.au/pubs/pdf/insol/cirsep02.pdf>.
4

It was later stated by the lawyer of Mr. Durie that the company was solvent and the
administrator had limited information. The other information was presented in second
meeting related to the offer by Mr Durie and acceptance by administrator and creditors.
It was also found that for repaying the overdraft facility of the company to ANZ, Mr. Durie
sold a property in Queensland.
Hence, it can be said that there is no such actions that shows that he committed the offense as
he was repaying the debts and the payment to the creditors. The financial conditions of the
company were good but, Mr. Durie paid the money to the creditors and also paid the taxes as
well. Although, he sold the assets of the company to other company owned by him, which
was uncommercial. There was no such evidence about the insolvency of the company apart
from the time when the company had to pay to Mr Curnow and Australian Taxation Office.
Hence, the issue of insolvent transaction was there at that time, but, Mr. Durie maintained
this through repaying all the debts of the company, giving the payments to creditors and
paying taxes through his own funds.
Answer 2
Issue: Breach of company’s constitution
Rules: Shares and Shareholders Section 1.5.6
According to the Corporations Act 2001, the person holding shares of the company becomes
the shareholder of that particular organization. According to the Australian Securities and
Investments Commission (ASIC), if a company is making changes in the share structure of
the company, the company needs to inform to ASIC.7 In this case, the Model Haircuts Pty.
Ltd. has not mentioned about the change in the share structure of the company, which was
equally divided among the five members of the company. Elle and Belle are the two members
7 ASIC, Company Shareholders (2014) Asic.gov.au <https://asic.gov.au/for-business/running-a-
company/company-shareholders/#notifying-ASIC>.
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of the company who have issued shares in addition to the shares allotted to them, which
needs to be notified to ASIC. Any changes in the details of the share are required to be
registered at the ASIC and only then, the change can be implemented. Details related to the
issue of shares also need to be shared with the ASIC.8 The Australian Business Law has made
provisions to protect the rights of the minority shareholders. The act of the majority
shareholder that may be unfair towards the minority shareholder is an offense according to
the business law of Australia. This was laid down after the case of Foss v Harbottle (1843).
According to this, such act would be claimed as fraud against minority.9
Application: In this case it can be seen that in order to prevent Billy from winning in the
elections, the present directors of the company, Elle and Belle issued additional shares in
their favour. This is so because according to the law, the formula for calculating the result of
the votes of directors election is represented as V x S. Where, V stands for number of
directorship vacancies and S stands for shares held by the member.10 This way Billy may lose
in the elections as according to the norms of the company, Billy has 20 per cent shares of the
company whereas, Elle and Belle has more than 20 per cent shares of the company.
According to the rule mentioned above, Billy has all the rights to complaint against this move
taken by the company, as it is totally against the law. Also, according to the corporation law,
it has been mentioned that a shareholder can sell their shares only if such selling does not
lead to the breach of company’s constitution.11 Whereas in this case it is clearly a breach of
8 ASIC, How to Change Company Details - Change to Share Structure | ASIC - Australian Securities
and Investments Commission (2017) Asic.gov.au <https://asic.gov.au/online-services/company-
officeholders/company-officeholders-help/how-to-change-company-details-change-to-share-
structure/>.
9 Binus University, Protection of Minority Shareholders in Australia (2016) Binus.ac.id
<http://business-law.binus.ac.id/2016/10/18/protection-of-minority-shareholders-in-australia>.
10 APH, Chapter 2 - Proportional Voting for Directors – Parliament of Australia (2018) Aph.gov.au
<https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Ser
vices/Completed_inquiries/1999-02/complawreview/report/c02>.
11 Austlii, Corporations Act 2001 - Sect 1.5.6 Shares and Shareholders (2018) Austlii.edu.au
<http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1.5.6.html>.
6

the company’s constitution as it has been mentioned in the share structure of the company
that the shareholders of the company have 20 per cent share rights of the company. Hence,
any additional share issuing is the breach of the company’s constitution. Billy can claim the
ASIC against the wrong been done against him. On the basis of the ruling of the court in the
case of Foss v Harbottle (1843), it is clear that after the issuing of the additional shares, Elle
and Belle became the majority shareholders. Therefore, this act of these two directors can be
considered as a fraudulent act against the minority shareholders of the company. On the basis
of this as well, Billy can move the court against the two directors that is Elle and Belle on the
grounds of fraudulent act against the minority shareholder. Billy fulfils all the necessary
requirements that are required in order to stand in elections for the directorship of the
company. Hence, such an act should be considered as a fraud or conspiracy against Billy.
Here, Elle and Belle are clearly at fault and it can be stated that they have committed frau d
against Billy. In order to get justice, Billy can go to the ASIC as all the grievances related to
company shareholding or any corporate issue is taken care of by the ASIC. It is suggested to
Billy that he should seek help of a legal advisor and then, he should tell him about his
situation and then, with the help of legal procedures he should claim against the wrong being
done against him. ASIC has provided all the steps that should be taken in order to reach to
them and claim justice.12
Conclusion: In the end it can be concluded that Elle and Belle is clearly at fault and has done
wrong to Billy. Also, the act done by them has resulted in the breach of company’s
constitution as it has altered the share structure of the company. Therefore, Billy can ask for
justice from the ASIC.
12 ASIC, How to Complain (2018) Asic.gov.au <https://asic.gov.au/about-asic/contact-us/how-to-
complain/>.
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References
APH, Chapter 2 - Proportional Voting for Directors – Parliament of Australia (2018)
Aph.gov.au
<https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_
Financial_Services/Completed_inquiries/1999-02/complawreview/report/c02>
ASIC, Company Shareholders (2014) Asic.gov.au <https://asic.gov.au/for-business/running-
a-company/company-shareholders/#notifying-ASIC>
ASIC, How to Change Company Details - Change to Share Structure (2017) Asic.gov.au
<https://asic.gov.au/online-services/company-officeholders/company-officeholders-
help/how-to-change-company-details-change-to-share-structure/>
ASIC, How to Complain (2018) Asic.gov.au <https://asic.gov.au/about-asic/contact-us/how-
to-complain/>
Austlii, CORPORATIONS ACT 2001 - SECT 1.5.6Shares And Shareholders (2018)
Austlii.edu.au <http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1.5.6.html>
Binus University, Protection of Minority Shareholders in Australia (2016) Binus.ac.id
<http://business-law.binus.ac.id/2016/10/18/protection-of-minority-shareholders-in-
australia>
Dissolve, What Is Insolvent Trading? (2012) Dissolve.com.au
<https://www.dissolve.com.au/definitions/insolvent-trading/#Is_a_director_automaticall
y_liable_for_all_debts_of_a_company>
Evans, M, Jamie Durie Calls in Attorneys to Dispel Bankrupt Buying and Selling Declare
⋆
Pacific News (2018) Pacific news <https://pacific.epeak.in/2018/06/22/jamie-durie-calls-
in-attorneys-to-dispel-bancrupt-buying-and-selling-declare/>
Hartingan Law, How Does The ATO Use A Garnishee Notice? (2018) Hartiganlaw.com.au
<http://hartiganlaw.com.au/tax-debt/how-do-garnishee-notices-work/>
8

James, Paul, Ian Ramsay and Polat Siva, Insolvent Trading – An Empirical Study (2004)
Law.unimelb.edu.au
<https://law.unimelb.edu.au/__data/assets/pdf_file/0011/1710020/103-
InsolventTradingfinal2.pdf>
SV Partners, Guide to Corporate Voidable Transactions - SV Partners (2018)
Svpartners.com.au <https://svpartners.com.au/resource-centre/voidables/guide-to-
corporate-voidable-transactions/>
Warde, John, Uncommercial Transactions (2003) Allens.com.au
<https://www.allens.com.au/pubs/pdf/insol/cirsep02.pdf>
9