TOPIC 2 Registration
Registration process Process:
1. A person may lodge an application with ASIC (s 117(1) Corporations Act 2001 (Cth));
s 117(2) outlines what the application must state (page Error: Reference source not found). 2. ASIC may then register the company, give the company an ACN, and issue a certificate of
registration (s 118(1)).
Company names:
o Must be stated on the application, unless the ACN is to be used (s 117(2)(b));
o Requirements for a valid company name:
Name must be available (s 148(1)(a)).
A name is not available where it is identical to a name held or registered on the Business
Names Register (s 147(1)(b)) or it is unacceptable for registration under the regulations1 (s
147(1)(c)).
Name must contain “Limited” or “Proprietary Limited”, as appropriate (s 148(2) – or the
abbreviation, s 149).
o A company must set out its name and ACN on all public documents (s 153).
o A person may reserve a company name for 2 months (with 2 months extensions) (s 152).
Effect of registration
The company has a separate legal personality once it is registered (s 119 and Salomon).
The shareholders and directors are distinct from the company and can therefore also be secured
creditors (eg Salomon) or employees (eg Lee’s Air Farming) with respect to the company.
Corporate groups
A corporate group is not a separate legal entity – each company within the group has separate legal personality, but not the group as a whole.
Consequences:
- Duties are owed by directors to the company on whose board they sit. The question is what is in the best interests of the individual company and not what is in the best interests of the corporate
group (Walker v Wimborne);
- Profits of each company must be treated separately and a parent company cannot pay a dividend
based on the profits of the group as a whole (Industrial Equity);
- A contractual promise made by a subsidiary does not bind the holding company to the contract
(Pioneer Concrete).
Corporate veil
The veil of incorporation recognises that a company is a separate legal entity distinct from its
shareholders. The liabilities of the company are not the liabilities of the shareholders. Therefore, a
shareholder’s liability for the company’s debts is limited to paying the full purchase price of shares taken.
However, the veil can be lifted in certain circumstances:
i. Where company is being used as a sham so as to avoid an existing legal obligation.
o Examples:
In Gilford Motor Co, Mr Horne attempted to avoid a restraint of trade contract that applied to him as an individual by setting up the company. The Court granted an
injunction against Mr Horne and his company (even though the company was not a party to the contractual restraint) because “the company was formed as a device, a
strategem... to mask the effective carrying on of a business by Mr Horne... it was a cloak or a sham”.
In Creasey, a company was wound up and assets transferred to new company to avoid legal claim by dismissed employee. Mr Creasey commenced legal proceedings for wrongful dismissal as manager of Welwyn Ltd. Prior to the hearing, W became insolvent and its business and other assets were transferred to Breachwood Motors Ltd. B paid off all of the debts of W, but made no allowance for C’s claim. C sought to substitute W with B in the proceeding. The court held that B was liable for W’s debt, because it would be unfair for B to honour all debts and obligations of W except for C’s claim.
In Jones v Lipman, a landowner transferred land to a company in order to avoid an order for specific performance of the sale contract concerning the land (ie L agreed to sell to J, L changed his mind and then transferred land to a new company). The Court treated the contractual obligation of the landowner as the obligation of the company, because the company was a sham used to avoid a legal obligation.
ii. Where company was formed to perpetrate a fraud.
o Example:
In Re Darby, Darby and Gyde formed a company (C). C purchased a licence to work a quarry and sold it, at a substantial overvalue, to another company they set up (W). W issued shares to the public and that money was paid to C for the licence, which was then divided between Darby and Gyde. W became insolvent and the liquidator sought to recover the profits from Darby. Darby argued that the profit was made by C and not Darby himself. This argument was rejected, because C was a “dummy company” formed as a front for Darby to perpetrate a fraud.
iii. Corporate groups.
a. Where the subsidiary is treated as agent of the holding company.
o Where the court finds that a subsidiary has acted as an agent for its holding company,
the holding company is liable for the acts of the subsidiary.
o In Smith, Stone & Knight, Atkinson J held that six requirements must be established
before finding that an agency arrangement exists:
1. the profits of the S must be treated as the profits of the HC;
2. the persons conducting the S’s business must be appointed by the HC;
3. the HC must be the head and brain of the S;
4. the HC must govern the S and decide what should be done and what capital
should be embarked on it;
5. the profits of the S must be made by the HC’s skill and direction; and
6. the HC must be in effectual and constant control.
o On the facts, Birmingham Waste Co was a wholly owned subsidiary of SSK. Land was
the land. SSK could get compensation for dislocation of the business if it could show that BWC was the agent of SSK. The Court held that they were.
b. Where the directors act for the benefit of the group as a whole.
o According to Walker v Wimborne, directors must act in the best interests of the
individual company.
o However, in some circumstances, a director will not breach their duty if they act for the
benefit of the corporate group as a whole, where it will indirectly benefit the individual company on whose board they sit (Equiticorp Finance).
o For example, in Equiticorp Finance, the Bank of NZ lent money to one company in the
Equiticorp group. The director of two other companies in the group agreed to provide security for that loan. The majority of the NSWSC held that the transactions indirectly benefited the two companies, because the Bank of NZ funded the entire group and
without that security the funding of every company in the group would be jeopardised.
c. Where the subsidiary commits a tort.
o Different considerations apply in tort actions compared with other cases, because, as
Rogers AJA noted in Briggs v James Hardie, “The victim of the negligent act has no
choice as to the corporation which will do him harm [cf. contracting parties].”
o A holding company may be liable to an employee of its subsidiary for negligence, on the basis that the HC itself owed a duty of care to the employee. This DOC can arise
where the HC exercise a high degree of control over the day-to-day activities of its
subsidiary.
o For example, in CSR v Wren, Wren developed mesothelioma after working for AP, a
subsidiary of CSR. The Court held that CSR owed Wren a DOC because CSR had
operational responsibility for the work conditions at AP (as the management staff at AP
were CSR staff). Similarly, in CSR v Young, the degree of control of CSR over the
activities of the subsidiary was so strong that CSR itself effectively conducted those activities.
iv. Where the veil is pierced by statute.
o For example, ss 588V-588X (holding co liable for debts of subsidiary if holding co knew or
should have known subsidiary was trading whilst insolvent) and ss 588G-588H (director
personally liable to pay debts of the co if director knew or should have known co was trading whilst insolvent).
TOPIC 3 Types of Companies
Classification (s 112)
First classification
Proprietary company
o A proprietary company is a company that is registered as, or converts to, a proprietary company
under this Act (ss 9 and 45A(1));
o Restrictions:
It must not have >50 non-employee shareholders (s 113(1)). “Employee” means an
employee of the company or of a subsidiary of the company (s 113(2)(b));
It must not engage in public fund raising (s 113(3)).
o Can be either a small or large proprietary company:
Small proprietary company: A proprietary company is a SPC for a financial year if it satisfies
as least 2 of the following: consolidated revenue <$25 million, consolidated gross assets
value <$12.5 million, or <50 employees (s 45A(2)). A small proprietary company has
reduced financial reporting requirements.
Large proprietary company: All other proprietary companies (s 45A(3)). Public company
o A company other than a proprietary company (s 9).
o It may be listed or unlisted.
Second classification
Public companies
Limited by shares: The liability of members for the debts of the company is limited to any amount that is unpaid on the shares that the member holds in
the company (ss 9 and 5162). Must have Ltd in name (s 148(2)).
Limited by guarantee: The liability of members is limited to the amounts that they have undertaken to contribute in the event of it being wound up (ss 9 and
5173). This type of company does not have shareholders. It does not
raise money from its members, nor does it return profits to its
members. Must have Ltd in name (s 148(2)).
Unlimited with share capital: Members have no limit placed on their liability (s 9).
No liability company: A company registered as, or converted to, a no liability company. It
must have solely mining purposes and have no contractual right to
recover unpaid calls (ss 9 and 112(2)). Must have No Liability or NL in
name (s 148(4)).
Proprietary companies
Limited by shares Must have Pty Ltd in name (s 148(2)).
Unlimited with share capital Must have Pty in name (s 148(3)).
2 s 516: If the company is a company limited by shares, a member need not contribute more than the amount (if any) unpaid on the shares in respect of which the member is liable as a present or
past member.
3 s 517: If the company is a company limited by guarantee, a member need not contribute more than the amount the member has undertaken to contribute to the company's property if the
Related companies Definitions (s 9)
o Holding company means a body corporate of which the first body corporate is a subsidiary;
o Subsidiary means a body corporate that is a subsidiary of the first-mentioned body by virtue of
Division 6.
Test
Under s 46, a company (AB) is a subsidiary of another company (A) if one of four tests is satisfied:
1. A controls the composition of AB’s board (s 46(a)(i));
o Under s 47, A is deemed to have this control if it can appoint or remove all or the majority
of the directors of AB. A is deemed to have the power to appoint if a person cannot be appointed as director of AB without the exercise by A of such a power, or a person’s appointment as director of AB follows necessarily from them being director or officer of A; o “Control” means a legal power to control – practical or de facto control, in the absence of
any legally enforceable power, is not sufficient (Mount Edon). For example, it was not
enough in Mount Edon that the two companies thought they were holding and subsidiary
companies and one deferred to the other to determine board composition.
o Where A holds >50% of the capital of AB, this gives A legal control (overlaps with (a)(iii)).
OR look for an enforceable and irrevocable agreement that AB’s members will vote according to A’s directions.
2. A can cast, or control the casting of, more than one-half of the votes that might be cast at a general meeting of AB (s 46(a)(ii));
o “Control the casting” requires an actual power (revocable or not, legally enforceable or not) to cast >50% of the votes (Bluebird Investments). It is enough if A has an
unenforceable agreement with AB’s shareholders to cast their vote (a proxy vote). 3. A holds more than one-half of the issued share capital of AB (s 46(a)(iii)); or
TOPIC 4 Company Constitution and Membership
Constitution
A company may use:
o The replaceable rules in the Act (s 135(1)); o Its own constitution (s 136(1)); or
o A combination of the two.
A company can adopt a constitution:
o On registration, by lodging a copy with the application (ss 136(1)(a) and 117(3)); or o After registration, if the company passes a special resolution4 (s 136(1)(b)).
Objects clauses
The constitution may contain an objects clause that restricts the company’s powers (see s 1255).
If the company breaches its objects clause, the exercise of power is not invalid (s 125). However, there may be consequences against directors or agents who caused the clause to be breached (eg breach of duty).
The constitution as a statutory contract
Per s 140(1), the constitution of the company has effect as a contract between:
(a) the company and each member;
(b) the company and each director and company secretary; and
(c) the members.
Under this contract, each person agrees to observe and perform the constitution so far as it applies to
that person (s 140).
How can this contract be enforced?
o The company can take action against its members to force them to comply with the constitution
(because of s 140(1)(a)). For example, in Hickman, the court stayed Mr Hickman’s case on the
basis that he was obliged to follow the dispute resolution procedure in the constitution (which
prescribed arbitration and not judicial action);
o A member can only enforce rights in the constitution that attach to them in their capacity as a member of the company. For example, in Eley, the court would not enforce a provision in the
constitution that provided for him to be the company’s solicitor for life, because the right he was
claiming (to act as solicitor) was not a right that attached to him as a member.
o Examples of rights that attach to members in their capacity as members include: the right to inspect the register, the right to receive a share certificate, to vote, to receive informative notice of
meetings, to receive payment of duly declared and payable dividends, and the like (Bailey per
McHugh and Gummow JJ).
Members may also have contracts with the company that bind them as individuals (special contracts) (Bailey).
4 Special resolution means a resolution of which notice has been given and that has been passed by at least 75% of the votes cast by members entitled to vote on the resolution (s 9). 5 s 125(1): The constitution may contain an express restriction on, or a prohibition of, the company's exercise of any of its powers. The exercise of a power by the company is not invalid merely
because it is contrary to an objects clause.
Alteration of constitution
The company may modify or repeal its constitution by special resolution (s 136(2)).
Effect of alteration
o Members are bound to changes even if they did not vote for them;
o Alteration takes effect on the date on which the resolution is passed (s 137);
o Special contracts
Generally, an alteration to the constitution will not alter a special contract unless the parties
intended to the contrary (Bailey);
Where a special contract refers to the constitution, an alteration of the provision in the
constitution will vary the special contract prospectively (into the future) and not
retrospectively (Bailey);
For example, in Bailey, Dr Bailey was a member of the NSW Medical Defence Union. Its
purpose was to provide its members with insurance against negligence claims. The Union changed its constitution, giving the directors the discretion to terminate assistance to any person who has ceased to be a member (eg through death). Dr Bailey died and a claim was made against him. Was his estate entitled to be indemnified from the Union? The majority found that the contract of insurance was a special contract and therefore changes to the constitution could not have a retrospective effect to the contract.
Limits on changing the constitution In addition to a special resolution
1. The company must abide by any entrenching provisions in its constitution: s 136(3) (ie any additional requirements must be complied with – “The company’s constitution may provide that the special resolution does not have any effect unless a further requirement specified in the constitution relating to that modification or repeal has been complied with”);
2. Changes that increase the liability of current members require their written agreement:s 140(2)6.
3. Majority shareholders cannot use their voting power to unfairly deprive minority shareholders of their rights (also called oppression, or fraud on the minority).
o Equitable restriction;
o Where the alteration provides for the expropriation or compulsory disposal of a
member’s shares, a two-fold test must be satisfied (Gambotto and Bundaberg – *use
Gambotto for acquisition of shares, and Bundaberg for cancellation/extinction of shares):
The expropriation must be: 1. For a proper purpose; and 2. Fair in all the circumstances.
o 1. Proper purpose
6 (2) Unless a member of a company agrees in writing to be bound, they are not bound by a modification of the constitution made after the date on which they became a member so far as the
modification:
(a) requires the member to take up additional shares; or
(b) increases the member's liability to contribute to the share capital of, or otherwise to pay money to, the company; or (c) imposes or increases restrictions on the right to transfer the shares already held by the member.
An expropriation will be for a proper purpose if it prevents the company from suffering significant detriment or harm (eg to remove shareholders who are competing with the
company, as in Sidebottom).
In Gambotto, the majority held that an expropriation to secure taxation and
administration advantages was not a proper purpose (it does not protect the company from harm; rather it results in a gain to the majority). McHugh J dissented because he thought that the substantial tax savings were sufficient to make it a proper purpose.
However, in Bundaberg, the court held that an extinction of shares to prevent a loss of
valuable and existing long-term tax benefits was a proper purpose (how to reconcile
with Gambotto? To protect benefits is acceptable, but to gain them is not).
o 2. Fairness
Fairness has two elements: (1) the process must be fair (requires disclosure of all
relevant information to the shareholders, and valuation by an independent expert);
and (2) the price to be paid for the expropriated shares must be fair (if the price is < market price, it is prima facie unfair – however, other considerations are relevant). In Bundaberg, the alteration was invalid because it was oppressive, as the directors
would not pay a market price for the shares.
Membership of companies
How does a person become a member?
Under s 231, a person is a member of a company if they:
(a) are a member of the company on its registration [a person becomes a member of a company on
registration if the person is specified in the application with their consent as a proposed member of
the company (s 120(1))]; or
(b) agree to become a member of the company after its registration and their name is entered on the register of members.
There must be a register of members (s 169; see page Error: Reference source not found).
Refusal to register a transfer of shares
The proprietary company replaceable rule in s 1072G provides that directors of a proprietary company
have the power to refuse to register a transfer of shares for any reason. The replaceable rule in s
1072F(3) allows directors to refuse to register a transfer of shares if the shares are not fully paid up or the company has a lien over the shares.
General principles:
o Where the company’s constitution gives directors a discretion to refuse to register a transfer, they
must exercise this power consistent with their fiduciary obligations – that is, in good faith in the best interests of the company (Re Smith and Fawcett);
o The directors do not have to give reasons, unless the constitution provides otherwise. The
transferee must lead evidence showing bad faith or not in best interests (eg in Re Smith and
Fawcett the applicant failed as he could not prove this);
o The power must be exercised in a reasonable time (16 months is unsatisfactory; Winmardun).
Note: under s 1072E(6), a Trustee in Bankruptcy automatically becomes the registered owner of the
TOPIC 5 Corporate Financing and Dividends
Share capital
Share capital vs loan capital
Flexibility for company: share capital is less flexible as it cannot be readily paid back (for non-listed
companies).
Rights of investor to have a say in company business: ordinary shareholders have a right to vote,
whereas lenders do not have any say (in most circumstances).
Tax advantages: loan and interest repayments are tax deductible, whereas dividends paid to
shareholders are not tax deductible. Shareholders get no automatic return on their investment as there is no right to a dividend.
What is a share?
Per s 1070A(1), a share is:
(a) personal property;
(b) transferable or transmissible as provided by:
(i) the company’s constitution;
(c) capable of devolution by will or by operation of law.
Shareholders do not own the company’s property, as the company is a separate legal entity.
Raising share capital
Under s 124(1)(a), a company has the power to issue shares in the company. The right to issue shares
belongs to the Board.
The power to issue shares includes the power to issue: bonus shares (shares for whose issue no
consideration is payable to the company), preference shares, and partly-paid shares (s 254A(1)).
A company may determine the terms on which its shares are issued, and the rights and restrictions
attaching to the shares (s 254B(1)).
A company must, within 28 days, lodge a notice of share issue with ASIC (s 254X(1)).
Consideration paid for share issue
o A shareholder must pay the company the issue price of shares, which is consideration for share
issue;
o Companies may issue shares for a non-cash consideration (eg in Salomon, a sole tradersold his property to the newly formed company in exchange for shares; Re Wragg, where partnership assets were transferred to a company in exchange for shares; and s 254X(1)(e), which requires particulars of the non-cash consideration or the contract to be included in the notice of share issue);
o The value of the consideration must represent money’s worth for the allotment of shares (Re White Star Line). That is, the consideration must not be merely colourable or illusory.
Classes of shares
Shares can be divided into classes. A class of shares is a category of shares that differs sufficiently in
respect of the rights, benefits or disabilities or other incidents that attach to the shares so as to make
that class distinguishable from any other category of shares in the company (Crumpton). Shares belong
to the same class when there is commonality of interest between shareholders of a particular class.
There may be only one shareholder of a particular class of shares.
Common classes are ordinary shares and preference shares
o Preference shareholders are like financiers of the company (lenders);
o The rights that attach to preference shares must be set out in the company constitution or
approved by special resolution (s 254A(2)).
Common differences
Ordinary shares Preference shares
Right to vote on general business
No right to vote.
(In many constitutions, preference shareholders get a right to vote when
they have not been paid a dividend – that is, the dividend is in arrears)
Right to dividend only if determined
Fixed dividend, paid first. This still depends on whether the company is profitable, but the board will ensure that pref shareholders are
paid dividends before ordinary shareholders.
Right to return of investment after pref shareholders are paid
Priority return of investment. If company is wound up, pref shareholders get their investment (the purchase price of shares) paid out first. Share of surplus assets after company
has paid all debts and investments No share of surplus assets.
Variation of rights of class shareholders
Q1: Is there a variation or cancellation of rights attached to class shares?
o Section 246C sets out actions that are deemed to vary class rights:
Company divides existing shares into further classes with different rights.
If shares in a class are divided into further classes and after the division the rights attached to all of the shares are not the same, then this is action is taken to vary the rights attached
to every share (s 246C(1)). Where the rights attached to some of the shares are varied, the
variation is taken to vary the rights attached to every other share in the class (s 246C(2)).
Company with one class issues a new class with different rights.
If a company has only one class of shares and issues new shares, if the rights attaching to the new shares are different to the rights attaching to the original shares then the rights of
holders of existing shares are varied (s 246C(5)).
Company issues new preference shares that rank equally with existing preference shares. If a company issues new preference shares ranking equally with existing preference shares, then the holders of existing preference shares are deemed to have had their rights altered (unless authorised by the terms of issue of the existing preference shares or the company’s
constitution) (s 246C(6) cf. White v Bristol Airplane).
Dilution of voting power (eg the issue of new shares that dilutes the existing shareholders’ voting power does not vary a legal right [eg they can still vote], rather it varies the
enjoyment of that right [their vote carries less weight] and this is not sufficient; White v
Bristol Airplane);
For example, in Greenhalgh v Arderne Cinemas, the company resolved to subdivide all 10
schilling shares into 2 schilling shares (giving the holders a five-fold increase in voting power). The only shareholder with 2 schilling shares, G, argued this was a variation to his
class rights. The Court held there was no variation of a legal right. In addition, s 246C would
not apply because G’s shares were not being divided. [Could be oppressive conduct.]
Q2: Does the constitution specify a procedure? If so, it must be followed (s 246B(1)7).
Q3: If the constitution does not set out a procedure:
Two requirements under s 246B(2):
i. Special resolution of the company; and
ii. Special resolution of members of the class whose rights are being varied (or the written
consent of at least 75% of the members of the class). Effectively, >90% vote is required, as
members with at least 10% of the votes in the class may apply to the Court to have the
variation set aside (s 246D8).
Maintenance of capital General position
General rule: Limited liability companies must maintain their issued share capital (Trevor v Whitworth). This is because a reduction in share capital would prejudice the rights of creditors.
A company may reduce its capital eg by purchasing shares from a shareholder.
A company might want to reduce share capital for various reasons:
- Business changes (eg sale of part of business, reduced performance); - Buy out retiring shareholders;
- Buy out retiring directors.
Permitted capital reductions
Share capital reductions
Part 2Jpermits some reductions. Under s 256A, the rules governing capital reductions are designed to protect the interests of shareholders and creditors by:
(a) addressing the risk of these transactions leading to the company’s insolvency;
(b) seeking to ensure fairness between the company’s shareholders; and
(c) requiring the company to disclose all material information.
Under s 256B(1), a company may reduce its share capital if the reduction:
(a) is fair and reasonable to the company’s shareholders as a whole; AND
o “Fair and reasonable” is a composite requirement (EM);
o Consider (EM):
7 If a company has a constitution that sets out the procedure for varying or cancelling rights attached to shares in a class of shares, those rights may be varied or cancelled only in accordance
with the procedure. The procedure may be changed only if the procedure itself is complied with.
The adequacy of the consideration paid to shareholders;
Whether the reduction would have the practical effect of depriving some
shareholders of their rights (eg by stripping the company of funds that would otherwise be available for distribution to preference shareholders); or
Whether the reduction was being used to effect a takeover and avoid the
takeover provisions.
o The reduction must be fair and reasonable “as a whole” – that is, the reduction need
not be fair and reasonable for every individual shareholder, but it cannot prejudice significant groups of shareholders;
o For example, a reduction in capital that gives payment to ordinary shareholders and
nothing to preference shareholders is not fair and reasonable, because the company’s constitution gave the preference shareholders a priority to a return of capital on
winding up (Fowlers Vacola).
(b) does not materially prejudice the company’s ability to pay its creditors; AND
o The company must ensure that it will remain solvent after the reduction;
o For example, a reduction of capital that involves cancellation of shares for no
consideration does not alter the company’s financial position, so this requirement does not apply.
(c) is approved by shareholders under section 256C.
o Depends on type of reduction:
Equal reduction: only relates to ordinary shares and applies equally and in
proportion to the # of ordinary shares the shareholder holds (s 256B(2)); or
Selective reduction: all other reductions (s 256B(2)).
o If equal reduction, must be approved by an ordinary resolution9 (s 256C(1));
o If selective reduction, must be approved by either: unanimous agreement of ordinary
shareholders, or special resolution of all shareholders (no voting by those who stand to gain from the reduction) (s 256C(2));
o BUT if the reduction involves the cancellation of shares, it must be approved by a
special resolution passed at a meeting of the shareholders whose shares are to be cancelled: s 256C(2). This requires a class meeting (ie a meeting of just those
shareholders) (Winpar Holdings).
AND s 256C disclosure requirements are satisfied
o Disclosure to shareholders (the company must include with the notice of the meeting a
statement setting out all information known to the company that is material to the
decision on how to vote on the resolution; s 256C(4));
o Disclosure to ASIC (before the above notice, the company must lodge with ASIC a copy
of the notice of the meeting and the information statement; s 256C(5)).
Breach?
The company must not make the reduction unless it complies with the above requirements (s 256D(1)).
If the company does not comply with the requirements, the validity of the reduction is not affected and
the company is not guilty of an offence (s 256D(2)).
However, any person who is involved10 in the contravention is liable for a civil penalty (s 256D(3)), or an
offence if their involvement is dishonest (s 256D(4)).
Financial assistance for purchase of shares
Financial assistance is not defined in the Act, but it includes lending money; guaranteeing repayment of a loan; providing assets as security for a loan; releasing person from a debt or other obligation already owed to the company; and acquiring assets at an inflated price.
The financial assistance must assist a person acquire shares in the company providing the assistance, or
its holding company11 (see s 260A(1)).
Under s 260A(1), a company may financially assist a person to acquire shares in the company (or a
holding company of the company) only if:
(a) giving the assistance does not materially prejudice:
(i) the interests of the company or its shareholders; or
o One assesses material prejudice by reference to the transaction with its
interlocking elements giving rise to the financial assistance, taking into account its financial consequences for the interests of the company or its shareholders.
This is in order to determine where the net balance of financial advantage lies from the giving of the financial assistance. If it lies against the company or its shareholders, then there is material prejudice (Adler per Santow J);
o For example, in Adler, the financial assistance was in the form of an unsecured
loan without any documentation and it was likely that only a small amount of the $10 million could be recovered. Therefore, there was material prejudice.
(ii) the company's ability to pay its creditors; OR
o See above.
(b) the assistance is approved by shareholders under section 260B; OR
o Even if there is material prejudice, financial assistance is allowed if approved by:
A special resolution of all shareholders (with no votes being cast by those who stand to gain); or
Unanimous resolution of all ordinary shareholders. (s 260B(1))
o The disclosure requirements are the same as in s 256C (ss 260B(4),(5)).
(c) the assistance is exempted under section 260C.
Breach?
The contravention does not affect the validity of the financial assistance and the company is not guilty of
an offence (s 260D(1)).
However, any person who is involved in the contravention is liable for a civil penalty (s 260D(2)), or an
offence if their involvement is dishonest (s 260D(3)).
10 s 79: A person is involved in a contravention if, and only if, the person:
(a) has aided, abetted, counselled or procured the contravention; or
(b) has induced, whether by threats or promises or otherwise, the contravention; or
(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention.
11 Example: Independent Steels v Ryan. A company wanted to buy shares in Marlon and Marlon’s subsidiary, Independent Steels, paid part of the purchase price. Therefore, Independent Steels
Dividends
Dividends are payments to shareholders and represent a return on the shareholder’s investment.
When can a dividend be paid?
o A company limited by guarantee must not pay a dividend to its members (s 254SA);
o Under s 254T(1), a company must not pay a dividend unless:
(a) Assets exceed liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend;
(b) The payment of the dividend is fair and reasonable to the shareholders as a whole; and
(c) The payment of the dividend does notmaterially prejudice the company’s ability to pay
its creditors (eg if the company would become insolvent as a result of the payment).
How is a dividend paid?
o The company constitution may state that a dividend is:
1. Recommended by the board and declared by the members; or 2. Determined by the board (eg RR s 254U).
o This affects when a dividend payment becomes a debt due to members (in turn affecting whether the directors may be liable for insolvent trading by paying a dividend). If:
1. Recommended by the board and declared by the members: The declaration by the members
creates an enforceable debt by the company in favour of the shareholders (s 254V(2)).
2. Determined by the board: The determining of a dividend does not create a debt. A debt is only
created when the time for payment of the dividend arrives. Any time before this, the directors may revoke the decision to pay the dividend (s 254V(1)).
Loan capital and debentures
Under s 124(1), a company has the power to:
(b) issue debentures;
(e) grant a security interest in uncalled capital;
(f) grant a circulating security interest over the company’s property;
A debenture is a loan arrangement. It is defined in s 9 as a chose in action that includes an undertaking
by the company to repay as a debt money deposited with or lent to the company. The chose in action may (but need not) include a security interest over property of the body to secure repayment of the money.
Security interest can be either:
o Non-circulating (NCSI): where the charge is taken over fixed, valuable asset. The company
cannot exercise any rights over that asset; or
The company can use these assets without the prior consent of the lender, but only in the ordinary course of ordinary business;
If a receiver is appointed or the loan agreement is breached (eg asset not dealt with in the
ordinary course of ordinary business), the charge agreement crystallises and the CSI turns
into a NCSI, therefore the assets cannot be dealt with freely;
Ordinary course of business?
The transactions must be made for the purpose of carrying on the business as a going concern, even if exceptional in nature (Reynolds Bros).
TOPIC 6 Directors
Directors Who are directors? Directors include:
o Persons appointed to the position of director (s 9(a)(i)); and
o Persons not appointed as directors, but who act in the position of a director (de facto director) or
the other directors are accustomed to act in accordance with that person’s instructions or wishes
(shadow director) (s 9(b)).
o See page Error: Reference source not found for the provision.
Types of directors:
o Executive director (managing director): officer and employee of the company;
o Non-executive director: officer but not employee;
o Nominee director: represents a major creditor or shareholder on the board;
o Alternate director: temporary appointee12 (eg if another director has taken a holiday).
Appointment
Requirements of the Act:
1. There is a minimum number of directors (1 for a proprietary company, 3 for a public company; s 201A(1),(2));
2. A minimum number of the directors must ordinarily reside in Australia (1 for a proprietary company,
2 for a public company; s 201A(1),(2));
3. Director must be at least 18 (s 201B(1)); and
4. Person must give the company a signed consent before being appointed (s 201D).
Requirements of constitution:
o Other requirements can be specified by company constitution;
o For example, RR s 201G: a company may appoint a person as a director by resolution passed in
general meeting.
Functions
Functions include:
o To manage the business of the company in the interests of its shareholders;
For example, RR s 198A: the business of a company is to be managed by or under the
direction of the directors.
This includes:
- To set business goals;
- To oversee the implementation of business strategies to achieve those goals;
- To ensure there are systems in place to monitor compliance with business
strategies and legal requirements; and
12 Eg RR s 201K: a director may appoint an alternate for a specified period, with the other directors’ approval. Any power exercised by the alternate is just as effective as if exercised by the
- To monitor the company’s financial position, in particular to be aware of the company’s solvency.
o Appoint a Managing Director/CEO;
o Call and run board and company meetings;
o Determine dividends;
o Issue new shares (to raise capital); and
o Refuse to register a share transfer (Pty Ltd company).
Division of power between directors and members
o The company belongs to the members (and directors do not have to be shareholders);
o The members can also appoint the directors (RR s 201G);
o However, where the constitution gives the power to manage the company to the directors, then that power cannot be controlled by the members. That is, the directors are not agents of the members
(Automatic Self-Cleansing Filter Co – hence, the members could not resolve to direct the directors to sell the company assets);
o Each organ of the company is separate and sovereign (John Shaw & Sons).
Removal A. Resignation
RR s 203A: A director of a company may resign as a director of the company by giving a written notice of resignation to the company at its registered office.
B. Removal by members
For Pty Ltd company:
o RR s 203C(a): Directors may be removed by ordinary resolution.
For public (Ltd) company:
o s 203D (not a RR – must be complied with): Director may be removed by ordinary resolution, despite anything in the constitution or employment contract (s 203D(1));
o However:
Notice of intention to move the resolution must be given to the company at least 2
months before the meeting (s 203D(2));
The director must receive a copy of the notice as soon as practicable (s 203D(3)); The director can put their case to members by giving a written statement or
speaking at the meeting (s 203D(4)). The written statement must be sent to all
members, or distributed to members attending the meeting and read out at meeting (s 203D(5)) – unless the statement is >1,000 words or defamatory (s 203D(6)).
C. Disqualification
Directors will be disqualified if:
o Convicted of a serious offence (s 206B(1));
A serious offence is one either in contravention of the Act and punishable by imprisonment
206B(1)(b)(i),(ii)); or contravenes a law of a foreign country and punishable by imprisonment
for >12 months (s 206B(1)(c));
The disqualification is for 5 years – starting on the day they are convicted (if no
imprisonment) or the day they are released (if imprisonment) (s 206B(2)).
o An undischarged bankrupt, or fails to pay personal creditors (ss 206B(3),(4)); o Contravened a civil penalty provision of the Act (s 206C);
Under s 206C(1), on application by ASIC the Court may disqualify a person from managing
corporations for an appropriate period if the person has breached a civil penalty provision (eg directors’ duties) and the Court is satisfied that the disqualification is justified (looking at
their conduct in relation to the management, business or property of any corporation; s
206C(2));
The purpose of the provision is both protective, ie to protect individuals who deal with
companies (Adler per Santow J), and punitive, ie to punish the director (Rich per McHugh J);
For example, in Adler, Mr Adler was disqualified for 20 years. Santow J thought that the
longest periods should apply where:
- Large financial losses;
- High likelihood that the defendant will continue to engage in similar conduct;
- Activities were undertaken in areas where there was potential to cause great harm;
- Lack of contrition or remorse;
- Disregard for the law;
- Dishonesty and an intention to defraud; and
- Previous contraventions.
o Mismanaged corporations in the past (ss 206D, 206E); o Is disqualified by ASIC (s 206F).
Managing13 a company whilst disqualified is an offence (s 206A(1));
The court may grant permission to disqualified persons to manage a company (s 206G).
Remuneration
Proprietary companies:
o Remuneration is determined by resolution (RR s 202A(1));
o The company may also pay the directors’ travelling and other expenses that they properly incur in
attending directors’ meetings, attending general meetings or in connection with company business (RR s 202A(2));
o Generally, the remuneration of executive directors is set by contract. However, a company must
disclose the remuneration paid to each director if directed to disclose the information by ≥5% of
the votes of members at a general meeting (s 202B(1)(a)).
Listed public companies:
o The directors’ report for a financial year must also include a remuneration report, stating the
remuneration policy of the board for key management personnel (s 300A);
13 Section 206A(1)
A person who is disqualified from managing corporations under this Part commits an offence if: (a) they make, or participate in making, decisions that affect the business of the corporation; or (b) they exercise the capacity to affect significantly the corporation’s financial standing; or (c) they communicate instructions or wishes to the directors of the corporation:
(i) knowing that the directors are accustomed to act in accordance with their instructions or wishes; or (ii) intending that the directors will act in accordance with those instructions or wishes.
o There is a two-strikes and re-election process. That is, shareholders can vote on a non-binding resolution as to whether they adopt the remuneration report. If the resolution receives a “no” vote of ≥25%, two years in a row, then a resolution is put to the shareholders to determine whether the directors should stand for re-election. If passed with ≥50% of the votes cast, a meeting to elect the directors must be held within 90 days [see pages 328-9 of book].
TOPIC 7 Duties of directors
1: Duty of care, skill and diligence About competent management of the company
Common law – duty of care
Directors and senior employees are under a duty to exercise a reasonable degree of care and diligence;
The duty applies to directors (under the common law tort of negligence and the equitable duty of care)
and to senior employees (as an express or implied term of their contract of employment).
Corporations Act
Who are subject to the duties?
Directors (see s 9, page 16);
Officers: defined in s 9 to mean:
o (a) Directors;
o (a) Company secretary; o (c) Receivers;
o (d) Administrators; o (f) Liquidators; or o A person who:
(b)(i) Makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(ii) Has the capacity to affect significantly the corporation’s financial standing; or
(iii) Is a shadow director.
Section 180 – care and diligence
The substance of the common law and statutory duties is the same (Vines v ASIC). The statutory duty
does not override the common law (s 185).
Test: Section 180(1) provides 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 were in the position of that director or officer.14
ASK: What would an ordinary person, with the knowledge and experience of the Defendant, be expected to have done in the circumstances if he or she was acting on their own behalf? (Adler)
Duties of the directors
o Directors must become familiar with the company’s business (Daniels v Anderson at 500);
o Directors are under a continuing obligation to keep informed about the activities of the corporation
(Daniels at 503);
14 That is, the reasonable person:
(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 as, the director or officer.
o Directors must maintain familiarity with the financial status of the corporation by a regular review
of financial statements (Daniels at 504).
o Directors must ensure that the board has available means to audit the management of the
company so that it can satisfy itself that the company is being properly run (Daniels at 500);
o Directors are expected to attend all board meetings unless exceptional circumstances, such as
illness or they are not in the state. They should bring an informed and independent judgment to
bear on the various matters that come to the board for decision (CBA v Friedrich at 117);
o Directors must institute inquiries, and raise issues with the board (Daniels at 504).
o Directors must have a minimum degree of financial literacy (so that they can read and understand
financial statements) (ASIC v Healey per Middleton J at [124]). They must also actually read and
consider the company’s financial statements (CBA v Friedrich per Tadgell J at 126). Although the
preparation can be delegated, the obligation to read them cannot (ASIC v Healey at [124]).
Directors occupying different positions
o A relevant factor in assessing the degree of care and diligence which a reasonable person would
exercise is the office held by the director or officer (s 180(1)(b));
o Board chairman
It is arguable that the chairman of directors has additional responsibilities that are more
than just procedural (Rich per Austin J at [70]15);
This is because the chairman of listed companies settles the agenda of the meetings of the
board, and has the primary responsibility of selecting matters and documents to be
brought to the board’s attention (Rich at [61]). Therefore, the chairman may have to take
reasonable steps to ensure that the board is properly informed and takes appropriate action.
o Non-executive directors
Reasonable person is attributed the particular skills and experience of the non-executive director (Daniels at 502);
But directors are subject to minimum standards, regardless of their background; Daniels. The courts have rejected attempts by uneducated or inexperienced directors to lower the standard, even if, when appointed, they were assured that they would not have to do
anything (DCT v Clark);
For example, a non-executive director who comes to the board with extensive lending
experience must give the company the benefit of that experience (in Gold Ribbon, Dunn failed to ensure that the lending scheme complied with accepted practice, failed to ensure that the company had appropriate procedures for making due diligence inquiries, and failed to monitor the administration of the scheme).
In ASIC v Hellicar, the seven non-executive directors of JHIL’s board failed to take
reasonable care when they approved the ASX announcement that the foundation for
compensation was fully funded. The directors ought to have known that the statement was misleading and they were well aware of the damage that this false statement would cause. o Executive directors and senior employees
The skills and experience of the director are irrelevant – the director is held to the objective standard of a person in their position (Vines);
Because executive directors are full-time employees of the company and have managerial
responsibilities, they are subject to higher standards than non-executive directors;
CEO and Managing Director
They are under a continuing obligation to supervise management and seek satisfactory
explanations regarding any deficiencies (Daniels);
They must fully inform the board of all relevant facts within their knowledge (PBS v
Wheeler – in this case, the MD withdrew from making a decision on a transaction because of a conflict of interest, but he was in breach because he did not alert the board to all information he knew about the transaction).
CFO
They must be proactive and take steps to ensure that the financial information is up to
date and accurate, and any assumptions or deficiencies are communicated to the board (Vines16).
DEFENCE 1: Business judgment rule
o Section 180(2) provides a defence to s 180(1) and the common law duties;
o 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:
i. (a) Make it in good faith for a proper purpose;
ii. (b) Do not have a material personal interest in the subject matter of the judgment; iii. (c) Inform themselves about the subject matter of the judgment to the extent they
reasonably believe to be appropriate; and
iv. (d) Rationally believe that the judgment is in the company’s best interests. The belief is
rational unless it is one that no reasonable person in their position would hold (s 180(2)).
o Business judgment?
Onus on party evoking the rule to establish (Adler);
Defined in s 180(3) to mean any decision to take or not take action in respect of a matter
relevant to the business operations of the corporation;
Two requirements:
i. Must be a positive, conscious decision to take or not take action (thus failure to do
something is not sufficient; Adler); and
ii. The action must be in respect of a matter relevant to the company’s business operations.
This includes planning, budgeting and forecasting (Rich). It does not include monitoring the
affairs of the company, because there is no action in respect of business operations (Rich).
DEFENCE 2: Relying on information and advice from others
Under s 189, the director’s reliance on the information or advice is prima facie reasonable, provided:
(a) a director relies on information, or professional or expert advice, given or prepared by:
(i) an employee whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned;
(ii) 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;
(iii) another director or officer in relation to matters within the director’s or officer’s authority; or
(iv) a committee of directors on which the director did not serve in relation to matters within the committee’s authority; AND
(b) the reliance was made:
16 Note: Vines’ comment to the board that “Management remained confident of the profit forecast” was not a breach, because it was a statement a reasonable person could have made given it
(i) in good faith; and
(ii) after making an independent assessment of the information or advice, having regard to the director’s knowledge of the corporation and the complexity of the structure and operations of the corporation.
This applies to Part 2D.117 proceedings and equivalent general law proceedings (s 189(c));
Person alleging that reliance was unreasonable (eg ASIC) has the burden of proof.
HOWEVER, despite the statutory provision, the court may still impose a higher standard.
o For example, in Healey, it was held that while directors are entitled to rely on others for
preparation of financial statements, they retain the responsibility to read, understand and question
the contents;
o In ASIC v Macdonald, Gzell J found that s 189 did not apply because the non-exec directors were
not entitled to rely on the exec directors because this was a key statement in relation to a highly
significant restructure of the group.
Delegation of board powers
Under s 198D(1), unless the company’s constitution provides otherwise, the directors of a company may
delegate any of their powers to:
(a) a committee of directors;
(b) a director;
(c) an employee of the company; or
(d) any other person.
The delegation must be recorded in the company’s minute book.
The delegate must exercise the powers in accordance with any directions of the director (s 198D(2)).
The exercise of the power by the delegate is as effective as if the director had exercised it (s 198D(3)).
What if the delegate uses power negligently?
o The director is prima facie responsible (s 190(1));
o BUT s 190(2) provides that the director is not responsible if they believed:
(a) On reasonable grounds at all times that the delegate would exercise the power in conformity
with the duties imposed on directors by this Act and the company’s constitution (if any); and
(b) (i) On reasonable grounds and (ii) in good faith and (iii) after making proper inquiry if
needed, that the delegate was reliable and competent in relation to the power delegated.
o In assessing reasonableness, the court will consider (Adler per Santow J at [372]):
- The relationship between the director and delegate (eg good friends vs virtually unknown); - The steps taken by the director to ascertain relevant information about the delegate;
- The extent to which the director is, or should have been, put on inquiry;
- The delegated function is such that “it may properly be left to such officers”; and
- The risk involved in the transaction.
Consequences of breach
Section 180(1) is a civil penalty provision under s 1317E (but not an offence under s 184);
The Court may order:
o A pecuniary penalty of up to $200,000 (under s 1317G); o Compensation to the corporation (under s 1317H); or o Disqualification (under s 206C, see page 18).
2: Acting bona fide in the company’s interests and for proper purposes About protecting the company’s interests
Common law
Duty 1: Acting bona fide in the company’s interests (see s 181(1)(a)) Test:
o Director must act honestly for the benefit of the company and not for some ulterior purpose;
o This is subjective; however, the Court will look for objective evidence of the director’s assertion
(Bell Group per Owen J). The court is not questioning the commercial justification for the decision –
rather, the court is assessing whether the director actually held that assertion;18
o If no rational director would have considered the actions to be in the best interests of the company, then the duty is breached (Adler). Otherwise a company could be run by a “lunatic” (Hutton).
What does “in the company’s interests” mean?
o The duty is owed to the company (being the collective body of shareholders) and not to individual members (Percival v Wright);19
o Director must consider the interests of present and future shareholders and the company as a commercial entity (Darvall v North Sydney per Hodgson J).
Exceptions to Percival: When are duties owed to individual shareholders?
Directors must act in the best interests of individual shareholders or groups of shareholders in some
circumstances:
1. Small family companies
o A fiduciary relationship can arise in equity when a person in whom particular trust, confidence
and dependence has been reposed exploits this to achieve an improper benefit (Coleman v Myers);
o For example, where a director possesses special knowledge, they must disclose this to the
shareholders and not use it to the disadvantage of the shareholders:
In Coleman, the MD arranged for the company to be taken over by a company controlled by him. The MD and the Chairman recommended that the shareholders accept a price per share that was a substantial undervalue. A fiduciary relationship
was found to exist, because the directors had inside knowledge of the true value of the
shares, and they used this to the detriment of the shareholders; and
In Brunninghausen v Glavanics, G, a director and minority shareholder, agreed to sell his shares to the other director, B. B then sold all the shares to a third party for a much
higher price. The Court held that B owed G a fiduciary duty, because B possessed
special knowledge about the third party offer (which G did not have, because he did not participate in the management of the company).
2. Corporate groups
o See page 2;
18 If a business decision is made in good faith and for proper purposes, it will not be reviewed by the courts (Harlowe’s Nominees). That is, the courts do not assess the merits of a decision, just
the legality.
o A director will not breach their duty if they act for the benefit of the corporate group, where it will benefit the company on whose board they sit (Equiticorp);
o It is not necessary for the director to independently consider the interests of the company on
whose board he sits, provided the decision benefits the company as well as the corporate
group (Equiticorp, cf. dissent of Kirby P).
3. Employees
o Directors cannot favour the interests of employees at the expense of the shareholders;
o For example, gratuitous payments cannot be made to ex-employees (in Parke v Daily News,
DN closed down one branch of the company and gave the surplus from the sale to the dismissed employees. Held: Breach, because it does not serve the interests of the company); o A payment to current employees may be in the interests of the company, because industrial
relations may be improved.
4. Creditors
o Creditors’ interests must be taken into account when the comp is insolvent or near insolvency
(Kinsela). At this time, the shareholder value is almost nil and so the focus of the directors must shift;
o Can shareholders cure a breach? NO – since the duty is owed to the creditors, the shareholders cannot cure a breach by majority vote (eg in Kinsela, the directors caused the company
nearing insolvency to lease its premises to the directors, on less than commercial terms. Held:
Breach, because a reasonable person could not have believed that the lease transaction was for the benefit of the company, having regard to the interests of creditors – lease set aside); o How close to insolvency? The greater the degree of financial instability, the less risk the
directors can take with the assets (Kinsela);
o *BUT this obligation does not give creditors an independent right to sue for breach (Spies v R). It is up to the liquidator to ensure fair proportional distribution to creditors.
Nominee directors
Nominee director: represents the interests of a major creditor or shareholder on the board.
Prima facie they must they act bona fide and in the company’s interests, and not in the interests of their nominator. However, the company constitution may provide otherwise.
See s 187 for a nominee director from the holding company on the board of a subsidiary.20 Duty 2: Acting for proper purposes (see s 181(1)(b))
Test:
Directors must use their powers for:
i. The purposes for which the power was given; and ii. The benefit of the company as a whole.
20
A director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary if: (a) the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company; and
(b) the director acts in good faith in the best interests of the holding company; and
Proper purpose
A director who exercises their powers to secure some private advantage is acting for an improper
purpose because such a purpose is outside the purpose of benefiting the company (Mills v Mills);
However, directors are not prohibited from acting in any way that benefits their interests as
shareholders.
In determining proper purpose, ask:
1. As a matter of law, what are the purposes for which the power may be used (objective)?
2. As a matter of fact, for what purposes was the power actually used (subjective)?
3. Is the actual purpose in (2) within the legal purposes in (1)?
More than one purpose?
o If the Directors act for more than one purpose, apply the ‘but for’ test (Whitehouse v Carlton
Hotel):
“ If not for the improper purpose, would the directors still have acted that way?” If no, then breach of duty.
o For example, in Howard Smith, the Miller’s board argued that the issue of shares to HS was
primarily motivated by the fact that their company was in urgent need of funds to finance tankers
(and the share issue indirectly blocked a takeover bid). The Court examined how real and pressing
the proper purpose was – here, there was no pressing need for the tankers and the need had been alleviated by the company raising loan capital, therefore primary purpose was to block takeover.
The power to issue shares
Directors can issue shares for the following proper purposes:
- To raise capital for the company;
- As part of an employee share scheme;
- To foster business connections; or
- As consideration for the purchase of assets.
Improper purposes include:
o To dilute the voting power of another shareholder (eg in Whitehouse, the father, who was
the governing director with the sole power to issue shares, issued shares to his sons to dilute the
voting power of his ex-wife and this was an impermissible purpose. The primary purpose of share issue is to raise capital). See also PAGE 62 FOR REMEDY (in addition to members’ remedies). o To create a new majority shareholder, to block takeover (eg in Howard Smith, the two majority
shareholders of Miller, Ampol and Bulkships, wanted to make a hostile takeover bid for the minority (45%). A company friendly to Miller, HS, agreed to make its own higher takeover bid. To make this
bid successful, the Miller’s board issued sufficient shares to HS to reduce A and B’s majority to a
minority. This was improper);
o BUT not all transactions that defeat a takeover bid will be improper (for example, where the transaction both defeats the takeover offer and is in the best interests of the company, it will not be improper; Darvall per Mahoney JA). In this case, the directors decided to sell land, and a term of the agreement was that another party would make a higher takeover bid of the company. This was not improper). See but for test.
Duty 3: Not to fetter discretions
Directors must exercise an independent judgment when making decisions and not promise to act in accordance with the wishes of others. It is a breach if the director binds himself in advance to vote in particular ways;
The relevant time to judge the exercise of discretion is when the agreement is entered into, rather than when the terms of the agreement are to be performed (eg in Thorby v Goldberg, the directors entered
into a contract whereby they agreed to vote in favour of a particular course of action in the future. The
directors then sought to have the contract declared void, because it purported to fetter their discretion. Held: No breach, because at the time the contract was entered into the directors exercised their
discretion).
Corporations Act – s 181
(1) A director or other officer must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
Section 181(1) is a civil penalty provision under s 1317E (and is an offence under s 184, if the director is reckless or intentionally dishonest – higher BOP).
Additional examples:
o In Adler, Mr Adler breached s 181 by using the loan from HIHC (where Mr A was a director) to purchase bad investments from his own company;
o In PBS v Wheeler, the MD was not in breach because he excused himself from the transaction
