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LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TOPIC 5.2

Management (cont)

Topic 5: Part 2 This lecture includes: • Directors’ disclosure requirements • Exoneration and relief for breach of duty • Insolvent trading • Company secretaries • Roles and responsibilities of executive officers; meetings and procedures

DIRECTORS’ DISCLOSURE REQUIREMENTS

Directors’ disclosure requirements. •  Directors’ disclosure and voting obligations reinforce the

general law and statutory duties concerning conflicts of interest

•  They arise under:

•  general law •  Corporations Act and •  ? Under company’s constitution

•  The general law requires directors involved directly or indirectly in a contract with the company, to disclose that interest to the general meeting. If this requirement is breached, the contract is voidable at the option of the company.

Directors’ disclosure requirements •  Apply to directors of both public and private

companies. •  Directors with a “material personal interest” must

disclose that interest to the board. •  Unless the interest is exempt under section 191(2) •  Does not apply to directors of single director

proprietary companies section 191(5) •  Directors of public companies - additional disclosure

and voting obligations: if have a material personal interest, not entitled to vote or be present during a board meeting at which that matter is being considered section 195

Grand Enterprises Pty Ltd v Aurium Resources Ltd (2009) 72 ACSR 75

Directors’ disclosure requirements (cont.) Chapter 2E - related party transactions. Applies when: •  a public company or an “entity” controlled by it

(includes an individual, partnership or an incorporated body) gives;

•  a “financial benefit” (eg, a loan, a guarantee, forgiving a debt, buying or selling an asset, giving money or property) to;

•  a “related party” (eg, a director, a director of a controlling entity, a director’s relative or a company controlled by a director or a director’s relative).

Some transactions are exempted from related party rules. For example, arm’s length commercial transactions.

EXONERATION AND RELIEF FOR BREACH OF DUTY

Exoneration and Relief for Breach of Duty

•  Director may be excused from civil liability arising from the breach of a director’s general law duty either by:

•  the members, in general meeting (ratification); •  the company’s internal rules; •  the court. •  Breaches of statutory duties can only be excused by

the court.

1. Relief for directors’ liability for breach of duty – GENERAL LAW DOCTRINE OF RATIFICATION

= Director – breached duty, but general meeting of members ‘ratifies’ actions eg Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 Bamford v Bamford [1970] Ch 212 Hogg v Cramphorn Ltd [1967] Ch 254 Winthrop Investments Ltd v Winns Ltd [1975] 2NSWLR 666

GENERAL LAW DOCTRINE OF RATIFICATION

Ratification is not available where: •  it would constitute a fraud on the minority •  company is nearing insolvency and it would prejudice

creditors •  it would defeat a member’s personal rights •  it would be oppressive (see also sections 232-234) •  statutory duties have been breached

2. Relief for directors’ liability for breach of duty – THE COMPANY’S INTERNAL RULES

Company constitution may contain provisions relieving directors - but subject to •  section 199A – company must not exempt a person

from liability to the company incurred as an officer or auditor

•  section 199B – company must not pay a premium for insurance re officer’s liability re wilful breach of duty or contravention of section 182 or section 183

3. Relief for directors’ liability for breach of duty – THE COURT Courts empowered to excuse directors from liability: •  if it appears to the court that the person acted

honestly and •  having regard to all the circumstances the person

ought fairly be excused for the breach or contravention

section 1318 civil proceedings - negligence, default, breach of duty or breach of trust section 1317S contraventions to civil penalty provisions

INSOLVENT TRADING

Duty to Prevent Insolvent Trading When does the duty to prevent insolvent trading arise?

Section 588G (1),(2) • Who owes the duty? Also section 588V • What types of debts are relevant for the purposes of the duty?

• When (ie at what time) was a relevant debt incurred?

Duty to prevent insolvent trading section 588G

When is a company insolvent? Section 95A - Solvency and insolvency (1) A person is solvent if, and only if, the person is able

to pay all the person's debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.

Statutory presumptions of insolvency contained in section 588E (3),(4) - failure to keep financial records

Elements of liability Four elements to establish liability under section 588G(1): •  the person is a director of a company •  at the time the company incurs a debt •  the company is insolvent at the time of incurring the

debt •  at that time there are reasonable grounds for suspecting

that the company was insolvent, or would become insolvent

ASIC v Plymin, Elliott & Harrison [2003] VSC 123 [421], [423], [427]

Section 588G(2)

Where elements of section 588G(1) exist, section 588G(2) establishes a contravention only when: a)  The person is aware at that time that there are

grounds for so suspecting or b)  A reasonable person in a like position in a

company in the company’s circumstances would be so aware

STATUTORY DEFENCES to section 588G are provided for in section 588H

Section 588H > four defences available to a director who otherwise has contravened s 588G. These are: •  Reasonable grounds to expect solvency; •  Reasonable reliance on information as to solvency

provided by others; •  Non-participation in management; •  Reasonable steps taken to prevent incurring of debt

Consequences of contravention Section 588G - civil penalty provision •  Declaration of contravention section 1317E (1), •  Allowing ASIC to apply for

•  Pecuniary penalty order against the director section 1317G

•  Disqualification order from the court section 206C •  If director’s failure to prevent insolvent trading was

dishonest an offence will have been committed section 588G(3)

•  Court may order that the director compensate the company section 588J

•  Creditor may also sue for compensation under sections 588R – 588U

Consequences of contravention (cont.) •  Company in liquidation > liquidator has statutory right

to recover (within 6years of winding up) against the directors of the company, as a debt due to the company

•  Equal to loss or damage suffered by creditors as a result of the unsecured debts incurred by the company whilst insolvent section 588M

•  Liquidator may recover whether or not a civil penalty has been sought by ASIC against the directors in relation to the contravention

•  An individual creditor (as opposed to the liquidator) may seek compensation from directors on satisfying the requirements of sections 588R-588U

COMPANY SECRETARIES

Company secretary

•  No statutory definition •  ‘Officer’ defined in section 9 includes a secretary •  Duties imposed on ‘directors and officers’ by Part 2D.1

apply to secretary section 179 •  Duties will vary from company to company (which may be

expressly provided for in the company’s constitution) •  Corporations Act imposes responsibilities – especially

lodgement of notices and returns with ASIC, lodgement of financial reports section 188

Company secretary

Appointment sections 204A-204G • Public company must have a secretary section 204A(2)

• Optional for pty section 204A(1) • At least 18years old section 204B • Appointed by directors section 204D • Defective appointments do not affect validity of acts sections 204E/ 201M

Company secretary – removal/ disqualification

• Removal by the board • Removal by operation of Corporations Act • Removal by the Court • Removal by ASIC

Removal by the board:

•  A matter for decision by the board as a whole; Corporate Governance Principles and Recommendations 3rd Edition 2014; <http:// www.asx.com.au/documents/asx-compliance/cgc- principles-and-recommendations-3rd-edn.pdf >

•  Usually found in the company’s constitution

Removal by operation of Corporations Act

Automatically following: •  Conviction for certain offences •  Declaration as undischarged bankrupt or •  Execution of personal insolvency agreement (Part X

Bankruptcy Act); section 206B •  Disqualification to manage corporations including

foreign jurisdiction

Removal by the Court

By the Court following: • Contravention of civil penalty provision sections 206C, 1317E

• Involvement in 2 or more companies that become insolvent or unable to pay debts in the past 7 years section 206D

• Repeated contraventions of Act section 206E

Removal by ASIC: ASIC’s power to disqualify company secretary (as a person from managing a corporation): •  For up to 5 years •  If they have been associated with 2 or more insolvent

companies in the last 7 years which have been unable to pay unsecured creditors more than 50c in the dollar section 206F – refers to section 533

MEETINGS

Directors’ meetings Members’ meetings

DIRECTORS’ MEETINGS Part 2G.1; sections 248A-248G •  Any director can convene a directors’ meeting

section 248C

•  Reasonable notice to each director - general law + section 248C •  Notice need not be written or specify business to be

conducted, (subject to CC)

•  Directors’ meeting may be called/held using any technology consented to by all directors section 248D (subject to CC)

Directors’ meetings •  Quorum = 2 directors section 248F •  Resolution is generally passed by majority of directors

entitled to vote section 248G •  ‘Circulating resolutions’ (without directors’ meeting)

is permitted where all directors note (in writing) that they are in favour of the resolution; section 248A

•  Single director Pty companies - resolution passed by recording and it and signing the record section 248B

•  Public company directors with “material personal interest” excluded (= not present and not vote) section 195

•  Pty company directors with “material personal interest” must disclose interest section 191 but may still vote section 194 (RR)

MEMBERS’ MEETINGS Quorum = 2 members present at all times section 249T (RR) Single member company = that member section 249B Annual General Meeting (AGM) Public company (except 1 member company) must hold an AGM with 18 months following its registration, at least once a year and within 5 months after the end of the financial year section 250N Business of AGM may include: •  Consideration of the financial statements and

directors’ reports section 317 (Public company) •  Appointment/remuneration of directors and auditors;

Who may call members’ meeting? •  Director section 249C (RR) listed company; section

249CA •  Directors must call a GM on request of members with

5%+ of votes section 249D •  Members with 50%+ of the votes of the members who

make a section 249D request may call a GM if directors do not within 21 days after the request (& company must pay the expenses) section 249E

•  Members with 5%+ of the votes that may be cast at GM may call a GM. Members calling the meeting must pay the expenses section 249F

•  Court may order a meeting of members on the application of a director or member section 249G

General and extraordinary meetings

How to call meetings of members •  Generally 21 days notice required (longer if required

by constitution). •  Shorter period is possible if 95% of the votes agree

before hand section 249H except where a resolution is proposed for removing or appointing directors or removing an auditor

•  Public listed companies 28 days notice required section 249HA

Members’ meetings: voting Part 2G.2 Div 7 sections 250E – 250M •  A properly authorised person (proxy or corporate

representative) may vote instead of a member; section 249X

•  Subject to special rights attached to shares, show of hands = 1 vote per member.

•  Poll = 1 vote for each share held section 250E •  The chair has a casting vote section 250E •  A resolution must be decided on a show of hands

unless a poll is demanded section 250J •  A poll may be demanded by 5%+ members or the

Chair section 250L

Cases Cited Doctrine of ratification Quarante Pty Ltd v The Owners Strata Plan No. 67212 [2008] NSWCA 258 per Sackville AJA at 109-110 Section 1317S & 1318 ASIC v Vines [2005] NSWSC 1349 Austin J at 50 ASIC v Macdonald (No 12) [2009] NSWSC 714 per Gzell J at 11 Civil Penalty provision Re AWB Limited [2008] VSC 473 [2008] VSC 473 per Robson J at 44 Sections 1317E & 206C ASIC v Citrofresh International Ltd (No 2) [2010] FCA 27 per Goldberg J at 41 & 42 ASIC v Adler & 4 Ors [2002] NSWSC 483 Santow J at 56 [re 206C] Section 588G ASIC v Plymin, Elliott & Harrison [2003] VSC 123 per Mandie J at 419-427

Key points

•  Directors’ disclosure requirements •  Exoneration and relief for Breach of Duty •  Ratification and exculpation of breaches of duty •  Insolvent trading & contravention

Next week Lecture Topic 6 –Financing the Corporation Tutorial/Collaborate Attempt Activities 5.2.1 & 5.2.2