Essential Australian Company Law

ESSENTIAL CORPORATE LAW

CP

Cavendish Publishing (Australia) Pty Limited

Sydney • London

Titles in the series: Essential Administrative Law Essential Australian Law Essential Constitutional Law Essential Contract Law Essential Corporate Law Essential Criminal Law Essential Equity and Trusts Essential Evidence Essential Family Law Essential International Trade Law Essential Management Law Essential Professional Conduct: Dispute Resolution Essential Professional Conduct: Legal Accounting Essential Professional Conduct: Legal Ethics Essential Tort Law

ESSENTIAL CORPORATE LAW Michael A Adams BA (Hons), LLM (Lond), FCIS, MACE Professor of Corporate Law, Faculty of Law, University of Technology, Sydney General Editor Professor David Barker Dean of the Faculty of Law, University of Technology, Sydney

CP

Cavendish Publishing (Australia) Pty Limited

Sydney • London

First published 2002 by Cavendish Publishing (Australia) Pty Limited, 3/303 Barrenjoey Road, Newport, New South Wales 2106 Telephone: (02) 9999 2777 Facsimile: (02) 9999 3688 Email: [email protected] Cavendish Publishing Limited, The Glass House, Wharton Street, London WC1X 9PX, United Kingdom Telephone: +44 (0)20 7278 8000 Facsimile: +44 (0)20 7278 8080 Email: [email protected] Website: www.cavendishpublishing.com © Adams, MA 2002

All rights reserved. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, photocopying, recording or otherwise, without the prior permission of the publisher and copyright owner. Any person who infringes the above in relation to this publication may be liable to criminal prosecution and civil claims for damages.

National Library of Australia Cataloguing in Publication Data Adams, Michael Andrew Essential corporate law 1 Corporation law – Australia I Title (Series: Essential series) 346.94066 ISBN 1 876213 29 9 Printed and bound in Great Britain

Foreword This book is part of the Cavendish Essential Series. The books in the series constitute a unique publishing venture for Australia in that they are intended as a helpful revision aid for the hard-pressed student. They are not intended to be a substitute for the more detailed textbooks which are already listed in the current Cavendish catalogue. Each book follows a prescribed format consisting of a checklist covering each of the areas in the chapter, and an expanded treatment of ‘essential’ issues looking at examination topics in depth. The authors are all Australian law academics who bring to their subjects a wealth of experience in academic and legal practice. Professor David Barker General Editor Dean of the Faculty of Law, University of Technology, Sydney

v

Preface Essential Corporate Law was inspired by the many students of law and business who must study this subject but generally find it hard work. After teaching corporate law for over a decade in the United Kingdom and Australia I believe there is a need for a book that crystallises the major points to enable the good student to really take advantage of their lecturer’s notes and nominated textbook. Australia is fortunate to have a range of good company law textbooks for both business and law students, but they are by their very nature heavy going, and a helpful guide I am sure will be most welcome. On a personal note, this book came into existence back in 1997 with the encouragement of Jo Reddy, Ruth Massey and Cara Annett, all of Cavendish Publishing. My Dean, Professor David Barker is a permanent inspiration, and my amazing secretary at UTS Kuring-gai, the late Shirley Turnbull, gave me exceptional support. During 2001, I was greatly assisted at UTS by my research assistant, Jeremy Green. However, none of my work could have ever been possible without the 100% emotional and intellectual support of my marvellous wife Melissa. This book is dedicated to all the 21st century students of Australian corporate law, and especially my very special daughters, Lucy Etta and Jessica Marie. Michael A Adams Sydney, Australia February 2002

Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Table of Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii 1 Australian Corporate Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 Corporate Constitution and Liabilities. . . . . . . . . . . . . . . . . . . . . 19 3 Company Officers and Management . . . . . . . . . . . . . . . . . . . . . . 31 4 Capital and Fundraising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5 Shareholders’ Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 6 Companies in Financial Trouble . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

i

x

Table of Cases ANZ Executors & Trustee Co Ltd v Qintex Ltd (1990) 2 ACSR 307 ASIC v Edensor Nominees Pty Ltd [2001] HCA 1; 177 ALR 329; 37 ACSR 1 AWA Ltd v Daniels t/a Deloitte Haskins & Sells (1992) 7 ACSR 759 Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461; [1843-60] All ER 249 Allen v Atalay (1993) 11 ACSR 753 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 Allen v Hyatt (1914) 30 TLR 444 Ashbury Railway Carriage & Iron Co v Riche Bros (1875) LR 7 HL 653 Austin & Partners Pty Ltd v Spencer [1998] SCNSW 5680/93

54 11 40 41 79 24 37 22 35

BNZ (Bank of New Zealand) v Fiberi Pty Ltd (1993) 14 ACSR 736; affirmed at (1994) 12 ACLC 232 Bailey v NSW Medical Defence Union Ltd (1995) 184 CLR 399; 132 ALR 1; 18 ACSR 521 Baillie v Oriental Telephone & Electric Co [1915] 1 Ch 503 Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 Broken Hill Proprietary Co Ltd v Bell Resources Ltd (1984) 8 ACLR 609 Brunningshausen v Glavanics [1999] NSWCA 199; 46 NSWLR 538; 32 ACSR 294

x

30 24 83 56 79 37

i

Carew-Reid v Public Trustee (1996) 20 ACSR 443 City Equitable Fire Insurance Co Ltd, Re [1925] Ch 407 Clemens v Clemens Bros Ltd [1976] 2 All ER 268 Club Flotilla (Pacific Palms) Ltd v Isherwood (1987) 12 ACLR 387 Coleman v Myers [1977] 2 NZLR 225 Commonwealth Bank of Australia v Eise & Friedrich (1991) 6 ACSR 1; 9 ACLC 1207 Cook v Deeks [1916] 1 AC 554; 114 LT 636 Daimler v Continental Tyre and Rubber Co [1916] 2 AC 307; 32 TLR 624 Dalkeith Investments Pty Ltd, Re (1984) 9 ACLR 247 Dallinger v Halcha Holdings Pty Ltd (1996) 14 ACLC 263 Daniels t/a Deloitte Haskins & Sells v AWA Ltd (1995) 37 NSWLR 438; 16 ACSR 607 Darvall v North Sydney Brick & Tile Co Ltd (1989) NSWLR 260; 15 ACLR 230 David Grant & Co Pty Ltd v Westpac Banking Corp (1995) 184 CLR 265; 18 ACSR 225 Derry v Peek (1889) 14 App Cas 337 Downsview Nominees Ltd v First City Corp Ltd (1993) 11 ACLC 3101

25 39 82 34 37 39, 44, 94 82

18 79, 92 89 40 22, 57 92 65 88

EPA (WA) v McMurtry & Gillfillan Holdings Pty Ltd (1995, unreported, WA) Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 Edmonds v Blaina Furnaces Co (1887) 36 Ch D 215 Elder v Elder & Watson Ltd [1952] SC 49

79, 92

x

i

i

28

58 78

Evans v Rival Granite Quarries Ltd [1910] 2 KB 979 Exicom Pty Ltd v Futuris Corp Ltd (1995) 18 ACSR 404 Forrest v John Mills Himself Pty Ltd (1970) 121 CLR 149; ALR 911 Foss v Harbottle (1843) 2 Hare 461; Ch 12 LJ 319 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Gambotto v WCP Ltd (1995) 182 CLR 432; 127 ALR 417; 16 ACSR 1 Gilford Motor Co Ltd v Horne [1933] All ER 109 Gluckstein v Barnes [1900] AC 240 Gould v Brown (As Liquidator) (1998) 193 CLR 346; 26 ACSR 317 Green v Bestobell Industries Pty Ltd [1982] WAR 1 HL Bolton (Engineering) & Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159 HR Harmer Ltd, Re [1958] 3 All ER 689 Hamilton v Whitehead (1988) 166 CLR 121 Hartnell v Sharp Corp of Australia Pty Ltd (1975) 5 ALR 493 Hickman v Kent or Romney Marsh Sheepbreeders’ Association [1915] 1 Ch 881 Hollis v Vabu Pty Ltd [2001] HCA 44; 181 ALR 263 Holpitt Pty Ltd v Swaab (1992) 33 FCR 474; 105 ALR 421; 6 ACSR 67 Hooker Investments Pty Ltd v Baring Bros (1986) 10 ACLR 525 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41

59 45

28 17, 69, 76, 77, 81, 82 29

25, 82 18 15 5, 11 18, 41, 43

26 79 27 28 25 28 44 45 40

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 Humes Ltd v Unity APA Ltd (1987) 5 ACLC 15

51 80

Industrial Development Consultants v Cooley [1972] 2 All ER 162

40

John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113

70

Kelner v Baxter (1866) 2 LR CP 174 Keyrate Pty Ltd v Hamarc Pty Ltd [2001] NSWSC 491; 38 ACSR 396 Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722 Kokotovich Construction Pty Ltd v Wallington (1995) 17 ACSR 478 Kriewaldt v Independent Direction Ltd (1995) 14 ACLC 73

17 81 37 50 74

Lee v Lee’s Airfarming Ltd [1961] AC 12 Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 Little River Goldfields NL v Moulds (1992) 10 ACLC 121 Lloyd v Grace, Smith & Co [1912] AC 716 Macuara v Northern Assurance Co Ltd [1925] AC 619 Mills v Mills (1938) 60 CLR 150 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 Morley v Statewide Tobacco Services Ltd (1992) 10 ACLC 1233 NRMA Holdings Ltd v Fraser & Talbot (1995) 127 ALR 577; 15 ACSR 768 NRMA Holdings Ltd v Parker (1986) 11 ACLR 1 x

i

17 28 80 28

17 40 79 18, 44

65 32, 70, 71 v

NSW, SA and WA v Commonwealth of Australia (1990) 169 CLR 482; 1 ACSR 137 Northside Developments Pty Ltd v Registrar-General (NSW) (1990) 170 CLR 146 Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 Pender v Lushington (1877) 6 Ch D 70 Peninsula Gold Pty Ltd v Sunbeam Victa (1996) 20 ACSR 553 Percival v Wright [1902] 2 Ch 421 Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1 Peter’s American Delicacy Co Ltd v Heath (1939) 61 CLR 457; ALR 124 Prudential Assurance Co Ltd v Newman Industries (No 2) [1982] 1 Ch 204 R v Byrnes and Hopwood (1995) 183 CLR 501; 130 ALR 529; 17 ACSR 551 R v Hannes [2000] NSWCCA 503; 158 FLR 359; 36 ACSR 72 R v Hughes [2000] HCA 22; 171 ALR 155; 34 ACSR 92 Rankine v Rankine (1995) 18 ACSR 725 Regal (Hastings) Ltd v Gulliver [1967] AC 134 Rossington Pty Ltd v Lion Nathan Ltd (1992) 7 ACSR 509; 10 ACLC 722 Royal British Bank v Turquand (1856) 6 E & B 327; 119 ER 886 Salomon v Salomon & Co Ltd [1897] AC 22 Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225 Smith & Fawcett Ltd, Re [1942] Ch 304 Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701

x

5 29, 30

34 83 74 36 41 25, 53 78

42 45 5 79 40 74 29, 57 4, 17, 19, 57, 94 65 39 26

v

Spies v R [2000] HCA 43; 201 CLR 603; 35 ACSR 500 State of South Australia v Marcus Clark (1996) 66 SASR 199; 19 ACSR 606

37 38–40, 46

Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd [2001] QSC 324 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 Theatre Freeholds Ltd, Re (1996) 20 ACSR 729 Timber Engineering Co Pty Ltd v Anderson [1908] 2 NSWLR 488 Titlow v Intercapital Group (1996) 144 ALR 203; 20 ACSR 201 Tracy v Mandalay Pty Ltd (1953) 88 CLR 215 Trevor v Whitworth (1887) 12 App Cas 409 Twycross v Grant (1877) 2 CPD 469

78 15 54 15

United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673; 33 ALR 1; 5 ACLR 182

59

Wakim; Ex parte McNally, Re [1999] HCA 27; 31 ACSR 99 Walker v Wimborne (1976) 137 CLR 1; 3 ACLR 529 Wayde v NSW Rugby League Ltd (1985) 180 CLR 459; 61 ALR 225; 10 ACLR 87 Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285; 70 ALR 251; 11 ACLR 715

x

v

81 28 87 33

5, 11 18, 36 79 41

i

Introduction Company law can be seen as a difficult subject grounded in complex legislation and ever expanding case law. This book is not intended as a replacement for the major company law textbooks in Australia; it is, however, a valuable tool for obtaining an understanding of the major principles and leading authorities. It is aimed at helping economics, accounting, commerce and business students studying company law, as well as the many law students trying to survive their LLB! Essential Australian Corporate Law focuses on the key issues of corporate law under the existing legislation and developing case law. However, it is worth noting that, since the Corporations Law legislation was proclaimed on 1 January 1991, there have been at least 25 amending statutes and approximately 2,700 cases dealing with company law matters. The Australian Constitutional matters relating to corporate law have been ‘put to bed’ for the next five years by the States referring their ‘corporate powers’ to the Commonwealth and the enactment of the Corporations Act 2001 (Cth). Thus, in any company law course it is of value to focus on the main principles and known exceptions. Where possible, it is worthwhile to know the original authority (often an old English case) and some modern Australian examples of how the principle has been applied or adapted. At the end of each chapter, references to the relevant chapters in the main company law textbooks are provided. The internet also provides some very useful sites for obtaining the latest company information. Throughout the book there are approximately 100 cases referred to and many of these cases are available online for free. If you go to www.law.uts.edu.au/~corp/ you will find hyperlinks to the cases mentioned in this textbook. Please note: references to legislative sections throughout the book are to the Corporations Act 2001 (Cth) (CA) unless otherwise stated.

Useful company law internet sites www.afr.com.au www.asic.gov.au www.asx.com.au

Australian Financial Review Australian Securities & Investments Commission Australian Stock Exchange

www.austlii.edu.au

Australasian Legal Information Institute www.brw.com.au Business Review Weekly www.cavendishpublishing.com Cavendish Publishing www.cpaonline.com.au Australian Society of CPAs www.CSAust.com Chartered Secretaries Australia (Division of ICSA) www.icaa.org.au Institute of Chartered Accountants in Australia www.icsa.org.uk Institute of Chartered Secretaries & Administrators www.law.uts.edu.au/~corp/ The author’s Corporate Law Website www.lbc.com.au LBC Information Services cases www.lexisnexis.com.au Butterworths’ latest cases www.treasury.gov.au Federal Treasury Department

Main Australian company law textbooks Baxt, R, Fletcher, K et al, Afterman & Baxt’s Cases and Materials on Corporations and Associations, 1999, Sydney: Butterworths. CCH Corporations Law Editors, 2002 Australian Corporations & Securities Legislation, 2002, Sydney: CCH. Editor, The New Corporations Act 2001 and Related Legislation – Centenary of Federation Edition, 2001, Sydney: Butterworths. Ford, HAJ, Austin, RP et al, Ford’s Principles of Corporations Law, 2001, Sydney: Butterworths. Hanrahan, P, Ramsay, I et al, Commercial Applications of Company Law, 2001, Sydney: CCH. Lipton, P and Herzberg, A, Understanding Company Law, 2001, Sydney: Lawbook Co. Redmond, P, Companies and Securities Law – Commentary and Materials, 2000, Sydney: Lawbook Co. Tomasic, R, Jackson, J et al, Corporations Law – Principles, Policy and Process, 2002, Sydney: Butterworths.

1 Australian Corporate Law

You should be familiar with the following areas: • The Australian framework of corporate law • The use of common law and statutory interpretation of the Corporations Act 2001 • The concept of separate legal entity and lifting the veil of registration (incorporation) • The various business structures in Australia, including partnerships • The various types of companies that may be registered and the role of promoters • The role of the regulator, Australian Securities and Investments Commission (ASIC)

1.1

Introduction

Australia operates under a Federal system of government, with specified powers granted to the central Federal (Commonwealth) parliament and residual powers vested in the State parliaments. The corporate law system has traditionally been based upon State laws, but since 1991 it has been treated as a Federal law. This chapter explains the legal framework of Australian corporate law, including the alternative types of business enterprises and the role of the regulator.

1.2

The company and other business structures

Although there are over one million companies registered in Australia, there are many other choices of business structure which need to be evaluated. The major choices are:

1

ESSENTIAL CORPORATE LAW

• • • •

sole traders; partnerships; joint ventures; and companies.

Although businesses can be established as trusts, co-operatives, mutuals, friendly societies and associations, these are beyond the scope of this book. The selection of the best type of business structure or enterprise will depend upon a variety of factors. The key factors in determining business structure are: • • • • • • • • •

How easy is it to establish? What is the cost of setting up? Are there any minimum or maximum capital requirements? What are the laws and who will control the management of the business? What is the degree of business flexibility? What taxation rate is applied (personal or corporate)? Size of business enterprise? The process involved in the sale of the business entity or part. The process involved in the termination of the business.

Although there is in theory a great choice, a business will often end up being registered as a company because there is a general perception that it is the appropriate structure. Also, the change of the tax regime on July 2000 to a Goods and Services Tax (GST) required an Australian Business Number (ABN), which was much easier to obtain if the business was a company rather than a sole trader or partnership. Thus, in Australia, the business structure of choice tends to be the company. What are the legal requirements of a sole trader? An individual is allowed to operate in business as a sole trader under Australian law – a structure that is very easy to establish. However, unlike when dealing with companies, the law does not distinguish between the person and the business. Thus, the sole trader is governed by the ordinary commercial laws of Australia, which include contract, tort, crime, agency, trust and legislation, such as the Fair Trading Act (State) or Trade Practices Act 1974 (Cth).

2

AUSTRALIAN CORPORATE LAW

There are limited taxation issues that must be taken into account by a sole trader, and the individual will be personally liable for any debts the business incurs. A sole trader may obtain an ABN from the Australian Tax Office (ATO) tax office and may be required to make annual or quarterly payments to the government based on the Business Activity Statement (BAS). The benefit of the sole trader structure is that the person has a lot of flexibility and is in control of the business. This has to be weighed up against the lack of capital for expansion, the shortage of skills and the potential for unlimited liability for debts! What are the legal issues in respect of partnerships? Partnerships require at least two persons to come together with the intention to make a profit. Partnerships have a maximum number of 20 partners (s 115), the exception being professional practices, such as lawyers and accountants, which may have up to 400. The governing laws of partnership are contract, trust and agency, plus the codifying State statute of the Partnership Act 1892 (NSW), or other State equivalent. This Act has not really changed in the last 100 years and is based on the same UK statute of 1890. In 1991, the Partnership Act was amended to allow some partners to have limited liability by virtue of the Partnership (Limited Partnership) Amendment Act 1991 (NSW). However, every limited partnership must be registered with the State government and have at least one unlimited liability partner. Partnerships are quick and easy to establish both informally or more formally with a partnership deed (contract), but can run into difficulties with the concepts of joint and several liability. Each partner owes a fiduciary duty to the partnership (usually called the ‘firm’) and to each partner. Thus, if one partner binds the partnership to a contract, all the partners are equally liable for the debt. If a partner is bankrupt, then the other partners can be liable for that partner’s debt as well! The cost and ease of registration of a corporation means that in Australia it is more common for a company to be created, rather than a partnership. This enables all the investors, as shareholders, to have limited liability, rather than a few partners having protection under a registered limited partnership.

3

ESSENTIAL CORPORATE LAW

What is a corporate body? Corporations are seen in law as being separate legal persons. Thus, there is a distinction between the company and the shareholders and management and other stakeholders. Originally, corporations (dating from the 14th century) were ‘chartered’ corporations created by the Crown by way of a royal charter. Other companies were created by an Act of Parliament and these became known as ‘statutory’ corporations. Unfortunately, a financial disaster called the ‘South Sea Bubble’ resulted in the Bubble Act 1720 (UK), which prohibited any future companies from being formed until the legislation was finally repealed in 1825. The UK conducted a review of companies in the early 1800s and as a result passed the Joint Stock Companies Act 1844 (UK). This statute is the basis of the modern day ‘registered’ company that exists in the UK and Australia. It was a further 11 years before the concept of limited liability for shareholders was accepted, when the Limited Liability Act 1855 (UK) was passed. This statute also added the word ‘Limited’ to the end of a company’s name and required auditors to be appointed to protect shareholders. This is a distinction from companies created in the United States, which use the word ‘Inc’ to mean incorporated under the US State legislation, such as Delaware. Under s 124 Corporations Act 2001 (Cth), a company is an independent person, re-enforcing the common law position set out in Salomon v Salomon & Co Ltd (1897). The House of Lords resolved that a company was a person, distinct from its shareholders, creditors and management (directors and employees). This concept (often referred to as ‘the corporate veil’) is an important and distinguishing feature of a corporation.

1.3

Corporations Act 2001

What is the structure of Australian corporate law? The major legal control governing the functions of Australian companies, and in fact for all corporate officers, is the CA. On 15 July 2001, the Federal government was able to finally change the previous decade of debate over whether Australia had State or Federal corporate law. Prior to 1991, each State of Australia had its own Companies Act, which was broadly codified. Each State also had a Corporate Affairs Commission, which co-operated with the National Companies and Securities Commission and Ministerial Council to help codify the laws. 4

AUSTRALIAN CORPORATE LAW

Between 1991 and 2001, the relevant statute was called the Corporations Law. This was an unusual Act of Parliament because, although it was technically State/Territory based, it actually operated as Federal legislation. This special arrangement arose because of a constitutional challenge by New South Wales, South Australia and Western Australia against the Commonwealth’s Corporations Act 1989. The High Court of Australia (HCA), in NSW v Commonwealth (1990), determined (in a 6:1 majority judgment) that parts of the legislation were unconstitutional. As a result of the HCA ruling, a special agreement was made between all the Attorneys-General (six States and Commonwealth) to allow the new pseudo-Federal corporate laws to operate from 1 January 1991, as if it were a national law. Thus, the Corporations Law came into existence and for most practical purposes, Australia had one system of corporate law. This system remains under constant reform due to the ongoing Corporate Law Economic Reform Program (CLERP). It is possible to observe, in the current legislation, traces of the original drafting of the previous State laws from the Companies Code, Securities Industry Code, Futures Industry Code and the Companies (Acquisition of Shares) Code, dating from the early 1980s. In fact, the Corporations Law was mostly an amalgamation of these previous State statutes. In 1993, the reform process was commenced by the Commonwealth Labor Attorney-General and called the ‘Corporations Law Simplification Program’. With the change of Federal Coalition government, this program of reform continued under the auspices of the Federal Treasury Department and is called the Corporate Law Economic Reform Program. A series of High Court cases followed, including Gould v Brown (1998); Re Wakim (1999); and R v Hughes (2000), which all challenged the constitutional validity of the Corporations Law. During 2000 and 2001, the Commonwealth Attorney-General and the Minister for Financial Services and Regulation pressured the States to refer their individual corporations powers to the Commonwealth for five years. The States all eventually passed legislation, conferring their powers to the Federal government, which facilitated the passing of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Act 2001 (Cth) (the ASIC Act), both of which commenced on 15 July 2001. The CA is divided into 27 Chapters and three Schedules. There were 1,362 sections when it became operative on 1 January 1991; but now, with 1,409 numbered sections, capital letters have been added to the section numbers when inserting new provisions in order to keep 5

ESSENTIAL CORPORATE LAW

the structure logical. Such additions have taken the total number of sections in the CA to over 2,000. For example, the appointment of a company secretary for a public company is found in s 204A, as there was already an existing s 204 and s 205. Thus, the Corporations Act 2001 is organised as follows: Table 1: Corporations Act structure

6

Chapter

Section

Topic

Chapter 1

1 to 111J

Introductory

Chapter 2A

112 to 123

Registering a company

Chapter 2B

124 to 167AA

Basic features of a company

Chapter 2C

167A to 178

Registers

Chapter 2D

179 to 206HA

Officers and employees

Chapter 2E

207 to 230

Related party transactions

Chapter 2F

231 to 247D

Members’ rights and remedies

Chapter 2G

248A to 253N

Meetings

Chapter 2H

254AA to 254Y Shares

Chapter 2J

256A to 260E

Transactions affecting share capital

Chapter 2K

261 to 282

Charges

Chapter 2L

223AA to 283I Debentures

Chapter 2M

285 to 344

Financial reports and audit

Chapter 2N

345 to 352

Annual returns and lodgments with ASIC

Chapter 5

410 to 600F

External administration

Chapter 5A

601AA to 601ALDeregistration of companies

Chapter 5B

601BA to 601DJ Bodies corporate registered as companies and registrable bodies

Chapter 5C

601EA to 601QB Managed investment schemes

Chapter 6

602 to 659C

Takeovers

AUSTRALIAN CORPORATE LAW

Chapter 6A

660A to 669

Compulsory acquisitions and buyouts

Chapter 6B

670A to 670F

Rights and liabilities in relation to Chapters 6 and 6A matters

Chapter 6C

671A to 673

Information about ownership of listed companies and managed investment schemes

Chapter 6CA

674 to 678

Continuous disclosure

Chapter 6D

700 to 742

Fundraising

Chapter 7

760A to 1101J

Financial services and markets

Chapter 9

1274 to 1369A Miscellaneous

Chapter 10

1370 to 1445

Schedule

Topic

Schedule 3

Penalties (criminal)

Schedule 4

Transfer of financial institutions and friendly societies

Transitional provisions

A decade of corporate law reform As previously mentioned, over the last decade there has been a major reform of the corporate law, prompting Mr Alan Cameron (former Chairman of ASIC), while speaking at the Corporate Law Teachers Association conference in 1994, to muse ‘you will need to keep buying legislation for some time yet’. Some of the key dates of reform are noted below. The law is not generally retrospective and thus companies and its officers can only be held liable for breaches of the law after the date of the commencement of any new law. • Pre-1991 State Companies Code, Futures Industry Code, Securities Industry Code etc. • 1 January 1991 commencement of the Corporations Law consolidating the previous State codes and establishing the Australian Securities Commission as a national regulator. • 1 February 1993 commencement of the ‘new’ directors’ duties after passing the Corporate Law Reform Act 1992. 7

ESSENTIAL CORPORATE LAW

• 23 June 1993

•

•

•

• •

8

commencement of the new external administration provisions, such as voluntary administration and insolvent trading after passing the Corporate Law Reform Act 1992. 9 December 1995 commencement of the First Corporate Law Simplification Act 1995 which rewrote the laws governing buy-backs, company registers and proprietary companies. 1 July 1998 commencement of the Company Law Review Act 1998 (originally the Second Corporate Law Simplification Bill), which re-wrote the maintenance of capital laws, simplified registrations, corporate constitutions, reduced meetings, reduced annual returns and simplified the deregistration process. Commencement of the Financial Sector Reform (Consequential Amendments) Act 1998 changed the name of the ASC to Australian Securities and Investments Commission (ASIC) and outlined its role for consumer protection. The government also established the Australian Prudential Regulatory Authority (APRA) with responsibility for the wholesale market in financial services. 13 March 2000 commencement of the Corporate Law Economic Reform Program Act 1999, which rewrote the fundraising provisions, officers’ duties, takeover laws and accounting standards. 15 July 2001 commencement of the national Corporations Act 2001 (Cth) and the ASIC Act 2001 (Cth). 11 March 2002 commencement of the Financial Services Reform Act 2001 (previously known as ‘CLERP6’), which repeals the existing Chapters 7 and 8 of the CA dealing with securities and futures and replaces it with a completely new Chapter 7 entitled ‘Financial services and markets’.

AUSTRALIAN CORPORATE LAW

There are still further reforms to occur under the CLERP process and the next most likely is called CLERP7, which deals with paperwork and compliance of corporations and the government. There are details at the Federal Treasury website: www.treasury.gov.au.

1.4 Australian Securities and Investments Commission The national agency responsible for the enforcement and administration of the CA is the Australian Securities and Investments Commission (ASIC). The Chairman of ASIC (Mr David Knott) is aided by a Deputy Chair and Commissioners within a national structure of 1,400 employees operating on an annual budget of $140 million. ASIC is responsible for the 1.2 million companies registered in Australia, which are kept on the massive ASIC database called ASCOT. ASIC also has responsibility for consumer protection in respect of financial services and the licensing of stockbrokers, insurance agents and other financial advisers. Approximately one-third of the ASIC budget is spent on enforcing the CA, involving criminal, civil, and civil penalty litigation. ASIC has been successful in over 70% of its cases. A number of other bodies involved in the investigation, reform and disciplinary measures of the CA were introduced or reconstituted under ASIC. These include: • The Corporations and Securities Panel (Takeovers Panel) The Panel is often called the ‘Takeovers Panel’ and from 11 March 2002 will formally have that name. It has primary responsibility for resolving disputes between parties involved in a takeover. • The Companies Auditors & Liquidators Disciplinary Board (CALDB) This disciplinary board has responsibility for complaints made against auditors and liquidators who are registered with ASIC and it can impose restrictions on or removal of the licence to practice as an auditor or liquidator if in breach of the CA. • The Companies and Securities Advisory Committee (CASAC) CASAC is the official ‘think tank’ for corporate law reform and produces a number of quality consultative reports and discussion papers, such as Corporate Groups (2000) and Insider Trading (2001). After the Financial Services Reform Act 2001 commences, it will be known as the Corporations and Markets Advisory Committee (CAMAC). 9

ESSENTIAL CORPORATE LAW

• The Australian Accounting Standards Board (AASB) The AASB, in consultation with the accounting profession, the International Accounting Standards Committee and the Financial Reporting Council make appropriate accounting standards for Australia. The acceptability of international accounting standards and harmonisation of practices is critical to the work of the AASB. How does the doctrine of precedent operate in corporate law? The doctrine of precedent (case law) is important in fully understanding the legal framework of corporate law. A case heard before a superior court will bind the future decisions of lower courts on that point of law. Thus, a judgment of the HCA is binding on all other courts. However, a decision in a State Supreme Court would only be persuasive to other judges in other States. This can cause ambiguities in the law, which lead to the need for appeals and legislative intervention. The development of Australian corporate law through case law can best be illustrated by the figures in Table 2. Table 2: Classification of Australian corporate law cases 1991–2000

Year 1991 1995 2000 1991–2000

All court Total corporate HCA cases cases 4,797 275 1 7,835 238 6 7,397 250 5 65,281 2,705 31

FC

SSC

47 68 10 656

227 164 235 2,018

Source: Butterworths Australian Current Law Reporter

This table illustrates three specific years (1991, 1995 and 2000) and a cumulative total for the litigation commenced during the whole decade of corporate law. All cases relate to superior court decisions reported in the Butterworths Australian Current Law Reporter service. Corporate cases are classified in Category 120 of Halsbury’s Laws of Australia. This enables a consistent approach to the analysis of which court hears specific corporate law cases. It can be seen that there are few High Court decisions relative to both State Supreme Court and Federal Court decisions. Furthermore, the Federal Court of Australia has been developing considerable expertise in the use of the Australian corporate legislation. However,

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AUSTRALIAN CORPORATE LAW

in Gould v Brown (1998), the HCA, in a very narrow decision (3:3 judgment), questioned the validity of the cross-vesting legislation between the States and the Commonwealth. This cross-vesting scheme enabled civil cases to be heard in either the Federal or State systems. The High Court of Australia subsequently ruled in Re Wakim (1999) that the cross-vesting legislation was in fact unconstitutional and thus invalid. This meant that corporate law matters needed to be determined in the State Supreme Courts rather than the Federal Courts, which accounts for the significant fall in the number of cases heard before the Federal Court as illustrated in Table 2. Although it has to be accepted that the High Court’s interpretation of the Australian Constitution is correct, it is hard to understand how the States and the Commonwealth have been able for over 10 years to effectively and efficiently transfer legal powers to the Federal Court. However, in ASIC v Edensor Nominees Pty Ltd (2001), ASIC won the right to be able to bring litigation in the Federal Court as a Commonwealth agency. After the commencement of the CA and ASIC Act, litigation may be brought in either the State or Federal Courts.

1.5

Public and proprietary companies

Australian companies

Public companies

Proprietary companies

Shares

Others

ASX listed

Guarantee No liability Unlimited liability

Small

Large

Types of corporation in Australia

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ESSENTIAL CORPORATE LAW

What types of corporation may be registered? There are just two main types of company in Australia: public and proprietary companies. Section 112 allows these two main types to be sub-divided into various categories: • proprietary companies limited by shares or unlimited in liability (with a share capital); or • public companies with liability: ❍ limited by shares; ❍ limited by guarantee; ❍ unlimited with a share capital; or ❍ no liability. The type of relationship that exists between the company and its members (shareholders) may also classify them. 99% of companies are limited by shares, meaning that the member is only required to give the company the share price value of their investment. Effectively, the shareholder cannot be required to pay any more to the company, even in liquidation (hence the term ‘limited liability’). A ‘guarantee’ company means that the member only pays the agreed amount (usually $50 per member) on a winding-up of the company. ‘Unlimited’ companies are the same as a partnership and are only used for professional practices, such as those of lawyers or accountants. ‘No liability’ companies are mining companies that give the members extra protection from having to pay up the full value of their shares on winding-up. Table 3 shows the various types of corporations that exist in Australia and their distribution over the last ten years. It should be noted that companies listed on the Australian Stock Exchange (ASX) are a subset of either the public companies with shares or no liability mining companies. Proprietary companies make up 98% of all registered companies in Australia and vary from a $2 company to companies such as Tattersalls Holding Pty Ltd, which is worth billions of dollars. The category labelled ‘other public companies’ relates to public companies that do not have a limitation of liability by shares, such as charities, clubs and professional associations, which are limited by guarantee only. These are not commercial entities.

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AUSTRALIAN CORPORATE LAW

Table 3: Classification of Australian companies 1991–2001 Year

Total no of companies

Proprietary companies

Other public Public companies companies

ASX listed companies

1991

892,749

871,648

10,699

10,402

1,096

1992

859,678

839,946

10,381

9,351

1,116

1993

839,593

821,485

10,146

8,062

1,067

1994

885,118

866,726

10,311

8,081

1,163

1995

833,652

915,437

10,503

7,712

1,186

1996

965,869

947,776

10,702

7,391

1,184

1997

1,026,206

1,007,879

10,965

7,362

1,192

1998

1,088,922

1,070,050

11,363

7,509

1,219

1999

1,111,214

1,092,436

11,337

7,441

1,222

2000

1,173,709

1,154,044

11,559

8,106

1,295

2001

1,208,484

1,188,042

11,549

8,896

1,475

Source: ASIC and ASX Annual Reports What is a proprietary company? A proprietary company (usually shown as Pty Ltd) is defined in a variety of sections in the CA, including ss 9, 45A and 112 to 114. Examples of a proprietary company include Tattersalls Holding Pty Ltd (clubs and gaming) and Transfield Holding Pty Ltd (major infrastructure construction). It must be limited only by shares and thus have a share capital. The law requires only one member (shareholder) and there is a maximum limit of 50 non-employee shareholders. Also, the company must not engage in activity that would require a fundraising document (prospectus) to be lodged with ASIC. Thus, the fundamental aspect of a proprietary company is that it is private and must not raise capital from the public. In 1995, as part of the Simplification Task Force, Part 1.5 CA (s 111J) was introduced as a ‘Small Business Guide’. This part of the CA is written in plain English and is a great starting point to understanding the law applicable to approximately 500,000 companies. At that same time, the government altered the CA to allow for proprietary

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ESSENTIAL CORPORATE LAW

companies to be classified into small proprietary or large proprietary companies (s 45A) for disclosure purposes. To be classified as a small proprietary company, two of the three following criteria must be satisfied in a financial year: • gross revenue of no more than $10 million; • gross assets of no more than $5 million; or • no more than 50 full time employees. If the company exceeds any of these criteria, it will be deemed a large proprietary company. A small proprietary company is not required to lodge accounts or financial statements unless requested by a notice from ASIC or shareholders representing 5% of the voting rights. A large proprietary company must lodge accounts with ASIC, as if it were a public company. If a proprietary company wishes to convert to public, the process is laid down simply in the CA. What is a public company? Public companies are defined in s 9 (the CA dictionary) as being all companies that are not proprietary companies! Public companies usually end in ‘Ltd’ and examples include News Corporation Limited and BHP Billiton Ltd. Public companies are not required to be listed on a stock exchange like the ASX, yet may still raise capital from the public. Only one member is necessary (shareholder, s 114) and there is no maximum number of shareholders. Every public company must have at least three directors and a company secretary (ss 201A, 204A). Although there are fewer than 20,000 public companies, in economic terms they are extremely important.

1.6

Promoters, corporate personality and lifting the veil

A corporation must legally come into existence, and this process was previously called ‘incorporation’. After July 1998, the process of creating companies became known as ‘registration’. The person responsible for the process of registration is called a ‘promoter’. Once the entity has been registered, it becomes a corporation, with a personality distinct from its investors (members), creditors or directors. While the courts will not generally look behind the company to the identity of the directors or shareholders, in special

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AUSTRALIAN CORPORATE LAW

circumstances they may do so. This is known as lifting the veil of incorporation. Who is a promoter? In s 9, there is no definition of a promoter and in the whole of the CA the only reference to a promoter relates to a public company that is issuing a prospectus (s 711). Thus, in most cases, there is a complete reliance on the common law definition established by Lord Cockburn in Twycross v Grant (1877), where he defined a promoter as: One who undertakes to form a company with reference to a given project and who takes the necessary steps to accomplish that purpose.

In Australia, this UK definition was accepted by the HCA in Tracy v Mandalay Pty Ltd (1953), and was developed to include ‘deemed’ promoters. This is where some of the people involved with the establishment of the company do not take an active role in the registration, but rather delegate this task to others. Lawyers and accountants, in providing professional services, are not deemed to be promoters. If a person is held to be a promoter, they will automatically owe a fiduciary duty to the company. This can cause difficulties with conflicts of interest, in particular when entering into contracts on behalf of the company before it has been registered. Can a promoter obtain a benefit from registering the company? The answer is yes, but there must be full and frank disclosure if a promoter is involved in a transaction with the company. This is best illustrated in Gluckstein v Barnes (1900), where the judge held that ‘honest disclosure’ is the key. Shareholders who feel that the promoter is in breach of the fiduciary duty may bring an action for the rescission of the contract or an order to make an account of profits. What steps have to be taken to register a company? The first question is to make sure that you actually need to register a company. Australia does not require a minimum level of capital to establish a company and so it is easy and cheap to be registered. The promoter has a process cost of approximately $1,000. There are three simple steps:

15

ESSENTIAL CORPORATE LAW

(1) option to reserve a corporate name; (2) lodge documents & forms with ASIC; and (3) pay fees to ASIC. ASIC will issue a certificate of registration and the corporation is deemed to have come into existence on that specified day (s 119). What issues relate to the choice of corporate name? The promoter may select any name that has not already been registered (remembering that there are over one million companies already registered in Australia). There are some specific rules regulating names that are offensive or show a false connection to the government, royalty or certain charities, such as the Australian Red Cross. Each company is given an Australian Company Number of nine digits (usually called an ACN). This is different from the ATO requirement of an ABN, which has 11 digits. For convenience, the tax office has inserted two digits in front of the existing nine-digit ACN. A company may be registered as ACN 123-456-789 and the ATO will allocate the ABN as 00-123-456-789 for the sake of business efficacy. The name must end in either ‘Limited’ (for a public company) or ‘Proprietary Limited’ (for a private company), or an approved abbreviation such as ‘Ltd’ or ‘Pty Ltd’. The name may be similar, but not identical, to a name on the ASIC register or the database of Australian Business Names (which are registered at a State level). If there is potential for confusion, an action can be brought in the State court for either the tort of passing-off or in the Federal Court under s 52 of the Trade Practices Act 1974 (Cth) (for misleading or deceptive conduct). What are the necessary documents? ASIC Form 201 is the application form that must be lodged with ASIC, and contains the basic information. This is available from their website (www.asic.gov.au). The company may have a corporate constitution (this is optional) and must have a certified list of directors who consent and give notice of the registered office. The law for proprietary companies only requires one shareholder and one director (who can be the same person).

16

AUSTRALIAN CORPORATE LAW

What fees have to be paid? On the lodgment of the ASIC form and officers’ consent declarations, the regulated fee has to be paid. ASIC issues a certificate of registration and the company is deemed to come into existence at the beginning of the day the certificate is granted under s 119. What happens if there is a pre-registration contract? The position was originally stated that a promoter should be liable for all contracts entered into prior to the company being registered. This was stated in Kelner v Baxter (1886) at common law, but since 1981 the corporate statute has changed the position. In ss 131 to 133 of the CA it states that any contract made before the company is registered will be validated, provided: • the company is registered; and • the contract is ratified within a reasonable time. If this procedure is followed, the company is bound in the contract and the promoter is treated as an agent of the company. Alternatively, promoters can have a written release from liability or use the concept of novation for protection. Reasonable expenses may be paid to the promoter out of the company’s assets by way of s 122. What are the consequences of registration (incorporation)? The main consequence is that a company is a separate legal entity, as stated in the 1897 Salomon case. This principle has been supported in many cases including the Privy Council decision in Lee v Lee’s Airfarming Ltd (1961). Other consequences include: • perpetual succession (Lee v Lee’s Airfarming Ltd (1961)); • ownership of property (Macuara v Northern Assurance (1925)); • litigation in company’s own name (Foss v Harbottle (1843)); • own signature (common seal is optional under s 123); and • natural and independent person (ss 124 and 140). How can a court lift the veil of incorporation? A company is seen as the correct plaintiff in any litigation. It is the company, rather than the shareholders or the management, that

17

ESSENTIAL CORPORATE LAW

should sue or be sued in most circumstances. However, the court has the power from either the CA or the common law jurisdiction to ‘lift the veil’ (look behind the name of the company). The court may look behind the veil in the following circumstances: • group accounts; • document signed makes assumptions in ss 126 to 127; • insolvent trading (s 588G) and the example of Morley v Statewide Tobacco Services (1992); • under tax law; • avoiding contracts by using a corporate entity in Gilford Motors Ltd v Horne (1933); • agency or groups (Walker v Wimborne (1976)); • vehicle for fraud (Green v Bestobell Industries Ltd (1982)); and • under public policy, such as at times of war as in Daimler v Continental Tyre and Rubber Co (1916). The courts prefer not to lift the veil of incorporation, as the company is a separate legal entity, but would still wish for justice under equity to prevail.

1.7

References

This chapter is covered in more depth in the following chapters of these leading Australian textbooks: Baxt, R, Fletcher, K et al, Afterman & Baxt’s Cases and Materials on Corporations and Associations, 1999, Sydney: Butterworths, Chapters 1–6 Ford, HAJ, Austin, RP et al, Ford’s Principles of Corporations Law, 2001, Sydney: Butterworths, Chapters 1–5 Hanrahan, P, Ramsay, I et al, Commercial Applications of Company Law, 2001, Sydney: CCH, Chapters 1–4 Lipton, P and Herzberg, A, Understanding Company Law, 2001, Sydney: Lawbook Co, Chapters 1–4, 6, 21 Redmond, P, Companies and Securities Law – Commentary and Materials 2000, Sydney: Lawbook Co, Chapters 1–4 Tomasic, R, Jackson, J et al, Corporations Law – Principles, Policy and Process, 2002, Sydney: Butterworths, Chapters 1–4 18

2 Corporate Constitution and Liabilities You should be familiar with the following areas: • The corporate constitution • The ability to change the constitution and the protection for members • The s 140 contract between the company and its members • Corporate liability under the law of tort • Corporate liability under contract law • Corporate liability under criminal law

2.1

Introduction

As stated previously, a company is deemed to be a separate legal person at common law (Salomon case (1897)) and by s 124 CA. The relationship between the company and its members is jointly regulated by the CA and the company’s constitution (where applicable), by way of s 134. A person, whether a human or a company, is referred to as a member, rather than a shareholder under the CA, due to the fact that some types of company do not have shares (that is, public companies limited by guarantee). Section 231 defines membership of a company as being a member at the time of the company’s registration with ASIC. Alternatively, a person may become a member from the moment they are entitled to be entered on the register of members (s 169). The company is required to act through human agents, such as the company officers (directors, executives and the company secretary), its employees or appointed agents. The company may incur civil liability under contract law or under the law of tort, through both its own actions and those of its officers, employees and agents. A company may also be guilty of a crime under the CA or another statute, which carries criminal sanctions for contravening the law. Whereas an individual found guilty of an offence might be sent to gaol, a company

19

ESSENTIAL CORPORATE LAW

will be fined a greater amount than an individual in lieu of a prison sentence (s 1312). A company’s officers may be sent to gaol for helping the company to commit a crime.

2.2

Converting the memorandum and articles

All organisations are bound both by Australian laws and by their own constitutions (rule books). Before July 1998, every company was required to have a memorandum and articles of association. These documents were developed in the UK from 1844 and explained to the outside world what the company was all about. The memorandum of association was the external document that covered the name of the company, who was responsible for its incorporation, the amount of capital that could be raised and the limit of liability of its members. Some memorandums of association even included a list of business activities that the company would or might engage in and this was called the ‘objects clause’. The articles of association were an internal document, made publicly available by the requirement for all public companies to lodge their articles with the regulator, ASIC. The articles were the internal rules regulating the operation of the business, such as the shareholders’ rights, the regulation of meetings, the appointment of directors and other important issues. The previous corporate legislation did have a standard memorandum and articles, which were known as ‘Table A’. However, in practice, very few companies would ever adopt these standard articles, which then caused confusion between investors, creditors, and regulators. A common problem would arise within groups of companies, which had different memoranda and articles for each entity within the group. As part of the Simplification Task Force on corporate law reform, it was proposed that memoranda and articles be abolished. The Company Law Review Act 1998 amended the legislation to automatically convert all existing memorandum and articles into a corporate constitution. By virtue of the then s 1415 (now repealed), all companies’ documents were converted on 1 July 1998. Many of the important rules that were included in articles of association were imported in the CA, but with an option to ‘opt out’ of the law. These rules are called ‘replaceable rules’ and are listed in the s 141 table.

20

CORPORATE CONSTITUTION

2.3

AND

LIABILITIES

Corporate constitutions and replaceable rules

What is a corporate constitution? The 1998 Act dispensed with the need for companies to have separate constitutional documents – memorandum of association and articles of association. All companies have replaced two documents with an optional single document called the company constitution. Alternatively, a company can rely upon the replaceable rules that have been included in the CA. Only public companies are required to lodge their constitutions with the regulator. ASIC can request a copy from a proprietary company by s 138, as can a member (s 139). For companies that existed prior to 1 July 1998, there were three choices: • do nothing – so that the existing memorandum and articles are consolidated and become the company’s constitution; • choose to repeal their constitution and accept the replaceable rules of the CA; or • retain their constitution in part and allow the replaceable rules to be applied. For companies registered after 1 July 1998, there are two choices: • do not register a constitution and allow the replaceable rules to apply; or • create a company constitution which will displace the replaceable rules in their entirety or in part. There are three types of company to whom the general rules above apply differently: • No liability companies – these must have a constitution as there is still a requirement for a mining purposes objects clause (s 112(2)). • Sole member/director proprietary companies – if the same person is both director and member, then the replaceable rules do not apply (s 135(1)). • Listed Companies – as the ASX listing rules require certain provisions to be contained within a company’s constitution, these companies cannot rely solely upon the replaceable rules.

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ESSENTIAL CORPORATE LAW

The only remnant from the previous memorandum of association that may continue is the objects clause. Apart from no liability companies, any company is able to place such a clause in its constitution. What is the objects clause and why is it a problem? The objects clause was part of the memorandum, which described a long list of business activities in which the company might engage. The idea was to help investors and creditors to know if their financial commitment was being appropriately applied. The objects clause unfortunately suffered a number of problems because of the concept of ultra vires. The legal meaning of ultra vires is ‘exceeding the powers of the entity’. In the context of company law, this meant that a company could only carry on the business activities that were stated in the objects clause in the memorandum. In Ashbury Railway Carriage & Iron Co v Riche Bros (1875), the House of Lords declared that the company did not have the capacity to enter into a contract because it was outside (or ultra vires) its objects clause. This could become very restrictive if a new business opportunity arose. Many companies had objects clauses that continued for many pages, so as to cover virtually every conceivable business activity. The problem was originally resolved by making the need for an objects clause optional by amendments to the Companies Code 1981 in 1984. Under s 124 of the CA, the company is given the full capacity of an individual, which allows the corporation to engage in any lawful business activity. This effectively removes the whole concept of ultra vires for corporations, but some judges still use the phrase in respect of the capacity of the directors (Darvall v North Sydney Brick & Tile Co Ltd (1989)). A company is allowed to place a restriction in its corporate constitution by s 125. For example, this restriction could be used to prevent a cosmetics company from contracting with a business that uses animals for testing products. Notwithstanding s 125, the company, as a separate entity, retains its capacity to contract even though this activity may be in breach of the restriction. Although the company would be bound in the contract, the officers would be most likely to be in breach of their duties for failing to comply with the corporate constitution. The corporation’s freedom to contract is further supported by ss 128 to 129, which provide extensive rights of assumptions to those third parties who transact with a company. These include the right to assume that a company’s constitution and replaceable rules have been

22

CORPORATE CONSTITUTION

AND

LIABILITIES

complied with (s 129(1)). The right of assumption may be lost if the contracting third party knew or suspected that their assumption was incorrect. What are replaceable rules? If a company decides not to have its own constitution, the replaceable rules under s 135 provide the basic standards required for a company to function. For example, the minimum number of members required to be present at a shareholders’ meeting (called the ‘quorum’) would be uncertain without a constitution. Section 249T states that the minimum number is two members, but it is a replaceable rule and therefore a corporation could have its own constitution to set the quorum at five members. In s 141, there is a table that lists 40 different replaceable rules covering officers, employees, inspection of books, directors’ meetings, members’ meetings and shares. It should be noted that s 141 merely offers a convenient summary of the replaceable rules, which are, in fact, located throughout CA, depending upon their topic. For example, the replaceable rules relating to directors’ and members’ meetings are found scattered throughout Chapter 2G. These rules can apply to either proprietary or public companies and can be identified as replaceable by its heading in the CA. The advantage of relying upon the replaceable rules is that they will always be abreast of statutory change and this will save many companies the difficulty and expense associated with constitutional amendment. However, the replaceable rules have a bias towards proprietary companies, rather than public companies. It is doubtful whether any public company would wish to rely upon such rules, as they are capable of funding the cost of ‘custom-made’ rules, rather than adopting those found under s 141. Importantly, there is one replaceable rule that is specified as mandatory for public companies but not for proprietary companies. The rule relates to the members’ right to appoint a proxy and is found in s 249X. Therefore, s 249X may be adapted or repealed by a proprietary company, but it is compulsory for all public companies. Finally, it is worth noting that the internal management of a company is regulated by s 134, which states that a company must comply with the replaceable rules, the corporate constitution, or a combination of both. The CA, by way of sub-s 140(1), has the effect of creating a contract between members and the company based upon the nexus of the corporate constitution and replaceable rules.

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ESSENTIAL CORPORATE LAW

2.4

Altering the company’s constitution

Can the corporate constitution be changed? The corporate constitution can be legally altered by passing a special resolution and following a basic procedure. Alterations are allowed, subject to a number of statutory and common law safeguards, so as to protect minority shareholders. The primary restrictions on the alteration of the constitution are: • sub-s 140(2) – prohibition of any imposition of further liability on members; and • ss 232 to 234 – protection of minorities. The statutory right to alter the corporate constitution stems from s 136. A special resolution has to be passed by the members entitled to vote at a general meeting. The company will put forward the motion in a notice of the meeting, which must be provided at least 21 days in advance. The exact words of the change to the constitution must also be provided in the notice of the meeting. At the meeting, at least 75% of the votes cast (not of the total number of members) is required. Votes cast include all the votes of members present and the proxy votes that are available to the proxyholders (usually the chairman of the company or other member-nominated person). A public company must file the amended constitution with ASIC within 14 days of the resolution being passed. A sole member/director company wishing to amend its constitution need only sign a record, which will become the minutes of the deemed meeting (s 249B). However, most sole member/director companies would be unlikely to have a constitution. There are no specific statutory protection provisions for minority shareholders to prevent alteration to the constitution. However, there is a general minority protection provision in ss 232 to 234, which may be used. Sections 232 to 234 afford a variety of remedies to a member in the event that the affairs of the company or an act or omission are oppressive, unfairly prejudicial or are unfairly discriminatory, or operate against the interests of the company as a whole. Alternatively, a member can imply a separate ‘special contract’ based upon the terms of the constitution. This was successful in the High Court case of Bailey v NSW Medical Defence Union Ltd (1995). The need to protect minority shareholders from detrimental changes to the constitution was identified in Allen v Gold Reefs of West Africa Ltd (1900). The UK court laid down the ‘bona fide for the benefit

24

CORPORATE CONSTITUTION

AND

LIABILITIES

of the company as a whole’ test to determine the validity of the amendment. This principle was followed in the HCA case of Peter’s American Delicacy Ltd v Heath (1939). However, in 1995, the HCA revisited this principle and stated that the appropriate standard for any amendment to a corporate constitution should be ‘the proper purpose’ test. In Gambotto v WCP Ltd (1995), a minority shareholder with a 0.3% interest in the defendant company (50,590 shares out of 16,980,031) was able to prevent an amendment to the constitution. IEL, which owned 99.7% of WCP Ltd, wished to purchase the plaintiff’s shares to create a wholly owned subsidiary. A special resolution was passed by IEL to amend the WCP’s constitution to be able to compulsorily purchase (expropriate) G’s shares at fair value. The HCA held that this amendment was not for a proper purpose, even though WCP Ltd could show a substantial saving in administrative costs. Thus, any repeal or modification of a corporate constitution must be exercised for a proper purpose. The effective date of the constitutional amendment will be the date of the resolution or the date specified by the resolution (s 137).

2.5

Section 140 statutory constitutional contract

What is meant by the statutory contract? According to sub-s 140(1), the corporate constitution binds the company and all its members with the terms of a deemed special contract. This contract can be enforced by the company against its members, the eligible officers against the company, and between the members themselves. These various parties can enforce any of the rights contained in the constitution. This will often relate to issues such as voting rights, preemption rights (a right to be offered any company shares first in the event of them being offered for sale) or, as in the leading UK case of Hickman v Kent or Romney Marsh Sheepbreeding Association (1915), reliance on a dispute resolution clause rather than litigation. The company in question was able to stay legal proceedings against it until the parties had completed arbitration, as stated in the company’s constitution. This decision was followed in the Western Australia Supreme Court decision of Carew-Reid v Public Trustee (1996).

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ESSENTIAL CORPORATE LAW

The fact that the constitution is a contract means that all parties to the contract (that is, the members, company and the officers) have an additional range of rights and remedies based on contractual law principles. For example, a member may commence an action for damages for breach of contract if the constitution is not followed, as in Southern Foundries (1926) Ltd v Shirlaw (1940).

2.6

Corporate contractual, tortious and criminal liability

The corporation is a separate legal entity and it is liable for all of its actions under the civil and criminal law. A corporation can be held liable in the civil laws of contract or tort, as well as under criminal law. It is important to distinguish between the primary liability of an individual (agent or employee of the company) and the liability of the company itself. Alternatively, a corporation can be held secondary (vicariously) liable for humans under civil law. The company usually has insurance policies to cover the cost of litigation arising from the acts of its employees, officers and agents. However, the officers of a company can be held liable for aiding and abetting (helping) a corporation to commit a crime. Who can bind the company? There is a clear distinction between primary and secondary liability, in contract, tort and criminal law. In respect of companies, the basic test is derived from Lord Denning in HL Bolton (Engineering) & Co Ltd v TJ Graham & Sons Ltd (1957). His Lordship said that there is a distinction between the mind of the company and its hands. This requires a supplementary question: ‘how can the mind of a company be determined?’ This is not an easy question to answer, unless there are few people involved in the company, where the will of the controlling director(s) is taken to be the will of the company. The board of directors can certainly bind the company (s 198A) or delegate to other specific agents, employees and officers under s 198D. Can companies commit crimes? It is possible for the artificial entity of a company to be held criminally liable through the acts of humans. There are a few crimes that a company is incapable of directly committing, such as bigamy and

26

CORPORATE CONSTITUTION

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murder. It is possible for a company to be held guilty of crimes such as manslaughter, insider trading and theft. The entire CA is in fact criminal (s 1311); and a corporation will be required to pay five times the maximum fine that could be imposed on a human (s 1312). The most serious crime in the CA is insider trading, which has a maximum fine of $1.1 million for the corporation (s 1043A). After December 2001, all Commonwealth statutes that contain criminal offences must comply with the Criminal Code Act 1995 (Cth). The Criminal Code provides standard amounts for fines and standard defences applicable to all crimes. All fines are expressed as penalty units and are set by s 4AA of the Crimes Act 1914 (Cth) at $110. The prosecution is brought by ASIC or the Director of Public Prosecutions, with the help of the Australian Federal Police. Most crimes require the prosecution to prove the following: (a) Criminal action (actus reus) The first element to be proven in any criminal prosecution is that a criminal act has taken place. There are difficulties in proving that an artificial entity, like a company, has actually committed a crime. However, the courts will take into account the actions of individuals associated with the company as tantamount to the company committing the crime itself. For example, in 1997 a UK court found both a company (fined $120,000) and its managing director (gaoled for three years) guilty for the death of four teenagers on an adventure holiday. In contrast, in December 2001, the directors and managers of a Swiss adventure travel company that took Australian tourists canyoning in Interlaken were found guilty for manslaughter through culpable negligence of the death of three tour guides and 18 tourists. The directors and managers were fined in excess of $200,000 and received suspended gaol sentences. Modern forensic techniques are making it easier to provide the necessary evidence to a standard beyond reasonable doubt to prove that a company committed a particular crime. (b) Guilty intention (mens rea) The second element of a criminal act is even harder to prove against a company unless it is a strict liability offence. A company can be held primarily liable for a criminal offence, as was the case in Hamilton v Whitehead (1988). It is difficult to prove the mind of the company, especially where the decision maker is not a senior

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executive or endorsed by the board. For example, a supermarket store manager was not sufficiently senior for his misconduct to hold a UK national chain guilty of an offence (Tesco Supermarkets v Nattrass (1972)). This can be contrasted with a case where a microwave manufacturer falsely advertised compliance with the Standards Association of Australia. The company in Hartnell v Sharp Corp of Australia Pty Ltd (1975) was convicted under the Trade Practices Act 1974 (Cth) and fined $100,000. Under certain legislative provisions there is no need to prove mental guilt and these are known as strict liability or no fault liability offences. Examples include contraventions of the environmental laws, such as in EPA (WA) v McMurty & Gillfillan Holdings Pty Ltd (1995), or breaches of the occupational health and safety legislation, such as Forrest v John Mills Himself Pty Ltd (1970). Can there be liability under tort law? It is possible for the primary liability of the corporate mind to be found, but it is hard to prove. It is most common that the action would relate to the tort of negligence. An example of civil liability being imposed directly on a company is Lennard’s Carrying Ltd v Asiatic Petroleum Co Ltd (1915), where a ship caught fire due to its unseaworthiness, thereby destroying its cargo. The directing mind and will of the corporation was held to be its sole director (and captain of the ship) and therefore the company was liable in negligence for the resulting damage. It is more likely that a corporate body will be held liable for secondary liability, known as vicarious liability. This occurs if an employee or agent acts within the scope of their appointment when they breach the civil law. This was held to apply in the classic case of Lloyd v Grace, Smith & Co (1912). Companies in Australia may also be found to be vicariously liable for the actions of independent contractors whom they employ (such as bicycle couriers), following the HCA decision in Hollis v Vabu Pty Ltd (2001). How are corporations held liable in contract law? Once a company is registered, it is granted full contractual capacity under s 124. The real question is whether the person has proper authority as an agent to bind the company. The agent may have actual authority, apparent authority or no authority, but may have it

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backdated by way of ratification. Examples of liability being imposed on corporations, even though the agents did not have authority at the time, include Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) and Northside Developments Pty Ltd v Registrar-General (NSW) (1990). A company may contract directly with third parties by executing a contract under s 127, which requires two directors or one director and the company secretary to sign as if they were the company. Alternatively, the company may have a common seal (s 123), which is used as if the company were signing the contract itself. In reality, most companies, through their board of directors, will delegate the capacity to contract to agents and employees under s 198D. Are there any statutory protection rules for the protection of third parties? Yes, the CA (in ss 128 to 129) states that an outsider dealing with a company can make a series of assumptions, even when there is no constructive notice given, or where the dealings involve fraud or forged documents. What is the indoor management rule? In the old English case of Royal British Bank v Turquand (1856), the court held that an outsider could assume that all internal procedures had been followed by a company unless they knew otherwise. These have now been placed in the CA as the assumptions in s 129: • memorandum and articles complied with by corporation: Turquand rule; • persons in annual returns are properly appointed; • officers held-out by company are duly appointed; • officers’ authority to issue documents is genuine; • sealing of documents was by a director and secretary, etc; and • officers/agents/employees perform their duties for the corporation – proper purpose. Section 128 imposes some limitations to the s 129 assumptions for third parties; for example, where there is actual knowledge of the true position (which is based on a question of proof) or there is imputed knowledge where the person suspects the assumption is incorrect. These points were discussed in Northside Developments Pty Ltd v

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Registrar-General (NSW) (1990) and the case of BNZ v Fiberi Pty Ltd (1994).

2.7

References

This chapter is covered in more depth in the following chapters of these leading Australian textbooks: Baxt, R, Fletcher, K et al, Afterman & Baxt’s Cases and Materials on Corporations and Associations, 1999, Sydney: Butterworths, Chapter 6 Ford, HAJ, Austin, RP et al, Ford’s Principles of Corporations Law, 2001, Sydney: Butterworths, Chapters 6, 16 Hanrahan, P, Ramsay, I et al, Commercial Applications of Company Law, 2001, Sydney: CCH, Chapter 5 Lipton, P and Herzberg, A, Understanding Company Law, 2001, Sydney: Lawbook Co, Chapters 4–5 Redmond, P, Companies and Securities Law – Commentary and Materials, 2000, Sydney: Lawbook Co, Chapters 3–4 Tomasic, R, Jackson, J et al, Corporations Law – Principles, Policy and Process, 2002, Sydney: Butterworths, Chapter 4

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3 Company Officers and Management You should be familiar with the following areas: • The definitional issues of officers, directors, secretaries and executives • The role of the company secretary • Officers’ statutory duties under the Corporations Act 2001 • Officers’ common law and equitable fiduciary duties • The impact of civil actions and remedies • The impact of criminal prosecutions and sanctions

3.1

Introduction

The subject of corporate officers is one of the most important areas of corporate law and involves many complex and interlinked issues. It is essential that all lawyers have a solid understanding of the interrelationship between the common law duties, the equitable fiduciary duties and the statutory duties. There are also some laws that are applied to all corporate officers and some laws only to directors; thus, the definitions hold the key to the application of the law.

3.2

Definition of officers

Who are corporate officers? A typical Australian corporation has key corporate officers such as the directors, the chief executive officer (CEO), the company secretary and senior managers (called ‘executives’). An artificial entity like a corporation must be able to make legal decisions through certain organs of the company. In law, the company is seen as a separate legal entity (s 124) and is the real ‘person’

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employing managers and employees and transacting with third party suppliers or customers. The law has stated clearly that, if the Corporations Act or the corporate constitution provides the board with the power of management, it is the board of directors (and not the shareholders or the managers) who have the power to make certain decisions. Following NRMA v Parker (1986), even if the shareholders disagree with the board, the shareholders may not change those decisions. However, the shareholders could always sell their shares, change the corporate constitution with a special resolution (s 136 CA), or remove a director with an ordinary shareholders’ resolution (ss 203C and 203D). Decisions need to be made at meetings, which must be validly held and recorded in minutes at a board level or at the shareholders’ meetings. Managers rely upon agency authority, which may be approved in advance or by ratification. The directors get their powers from s 198A, which is a replaceable rule that can be altered by changing a company’s constitution. How does the law define an officer? An officer is defined in both the definition section of the CA (s 9) and also in s 82A. The s 82A definition of an officer (‘a director, secretary, executive officer or employee’) only applies to events occurring before the 13 March 2000, when the Corporate Law Economic Reform Program Act 1999 (CLERPA99) came into force. The main definition contained in s 9 provides a more functional definition, stating that an officer is: (a) a director or secretary of the corporation; or (b) a person: (i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or (ii) who has the capacity to affect significantly the corporation’s financial standing; or (iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation) …

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This definition of an officer should be compared to the definition of a director, which is also found in s 9 and is discussed in 3.3 below. Who are ‘employees’? The term ‘employee’ does not refer to each and every employee of a company, rather only to senior managers of the corporation. It relates to managers under a contract of employment, which carries with it a common law duty of fidelity (faithfulness) owed by the employee to the company. This principle was applied in the case of Timber Engineering Co Pty Ltd v Anderson (1908), where the defendant set up a competing company to his employer and passed business from his employer to the new company. Who are ‘executive officers’? An executive officer is often the most senior employee in the organisation and may be called the CEO or the Managing Director. In very large companies it is also common to have a small team of executives, such as the chief financial officer, chief information officer and general counsel. The law imposes a vast array of duties on such executives because of their unusual position and their ability to influence and damage employees, shareholders, creditors and the community. An executive officer assumes three different capacities, and is therefore subject to the duties owed by all three positions within the company. An executive is simultaneously: • an employee of the company, and therefore owes a duty of fidelity; • a director of the company (due almost always to occupying a position on the board), and is therefore subject to all directors’ duties; and • an agent of the company, with the ability to legally bind the company. This can be contrasted with the role of the non-executive director, who is a member of the board, but not an employee, nor an agent of the company.

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3.3

Role of the company secretary and directors

Who is the company secretary? Under s 240A, every public company is required to have a company secretary. Approximately 100 years ago, the position of company secretary was seen as merely a ‘servant of the board’ or as a mere clerk. However, that position changed after Lord Denning’s judgment in Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd (1971). His Lordship recognised that the secretary, who had rented motor vehicles for his personal use and paid for them on his corporate credit card, could bind the company as he held the ‘key administrative position’. This UK case was subsequently followed by the NSW Supreme Court in Club Flotilla (Pacific Palms) Ltd v Isherwood (1987). It is important to note that the authority only applies to administrative contracts rather than commercial contracts. Thus, if a corporate secretary purchases a photocopier, it would be administrative, but to arrange the bank overdraft would be deemed commercial. The board or CEO could always give the secretary the express authority to enter a commercial contract, but it is not implied. The corporate secretary is bound by the same statutory duties as directors and is actually appointed by the board of directors (s 204D). Although the only qualification is that the secretary must be over 18 years old (s 204B), the duties of care expected are the same as a director. The terms and conditions of the appointment of the secretary, including remuneration, are determined by the board of directors under s 204F. The name and address of the company secretary is kept on the public record by ASIC under s 205B. If there is a change of details, including a new secretary, ASIC must be informed within seven days according to s 205C. The company secretary may be held personally criminally liable for offences outlined in s 188. These include maintaining the registered office and the lodging of annual returns and notices with ASIC. Approximately 20,000 secretaries are held liable each year for breaching this law in respect of the lodgement of annual returns. Secretaries are also subject to the broader officers’ duties under common law, equity and ss 180 to 185 CA as discussed below. The actual role of the company secretary will depend upon the size and type of the corporate entity. Previously, all companies were required to have a company secretary, however, proprietary companies are now exempt from this requirement. In practice, many

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proprietary companies still retain the company secretary, who also has a financial/accounting or legal compliance role. Who are the directors? By law, public companies must appoint a minimum of three directors, while proprietary companies need only appoint one, under s 201A. The directors must ordinarily reside in Australia, but overseas directors may be appointed to the board. Section 9 defines a director as: (a) a person who: (i) is appointed to the position of a director; or (ii) is appointed to the position of an alternate director and is acting in that capacity; regardless of the name that is given to their position; and (b) unless the contrary intention appears, a person who is not validly appointed as a director if: (i) they act in the position of a director; or (ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes …

This is not a very helpful definition, but does indicate that the courts will look at the function of the person rather than at their job title. Therefore, a governor or trustee of a company could be a director for corporate law purposes. Conversely, a marketing director may not be a member of the board and is not within the CA definition. In Austin & Partners Pty Ltd v Spencer (1999), the Court held that a senior person who attended all the board meetings and was crucial to the decision-making process, even though not appointed to the board, was still a de facto director. How can a director be removed from their office? A director can be made to vacate their position by satisfying either certain statutory conditions or conditions under the company’s constitution. Statutory conditions may include: failure to obtain qualification shares; being an insolvent person; being convicted of fraud; by court order for dishonesty; attaining the age of 72 (if a director of a public company (s 201C)); or by shareholders passing a majority vote (ss 203C and 203D). Corporate constitutional conditions

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may include: being of unsound mind; being absent for more than six months; or discovery of any conflicts of interest.

3.4

Fundamental duties of officers

The fundamental duties of officers are of paramount importance to all students of corporate law. A clear understanding of the rudimentary concepts underlying these duties is essential before delving into the finer detail of each duty. In attempting to achieve this understanding, it would be prudent to formulate answers to three central questions. Who can bring a legal action against the officer? There are four parties who may bring a legal action against a company’s officer. These are: • the company itself (s 124); • ASIC, as the regulator (s 50 ASIC Act); • a shareholder, who has a personal right under oppression (ss 232 to 234) or as a statutory derivative action (s 236); and • creditors. The most appropriate person to bring the litigation will depend upon whether it is a civil or criminal matter. If a prosecution is being brought under the CA, the case will be brought by ASIC and the DPP. If it is a civil case, the plaintiff is most likely to be the company itself. It should be remembered that a century ago, in the leading UK case of Percival v Wright (1902), it was held that the officer’s duty is owed to the company, not the shareholders. In this case, the chairman and other directors took the opportunity to purchase shares from a shareholder without disclosing to that shareholder that takeover negotiations were underway at a higher price for the same shares. The court held that the duty was only owed to the company and not the individual shareholders. Where the company, through its board of directors, decides not to bring a legal action against a director, ASIC or a member may be able to bring the case. This is discussed further in Chapter 5. The principle that the officer’s duty is owed to the company was taken even further by the HCA in Walker v Wimborne (1976), where the Court held that, in a group of companies, the director owes a duty to the company to which the director is appointed, and not the ultimate holding company. This has been modified for wholly-owned subsidiaries acting in the best interests of the company, under s 187. 36

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It is natural that the courts have developed some exceptions to this general rule. For example, where the company is insolvent, the directors owe a duty to the creditors as in Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) and Spies v R (2000). Where a director is acting in another capacity, for example as an agent on behalf of a shareholder, the duty will be owed to that shareholder (Allen v Hyatt (1914)). In some cases, the courts may deem a special duty to be owed to the shareholders because of the quasi-partnership nature of the company. This exception was put forward in the New Zealand case of Coleman v Myers (1977) and approved by the New South Wales Court of Appeal in Brunningshausen v Glavanics (1999). What are the duties owed by an officer? Officers’ duties are governed by a complex interrelationship between case law and legislation, which gives rise to duties under the common law, equity and statute. Figure 1 best illustrates this web of duty in which officers are invariably entangled. Figure 1: The duties owed by an officer (Adams (1992, revised 2001))

CA s 184 s 588G s 1002G s 180 s 588G s 181

Common law duties

s 182 s 183 s 185

Equitable fiduciary duties

The overlapping areas represent how the Corporations Act in Part 2D.1 reflects parts of the common law and equitable principle. Some duties are specifically laid out in statute, such as insider trading in s 1002G (after 11 March 2002 and the commencement of the Financial Services Reform Act 2001, it will be s 1043A). Other duties, such as those that arise when directors have interests in contracts entered into by the company, are both statutory (s 191) and fiduciary. Directors

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must not allow the company to trade while insolvent (s 588G) and they have a common law duty to consider creditors in times of financial trouble. Probably one of the most important overlaps is the tort of negligence under the common law and s 180 of the CA. It is noted that, in a single litigation, an officer can be sued for breaches of all three, by virtue of s 185, as occurred in State of South Australia v Marcus Clark (1996). What are the remedies or sanctions that may be sought? It should be noted from the outset that the terms ‘remedies’ and ‘sanctions’ are not interchangeable; rather, they have their own distinct meanings and applications. In regard to the breach of a civil duty owed by an officer, the most common remedies sought and awarded by the courts are damages and injunctions. However, with regard to the criminal breach of a duty owed by an officer, the sanctions handed down by the courts may include fines and imprisonment. Both of these concepts are explored in greater depth in 3.7 below. Officers’ common law and equitable duties The common law development of the duties of corporate officers has occurred over the last 150 years. Many of the principles are based on ordinary principles of the common law and equity, such as honesty and avoiding conflicts of interests. However, due to the fact that officers did not require any special training or qualifications, the general standard expected has been very low (similar to the reasonable person in negligence, but with a greater element of subjectivity). Since the 1990s, the courts have started to impose and expect a higher duty of care, a fact evidenced further by the changing statutory environment. It is necessary to analyse the case law under the common law and equity to fully appreciate the impact of the judicial developments, as well as understanding the interrelationship with the post-March 2000 legislative amendments. All students of this area should be warned of the dangers and confusion caused by the CLERP renumbering of key sections of the CA relating to directors’ duties and the fact that many of the best writings in this area now appear somewhat dated as a result of these amendments. However, one can say that the basic concepts have not really changed and these need further investigation. The CA actually provides that the common law and equity are to be applied in conjunction with the statutory provisions in s 185. It is

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not unusual for an officer to be held liable for a breach of the CA, as well as breach of the common law and/or equitable duty. An example of a director being held liable for all three of these actions occurred in State of South Australia v Marcus Clark (1996). MC was the CEO of the State Bank of South Australia (SBSA), which was owned by the State of South Australia. MC negotiated the purchase of shares in a New Zealand company for $59 million, when in fact the true value was $21 million. MC was sued for negligence, breach of fiduciary duty for failing to disclose a relevant shareholding and breach of statutory duty. The court held MC personally liable for breaching all three civil duties for the loss which, plus interest, equalled $81,225,826.25. Common law duties The main duties that are imposed by the courts are the duty of care, skill and diligence, and the overarching common law duty to act honestly. Duty of care, skill and diligence The common law duty of care, skill and diligence that is expected by the courts has traditionally been set at an amazingly low standard. Lord Greene MR, in Re Smith & Fawcett Ltd (1942) defined the duty as the requirement: To act bona fide for the benefit of the company as a whole and not for any collateral purpose.

The basic test of whether this duty had been fulfilled was originally laid down in Re City Equitable Fire Insurance Co Ltd (1925), where it was simply stated that the officers should take reasonable care. This was a subjective test that relied upon the individual officer’s level of skill, knowledge and experience in determining what was ‘reasonable’. This can be compared with the attempted new objective standard of care, which was introduced by Parliament in February 1993. This amendment was known as s 232(4) and now has been refined in s 180(1). The common law duty for directors was the lowest standard for any professional person, which, for the modern business community, was clearly unacceptable. As a result of the inadequacy of the required standard, both the courts and Parliament have acted to change this traditional position. In a number of important cases, the courts have lifted the common law standard expected. A very clear statement was

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made to that effect in Commonwealth Bank of Australia v Eise & Freidrich (1991), where the court held the chairman and chief executive of the Victorian National Safety Council liable for the company’s debts. Important, however, was the 1992 decision of AWA Ltd v Daniels t/a Deloitte Haskins & Sells (1992), where Rogers CJ held that nonexecutive officers were not expected to adhere to the same standard of care as the executive officers. Whereas on appeal, it was held that all officers should apply the necessary standard of care and diligence (Daniels v AWA Ltd (1995)). These two cases were followed in State of South Australia v Marcus Clark (1996). Equitable duties At common law, all officers are expected to act honestly and reasonably in their activities. However, the equitable duties go further by requiring officers to comply with their fiduciary duty. Those people in a position to harm others are required by equity to owe a fiduciary duty. In the HCA decision of Hospital Products Ltd v United States Surgical Corp (1984), the fiduciary duty was defined. Directors, like partners, trustees and agents, always owe a fiduciary duty to those they could easily harm. As a fiduciary, there are three central tenets governing corporate behaviour: to avoid conflicts of interest, to not make a secret profit and to act for a proper purpose. All officers must avoid breaches of these equitable fiduciary duties, as a breach may result in the officer becoming a constructive trustee. This would mean that all proceeds that the officer has obtained would be held on trust and returned to the company. This was formally established in Regal (Hastings) Ltd v Gulliver (1967), where the directors took advantage of a business opportunity for their own benefit instead of on behalf of the company. The ironic point in that case was that the company was incapable of exploiting the commercial advantage. However, the court still held that the directors were in breach of their fiduciary duties. This fundamental principle, governing the conduct of fiduciaries, was accepted in the important HCA decision in Mills v Mills (1938). The fiduciary duty may be split into a variety of component parts, each with its own cases and judicial interpretations. Examples include: • Confidentiality – officers should maintain confidentiality in respect of information gained in their role as either a director or secretary of the company. In Industrial Development Consultants v Cooley (1972), the CEO breached confidentiality to take advantage of a corporate contract. 40

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• Conflicts of interest – officers should act in the best interests of the company and avoid personal benefits, which could give rise to conflicts of interest. This principle was established in Aberdeen Railway Co v Blaikie Bros (1854) and was illustrated in Green v Bestobell Industries Pty Ltd (1982), where a senior executive passed confidential tender bid information to his own family company. It is possible for a director to be released from the duty on the basis of full and frank disclosure, as in the case of Peso Silver Mines Ltd v Cropper (1966) or by an application to the court for relief under s 1318. • Overriding proper purpose rule – the HCA has stated that officers must comply with a general proper purpose test in carrying out their duties. This was illustrated in Whitehouse v Carlton Hotel Pty Ltd (1987), where Mr W made significant changes to voting rights, which impacted on the shareholders who were his former wife and daughters. The HCA held that although Mr W believed it was in the best interests of the company, it was, in fact, in breach of his fiduciary to act for a proper purpose. Officers’ statutory duties Since the implementation of the national corporate legislation, attempts have been made to codify the common law duties and impose a harsher penalty basis. In 1993, there was an attempt to decriminalise the statutory provisions by adopting a new idea called civil penalty provisions. These provisions are a hybrid of civil and criminal penalties for breaching the statutory officers’ duties. CLERPA99 rewrote the entire officers’ duties provisions, in order to clearly distinguish between the civil, criminal and civil penalty provisions. It is important to note that an officer may be sued for breaches of the common law, equity or the statutory duties under s 185. The most important duties are as follows: • The duty to act in good faith (s 181) requires all officers to exercise their duties and powers in good faith for the best interests of the company and for a proper purpose. A breach of this section is a civil penalty provision. The severity of the penalty depends upon whether there was any intention to deceive or defraud the company, members or creditors. If there is an attempt to be reckless or intentionally dishonest, a separate criminal offence may be committed under s 184(1).

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• The duty to exercise care and diligence (s 180(1)) is similar to the common law standard of care, except that it has different consequences in that it is a civil penalty provision. Section 180(1) was re-drafted from its predecessors so that the director or officer must exercise their duties and powers with the degree of care and diligence of a reasonable person if: ❍ they are a director or officer in the corporation’s circumstances; and ❍ they occupy the position and hold the same responsibilities within a corporation as an officer. This new standard only applies to conduct that occurred after 13 March 2000 and is treated as a purely civil penalty provision, with no equivalent criminal provision. To counter-balance the more stringent test of care and diligence, a statutory business judgment rule was introduced in s 180(2). This is a defence for all officers who are to be taken as complying with the duties in s 180(1) and their common law equivalents if all the following conditions apply: ❍ the business judgment was made in good faith for a proper purpose; ❍ the officer does not have a material personal interest in the events; ❍ they inform themselves about the subject matter; and ❍ they rationally believe that the judgment is in the best interests of the corporation. • The duty not to misuse the officer’s position (s 182) reflects the equitable fiduciary duty that an officer could easily take advantage of an opportunity that really belongs to the company. This provision is widely drafted to catch any officer or employee who is in breach. This is a civil penalty provision, but could also be criminal under s 184(2), depending upon the presence of intent. The HCA reviewed the concept of improper use of an officer’s position in R v Byrnes and Hopwood (1995). The directors could not defend themselves on the basis that their actions were in the company’s interest, while motivated by an ulterior motive (their own benefit). • The duty not to misuse information (s 183) is a refinement of the general duty not to take advantage of the officer’s position. All officers naturally handle the company’s most sensitive information and it should not be used for personal gain. The section is applied

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to all companies and is not as limited to securities as is the insider trading provision in s 1002G. An example of this provision being used is Green v Bestobell Industries Pty Ltd (1982). This is a civil penalty provision, which may lead to criminal consequences under s 184(3). There are a number of other statutory provisions within the CA which have a direct impact on officers of a company. A public company must comply with Chapter 2E, which is entitled ‘Financial benefits to related parties’. There are additional criminal provisions within the CA, aimed at enforcing disclosure. Sections 191 to 194 require proprietary directors to disclose to the board their holding of any another office; s 195 prohibits voting as an interested public director; ss 200A to 200B require the disclosure of directors’ benefits of loss or retirement of office; and s 202B requires the disclosure of all directors’ emoluments. ASIC maintains a register of disqualified directors and will prevent a dishonest director from being appointed as an officer of another company. ASIC can prosecute for additional offences, such as fraud by officers (s 596); falsification of books (s 1307); making false statements (s 1308); lodging false reports (s 1309); and even obstructing the regulator (s 1310). The CA also contains two specific statutory duties which commonly arise as important issues. These are the concepts of insolvent trading (s 588G) and insider trading (s 1002G).

3.5

Insolvent trading

Corporations are prohibited from trading while insolvent, as this unfairly places creditors at risk. The CA allows for the ‘veil of incorporation’ to be lifted where insolvent trading occurs. The company is always liable for the debts it incurs. Parliament has imposed a duty that if the company is unable to pay its debts, then the directors should be personally liable for debts incurred after the date of insolvency. The company and the directors are jointly liable for these debts that have arisen after the specified date. Originally, subject to a number of defences, all officers who took part in the management of an insolvent company could be held personally liable for the corporate debts. This old section (s 592) has been reformed and replaced with a narrower focus on directors, rather than on all officers, and is contained in s 588G. This section commenced operation on 23 June 1993.

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This insolvent trading provision received media attention because of a number of cases in which non-executive directors have been held liable, despite not being actively involved in the management of the company. In the leading case of Morley v Statewide Tobacco Services Ltd (1992), the court decided that a non-executive director (the mother of the company’s managing director) should pay $165,290 towards the corporate debt of $300,000 incurred by her son, as director. The largest amount imposed for insolvent trading occurred in Commonwealth Bank of Australia v Eise & Friedrich (1991), which came about as a result of the problems of John Friedrich and the Victorian branch of the National Safety Council. The honorary chairman, Max Eise, was found liable for nearly $97 million. A company secretary was sued for a breach of the earlier provision in Holpitt Pty Ltd v Swaab (1992), however, he was able to avoid liability through the use of the defence that he was not part of the company’s management (he was only an administrator). Under the reformed section of s 588G, the secretary would not be liable unless also holding the office of director. There are a number of defences to insolvent trading and they are contained in s 588H. It is worth noting that a breach of s 588G is a civil penalty provision under Part 9.4B. However, where the insolvent trading occurs due to dishonesty, there is a separate criminal offence under Schedule 3 to the CA, which may incur a fine of up to $220,000 and/or five years’ imprisonment. This law has also been extended to holding and subsidiary companies under s 588V. However, there has been very little litigation using the insolvent trading provisions against holding companies. During 2001, the corporate collapses of HIH Insurance Ltd and One.Tel Ltd raised a broader public awareness of the impact of insolvent trading on their directors.

3.6

Insider trading

Another crucial area of officers’ duties that must be considered is insider trading. The media and Hollywood have continued to keep the subject of insider trading alive and kicking through films such as Wall Street. Everyone appears to agree that insider trading occurs, but no one seems to be caught for actually doing it! Academic research reports that approximately 5% of all trades on the Australian Stock Exchange are tainted with insider information. The previous laws were significantly altered in 1991 with the repeal of s 1002 and its

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replacement with ss 1002A to 1002U. These provisions redefined the meaning of insider trading and increased the fines from $20,000 to $220,000 for an individual and $1.1 million for a corporation, with a maximum period of imprisonment of five years. There is a natural overlap with s 183 (misuse of information by an officer), but insider trading is limited to dealing in securities and therefore usually only applies to listed companies. The regulator’s first success was against one of their own officers, Mr Teh, who passed information on to his brother about companies that the regulator was investigating. Corporations were not capable of insider trading in their own right, until the legislation was changed in 1991 due to Hooker Investments Pty Ltd v Baring Bros (1986). Australia’s first criminal conviction for insider trading occurred in July 1996, relating to Murray Williams trading in Australis Media shares. Williams pleaded guilty to purchasing 200,000 shares just before a confidential announcement was made about Pay TV licences. One year later, the 52 cent shares were sold for $1.25, making Williams a secret profit of $90,000. Williams was fined $50,000 and was sentenced to 18 months’ periodic detention for contravening s 1002G. The ‘Mark Booth and TNT options scandal’ in September 1996 involved claims of insider trading and failed financial transaction reporting. The character Mark Booth was allegedly invented by Simon Hannes, a director of Macquarie Bank who was advising TNT on a proposed takeover by KPN. Subsequently, Mark Booth purchased five million TNT options (worth $90,000) which produced a profit of $2 million. Charges were laid against Mr Hannes for the TNT transaction, finally leading to his conviction in August 1999 for both insider trading and failed financial transaction reporting. On appeal, Hannes obtained a court order for a retrial, which is now scheduled to occur in 2002 (R v Hannes (2000)). Other high profile cases involving insider trading, such as Australian Coachlines and Mt Kersey Mining NL, were dropped due to technical reasons. It is important to remember that not all uses of company information will be deemed to be insider trading. In a takeover situation or during prospective fundraising, some confidential information may pass without necessarily breaching s 1002G. The courts are willing to look at the purpose of the section and the definition of ‘securities’ does not include future shares (which as yet do not exist). This was discussed in detail in Exicom Pty Ltd v Futuris Corp Ltd (1995).

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3.7

Sanctions and remedies

Under the CA, there are a range of civil remedies and criminal sanctions that are available where there is a contravention of corporate law. It is important to understand that different types of legal actions result in different outcomes. For example, a shareholder suing a director will wish to recover damages, while ASIC may wish to prosecute, resulting in a custodial sentence as a punishment. A legal action brought against the officers under the common law or breach of equitable fiduciary duty may only result in a civil remedy. The main remedies are: • damages; • compensation; • account of profits; • injunctions (interim and final); and • declarations. In calculating damages, the court will apply the ordinary principles of contract or tort. For example, in State of South Australia v Marcus Clark (1996), the court found MC to have caused a loss of $38 million, plus interest, totalling $81 million. A court may order civil compensatory damages for a breach of the CA under Part 9.5. Where ASIC or DPP commences a criminal prosecution, the sanctions are prescribed in the CA. It should be noted that the majority of provisions in the CA are criminal by virtue of s 1311, the general penalty provision. This imposes a maximum fine of five penalty units ($550) for a contravention of the CA. All the penalties for ‘serious’ criminal offences are listed in Schedule 3 to the CA, and may prescribe fines of up to 2,000 penalty units ($220,000) and/or five years’ imprisonment. Where a company is held liable under s 1312, the corporation must pay a fine of up to five times the equivalent maximum individual fine. Thus, for insider trading, the maximum fine would be $220,000, but for a company it would be $1.1 million. In calculating penalties under the CA, one must refer to s 4AA of the Crimes Act 1914 (Cth), which defines penalty units as $110. Furthermore, the criminal provisions of all Commonwealth statutes have been amended by the implementation of the Criminal Code Act 1995. This Act provides default provisions designed to govern all criminal offences, including defences, fault and strict liability, and the involvement of human agents on behalf of corporate entities.

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The CA does contain some specific sections, which state that a contravention is not a breach of the criminal law. For example, s 140 creates a civil contract which, if broken, does not incur criminal sanction. Similarly, failure to comply with the replaceable rules is not a contravention of the law by s 135(3), and misleading conduct (s 995) is purely a civil action. ASIC may bring a civil action on behalf of the company or shareholders if it is deemed to be of public interest by s 50 of the ASIC Act. In recent years, ASIC has been successful in negotiating civil remedies on behalf of investors and creditors. In July 1993, the government introduced a new form of remedy/sanction into the corporate legislation, which is a hybrid of civil and criminal law. These new provisions are called civil penalty orders. Part 9.4B outlines 18 different sections of the CA, which are dealt with as civil penalty provisions (CPPs), rather than criminal sanctions. CPPs are brought in a civil court, but can result in: an unlimited compensation order (damages); a pecuniary penalty (up to $200,000) paid to the government; a declaration; and an officer’s disqualification order. Where there is a serious contravention of a CPP, ASIC can bring criminal proceedings. CPPs are applied to the following selected areas of the CA: • officers’ duties (ss 180 to 183); • related parties’ rules (s 209); • financial reporting (s 344); and • insolvent trading (s 588G(2)). In the majority of cases where officers are in breach of their duties, the parties will reach a negotiable settlement, which removes the need for litigation. However, in commencing litigation, the shareholders must consider the costs and the potential outcomes of pursuing such action. Similarly, the regulator must take into account the strain on resources associated with investigating and commencing civil actions or criminal prosecutions. For the last decade, ASIC has been consistently successful in over 70% of its cases.

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3.8

References

This chapter is covered in more depth in the following chapters of these leading Australian textbooks: Baxt, R, Fletcher K et al, Afterman & Baxt’s Cases and Materials on Corporations and Associations, 1999, Sydney: Butterworths, Chapter 9 Ford, HAJ, Austin, RP et al, Ford’s Principles of Corporations Law, 2001, Sydney: Butterworths, Chapters 7–9, 12–16 Hanrahan, P, Ramsay, I et al, Commercial Applications of Company Law, 2001, Sydney: CCH, Chapters 6, 10–15 Lipton, P and Herzberg, A, Understanding Company Law, 2001, Sydney: Lawbook Co, Chapters 12–13 Redmond, P, Companies and Securities Law – Commentary and Materials, 2000, Sydney: Lawbook Co, Chapter 7 Tomasic, R, Jackson, J et al, Corporations Law – Principles, Policy and Process, 2002, Sydney: Butterworths, Chapter 7

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4 Capital and Fundraising

You should be familiar with the following areas: • The meaning of ‘share capital’ • The basic rules of maintenance of capital • The meaning of ‘debt capital’ • The differences between security and charges • The rules relating to fundraising of capital (prospectuses) • The potential civil and criminal liabilities for fundraising documents

4.1

Introduction

Business entities require funds to develop their businesses and to help them make a profit. There is a wide choice of financing options open to modern corporations. The focus of this chapter will be on how one becomes a member of a company and the choice of financing (debt and equity) options open to body corporates. It is important to note that in law there is a clear distinction between share capital (known as equity) and debt (loan) capital, unlike in accounting, where there exists a closer relationship between debt and equity. This difference can cause confusion, especially with hybrid financing options such as a redeemable preference shares (RPS) or convertible debentures. The choice of fundraising method and the category of finance utilised by the corporation will depend on the cost of capital and a range of other economic factors, rather than the legal requirements.

4.2

How does one become a member?

Any person (whether a human or a corporation) may become a member of a company (s 231) and membership may be obtained in a number of different ways, including: 49

ESSENTIAL CORPORATE LAW

• by agreement in the application for registration of the company; • by transfer (voluntary sale or gift) of shares from an existing member; • by transmission (operation of law) of shares (that is, on death or bankruptcy); and • by the conversion of debentures (debt) into shares. Where a company is limited by shares, the member is also called a shareholder. The membership details are confirmed on the company’s share register, known as the register of members. Shares are deemed to be the personal property of the member by virtue of s 1070A. The member or shareholder is also normally entitled to be issued with a share certificate as prima facie evidence of ownership (s 1070C). However, these membership provisions do not apply to ASX listed companies, which are governed by the ASX Listing Rules. On a practical level, it would be difficult for an individual company to be able to maintain its register of members in a highly liquid market. This is because the company’s shares are being bought and sold and the members may be changing as regularly as every minute. As a result, shares listed on the ASX are subject to the Clearing House Electronic Subregister System (known as CHESS). CHESS creates a ‘virtual ownership’, whereby traded shares are held on trust for a period of time, rather than the company having to issue share certificates upon every change in membership. Instead, a CHESS statement of their shareholdings, which they receive at regular intervals, updates the members as well as the company. Problems relating to the area of changes in share ownership were discussed in the complex case of Kokotovich Construction Pty Ltd v Wallington (1995). Listing rules are legally enforceable by s 777, which, after the commencement of Financial Services Reform Act 2001, will become s 793C. After 11 March 2002, business rules and listing rules for stock exchanges will be collectively known as ‘operating rules’ under Chapter 7 of the CA. At the other end of the share ownership spectrum, there are a number of different ways a shareholder may cease to be a member of a company. These include: • transfer of ownership of all shares to another investor; • non-payment of calls, resulting in the forfeiture of those partiallypaid shares; • reduction in share capital by the company, such as a share buyback;

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• surrender of the shares through the member’s free will; • lien, where the company reclaims the shares as security for a personal loan; and • deregistration (dissolution) of the company. Membership rights are a complex mixture of terms and conditions laid out in the corporate constitution, replaceable rules, and legislation under s 134. Many of the membership rights will be derived from the types and classes of shares each member owns.

4.3

Share (or equity) capital

Given that 99% of registered companies have a share capital, the importance of an understanding of equity capital becomes very clear. Equity capital is a generic term encompassing a range of different share types; and if a company only has a single type of share, they are called ‘equities’. There are specific rules in the CA for all companies as well as ASX Listing Rules for publicly listed companies, which relate to the maintenance of share capital. The board of directors, on behalf of the company, will determine how many, and what types of shares should be issued. Prior to 1998, there were a number of restrictions relating to the number of shares that could be issued and their nominal value. However, the abolition of par value (s 254C) has enabled companies to focus on the actual share capital, based upon the issue price of each share. Proprietary companies, under s 254D, have a pre-emption right, which requires the company to offer existing shareholders a proportion of any new issues of shares. This is a replaceable rule, which may be removed or amended by a company’s own constitution. Although s 124 provides the corporate capacity to issue shares and debentures, it is s 254A that further expands the choice of the different types of shares. A company must have as its primary purpose for issuing shares the desire to raise capital for the company. This principle was upheld in Howard Smith Ltd v Ampol Ltd (1974), where the company attempted (unsuccessfully) to issue shares to defend against a hostile takeover bid. It should be noted, however, that a company may choose to issue bonus shares to existing shareholders as an alternative to paying a dividend out of profits. Companies will generally issue shares in return for consideration. The consideration paid by a shareholder is usually cash, or cash worth. Where the investor is paying with cash

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worth, that is, an equivalent of cash such as goodwill, property or services, there should be an independent valuation of the asset. In respect of public companies, the independent valuation is lodged with ASIC. What are the types of shares available? It is important to understand that there are different types of shares, as they provide different types of membership rights. Many companies have only ordinary shares and thus all members have the same rights. However, many other companies, especially if public or listed on the ASX, may have different types of shares, as well as different classes (or subsets) of a particular type of share. It is important to note that a company may have both a number of types of share (for example, ordinary or preference) and different classes of share within that share type (for example, class A ordinary voting shares and class B ordinary non-voting shares). The three main types of shares are: • ordinary shares; • preference shares; and • deferred shares (sometimes called ‘founders’ shares’). Ordinary shares are the most common type of share. Normally, ordinary shares have voting rights, which are based on one vote per share. It is possible for a class of ordinary share to be created that either offers multiple votes per share or no voting rights at all. Provided the company has made a profit (s 254T), ordinary shares will entitle the holder to receive a dividend. The directors may determine how great and when a dividend is payable (s 254U), provided they comply with their duty under s 588G not to trade while insolvent. Ordinary shareholders will only receive dividends after other priorities have been paid, such as creditors and preference shareholders. However, unlike owners of preference shares, dividends are not a guaranteed amount to holders of ordinary shares and may vary from year to year. Ordinary shareholders have a ‘participation’ right, which is the right to a proportion of the surplus assets on a solvent winding-up. Preference shares have two unique elements. First, the dividend is a set percentage (for example, 5%, which would entitle the owner to a five cent dividend for each one dollar preference share owned) and is paid in priority to ordinary shares. The dividend must still be paid out of profits, due to s 254T. If a company is unable to pay a dividend in a particular financial year, the preference share dividends are normally 52

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cumulative, and thus will be paid in the following year before the ordinary shareholders. The second element to preference shares is that they have the benefit of a preferred return of capital on a winding-up, but generally do not have the participation right to surplus assets enjoyed by ordinary shareholders. That is, in the event of a solvent winding-up, owners of preference shares will be returned the value of their capital investment in the company ahead of ordinary shareholders. However, preference shareholders have no claim on any surplus assets of the corporation. Preference shares may be issued as redeemable at a fixed time or at the company or shareholder’s option (under s 254J). Deferred shares, or, as they are more commonly known, founders’ shares, are the ultimate ordinary share. Such shares are normally issued to the people who form the company, who sacrifice their right to dividends in return for weighted voting rights. This means that members with deferred shares will accept that preference and ordinary shareholders will receive dividends before they do, as the profits available for distribution as a dividend will not usually allow for payment to deferred shareholders. However, although the owners of deferred shares are unlikely to receive a dividend, they will have greater voting rights, for example, 100 votes per share, rather than the ordinary one vote per share. This enables the founders of the company to be appointed and/or remain as the directors and to maintain control over the other investors. Deferred shares are less common than ordinary shares as they may now be issued with any terms and rights attached as the directors deem fit, under s 254B. Alteration of the rights attached to the ownership of shares (class rights) may be made subject to terms contained in the corporate constitution or by passing a special resolution of the company by the particular class affected (s 246B). This is subject to an overriding test of ‘proper purpose’ (Peter’s American Delicacy Co Ltd v Heath (1939)) and the minority protection provisions contained within ss 232 to 242. There are also many ‘hybrid’ types, or, more accurately, classes of shares, which expand this basic list. Section 254A enables a company to issue shares, including bonus, preference and partially-paid. Bonus shares are those that are provided to an existing member without any consideration (value) being paid by that member. Partially-paid shares enable a member to purchase a share, but only pay the company a set amount at the time of purchase. At a later stage, the company will make a ‘call’ for the balance owing on the shares, at which time the shareholder must pay the balance or forfeit ownership of their shares. The various classes of shares have special features, with varying legal

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rights attached, and this tends to blend (or even blur) the defined roles of debt and equity capital. Examples of such hybrid shares include: redeemable preference shares; cumulative preference shares; convertible preference shares; participating preference shares; nonvoting ordinary shares; and super-voting shares. It is beyond the scope of this book to provide an exhaustive explanation of each of the above types of shares; it is sufficient for a student of corporate law to acknowledge their existence and understand that they are different to the three main types of share. What are the liabilities of a shareholder? If an investor owns shares that are fully paid-up, they will have the protection of limited liability. What this means is that the investor will incur no further financial liability in the event that the company enters liquidation. When a company enters into liquidation, shareholders become known as ‘contributories’ because if the shares are partiallypaid, they will be required to pay the outstanding debt (known as the call). What is the basic rule of maintenance of share capital? The basic rule of maintenance of share capital is that the company does not return the capital to its members. This was laid down in the classic case of Trevor v Whitworth (1887), where the company tried to purchase a shareholder’s interest in itself! It was reaffirmed at common law in ANZ Executors & Trustee Co Ltd v Qintex Ltd (1990), and is also contained in Chapter 2J, especially s 259A. Before July 1998, there were few exceptions to the maintenance of capital rule. However, the Company Law Review Act 1998 (Cth) provided a major change in policy to facilitate a company’s ability to make reductions in capital and share buy-backs. Section 256A states the rules for reductions and buy-backs to protect shareholders and creditors. Companies are now able to complete reductions in share capital and share buy-backs provided the company is solvent, there is fairness between shareholders, and there is adequate disclosure of all material information. Reductions in share capital are allowed as follows: • Reduction of share capital under s 256B. Specific procedures exist within the CA to protect creditors and shareholders from being disadvantaged by reductions in share capital. These procedures

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require a company to satisfy three provisions. First, that the reduction is fair and reasonable to the company’s shareholders as a whole and, secondly, that it does not materially prejudice a company’s ability to pay its creditors. Finally, under s 256C, the shareholders’ approval is required through the passing of a resolution. For an equal reduction (where all shareholders are treated the same), only an ordinary resolution is required. Where there is a selective reduction (where only some shareholders are having their capital reduced), a special resolution must be passed. It is interesting to note that if the company contravenes s 256B, this does not invalidate the reduction. That is, the shareholders’ capital may still be reduced, however, the person involved in the contravention (that is, the directors) can be liable, both civilly and criminally under s 256D. • Redemption of redeemable preference shares under ss 254A and 254J. Where a company completes a redemption of RPS, it must follow a specific procedure. Under s 254A(3), the redemption may be at a fixed time or on the happening of a specified event. The decision to make the redemption may be up to the company or the shareholder, depending upon the terms of the issue. A company may only redeem RPS if they are fully paid-up and out of the profits or proceeds of a new issue of shares. Once the shares have been redeemed, they must be cancelled under s 254J, although failure to do so does not invalidate the redemption. However, the person involved in the contravention can be liable, both civilly and criminally under s 254L. • Share buy-backs under s 257A. A company is allowed to buy-back its own shares if the buy-back does not materially prejudice the company’s ability to pay creditors and there is compliance with the CA. Section 257B provides a clear table, which demonstrates the five different methods of completing a buy-back and the necessary procedures that must be followed: ❍ Minimum holdings (odd lots) only require the company to cancel the shares and notify ASIC. Such buy-backs are used to clean up the register of members where some shareholders have very small parcels of shares, previously referred to as ‘odd lots’. ❍ Employee share schemes enable companies to buy back the shares when an employee leaves the company. The company is required to give the member/employee 14 days’ notice, then cancel the shares and notify ASIC. If more than 10% of the voting shares of the company are purchased in a 12 month period, then

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❍

❍

❍

the members must pass an ordinary resolution, authorising the company to reduce the shareholders’ capital by such an amount (s 257C). On-market buy-backs are allowed for listed companies if members are given 14 days’ notice and the shares are cancelled with appropriate ASIC notification. If more than 10% of the voting shares of the company are purchased in a 12 month period, then the members must pass an ordinary resolution (s 257C). An equal access scheme is an offer to purchase shares from all members of the company. The offer document, which is provided to members, must be lodged with ASIC (s 257E). The members must be provided with 14 days’ notice and there must be disclosure of relevant information when the offer is made. The bought back shares must be cancelled and ASIC notified. If more than 10% of the voting shares of the company are purchased in a 12 month period, then the members must pass an ordinary resolution (s 257C). A selective buy-back will always be the most controversial because only some members are getting the benefit of selling their shares at a fixed price back to the company. As such, s 257D requires there to be a special resolution passed by members who are not having their shares bought. The offer document for the selective buy-back must be lodged with ASIC and all members given 14 days’ notice. There must be disclosure of all relevant information and the shares cancelled, with ASIC notification after the purchase.

There are a number of consequences which flow from a buy-back, which are carefully explained in a table headed ‘Signposts’ in s 257J. • Financial assistance under Part 2J.3. Generally, the CA will prohibit the self-acquisition and control of shares by a company under s 259A. The exceptions to this rule are under legal buy-backs, a court order, or by way of a valid financial assistance. Financial assistance is where the company indirectly lends money to an investor, who purchases shares in that same company. In Belmont Finance Corp v Williams Furniture Ltd (No 2) (1980), financial assistance was broadly defined to reflect corporate activity, which diminished the value of the company. This means that, if a contract or other transaction results in the company providing financial

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help, including release from a debt, the company’s overall value decreases, which hurts all shareholders. A company is allowed to financially assist in the acquisition of shares if it complies with s 260A, which will require a special resolution for shareholders’ approval under s 260B. There is a broader exemption if the loan is in the ordinary course of commercial dealing, or under an approved employee share scheme (s 260C). If the company contravenes s 260A, this does not invalidate the financial assistance. However, the person involved in the contravention can be liable, both civilly and criminally under s 260D; see Darvall v North Sydney Brick & Tile Co Ltd (1989). Although share capital is fundamental to a corporation, the economic cycle has meant that interest rates have provided the need to also understand debt capital. The relationship between debt and equity is often referred to as the gearing ratio, and this will vary depending upon a range of economic and financial factors, such as the risk associated with the equity investment or the cost of debt capital. In the classic case of Salomon v Salomon & Co Ltd (1897), the relationship between the shareholder and the creditor (both of whom were Mr S) went to the heart of the debt and equity debate.

4.4

Debt capital

What is debt finance? Debt finance plays a crucial part in the structure of most corporations, but the choices of debt and their relationship to equity are often not fully understood. The reasons for selecting debt over equity (or vice versa) are based on a number of commercial factors. These might include interest rates, tax implications, liquidity, cash flow, market conditions, and the costs associated with raising capital, to name but a few. The borrowing powers of a corporation must also be considered. Section 124(1)(b) gives express power to companies to issue debentures, which effectively means that a company can borrow just like an individual. Furthermore, s 198A provides the board of directors with the authority to raise debt capital. A company’s constitution can restrict borrowing, but as long as the third party (creditor) is unaware of the restriction, the loan remains validated (s 125), as occurred in Royal British Bank v Turquand (1856).

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There are many reasons why the balance between debt and equity should be carefully considered. In creating debt there are a number of legal principles that have to be taken into account. These relate to provisions in the corporation’s constitution, shareholders’ rights, directors’ duties, taxation, and the consequences of a number of the provisions of the CA. Thus, in reviewing a corporation’s gearing ratio, the following legal areas require prudent consideration: • insolvent trading (s 588G); • voidable preferences of creditors (s 565); • charges granted by the company (s 566); • oppression of minority shareholders (ss 232 to 234); and • financing dealing in the company’s own shares (s 260A). One of the most common forms of debt financing is the debenture. Only corporations are allowed to issue debentures under s 124. What is a debenture? A debenture, in its very simplest form, is merely a document that is issued by a corporation, which acknowledges that a debt is owed by the corporation (Edmonds v Blaina Furnaces Co (1887)). The CA definition is found in s 9, and is quite far-reaching, but is not as wide as the common law. Thus, the word ‘debenture’ is a general heading for many different types of debt financing. There are different types of debentures that a corporation can issue, including secured or unsecured; convertible or not; and redeemable or non-redeemable. Finally, a register of debenture holders must be kept by each corporation (s 171) and be open for inspection by the public (s 173). It is worth noting that there is a definite distinction between the loan contract (debenture) and the security for the loan (the charge). Raising secured capital

Charge Company

Lender

(chargor)

(chargee)

Debenture contract

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Thus it is possible for a court to declare that the charge, as a security, is invalid, but the loan contract (debenture) is still valid. However, it is only enforceable by the lender as an unsecured creditor and ranks at the bottom of the creditors’ priority list in s 556. That is, the lender will still be owed the money by the company as the loan (debenture) contract is valid. However, the lender becomes an unsecured creditor as the charge (security offered by the company) is no longer valid.

4.5

Security and charges

A charge is the security document that is given by the company (chargor) to create a secured debenture. The lender or creditor is formally called the chargee. On a personal level, this is the same as a mortgage being granted over a home. It is regulated by Chapter 2K, which governs both the registration and priorities of charges created as security for corporations. Charges are divided into two broad categories: fixed and floating. A fixed charge is where the security is attached to a specific asset, such as land, and the most common form is a charge by way of a legal mortgage. A floating charge is, in fact, a legal fiction, in so far as it is an attempt to take a security over assets which can change and belong to a going concern. In Evans v Rival Granite Quarries Ltd (1910), the distinction between fixed and floating charges was clarified, so that the holder of a floating charge has no legal or equitable interest in the specific assets of the company while the charge is floating. Once the floating charge crystallises, it converts into a fixed charge over specific assets. The HCA, in United Builders Pty Ltd v Mutual Acceptance Ltd (1980), stated that the distinction depends upon the parties’ intentions and whether the class of assets are in the present and future, as well as the company’s ability to change them from time to time. For example, if the floating charge covers a fleet of company cars, the company would be able to update old models with new cars, and would be covered by the same floating charge. So, crystallisation simply means that the floating charge on a class of assets is converted into a fixed charge on specific assets. A floating charge may crystallise on the breach of the debenture contract, or automatically in the following circumstances: • default in payment of interest; • breaches of restrictions on future borrowings;

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• allowing the value of assets covered by the charge to go below a minimum amount; or • ceasing to deal with charged assets in the ordinary course of business. The most common event to cause crystallisation is insolvency and the appointment of a voluntary administrator or liquidator. The security holder will be entitled under both the debenture contract and the charge to appoint a receiver. An essential element of the validity of charges is the process of registration. Charges must be registered with ASIC on the Australian Register of Company Charges within 45 days of creation. Charges must also be recorded by the company on its register of charges, which contains copies of all relevant documents (s 271). It is a criminal offence for the company to fail to maintain its register. Section 262 requires the giving of notice and registration of all charges specified in this section, including floating charges, charges on uncalled share capital, and charges over personal chattels, goodwill, intellectual property, book debts, marketable securities and a lien. The company has the responsibility to ensure lodgement of the charge and supporting documents within the 45 days following creation of the charge (s 263). Although the company has the primary responsibility for registration, the reality is that an interested person (s 270), such as the creditor, will make sure that the charge is registered. There are strict rules that deal with the priority of charges registered on the same day. The consequence of failing to register a charge within the time period is that the charge may be declared void against a liquidator or administrator (s 266). If the company is trading in the ordinary course of business, the company or creditor will simply register the charge late, but should only be concerned with another charge which has been registered in the mean time. Once the company commences an external administration (liquidation or voluntary administration) and the charge was not registered within 45 days, the consequences are as follows: • the actual loan (debenture) is still valid between the company and its creditor; • the lender forfeits its right to be a secured creditor and is deemed to be an unsecured creditor; • the charge is declared void; and • the chargee has a lower priority for the repayment of the debt.

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A charge can also be avoided by a liquidator for an antecedent transaction, where the company is insolvent, such as unfair preferences (s 588FA); uncommercial transactions (s 588FB); or an unfair loan (s 588FD). A charge created in favour of company officers, where the company becomes insolvent within six months of the creation of the charge, may be unenforceable under s 267. Lastly, it is important to realise that the registration of a charge in one jurisdiction has a binding effect in all jurisdictions. What is meant by ‘priorities’ for creditors? The company has a responsibility to repay debts in a particular order, depending upon the ‘priorities’ as specified in the CA. If a company is solvent, it does not normally matter which creditor is paid in which order. It is common, where the company is solvent, for creditors to be paid in the ordinary course of business as the debts fall due. However, where a company becomes insolvent and is subject to external administration, there is a strict order, or priority, of repayments. There are general rules that guide external administrators as to the priorities of all creditors from a secured fixed charge through to an unsecured trade creditor (s 556). Secured creditors always rank at the top of the priority list of those to be paid. Given the nature of business, where numerous secured creditors may exist with a mixture of fixed and floating charges, there is a need for rules governing the priority of charges. In 2000, these rules of priority for charges were clarified and are now contained in Part 2K.3. There are general priority rules for registered charges contained in s 280 and different rules for unregistered charges (s 281). The leading factors for determining the priority of charges are the dates of registration and any agreements between the various chargees who are willing to vary the set rules of priority. An example of such an agreement might be where a director with a registered charge created in 2000 might be willing to allow a bank that is providing a substantial loan to the same company in 2001 to take priority of a charge on the same asset. There exist two important rules relating to the priority of charges. The first rule is that the priority given to a charge depends upon its place within the order of registration. In determining a charge’s place within the order of priorities, all calculations are taken from the time at which the individual charge’s notice was lodged with ASIC (s 278). Thus, the s 280 registration is a key point.

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The second rule is that the first registration does not prevail if the first registered chargee was aware of the creation of an earlier charge, which has not been registered. The awareness or notice can be either actual or constructive, which means that the chargee is deemed to have known about the earlier charge under s 281. All other unregistered charges are governed by the order in which they were created. Companies and creditors will negotiate the level of security for any debt based upon, amongst other things, the risk of default. Secured creditors have the lowest risk, but encumber higher transaction costs and prevent the company from having flexibility with its assets. There are alternative methods of protection from default under contract law, such as a retention of title (Romalpa) clause. However, the courts may not afford protection for a creditor that has failed to take a proper security against a debt.

4.6

Fundraising

What are the fundraising capital choices? The senior management of a company may decide that the business requires an injection of capital to develop its profitability. The corporation will naturally have to raise either share capital or loan (debt) capital at the time of incorporation or at some future time, as is commercially necessary. The cost of capital is an important calculation, which includes the prevailing interest rates, the company’s credit rating (for example, Standard & Poors), and the actual cost of raising capital. There are a number of direct and indirect costs associated with raising funds, such as legal fees, underwriting, management time and accounting services. Moreover, there are a number of different methods for raising share capital. The most common methods include rights issues, options, share purchase plans, dividend reinvestment plans and employee share schemes. The most formal way to raise capital for a public company is via a ‘disclosure document’, more commonly known as a prospectus. As a rule of thumb, based on commercial reality, if the amount of capital to be raised is above $5 million, a prospectus will be required. In January 1998, ASIC released a Class Order to enable business-matching services (such as venture capitalists) to advertise, without a full prospectus, the sale of private securities valued up to $5 million. This

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is of particular benefit to the small and medium-sized entities (SME) and services such as the ASX internet-based Enterprise Market. The government, as a priority of CLERP (see above, p 32), actively encouraged a new set of laws to provide SMEs with inexpensive channels through which additional funds could be raised. CLERPA99 introduced, from March 2000, four separate types of disclosure document. Three of these documents were specifically put forward to help SMEs and to clarify the exemptions to the issuance of a disclosure document. Section 705 provides for four different types of disclosure document, which enable an offer of securities to be made to potential investors: • prospectus – the standard full disclosure document; • short-form prospectus – the document provided to the investors that is an abridged version of all the material information lodged with ASIC; • profile statement – this is a brief statement of the offer, which is approved by ASIC, but does not replace the requirement to lodge a prospectus with ASIC; and • offer information statement – a genuine alternative to a prospectus, where the issue of securities is less than $5 million. Each type of disclosure document has its own contents and liability requirements, as laid out in Part 6D.2. There are a number of exemptions whereby a company may be able to avoid preparing a disclosure document, which may provide substantial savings to a company that is able to satisfy the requirements of such exemptions. Section 708 provides a list of offers that do not require a formal disclosure document. They include: • small scale offerings of 20 issues in a 12 month period as a personal offer to raise up to $2 million; • the sophisticated investor exception (colloquially referred to as the ‘gold card’ exemption). This requires either a minimum investment of $500,000 per person, or the investor must prove that they have net assets of $2.5 million or a gross income of $250,000 pa; • offers made through a licensed dealer or to professional investors (for example, life insurance companies or superannuation funds); and • shares for no consideration.

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The essential information that must be contained in a prospectus is laid out in ss 710 to 716 and will depend on the type of disclosure document that is required. Following the UK, in 1991 Australia adopted a general disclosure test for prospectuses, rather than the previous checklists. The introduction of s 710 caused concern among many companies and professional advisers, as it requires the provision of all information that an investor (or the investor’s professional advisers) would reasonably expect to find in a prospectus. It is prudent to note that s 710 is an overarching provision, which is supplemented by certain specific disclosure requirements for a prospectus contained within s 711. These include the terms and conditions of the offer, interests of, and fees paid to, certain persons, quotation of securities, expiry date, and lodgement with ASIC. More detailed prescribed information is set out in the corporate regulations. Short-form prospectuses have a more limited content under s 712, which enables reference to be made to other material information that has already been lodged with ASIC. Section 713 provides special content rules for continuously quoted securities, as investors would already be aware of the company’s operations on the ASX. The contents of profile statements and offer information statements are specifically outlined in ss 714 to 715. One of the significant changes of policy made by ASIC was the removal of the need for the regulator to provide a detailed pre-vetting of the prospectus, prior to its lodgement. There is a fundamental requirement in s 718 that all disclosure documents that are to be used to offer securities must be lodged with ASIC. This change of policy reflects the fact that the company, its officers and its expert advisers should be responsible for the disclosure document’s contents rather than the regulator. However, if ASIC or the company discovers information that is materially adverse to the investor after the disclosure document is lodged, there is a requirement under s 719 for the company to issue a supplementary or replacement document. Examples of materially adverse information include misleading statements, omissions of information required by ss 710 to 715, or a new circumstance that has arisen after the lodgement date. Given the complex web of legislative requirements governing capital fundraising, the need for professional advisers becomes abundantly clear. There are also a number of tax implications that have to be taken into careful consideration. The cost of raising share capital can be high, depending upon the amount being raised and the method being employed. One of the key challenges currently facing ASIC is

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the growth of fundraising on the internet. ASIC is keeping a careful watch on all corporate law activities on the world wide web and is now allowing electronic prospectuses.

4.7

Liabilities for misleading statements

A number of the parties who are involved with the production and issuing of a prospectus can be held liable under the civil law and criminal law for false or misleading statements or breaches of the CA. Part 6D.3 provides the prohibitions, liabilities and remedies for legal actions relating to disclosure documents. The simple contravention of the CA is a general criminal offence, under s 1311. There are specific, and more serious, crimes in the fundraising chapter (6D) of CA. For example, it is an offence to offer securities in a corporation that does not exist (s 726) or offer securities without a current disclosure document (s 727). Where a person commits an offence by making a misleading or deceptive statement that is materially adverse to the investor, it is a grave crime under s 728(3). These offences carry a maximum penalty of 200 penalty units ($22,000) and/or five years’ imprisonment. ASIC, with the DPP, has the burden of proof in the prosecution of such an offence. This does not guarantee that the investors will be able to recover damages or their losses. Investors have a myriad of civil actions available to them in order to recover any damage or losses arising from a misleading prospectus. Reforms in the CA have led to an increase in the liability of persons involved with the preparation and issuing of prospectuses, and other disclosure documents. At common law, it is possible to bring an action against the company and its directors in the tort of deceit, as in Derry v Peek (1889). However, the defence to deceit is ‘honest belief’, which makes any action in deceit extremely hard to prove. An investor may alternatively bring an action for the tort of negligence, based on the HCA principles established in Shaddock & Associates Pty Ltd v Parramatta City Council (1981). The developments under the Trade Practices Act 1974 (Cth) (TPA) for misleading and deceptive conduct (s 52) have been applied spectacularly to prospectuses. This was illustrated in the controversial case of NRMA Holdings Ltd v Fraser & Talbot (1995), where the majority of directors of the NRMA and its members wished to convert the mutual organisation into a publicly listed company. Two directors/members objected on the grounds that the prospectus was

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misleading under s 52 of the TPA, which is very similar to s 995 of the CA. The Federal Court, in October 1994, prevented the $2.2 billion float from going ahead and the appellant court upheld this decision in 1995, stating that the prospectus was misleading. The CA has been redrafted to remove the duplication of s 52 of the TPA and s 995 of the CA. Further, the broad provision in s 995 dealing with misleading or deceptive statements in connection with dealing in securities has been further refined and divided between such statements made in a takeover document (s 670A) and in a fundraising document (s 728). Section 728 states that a person must not offer securities under a disclosure document that is misleading or deceptive, or if there is a material omission or new circumstance, which should have been disclosed. If a person makes a forecast or forward-looking statement without reasonable grounds, this will be deemed to be a misleading statement under s 728(2). All persons that suffer a loss or damage due to the misstatements in breach of s 728 may bring a civil action for recovery under s 729 against the following people: • the person making the offer (the company); • directors; • person named in disclosure document who gave consent (experts); • underwriter; and • any other person who contravenes s 728.

4.8

Civil and criminal defences

The CA provides both a due diligence defence for the prospectus (s 731) and a more general defence for all disclosure documents (s 733). Due diligence for a prospectus requires that all reasonable inquiries have been made and, after doing so, reasonable belief that the statement was not misleading or deceptive. Similarly, s 733 provides some general defences for all disclosure documents. A person does not commit a crime under s 728(3), and is not liable for a civil action under s 728(1), where there is reasonable reliance on information provided by another person. Also, if the person withdraws their consent to being named in the disclosure document, they will be able to avoid liability (s 733(3)). Finally, if a person is unaware of a new matter that should have been revealed after the disclosure document has been lodged, they will have a defence under s 733(4).

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References

This chapter is covered in more depth in the following chapters of these leading Australian textbooks: Baxt, R, Fletcher, K et al, Afterman & Baxt’s Cases and Materials on Corporations and Associations, 1999, Sydney: Butterworths, Chapters 14–15 Ford, HAJ, Austin, RP et al, Ford’s Principles of Corporations Law, 2001, Sydney: Butterworths, Chapters 17–22 Hanrahan, P, Ramsay, I et al, Commercial Applications of Company Law, 2001, Sydney: CCH, Chapters 18–20 Lipton, P and Herzberg, A, Understanding Company Law, 2001, Sydney: Lawbook Co, Chapters 7, 8, 10, 11 Redmond, P, Companies and Securities Law – Commentary and Materials, 2000, Sydney: Lawbook Co, Chapter 9 Tomasic, R, Jackson, J et al, Corporations Law – Principles, Policy and Process, 2002, Sydney: Butterworths, Chapter 10

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5 Shareholders’ Protection

You should be familiar with the following areas: • The organ theory • The basic rules of how a company makes a decision • The rules relating to directors’ and members’ meetings • The majority rule from Foss v Harbottle • The statutory protections for minority shareholders • The case law exceptions to the majority rule principle

5.1

Introduction

As previously stated, corporations are artificial bodies that must make legally binding decisions. To this end, an analogy can be drawn with Parliament; in so much as there are certain organs of government that can make decisions based upon a delegation of authority from a majority of the people (voters). So too, a corporation; where, according to the fundamental principle laid down in Foss v Harbottle (1843), the majority of shareholders rule over the minority. Moreover, the decisions of a corporation must be validly made, both in terms of powers and in process. It is with the interplay of the concepts of majority rule and decision-making that this chapter is concerned.

5.2

Organ theory and decision-making

The key concept to this area of law is the political science topic often referred to as the ‘organ theory’. This theory applies the aforementioned analogy, that governments can only make decisions on behalf of its voting citizens with its decision-making organ. In the Australian Parliament, adult voters select members of parliament, the majority of whom make up the government of the day. From this pool

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(house) of representatives, a cabinet is selected, which may delegate to an inner group (for example, the Prime Minister) the authority for making day-to-day decisions. Thus, a government cannot make a decision without the involvement of its decision-making arm. Furthermore, individual voters, or ministers, are usually unable to change such decisions. Applying this organ theory to the corporate law paradigm in Figure 2, it can be seen that the board of directors is the elected decision-making arm of the corporation. However, when considering the theory in light of shareholders’ rights, a fundamental question arises: Can an ordinary shareholder or group of shareholders force the directors to change one of their decisions by passing a resolution at a members’ meeting? This question has been examined by the courts in the UK in John Shaw & Sons (Salford) Ltd v Shaw (1935) and, more recently, in Australia in NRMA Holdings Ltd v Parker (1986). The resulting common law principle has been in keeping with the concept of organ theory that, generally, shareholders cannot interfere with management decisions. Figure 2: Organ theory of corporations (Adams (1990))

CEO/MD

Company secretary

Board of Directors Managers

Company (separate legal entity)

Shareholders

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The simple diagram above illustrates the fact that various legal decisions can only be made by certain organs of the company. In law, the company is seen both as a separate legal entity (s 124) and as the real ‘person’ employing staff and transacting with third party suppliers and customers. The two main decision-making organs are the board of directors and the members at a general meeting. Each organ has specific and general powers to make decisions, as well as the authority to delegate their powers to other parties. Decisions need to be made at meetings, which must be validly held and recorded in minutes at a board level or at the shareholders’ meetings. Section 198E provides special rules for proprietary companies that have a sole director/shareholder, with respect to decision-making. As a general rule, the members delegate the management powers to the board of directors. Although this is a replaceable rule (s 198A), virtually every company would have a similar provision in their corporate constitution. However, under the CA, there are certain decisions that are reserved purely for the general meeting and cannot be made by the board of directors. Examples include the removal of directors (s 203D), amendment to the corporate constitution (s 136) and the declaration of dividends. The board of directors, as a decision-making organ of the company, has a broad power to manage the business of the company. Section 198A states that the directors may exercise all powers except those required by the CA or the company’s constitution to be exercised by the general meeting. The board may confer its powers to a managing director (more commonly known as CEO), by virtue of the replaceable rule, s 198C. As with any delegation, this may be revoked at any time by the board, but this does not operate retrospectively. The CA provides an express power in s 198D for the board to delegate its authority, subject only to the corporate constitution. The delegation of power may be made to a committee of directors; an individual director; an employee of the company; or any other named person. The delegation must be recorded in the company’s minute book, under s 251A. The law has stated clearly that if the CA or the corporate constitution provide, it is the board of directors, and not the shareholders or the managers, who have the power to make certain decisions. This was established in Australia in NRMA Holdings Ltd v Parker (1986). Even if the shareholders disagree with the board, they may convene a general meeting, but are unable to pass a resolution to try to change decisions that have already been made by the board of

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directors. Members of a company have three simple choices if they disagree with the direction of the board: (1) The general meeting has the power to remove the directors of a proprietary company by a simple resolution (greater than 50% of the votes cast) under replaceable rule s 203C. For a public company, a longer notice period is required, but still a simple resolution has to be passed under s 203D. The removal of the director(s) does not change the decisions already passed by the board. (2) The general meeting may modify the corporate constitution to restrict the broad powers in ss 198A and 198C. (3) The ‘Wall Street Walk’ – that is, the shareholder who is dissatisfied with the board of directors can sell their shares and invest in another company with philosophies more akin to those of the investor. Ownership of shares bestows upon members certain key rights under the CA and the terms contained in the contract between the company and the shareholder. For those companies that do not have shares, the membership rights are extremely important.

5.3

What are the key membership rights?

The key membership rights are often expressed as terms of the contract established by s 140. The actual terms and conditions between the shareholder and the company are determined by the company at the time of issue, including any rights and restrictions attached to the class of share (s 254B). For a public company, any document that provides rights to shares must be lodged with ASIC (s 246F). The most common key membership rights are: • voting rights; • the right to attend members’ meetings; • the right to appoint directors; and • the right to a dividend out of profits. Notwithstanding these fundamental rights, the actual power to manage the company’s business is left to the board of directors. It is important that people understand their rights as members, especially given the recent rise in the number of ‘mum and dad’ shareholders, resulting from the spate of privatisations, floats and demutualisations, such as Commonwealth Bank, GIO, Qantas, Telstra, TAB, Woolworths, NRMA and AMP. ASX surveys have demonstrated that over 50% of the Australian adult population own shares. 72

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One of the practical problems that has arisen from having companies with more than one million members is that the corporate registers must be kept up to date for members to be able to claim their rights. What are the corporate registers? Disclosure is a common theme of corporate regulation and registers are one way of providing the public with information. For a member to benefit from their key membership rights, they must be entered on the register of members, or at least be entitled to be entered (s 231). Prior to 1995, companies were required to maintain at least ten different registers. The First Corporate Law Simplification Act 1995 (Cth) created a new Chapter 2C, which contains all the information previously held on the essential registers. Section 168 requires a company to maintain three registers: • the register of members (s 169); • the register of option holders (s 170); and • the register of debenture holders (s 171). However, there is one other important register which a company is required to maintain, and that is the register of charges. This register is found in a different part of the CA, at s 271. Every company is required to have a register of members (s 169), and it is for this reason that it is the most important register under the CA. A corporation’s register of members must contain the following minimum information: • names and addresses of members; • details of shares held by each member, including class of shares; • date of entry onto the register; • date of each allotment and forfeiture of shares; and • amount paid or agreed to be paid on the shares. Where a company has more than 50 members, an index must be kept in addition to the register, unless the register is already maintained in alphabetical order (s 169(2)). A share register service (for example, Computershare and ASX Perpetual Registrars Ltd) may be utilised for convenience, subject to the appropriate notification to ASIC under s 72(2). The registers should be located at the company’s registered office, principle place of business or another place approved by ASIC.

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The company can alter the register of members at any time, so as to comply with the CA. This need may arise from the admission of a new member, a change of member’s name or address, an error in registration or some other reason (for example, a buy-back or a call on shares). In certain circumstances, the register can be altered by a court order, particularly when the company displays an unwillingness to alter the register (for example, where there is a disputed title to the shares). The court order, authorised by s 175, is called a ‘correction of registers’; an example of which is found in Peninsula Gold Pty Ltd v Sunbeam Victa (1996). Both the members and the general public have a limited right of inspection of the corporate registers (s 173), which can be exercised at no cost to members, with a small fee being charged to the public. The use of information in the registers is now restricted by s 177 and it cannot be used to send unsolicited material. In Rossington Pty Ltd v Lion Nathan Ltd (1992), the court identified the rights of the public to inspect company records. The following registers are no longer required to be kept: the directors’ register; directors’ shareholdings register; register of share buy-backs; substantial shareholders’ register; and a register of notices of beneficial interests. However, for commercial reasons, this information may still be kept on a company’s own system for the convenience of the board. The registers that are required to be kept under s 168 may be kept on a computer, by s 1306. A common register to be maintained for practical purposes is the ‘seal register’. This was never a requirement in the CA and is now less relevant due to the corporate common seal becoming purely optional (s 123). In Kriewaldt v Independent Direction Ltd (1995), the Court held that directors can have access to all board papers even after the person ceases to be a director. It was held that the secretary was to keep a full set of board papers for inspection by former company directors. The directors’ inspection rights are now contained in s 198F for a current director. This right continues for up to seven years after the director ceases to be a member of the board. Section 290 provides directors with access to the company’s financial records during their appointment. If the company refuses, the court may order the records to be made available (s 290(4)). The company or its directors may allow a member to inspect the company books, under replaceable rule s 247D.

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Alternatively, a court may order the inspection of all company books under s 247A. Section 247A contains the main provision covering members’ application to the court for access to the company’s books. Books are broadly defined in s 9 as including a register, any other record of information, financial reports or records, and a document. The court is granted a wide discretion when handing down its orders (s 247B), including the power to restrict the disclosure of the information to ASIC and the members who requested the order (s 247C). Section 1305 states that the books are prima facie evidence of the matters stated or recorded in the books, and may be used as evidence in legal proceedings. Probably the most important books that will be requested by either directors or members are the minutes books. These formally record the proceedings and the decisions that are made at both board and members’ meetings.

5.4

Company meetings

All meetings require notice to be given of their occurrence and the opportunity for members to put forward a motion. If the directors or the shareholders pass a motion, it is known as a resolution and becomes immediately binding upon the company. If a special resolution has to be passed, then the motion must be included in the notice and in writing. The notice period is set at 21 days for a members’ meeting (s 249H), which is extended to 28 days for ASX listed companies (s 249HA). Directors’ meetings, on the other hand, only require reasonable notice to be given (s 248C). At the meeting of the board, there is one vote per director and only a simple majority of votes is required to pass the motion as a resolution. Any resolutions decided must be recorded in the board’s minute book. Alternatively, directors may pass a resolution without a meeting, provided the motion is circulated to all the directors to sign (s 248A). This alternative method is a replaceable rule (s 135). The quorum for a board meeting is normally two directors, but again, this is a replaceable rule in s 248F. At the shareholders’ meeting, each member may vote depending upon the number of shares they own and the voting rights attached. Generally, ordinary shares have one vote per share. Where a member is unable to attend a meeting, they may appoint another person to

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have the right to vote their shares. These votes are known as proxies. Proxies may be voted in advance, specifying whether they are for or against the motion (similar to a postal vote in a political election). Alternatively, the proxy holder (who is often the chairman of the meeting) may be given discretion over when to vote and in which direction to cast the votes. The votes used to calculate whether a motion has been passed are always the votes actually cast – that is, the actual people present at the meeting and voting plus the proxies that have been lodged prior to the meeting. Thus, the total number of members eligible to vote is irrelevant. In theory, a company with 1,000 shareholders and 1,000,000 votes could make a decision with 10 members turning up with a total of 500 votes. In such a situation, a motion would be passed if 251 votes were cast in favour of the motion, rather than 500,001 eligible votes. An ordinary resolution requires a simple majority, which means more than 50% of the votes cast. A special resolution, such as to change the corporate constitution, requires a majority of at least 75% of the votes cast. The quorum for a members’ meeting is only two, which is also a replaceable rule (s 249T). Voting can occur in one of two ways. The most common method is by a show of hands, with one vote allocated per member, irrespective of the member’s shareholding. The second method is called a poll, which is an actual count of all votes cast. The poll is becoming more popular for public companies, due to the inaccuracy of a show of hands and the ASX requirement to record the number of proxy votes. Each member has the right to appoint a proxy under s 249X. This right is mandatory for public companies, but is a replaceable rule for proprietary companies. Where a company owns shares they may appoint either a proxy or a ‘corporate representative’ under s 250D. A corporate representative has all of the same powers as a natural member. All meetings must have minutes as a record and public companies must file special resolutions with ASIC within 14 days of the meeting. The minutes of a general meeting must be entered into the minute book within one month, and can be signed by the chairman at the next meeting (s 251A).

5.5

Majority rule in Foss v Harbottle

Foss v Harbottle (1843) is the leading case on majority rule and minority protection. The case provides two basic principles of corporate law. 76

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The first principle is that the majority of members make decisions that bind minority shareholders. The second principle is that the company is the ‘proper plaintiff’ in civil actions. If a director is in breach of their duties, then the company should bring the legal action, and not the shareholder. The problem with a strict interpretation of these principles is that the board of directors, with responsibility for bringing litigation on behalf of the company, may not wish to sue one of their own directors. This would naturally cause frustration to a minority shareholder who honestly believes a director to be in breach of their common law, equitable or statutory duties. Even in Foss v Harbottle it was recognised that, under exceptional circumstances, a minority shareholder should be allowed to bring a case in lieu of the company. Clearly, the majority of members, especially where they are also the company officers, could take an unfair advantage over the minority shareholders, and thus some degree of protection is necessary. As with any rule of law, there are always a number of exceptions. The rule in Foss v Harbottle has a number of statutory and common law exceptions. These have developed over time, but in March 2000, were rewritten with the introduction of a statutory derivative action in Australia. The courts have generally been sympathetic to minority shareholders, but clearly believe in majority rule. In providing the necessary minority shareholder protection, the courts have had to apply their inherent equitable jurisdiction in order to make the law work as it was intended. Further, Parliament has found it necessary to add further minority protection provisions (or what may be described as exceptions to the basic rule). There are some legal hurdles that a minority shareholder must jump in order to be able to bring litigation instead of the company. The law requires a person who brings a civil case to have locus standi (legal standing). As a corporation is a separate legal entity, it is deemed to have the appropriate locus standi to bring the case. However, if a member wishes to bring a case on behalf of the company, the member must obtain from the court the necessary legal standing. There are three ways this may occur: • derivative actions (bringing the case on behalf of the company, where the legal rights are derived directly from the company); • personal claims (where a member has suffered a greater loss than any other member); or • Federal court class (representative) actions (where a group of minority shareholders bring a collective action).

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It is possible to bring all three of these actions in a single litigation, as occurred in Prudential Assurance Co Ltd v Newman Industries (No 2) (1982). There are clear limitations on common law actions after the introduction of the statutory derivative action, because of the impact of s 236(3). Once the member is granted the locus standi, they still have to prove the breach of duty which they are claiming.

5.6

Statutory minority protection

Parliament has provided in the CA a number of provisions to protect minority shareholders. These statutory rules enable individual members, or a class of shareholder, to bring a legal action either on behalf of the company or in their own right. Some of the provisions are of a broad nature, whereas many relate to very specific circumstances. There are seven major statutory protection provisions. 1 Section 232 (oppressive conduct) Since 1948, the CA (and its predecessors) has included a provision that deals with ‘oppressive conduct’. Part 2F.1 is titled ‘Oppressive conduct of affairs’ and is made up of three key sections, ss 232 to 234. In the last decade, these same provisions were labelled as s 260 and as s 246AA. In many academic writings on this topic, you will see these numbers referred and should be interpreted as ss 232 to 234. The court is provided with a wide discretion if the plaintiff can make out that the majority of members have been oppressive, unfairly prejudicial or discriminatory to the minority under s 232. Section 234 lists who can bring an action including members and persons authorised by ASIC. This solves the problems relating to employees that arose in Elder v Elder & Watson Ltd (1952). Unfortunately, the courts’ attitude towards these provisions has generally required a high level of ‘oppression’ to be proved before a minority shareholder can be successful. The addition of the words ‘unfairly prejudicial or unfairly discriminatory’ to the oppression provision has provided greater flexibility. The case law for these provisions is derived from both the UK and Australia. Section 232 is more often used by small closely held companies where a domestic or family dispute arises, rather than by large public companies. For example, a company secretary refused to enter an employee’s name on to the register of members. The employee was not a member at the time of the proceedings and was denied access to s 232 (Titlow v Intercapital Group (1996)).

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Section 233 provides a long, but non-exhaustive, list of court orders that may be granted and offers a wide discretion to court with the words ‘as it considers appropriate in relation to the company’. An illustration of the court’s use of imagination is the case of Re HR Harmer Ltd (1958), where a governing director had his powers transferred to his sons and amendments were made to the corporate constitution (now s 233(1)(b)). A common remedy for such domestic corporate disputes is for the minority shareholder to be ordered to sell the shares to either the majority member or the actual company (a buy-back). Section 233 court orders to buy the minority’s shares will then require a valuation of the shares. The valuation of the shares can cause its own legal problems, particularly with the acceptance of expert accounting evidence, as in Rankine v Rankine (1995). Sometimes, the court may simply order the whole company to be wound up under either s 233 or s 461(k) (just and equitable winding-up provision). This provision has generated a number of important cases, such as Wayde v NSW Rugby League (1985) and Morgan v 45 Flers Avenue Pty Ltd (1986). 2

Section 461 (winding-up) The ultimate sanction for any disgruntled shareholder is to apply to the court to wind up the whole company (s 462). The grounds for seeking such an order are well defined in s 461(1)(e)–(g), which deal with oppression and unfairly prejudicial conduct. However, wider discretion is derived from s 461(1)(k), which allows a court to order a winding-up where ‘the court is of the opinion that it is just and equitable’ to do so. This has been used on a number of occasions and is illustrated by: Ebrahimi v Westbourne Galleries Ltd (1973) and Re Dalkeith Investments Pty Ltd (1984), as discussed in Chapter 6.

3

Section 1324 (injunctions) Where there is a contravention of the CA, a shareholder can lobby ASIC to bring an action under s 1324 for a statutory injunction, as was attempted in Broken Hill Proprietary Co Ltd v Bell Resources Ltd (1984). A creditor (landlord) who had not had rent paid by a company sued the directors for breach of duty under CA and claimed an injunction to stop them from breaching their duty. The court awarded the creditor compensatory damages instead of the injunction in Allen v Atalay (1993).

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4

Sections 247A to 247D (inspections of books) Any shareholder will naturally wish to maintain their class rights and also have unobstructed access to company records (minutes of meetings and other such documents as the CA allows). Such access can be an effective tool in an ongoing dispute between a shareholder and a company.

5

Sections 13 to 15 of the ASIC Act 2001 ASIC has specific powers of investigation following a request from the company, a liquidator, a shareholder or the minister. It should be noted that before ASIC can begin an investigation it must have reason to suspect that a contravention of the corporations legislation has occurred (Little River Goldfields NL v Moulds (1992)).

6

Section 249D, 249E (meeting requisitions) Shareholders who represent 5% of the voting power can make a written demand for a shareholders’ meeting to be held and are able to put forward various motions (usually to remove the directors). An example of this procedure can be found in Humes Ltd v Unity APA Ltd (1987). In practice, these types of actions are very rarely successful because of the power of proxies lodged (usually with the directors) in advance of the meeting. The NRMA has been subject to many of these actions, at a great cost (reportedly $1 million per meeting), but with little change in management decision-making on any of the issues raised.

7

Section 236 (statutory derivative actions) The CA provides a number of specific provisions that attempt to protect minority shareholders. In 2000, these were expanded to include the statutory derivative action. Officially, this is known as ‘Proceedings on behalf of a company by members and others’, and is found in Part 2F.1A. Australia has followed Canada and New Zealand in introducing such a type of action. Parliament has prevented the overlap with the common law derivative action (known as the fraud on the minority) by abolishing the general law to bring proceedings on behalf of the company, by s 236(3). Section 237 facilitates an application for leave from the court to launch such proceedings, which may be made by a member, former member or company officer. The legal action must be brought in the company’s name, rather than the member’s name. Permission to bring an action or to intervene in existing proceedings should be granted by the court if satisfied that:

80

SHAREHOLDERS’ PROTECTION

• the company will probably not bring the action; • the applicant acts in good faith; • it is in the best interests of the company; • there is a serious question to be tried (prima facie case); and • at least 14 days before the application, written notice was given to the company of the intention to apply for a statutory derivative action (or the court may waive the need for notice to be given). Proceedings under s 236 are relatively few in number, as statutory derivative actions were only introduced on 13 March 2000. One such case was Talisman Technologies Inc v Queensland Electronic Switching Pty Ltd (2001), which discussed the need for the application to be brought in good faith and in the best interests of the company. It was held that the applicants did not meet these two conditions, and therefore the Supreme Court of Queensland did not grant leave. The case involved a joint venture enterprise, of which one of the parties brought the action in their own interests. The court may appoint an independent investigator to report on the affairs of the company with respect to the facts or circumstances giving rise to the proceedings and the likely costs to be incurred. Section 240 requires the company to seek permission from the court to settle or discontinue the proceedings. This provision is to prevent a minority shareholder from ‘greenmailing’ the company and its officers. In the event that all of the members ratify the breach that is the basis of the legal action, the minority shareholder bringing the statutory derivative action is not prohibited from continuing the s 236 procedure. However, under s 239, the court would take this ratification or approval by the members into account in making its orders. The court has a wide power under s 242 to make orders in respect of costs, which are crucial in these cases. In Keyrate Pty Ltd v Hamarc Pty Ltd (2001), the Supreme Court of NSW reaffirmed the need for the action to be brought in the company’s name, and granted leave for the statutory derivative action to be brought so as to avoid multiplicity of legal actions. Although parliament has provided at least seven exceptions to the rule in Foss v Harbottle, the reality is that the courts retain a wide discretion to enforce the minority protection provisions. A minority shareholder will usually rely upon both common law (see 5.7 below) and statutory provisions to bring litigation. 81

ESSENTIAL CORPORATE LAW

5.7

Common law minority protection

The need for equitable relief from the rule in Foss v Harbottle (1843) was recognised by the bench in that landmark case. Over time there have developed five broad common law exceptions to the rule in Foss v Harbottle, which have become known as minority protection. It should be remembered that the commencement of the statutory derivative action, under s 236, has removed the right to apply the general law. The scope of this statutory interference will become apparent during the next decade, as the opportunities increase for judicial interpretation. 1

Fraud on the minority In Foss v Harbottle (1843), the court recognised the potential for the majority of members to be manifestly unfair to the minority shareholders. However, it was not until 1916 that the Privy Council had an opportunity to fully explore the concept of fraud on the minority. In Cook v Deeks (1916), a Canadian construction company transferred all of its business to another company, whose shareholders were identical except for Mr Cook. Their Lordships laid down three elements for a minority shareholder to successfully bring a derivative action at common law. These are: • the property belongs to the company; • the benefit passes to those in control; and • there is a degree of fraud (an abuse of power). Although there have been many cases that have developed the meaning of these conditions, the introduction of the statutory derivative action (in s 236) has seen them slide into insignificance.

2

Special rights denied Where the shareholder has a special right, this cannot be denied; for example, where there exists the ability to prevent a special resolution being passed, due to a minority shareholder holding more than 25%, as in Clemens v Clemens Bros Ltd (1976). The Court would not allow new shares to be issued which would have resulted in the dilution of the minority shareholders’ voting power to below 25% and, therefore, be unable to prevent a special resolution. This principle was followed by the HCA in Gambotto v WCP Ltd (1995).

3

Illegal or ultra vires Any activity of a company that is against the law could be reported by any shareholder (or in fact any member of the public) to the

82

SHAREHOLDERS’ PROTECTION

regulators. Illegal activity, for example, could include a director engaging in insider trading, objection to which may be voiced to the authorities by any member. This can be contrasted with ultra vires activity, best defined as acting beyond the capacity of the company. As companies, under s 124, have the capacity of an individual, they are entitled to enter into any lawful business activity. If, however, the company has a constitution which either limits its powers/capacity or specifies its objects, then s 125 states that, in acting outside these limits, a company does not contravene the law, but the officers may be liable for breach of duty. A member may be able to obtain an injunction under s 1324 to prevent a company from acting ultra vires. 4

Special procedures If the CA or a company’s corporate constitution requires a special procedure to be followed, then those procedures must be followed, as stated in Baillie v Oriental Telephone & Electric Co (1915). However, if there is a mere procedural irregularity, which can be easily corrected without any substantial injustice to the member applicant, then the court may validate the issue by s 1322. For example, if the court was to order another meeting or a new vote at a later date and it was unlikely that the outcome would be any different, it would be held that there was no substantial injustice.

5

Personal rights The corporate constitution, the CA and the class rights of shares are all legally enforceable and cannot be denied even by a majority of shareholders (s 140(1)). The right to vote, for example, was illustrated in the case of Pender v Lushington (1877). Another interesting area is the ‘pre-emption rights’, where existing shareholders have the right to be offered new shares in a company first or given the chance to buy the shares at a fair price before they are sold to outsiders.

The concept of shareholder protection has been challenged during the debates on corporate governance. Within Australia and other common law countries, such as the UK and USA, there is a balance between a growing number of individual shareholders and the massive wealth of institutional investors. The reality is that the cost of litigation is too great for an individual shareholder to bear, thus placing the onus squarely on the shoulders of the regulators and the institutional investors.

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ESSENTIAL CORPORATE LAW

5.8

References

This chapter is covered in more depth in the following chapters of these leading Australian textbooks: Baxt, R, Fletcher, K et al, Afterman & Baxt’s Cases and Materials on Corporations and Associations, 1999, Sydney: Butterworths, Chapters 8, 10, 12 Ford, HAJ, Austin, RP et al, Ford’s Principles of Corporations Law, 2001, Sydney: Butterworths, Chapters 7, 11 Hanrahan, P, Ramsay, I et al, Commercial Applications of Company Law, 2001, Sydney: CCH, Chapters 7–9, 15, 16 Lipton, P and Herzberg, A, Understanding Company Law, 2001, Sydney: Lawbook Co, Chapters 14, 17 Redmond, P, Companies and Securities Law – Commentary and Materials, 2000, Sydney: Lawbook Co, Chapters 6, 8 Tomasic, R, Jackson, J et al, Corporations Law – Principles, Policy and Process, 2002, Sydney: Butterworths, Chapters 6, 8

84

6 Companies in Financial Trouble You should be familiar with the following areas: • The meaning of ‘external administration’ • The differences between schemes of arrangements and receivership • The application of the voluntary administration system • The differences between a winding-up and a liquidation • The duties associated with liquidators • The impact of insolvent trading on directors and companies

6.1

Introduction

Under the Corporations Act 2001, a company comes into existence when it registers with ASIC and a certificate of registration is issued. In the same way, after a company ‘dies’, ASIC will de-register the company and this process is known as ‘external administration’. This area of law is complex and is undertaken by specialist lawyers and accountants called insolvency practitioners. Such professionals have to be specifically registered with ASIC, in the same way that auditors must be registered. In 1988, the Australian Law Reform Commission (ALRC) reviewed this area of law and produced the Harmer Report. Many of the recommendations made by the ALRC were incorporated into the legislation by the Corporate Law Reform Act 1992 and became effective from 23 June 1993. The law relating to external administration is contained concurrently within Chapter 5 of the CA and the multitude of case law that has developed around these matters. In fact, two-thirds of all corporate law litigation (approximately 1,750 cases) in the last decade have involved some aspect of external administration. There are four major types of external administration that need to be studied:

85

ESSENTIAL CORPORATE LAW

• • • •

schemes of arrangement; receivership; voluntary administration; and winding-up/liquidations.

6.2

Schemes of arrangement and receivership

What are schemes of arrangement and receiverships? With changes in economic circumstances such as a recession, many companies have to change their structures, amalgamate or pass control to creditors, rather than the investing shareholders. The board of directors may decide to engage in schemes of arrangement in order to facilitate complex changes to the corporate structure. Such schemes tend to be both expensive and time consuming. Receivership, on the other hand, comes into operation at the insistence of a secured creditor, rather than at the wish of the directors. Both systems have in common the concept that an external person takes control of the management of either the whole company or a particular asset of the company. After a period of time, the control may pass back to the management and directors of the company, or a move towards liquidation may occur if there is insolvency. Arrangements and reconstructions A scheme of arrangement is a process whereby a number of difficult problems can be resolved at one time. It is an alternative to either a voluntary administration or liquidation of the company, and is carefully controlled by ss 410 to 415 (Part 5.1 of the CA). It can be used for two distinct purposes. First, as a special provision with creditors to enter a compromise agreement that is binding on all parties. Secondly, a scheme may be used as part of a financial reconstruction of the company. Schemes may be put forward as either creditors’ or members’ schemes, depending upon the solvency of the company and the proposed outcomes. Under a creditors’ scheme of arrangement, a creditor may be given the opportunity to accept a proposed scheme of arrangement and compromise their existing claims, rather than wait for a liquidator to wind up the whole entity. For example, a creditor may be more willing to accept a $750,000 payment immediately, rather than have to wait for an unknown proportion of a million dollar loan to be repaid at the direction of a liquidator at some uncertain point in the future. 86

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The scheme of arrangement that is to be used for a reconstruction by members may involve a variation of the company’s share capital, such as conversion of debt and preference shares into ordinary shares. A members’ scheme may also be used for the transfer of one entity’s assets for the issue of new shares in another entity. This is particularly beneficial to amalgamate a group of companies into a single entity. ASIC will examine a proposed scheme prior to the application that must be made to the court. The court must order a creditors’ meeting for the scheme to be fully explained. Furthermore, the scheme must be approved by 75% of the parties entitled to vote. Once approved by the members and creditors, the scheme must still be put forward to the court for approval. The scheme of arrangement, upon approval by the court, binds all the creditors or members. It is this fact which makes it of use to companies with debt problems, as it will bind all the creditors and members to a compromise or an arrangement. Schemes of arrangement are relatively slow and costly to implement. There is a lot of detailed documentation that must be provided and the scheme is always subject to court approval under s 411. After the failed attempt to de-mutualise the NRMA in 1995, both the courts and many commentators stated that the NRMA should have used the scheme of arrangement system. In light of the costly nature of schemes of arrangement, in 1993 the government introduced an alternative to the creditors’ scheme of arrangement, in the form of voluntary administration. Schemes of arrangement are now rarely being used for companies in an insolvent state. An example of a case on schemes and their use is Re Theatre Freeholds Ltd (1996). Receivership A receiver may be appointed by a court or secured creditor to take control of specific corporate property. Receivership, which includes both the appointment of a receiver for a specific asset and a ‘receiver and manager’ who has control over all assets, is governed by ss 416 to 434C (known as Part 5.2 of the CA). The company entering receivership must be served with notice of the appointment of a receiver and ASIC must be notified by lodging an ASIC Form 504. The receivership is also published in the Commonwealth Gazette. Furthermore, the directors and company secretary must make a report on the affairs of the company to the receivers within 14 days of the notice of receivership being served.

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ESSENTIAL CORPORATE LAW

There is a difference between the appointment of a receiver and the appointment of a receiver and manager. The receiver is solely responsible to the creditor that has appointed them to realise the asset subject to the charge; whereas the receiver and manager (more often appointed under a floating charge and covering all the assets) must be aware of all creditors and be extremely careful not to damage any of the assets that are not covered by the security. The appointment of a receiver may be made either by the court, on an application from creditors, or privately, where the creditor directly appoints a receiver under the security document. This document is the contract that makes up the fixed or floating registered charge. Receivers have a number of powers and duties that are outlined in s 420. These include the power to: • enter into possession and take control of property; • lease, let, hire or dispose of property; • borrow money on security of property; • convert property to money; • execute any document, bring or defend any legal proceedings in the name of the company; and • make an application for the winding-up of the company. Additionally, under s 422, the receiver has an obligation to report to ASIC any misconduct by the company in receivership. Moreover, at common law, the receiver has a duty to act in good faith (Downsview Nominees Ltd v First City Corp Ltd (1993)). The deed of appointment of a receiver is crucial and it contains what action a receiver may and may not take while in possession of the relevant assets. A practical example of the process of receivership was the 1995 appointment by the Commonwealth Bank of a receiver under a floating charge for Osborne Computers. The receiver, working with the creditors, was later able to convert the receivership into a voluntary administration due to the company’s insolvency. The largest creditor to the computer manufacturer, Gateway Computers of the USA, paid out all the other creditors and traded the company back to profitability. By contrast, the receiver and manager replaces the company’s existing management and owes a duty to inform ASIC if the previous management is suspected of any form of misconduct. If a receiver is unsure what decisions to make, they may apply to the court for specific directions under s 424.

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6.3

IN

FINANCIAL TROUBLE

Voluntary administration

The introduction of Part 5.3A (ss 435A to 451D) on 23 June 1993 established a new procedure for companies in financial difficulty. The law enables the appointment of an administrator (who is a registered liquidator with ASIC) to determine whether a deed of company arrangement can be executed or whether the company should be wound up. Voluntary administration (known as ‘VA’) replaced the previous concept of an ‘official manager’, which had not been very successful. Appointment of an administrator An administrator may either be appointed by: the directors (s 436A) who think that the company is insolvent, a company’s liquidator or provisional liquidator (s 436B), or by a creditor (s 436C) who has a charge over the whole company. The administrator is deemed to be the company’s agent and thus has a wide range of powers in order to carry on the company’s business. Examples of administration include the Brashs Group in 1993, Osborne Computers in 1995 (later becoming Gateway) and Ansett Airlines in 2001. Effect of appointment In order to give the administrator time to devise a plan to restructure the company in difficulty, s 440A grants a moratorium period for the enforcement of debts. That is, during this 35 day period, the company cannot commence a voluntary winding-up and the court will not accept a petition to liquidate if it is not in the creditors’ interests. The intention of the VA is to enable an insolvent company to maximise its chances of trading out of financial difficulties and to maintain itself as a going concern as stated in s 435A. The Federal Court, in Dallinger v Halcha Holdings Pty Ltd (1996), held that there does not have to be some prospect of saving the company from liquidation when the administration commences. A secured creditor will not be able to enforce a charge or take possession of assets without the court’s leave or the written consent of the administrator. The exceptions to the moratorium are a creditor who has a charge over a substantial amount of the company’s property or a secured creditor who commenced enforcement prior to the appointment of the administrator. 89

ESSENTIAL CORPORATE LAW

Conclusion of administration Within 35 days of the administration commencing, the administrator must hold a company creditors’ meeting to pass a resolution (pursuant to s 439C) to the effect that: • the company executes a deed of arrangement; or • a winding-up commences. If a deed of company arrangement is to be executed, then all the company creditors, officers, members and the administrator are bound by it (s 444D). A secured creditor is only bound by the terms of the deed to the extent that the court orders or the creditor agrees. If the creditors decide to wind up the company after the administration, a number of procedural steps are deemed to have already occurred.

6.4

Voluntary winding-up

‘Winding-up’ or ‘liquidation’ are terms used to describe a process or procedure. The terms are synonymous, but as a matter of convenience, ‘winding-up’ is a voluntary process (that is, at the choice of the company) and ‘liquidation’ is a compulsory process (that is, as a result of a court order). Approximately 30,000 companies are wound up and/or deregistered each year by ASIC. A voluntary winding-up may be classified as either: • a members’ winding-up; or • a creditors’ winding-up The difference between the two types of winding-up is whether or not the directors are able to make a declaration of solvency. A members’ voluntary winding-up is commenced by a special resolution passed by the company under s 491. The members at a general meeting appoint the liquidator under s 495 if the company is solvent. The necessary declaration of solvency is made after an inquiry into the affairs of the company, and the directors form the opinion that all debts will be paid in full within 12 months of the resolution. Section 494 imposes severe penalties on directors who make a declaration of solvency without reasonable grounds. The deemed time of commencing a winding-up is the date of the company resolution or when the petition is filed with the court (s 465). A provisional liquidator may be appointed until the formal court order commences the full liquidation.

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FINANCIAL TROUBLE

Liquidators appointed by the court are officers of the court and are bound by a number of special duties. ASIC must be informed of the appointment of a liquidator and all company documents must show ‘in liquidation’ after the company name (s 541). Liquidators also have a number of reporting duties to the members, creditors and ASIC. There will be a creditors’ winding-up if the directors cannot make a declaration of solvency or if during the members’ winding-up the liquidator discovers that the company cannot in fact pay all the debts. In such a situation, the liquidator must immediately call a creditors’ meeting. The creditors get to vote on the basis of one vote per dollar of debt as to whether to change the liquidator from the person appointed by the members or to continue with the member-appointed liquidator (s 496).

6.5

Compulsory liquidation

The court-ordered compulsory liquidation requires a petitioner (person who applies to the court) to specify a ground (reason) for placing the company into liquidation. The persons who can apply to the court for a compulsory liquidation order are listed in s 462 as being: • the company; • a creditor; • a contributory (name of a member on a winding-up); • a liquidator (such as a provisional liquidator); • ASIC; or • APRA (Australian Prudential Regulatory Authority). The grounds for applying to the court for such an order are stated in s 461 as follows: • company passes a special resolution; • company did not commence business within one year of registration; • company has no members; • directors have acted in their own interests or oppressively, unfairly prejudicially or unfairly discriminatory to the members as a whole; • ASIC has prepared a report that the company should be wound up;

91

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• APRA has prepared a report that the company should be wound up; or • the court is of the opinion that it is just and equitable that the company should be wound up. The most common ground for petitioning to wind up a company is insolvency and this is laid down in its own section, s 459C. The meaning of insolvency has been quite controversial, but generally is taken to mean that the corporation cannot pay its debts as they fall due. However, this does not automatically mean that a company will be wound up. The CA provides that once a statutory demand has been made for the debt, if it is not paid, then a rebuttable presumption of insolvency is created, as stated in s 459A. The form of the statutory demand for an outstanding debt has been altered from the previous law and its contents are now specified in s 459E. There is a prescribed form (Form 509H) that should be used and is available from the ASIC website (www.asic.gov.au). The minimum amount for an outstanding debt to give rise to a statutory demand is $2,000. Further reforms of the laws governing insolvency have meant that the ability to dispute the debt and have the demand set aside for technical errors has been limited. A company still has 21 days to pay the debt or to apply to the court to have the demand set aside if the substantiated amount is less than $2,000, or if, by allowing the demand to continue, there would be a ‘substantial injustice’. There have been many cases in this area, the most significant being David Grant & Co Pty Ltd v Westpac Banking Corp (1995) in the High Court of Australia. Under s 461(1)(k), the court retains a residual discretion to order the winding-up of any company on the ground that it is ‘just and equitable’ to do so. Take, for example, the case of Ebrahimi v Westbourne Galleries Ltd (1973). In this case, the company had two directors, who were the only shareholders, and had been in business for 25 years. One of the directors’ sons joined the company and was given a small shareholding. At the next general meeting of the company, the father and son voted to remove the other director. The House of Lords held on equitable grounds that the proper course was to wind up the company, even though it was extremely solvent. This principle was followed in Australia in Re Dalkeith Investments Pty Ltd (1984), where there was an atmosphere of animosity following the marital separation of the chairman (Mr Smith) from his directorwife. S was late for a general meeting, at which various resolutions

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were passed in his absence, which had the effect of diluting his shareholding or would force him to invest more money in a company whose shareholders were hostile to his interests. The court decided not to wind up the company, but the unfairly prejudicial conduct against Smith entitled him to have his shares purchased at an appropriate value. The majority of compulsory liquidations will arise under the insolvency petition. The next most common reason is ASIC applying deregistration procedures for companies. The most controversial winding-up appears to be under the court’s residual ‘just and equitable’ power. There is an overlap between the oppressive or unfairly prejudicial ground in s 461 and the same provisions found in s 233.

6.6

Insolvent trading

A number of other changes to the liquidation provisions have occurred, which clearly distinguish between a solvent and insolvent winding-up. Liquidators have greater powers to avoid certain types of transactions. These powers are contained in s 588FE and allow for certain transactions to be declared voidable if: • the insolvent transaction occurred within the last six months of the winding-up commencing; • the insolvent transaction was an ‘uncommercial transaction’ (that is, a reasonable person in the company’s circumstances would not have entered into such a transaction) occurring within the last two years of the winding-up commencing; • the insolvent transaction was with a related entity to the company, within the last four years; • the insolvent transaction was entered into so as to interfere with the rights of creditors within the last 10 years; or • it was an unfair loan (extortionate interest or charges) to the company prior to the winding-up. Insolvent transactions are defined as unfair preferences or uncommercial transactions that cause the company to become insolvent or which occur while the company is insolvent. ASIC investigates ‘phoenix’ companies where directors leave one insolvent company and then operate another business entity. ASIC receives over 7,000 complaints each year, but can only investigate

93

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about 120 serious cases. Many people were disqualified by ASIC from acting as a director for the next five years because of their involvement in an insolvent company. Insolvent trading The laws relating to insolvent trading were briefly discussed in Chapter 3 (Officers’ Duties) because of the impact they have on directors. The CA imposes a duty on directors to prevent insolvent trading. Following the Harmer Report, the old s 592 was replaced by a Part 5.7B and, in particular, the key sections of 588G and 588V. Under s 588G, a director will be personally liable for the debts incurred by the company if there are reasonable grounds for ‘suspecting’ that the company is insolvent while continuing to trade (for example, during 2001, One.Tel Ltd and HIH Insurance Ltd). This is an objective test and the judge will decide whether a reasonable person in a like position would continue to trade. Holding companies can now be held liable for the debts of their subsidiaries by s 588V if they are engaged in insolvent trading. There is a defence to insolvent trading in s 588H. It states that directors need to have had reasonable grounds to expect that the company was solvent at the time or that a competent and reliable subordinate was monitoring the position. A leading case is Commonwealth Bank v Eise & Friedrich (1991), where the honorary chairman was held liable for $97 million for insolvent trading, even though there was no question of dishonesty. One of the most difficult areas for the liquidator of an insolvent company is the priority order of payments to creditors. As long ago as 1897, in Salomon v Salomon & Co Ltd, the question as to who should be paid was of crucial importance. Section 556 states that the priority ranking of payments between secured, preferred unsecured, and unsecured creditors is a set order. Within each class of debt, all creditors rank equally due to s 555. Thus, if there are insufficient assets for a particular class, each creditor must be paid proportionally, which is expressed as ‘cents in the dollar’ of debt. The government has passed special provisions (Part 5.8A) to deal with employee rights, especially where the company and its officers have attempted to avoid paying their employees’ entitlements (s 596AA).

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6.7

IN

FINANCIAL TROUBLE

References

This chapter is covered in more depth in the following chapters of these leading Australian textbooks: Baxt, R, Fletcher, K et al, Afterman & Baxt’s Cases and Materials on Corporations and Associations, 1999, Sydney: Butterworths, Chapters 16–17 Ford, HAJ, Austin, RP et al, Ford’s Principles of Corporations Law, 2001, Sydney: Butterworths, Chapters 25–27 Hanrahan, P, Ramsay, I et al, Commercial Applications of Company Law, 2001, Sydney: CCH, Chapters 23–24 Lipton, P and Herzberg, A, Understanding Company Law, 2001, Sydney: Lawbook Co, Chapters 22–25 Tomasic, R, Jackson, J et al, Corporations Law – Principles, Policy and Process, 2002, Sydney: Butterworths, Chapters 13–15

95

Index Accounting standards Administration Agents, authority of Articles of association ASCOT database Auditors Australian Accounting Standards Board Australian Business Number Australian Company Number Australian Securities and Investments Board Books, access to Borrowing powers Business Activity Statements Business vehicles, structure of Capital debt fundraising maintenance of share capital reduction in share Care and diligence Charges Chartered companies CHESS Civil penalty orders Classification of Australian companies Clearing

10 85, 89–90 28–29 20, 21 9 9 10 2, 3, 16 16

9–11 75, 80 57 3 1–2

57–62 62–65 54–58 54–55 51–57 42 59–62, 73 4 50 47 13 50

Companies and Securities Advisory Committee 9 Companies Auditors & Liquidators Disciplinary Board 9 Company secretaries 34–35, 44 Compulsory liquidation 91–93 Confidentiality 40, 45 Conflicts of interest 41 Constitution of corporations 19–30 alteration 24–25 contracts, statutory constitutional 25–26 definition 21–22 memorandum and articles, conversion of 20 minority shareholders 24–25 proper purpose test 25 replaceable rules 21 Contracts company secretaries 34 constitutions 25–26 freedom to contract 22–23 liability 26, 28–29 members’ rights 72 pre-registration 17 statutory constitutional 25–26 Corporate Affairs Commission 4 Corporate bodies, meaning of 4 Corporate Law Economic Reform Program 5, 7–9, 32 Corporate veil 4, 14–15, 17–18

97

ESSENTIAL CORPORATE LAW

Corporations Act 2001 4–9 Corporations and Securities Panel 9 Criminal offences 19–20, 26–28, 41, 43 company secretaries 34 insider dealing 44–45 insolvent trading 44 misleading statements, liability for 65–66 remedies 27, 46–47 Damages Debentures Decision-making Derivative actions Directors

46 57–61 69–72 80 35–40, 43–44, 70–72, 77 Disclosure documents 63–66 Documentation. See also Registration and registers 16, 63–66 Duty of care, skill and diligence 38–40 Employees Equitable duties Equity capital Executives External administration Federal government Fees Fiduciary duties Fines Fixed charges Floating charges Foss v Harbottle rule Fraud on the minority Fundraising

98

33 38–41 51–58 31, 33 85 1, 4–5, 10–11 17 40–42 27, 46 59, 61 59–61 69, 76–78, 81–82 82 62–65

Good faith Goods and services tax Guarantee companies Illegality Indoor management rule Information, misuse of Injunctions Insider trading Insolvency floating charges, crystallisation of insolvent trading petitions phoenix companies practitioners priorities statutory demands unfair preferences Law reports Liabilities of corporations Limited liability Liquidation Liquidators Listed companies Locus standi Management Meetings Members Memorandum of association Mining companies Minority shareholders books, inspection of

41 2 12 82–83 29–30 42–43 79 44–45

60–61 43–44, 93–94 92–93 93–94 85 61–62, 94 92 93 10 19–30 4, 12 90–93 9 12, 21, 50, 51 77–78 23, 32 70–72, 75–76, 80, 87 19, 49–52, 72–75 20, 21–22 12

80

INDEX

common law constitution, alteration of derivative actions directors Foss v Harbottle rule

82–83 24–25 80–81 77 69, 76–78, 81–82

fraud on the minority illegality injunctions investigations meetings, requisitioning oppressive conduct personal rights protection of sale of shares, order for special procedures special rights, denial of statutory ultra vires winding-up Minutes Misleading statements, liability for Moratorium

82 82–83 79 80–81 80 78–79 83 24–25 79 83 82 78–84 82–83 79 76 65–66 89

Names, choice of National Companies and Securities Commission Negligence No liability companies Objects clause Officers company secretaries definition directors board of duties owed by

16 4 28, 38 12, 21

20, 22–23 31–33, 36–43 34–35, 44 31–33 35–40, 43–44 70–72, 77 37–43

duty of care, skill and diligence employees equitable duties executive remedies and sanctions statutory duties Partnerships Phoenix companies Precedent Priorities Professional practices Promoters Proper purpose test Proprietary companies Prospectuses Proxies Public companies Receivership Reconstructions Reform Registration and registers alteration ASCOT database charges inspection members promoters Remedies Resolutions Restructuring Sanctions Schemes of arrangements

38–40 33 38–41 33 38, 46–47 41–43 3, 12 93–94 10–11 61–62, 94 3, 12 15 25, 41 11–14 62–66 23, 24, 75–76 11–14, 23 86–88 86–87 5, 7–9, 32, 85 15–18 74 9 60–62, 73 74 73–75 15 38, 46–47, 79 71–72, 75 89 38, 46–47 86–87

99

ESSENTIAL CORPORATE LAW

Secured creditors Security Selection of business structure Shareholders See also Minority shareholders books, access to decision-making directors, board of Foss v Harbottle rule liability limited liability meetings members organ theory protection of registration resolutions types of companies and Shares See also Shareholders alteration of rights buy-backs capital certificates CHESS deferred financial assistance to purchase own fundraising hybrid issues maintenance of share capital offers

100

61 59–61 1–2

4, 32 75, 80 69–72

ordinary preference redemption types of Small and mediumsized enterprises Sole traders, legal requirements of South Sea Bubble States

70–72 69, 76–78, 81–82 4, 12, 54 4, 12 70–72, 75–76, 80 50–52, 72–75 69–72 24–25, 69–84 73–75 71–72, 75 12

53 54–56 51–58 50 50 53 56–57 62–65 53–54 51 54–57 62–63

Statutory contracts Statutory corporations Statutory demands Strict liability Structure of Australian corporate law Structure of companies Takeovers Panel Taxation Third parties, protection of Tortious liability Types of companies Ultra vires Unfair preferences Unlimited companies Veil of incorporation Vicarious liability Voluntary administration Voluntary winding-up Voting Winding-up

52 52–53, 55 55 52–54 13–14, 63 2–3, 21 4 1, 4–5, 10–11 25–26 4 92 28 4–7 1–2 9 2, 3 29–30 26, 28 11–14 22, 82–83 93 12

4, 14–15, 17–18 26, 28 89–90 90–91 23, 24, 75–76 79, 90–91