SEMESTER 2/2012

REGISTRATION AND ITS EFFECT – CHAP 1&2

CHARACTERISTICS OF A COMPANY
I. EFFECT OF REGISTRATION:
Companies are artificial entities recognized by the law as legal persons with rights and liabilities
separate from their shareholders or members.

S.119: A company comes into existence as a body corporate at the beginning of the day on which it is
registered with the name specified in its certificate of registration.

S.124(1): Power of a company as a body corporate

 Issue shares and debentures;
 Grant options over unissued shares;
 Distribute the company property among its members;
 Grant a floating charge or give security over uncalled capital; and
 Do anything it is lawfully authorized to do.

 A company may sue or be sued under its own name.

 Shareholders do not own the company’s property.
 A company continues to exist until it is deregistered by ASIC.
Text page 3-4, 27-28

II. LIMITED LIABILITY

 Limited liability means that shareholders are not personlally liable for their company’s debts. (p. 3,
28)
 The liability of shareholders is limited to the amount unpaid on the issue price of their shares.
 Limited liability transfers the risk of the business failure from the company’s shareholders to its
creditors
 Limited liability achieves various economic goals
o Facilitating enterprise
o Reducing monitoring
o Promoting market efficiency
o Encouraging equity diversity. (p.29)

III. SEPARATE LEGAL ENTITY

1. General rule
Salomon’s case established that a company is a separate legal entity even though a single person
manages and controls it.

RMIT Vietnam Help Desk Team. By An Vu Page 1

 SEMESTER 2/2012

o Fact:
 A one-person company may borrow money from its controller on a secured basis who will rank
ahead of its unsecured creditors on the company's insolvency.
 A company is separate legal entity even if a single person owns all its shares.

2. Application of Salomon’s case (p.29)

Lee v Lee’s Air-Farming Ltd : a one-person company is a separate entity from its controller who
may also be its sole employee (p30)

Macaura v Northern Assurance Co Ltd: Separate legal entity status can also work to the
disadvantage of the shareholder (in this case: timber insurance) (p30)

Walker v Wimborne: Directors of a company is a member of a group cannot act in the best
interests of the group and disregard the interests of that company’s shareholders and creditors.
(p32)

Industrial Equity Ltd v. Blackburn: A subsidiary’s profit could not be regarded as the profit of its
holding company available for payment of the holding company’s dividend.

Pioneer concrete Services Ltd v Yehah Pty Ltd: Holding company cannot be sued for breach of
contract which is between a subsidiary and another entity (without agency relationship p.33)

IV. LIFTING THE VEIL OF INCORPORTATION

a. Exceptions by Statute.
 Directors’ liability for insolvent trading –s588G: Directors may be personally liable for
their company’s debts if they fail to prevent their company incurring debts while insolvent
(p34)
 Uncommercial transactions – s588F: Preventing insolvent company from disposing asset
prior to liquidation through uncommercial transaction resulting in the recipient receiving a
gift or obtaining a bargain of such magnitude that it could not be explained by normal
commercial practice. (p34)
 Company officer charges – s267: an officer who has been granted charge over company’s
property is not entitled to take any step to enforce the charge without first obtaining the
court’s permission within 6 months of its creation –read more p.34)
 Financial assistance: s260D officer is liable for civil penalties if they were involved in their
company’s contravention of the Corporation Act.
 Taxation legislation:
b. Exceptions by Common Law.
 Fraud: company is used as a vehicle for fraud (case Re Darby p35)
 Avoidance of legal obligation
Gilford Motor Co Ltd v Horne: create a company to avoid a contractual obligation ( waiver
clause)
Creasey v Breachwood Motors Ltd: create a company to avoid liability from its creditors.
(p36)

RMIT Vietnam Help Desk Team. By An Vu Page 2

 SEMESTER 2/2012

 Involvement in director’s breach of duty: The courts may lift the corporate veil if a
company knowingly participates in a director’s breach of fiduciary duties.
Green v Bestobell Industries Ltd: the director had breached his fiduciary duties by placing
himself in a position where his duty conflicted with his own interest. Furthermore, the
company knowingly and for its own benefit participated in director’s breach of duty. (p36)
 Attributing mind and will of company P36.

V. LIFTING THE VEIL OF GROUP COMPANIES.

 Holding company’s liability for insolvent trading by subsidiary –s588V -588X: a
holding company may personally liable to the liquidator of its subsidiary if it fails to prevent
the subsidiary incurring debt while insolvent. P37
 Consolidated financial statements: p37
 Taxation consolidation p37
 The benefit for the group as a whole
Case: Equiticorp Finance Ltd v Bank of New Zealand: a bank loan to one company was
repaid after funds were transferred from other companies in the group  there is no breach
of fiduciary duty if the transaction benefits the group as a whole, including the transferring
company.
 Pooling in liquidation: where a corporate group goes into liquidation, the companies
are treated as a single entity so each company is taken to be jointly liable for each debt
payable to other creditors. p38
 Subsidiary as an agent or partner p.39
Agency relationship arises where a parent comp has exercised such a degree of control over
a subsidiary that the subsidiary was held to be an agent of the parent company and its acts
deemed to be the acts of the parent company.
Case Smith, Stone & Knight Ltd v Birmingham Corporation
6 requirements to prove an agency relationship:
 The profits of the subsidiary must be treated as the profits of the holding company
 The persons conducting the business must be appointed by the holding company.
 The holding company must be the head and brain of the trading revenue.
 The holding company must govern the venture and decide what should be done and
what capital should be embarked on it.
 The profits of the business must be made by the holding company’s skill and
direction.
 The holding company must be in effectual and constant control.
 Tort liability: The parent company may be liable to its subsidiaries’ torts.
o A controlling company may owe a duty of care to an employee of its subsidiary
if it has a sufficiently strong degree of control over the activities of the
subsidiary. It most likely arises where the controlling company exercises a high
degree of control over the day-to-day activities of its subsidiary out of which the
tort claim arose.
o Case: Briggs v James Hardie & Co Pty Ltd
 Fact: employee of subsidiary sued the holding company for tort liability
=> the corporate veil is not lifted just because the holding company
exercises complete dominion and control over a subsidiary. (must be
control day-to-day activities)

RMIT Vietnam Help Desk Team. By An Vu Page 3

 SEMESTER 2/2012

VI. COMPANY V PARTNERSHIP V TRUST:

VII. COMPANY REGISTRATION:

Chapter 3: Types of companies

I. Corporation and companies
Definition of corporate: [s57A]
II. Classification according to liability of members
a. Company limited by shares:
- [s9] a company formed on the principle of having the liability of its members limited to the amount,
if any, unpaid on the shares respectively held by them.
- 2 types: fully paid share and partly paid share.
- [s515] shareholder is liable to contribute to the company’s property an amount sufficient to pay the
company debts and liabilities and the costs, charges and expenses of the winding up.
- [s516] Shareholder need not contribute more than the amount, if any, unpaid on the share in respect
of which the shareholder is liable as a member.
- Past shareholders may be liable to contribute to the company’s property on a winding up.
- [s520] past shareholders will not be liable for any debt or liability of the company contracted after
they ceased to be a shareholder.
- [s521] they need not contribute if they were not shareholders within one year of the commencement
of winding up.

RMIT Vietnam Help Desk Team. By An Vu Page 4

 SEMESTER 2/2012

- [s522] If the existing shareholders are unable to satisfy the contributions they are liable to make, past
shareholder will be liable.
- [s148(2)] Word “Limited” or “Ltd” in its name.
b. Company limited by guarantee
- [s9] Company whose members have their liability limited to the amounts that they have undertaken
to contribute to the property of the company in the event of it being would up.
- Does not have share capital.
- [s117(2)(m)] The guaranteed amount must be set out in the company’s application for registration.
- Drawback: It does not raise initial/working capital from its members
- Convenient for clubs, charities, and other non-trading companies.
- Advantages: limited liability to the guaranteed amount.
- [s517] members at the time of commencement of winding up need not contribute more than the
amount they have undertaken.
- Past shareholders (like above)
- [s150] charitable purpose company can omit the word “Limited”.
c. Unlimited company
- [s9] company whose members have no limit placed on their liability to the company.
- Members of unlimited companies are liable in a winding up for the debts of the company without
limit if the company has insufficient assets to meet its debts. (similar to partnership)
- Apply for accountancy and solicitor’s practices.
d. No liability company
- [s162] a public company may be registered as a no liability or convert into one. To be registered,
they must:
. Have a share capital
. State in its constitution that its sole objects are mining purposes, and
. Have no contractual right under its constitution to recover calls made on its share from a
shareholder who fails to pay a call: [s112(2)]
- [s112(3)] a no liability company is prohibited from engaging in activities that are outside its mining
purposes objective.
- [s148(4)] Must have the words “No liability” or “NL”
- [s254M(2)] The acceptance of share does not constitute a contract by the shareholder to pay calls or
contribute to the debts and liabilities of the company.
- [s254Q(1)] A share is forfeited if a call is unpaid 14 days after it became payable.
- If the company is wound up, any surplus must be distributed among the shareholders in proportion to
the number of shares held by them irrespective of the amounts paid up.
III. Proprietary and public companies
a. Definition
- [s112(1)] A proprietary must be either a company limited by shares or an unlimited company that
has a share capital.
- [s113(1)] It must have no more than 50 non-employee shareholders.
- [s113(2)] Joint holders of shares are counted as one person.
- [s113(3)] Proprietary companies must not engage in any activity, such as issuing shares or
debentures, that would require disclosure to investors under Ch 6D of the Corporation Act, except
for an offer of its shares to existing shareholders or employees of the company or of its subsidiary.
- [s113(4)] An act or transaction is not invalid merely because of a contravention of s 113(3)

RMIT Vietnam Help Desk Team. By An Vu Page 5

 SEMESTER 2/2012

- [s165] ASIC may require a company that contravenes s113 to convert into a public company.

b. Comparison:

Proprietary Public
Function Small and medium size Large business which requires many
business => Cheaper to investors to participate in fundraising =>
maintain greater disclosure obligations
Membership - [s114] Must have at least - [s114] Must have at least one member
one member - No maximum.
- [s113] maximum 50
shareholders.
Name Pty Ltd Ltd or Limited
Replaceable rules and [s134] Company internal management may be governed by constitution or
company constitution replaceable rule, or the combination of both.
Some of the provisions are replaceable rules for proprietary companies but
mandatory rules for public companies.
Directors [s201A]Must have at least one [s201A]Must have at least three
director. directors.
At least one director must At least two directors must ordinarily
ordinarily reside in Australia reside in Australia.
Secretary Does not require secretary. If it Must have at least one secretary and at
chooses to have, at least one least one must ordinarily reside in
must be ordinarily reside in Australia. [s204A(2)]
Australia (s204A(1)]
Raising funds [s113(3)]Cannot raise funds by Not prohibited.
offering its share or debentures
to a large number of people.
AGM Does not have to hold unless [s250N] require holding AGM at least
this is required by their once a year unless it has only one
constitution. member.
Auditors Public and large proprietary companies must appoint an independent
auditor to audit their financial report.
Registered office Require to register but do not [s145] Require to register and have to
have to keep it open keep it open to public
[s144] Must also display their name and
the words “registered office”
prominently at their registered office.

IV. Large and small proprietary companies:

- To avoid public companies conducted their businesses through proprietary company subsidiaries that
they controlled, and receive dividends without disclosing its activities to the public, two ways:
 AASB 127: Preparing consolidated financial statements.
 Proprietary companies are classified as either large or small.
i. [s45A] A proprietary company that does not come within a definition of small pty is
regarded as large pty.
ii. [s45A(2)] A pty company is regarded as a “small pty company” for a financial year
if it satisfies at least two of the following three criteria.
 The consolidated operating revenue for the financial year is less than $25
million;

RMIT Vietnam Help Desk Team. By An Vu Page 6

 SEMESTER 2/2012

 The value of the consolidated gross assets at the end of the financial year is
less than $12.5 million.
 The company has fewer than 50 employees at the end of the financial year.
b. Advantage of small proprietary companies:
- The main advantage is that they are subject to fewer requirements in relation to preparation,
lodgment and audit of financial reports.
- A small pty company is not required to prepare annual financial reports or appoint an auditor =>
significant cost saving.
- However, small pty company need to prepare financial reports only if they are directed to do so
by:
o Shareholders holding 5 per cent or more of the voting share: s293; or
o ASIC: s 294
- The auditor of a small pty company is permitted to be employed as an officer of the company.
This is not a case for auditors of public and large pty companies.
V. Conversion from proprietary to public and vice versa.
- ss 162 and 163: passing a special resolution to this effect and lodging and application with
ASIC.
- Change name.
- [s116(1)] a change of type of company does not create a new legal entity, affect the company’s
rights or obligations or any legal proceedings involving the company.

Pay attention: conversion

- Section 162: Changing company type

- (1) A company may change to a company of a different type as set out in the following
table by:
- (a) Passing a special resolution resolving to change its type; and
- (b) Complying with sections 163 and 164.
-
Allowed conversions [operative table]
This type of company may …to this type of company
change…
1 proprietary company limited by unlimited proprietary company
shares unlimited public company
public company limited by
shares

RMIT Vietnam Help Desk Team. By An Vu Page 7

 SEMESTER 2/2012

Allowed conversions [operative table]

This type of company may …to this type of company
change…
2 unlimited proprietary company proprietary company limited by
shares (but only if, within the last
3 years, it was not a limited
company that became an
unlimited company)
public company limited by
shares (but only if, within the last
3 years, it was not a limited
company that became an
unlimited company)
unlimited public company
3 public company limited by shares unlimited public company
unlimited proprietary company
proprietary company limited by
shares
no liability company (see
subsection (2))
4 company limited by guarantee public company limited by
shares
unlimited public company
proprietary company limited by
shares
unlimited proprietary company
5 unlimited public company public company limited by
shares (but only if, within the last
3 years, it was not a limited
company that became an
unlimited company)
proprietary company limited by
shares (but only if, within the last
3 years, it was not a limited
company that became an
unlimited company)
unlimited proprietary company
6 public no liability company public company limited by
shares (but only if all the issued
shares are fully paid up)
proprietary company limited by
shares (but only if all the issued
shares are fully paid up)
- Note 1: A public company seeking to change to a proprietary company must comply with
the requirements for proprietary companies set out in section 113.
- Note 2: Other types of companies that were previously allowed can change type under the
Part 10.1 transitionals.
- (2) A public company limited by shares may only convert to a no liability company if:

RMIT Vietnam Help Desk Team. By An Vu Page 8

 SEMESTER 2/2012

- (a) The company’s constitution states that its sole objects are mining purposes; and
- (b) Under the constitution the company has no contractual right to recover calls made on its
shares from a shareholder who fails to pay them; and
- (c) All the company’s issued shares are fully paid up.
- Note: Section 9 defines mining purposes and minerals.
- (3) The company must lodge a copy of the special resolution with ASIC within 14 days
after it is passed.

- (3A) An offence based on subsection (3) is an offence of strict liability.

- Note: For strict liability, see section 6.1 of the Criminal Code.
- (4) A special resolution to change an unlimited company that has share capital to a
company limited by shares may also provide that a specified portion of its uncalled share capital
may only be called up if the company becomes an externally- administered body corporate.

- Section 163: Applying for change of type

- Lodging application

- (1) To change its type, a company must lodge an application with ASIC.

- Contents of the application

- (2) The application must be accompanied by the following:

- (a) A copy of:
- (i) the special resolution that resolves to change the type of the company, specifies the new type
and the company’s new name (if a change of name is necessary); and
- (ii) any other special resolution passed in connection with the change of type;
- (b) For a company limited by guarantee changing to a company limited by shares:
- (i) a statement signed by the directors of the company that in their opinion the company’s
creditors are not likely to be materially prejudiced by the change of type and that sets out their
reasons for that opinion; and
- (ii) any special resolution dealing with an issue of shares according to section 167;
- (c) For a company limited by shares or a company limited by guarantee changing to an
unlimited company:
- (i) an assent to the change of type in the prescribed form signed by all the members of the
company; and
- (ii) a statement signed by a director or a company secretary of the company that all the members
of the company have signed the assent;
- (d) For a proprietary company changing to a public company:
- (i) a consolidated copy of the company’s constitution (if any) as at the date of lodgment; and
- (ii) a copy of each document (including an agreement or consent) or resolution that is necessary
to ascertain the rights attached to issued or unissued shares of the company.
- Note 1: The company must lodge a copy of any special resolution modifying its constitution
passed after the application is lodged (see subsection 136(5)).
- Note 2: The company must lodge information relating to any change of rights attached to its
shares, or any division or conversion of its shares into new classes, occurring after the
application is lodged (see section 246F).

RMIT Vietnam Help Desk Team. By An Vu Page 9

 SEMESTER 2/2012

- Company limited by guarantee to company limited by shares

- (3) If shares will be issued to persons under paragraph 166(2)(c) on the change of type
from a company limited by guarantee to a company limited by shares, the application must state:
- (a) that the company has prepared a list that sets out the following details about each person to
whom the shares will be issued:
- (i) name and address;
- (ii) the number and class of shares the person will take up;
- (iii) the amount (if any) the person will pay for the shares;
- (iv) the amount (if any) that will be unpaid on the shares; and
- (b) the number and class of shares those persons will take up; and
- (c) the amount (if any) those persons will pay for the shares; and
- (ca)the amount (if any) that will be unpaid on the shares; and
- (d) if the shares will be issued for non-cash consideration—the prescribed particulars about the
issue of the shares, unless the shares will be issued under a written contract and a copy of the
contract is lodged with the application; and
- (e) that each of those persons who is not a member of the company when the application is
made consents in writing to the inclusion in the list of the details about them that are referred to
in paragraph (a).
- The shares may be issued to existing members only, to new members only or to existing and
new members.
- Note: An offer of shares associated with a proposed change of type may need disclosure to
investors under Part 6D.2 (see sections 706, 707, 708, 708AA and 708A).
- (3A) For a company changing to a proprietary company, if any of the particulars in the
register kept by the company under section 169 and mentioned in paragraph 178A(1)(b) are
different from the particulars set out:
- (a) in the latest extract of particulars received by the company; or
- (b) if the company responded to the latest extract it received—in the company’s extract taken
together with the company’s response to the extract;
- the application must set out those different particulars in addition to the other information
required by this section.

- (3B) If the company has more than 20 members, the company is only required to set out
the different particulars under subsection (3A) that relate to a person who is a top 20 member of
a class of the company.
- Note: See also section 107.
- (3C) If subsection (3A) applies and any details mentioned in subsection 178C(1) are
different from the details set out:
- (a) in the latest extract of particulars received by the company; or
- (b) if the company responded to the latest extract it received—in the company’s extract taken
together with the company’s response to the extract;
- the application must set out those different details as well.

- (4) The application must be in the prescribed form.

- (5) The company must have the consents referred to in paragraph (3)(e) (if any) when
the application is lodged. The company must keep the consents.

- (6) An offence based on subsection (5) is an offence of strict liability.

RMIT Vietnam Help Desk Team. By An Vu Page 10

 SEMESTER 2/2012
- Note: For strict liability, see section 6.1 of the Criminal Code.

VI. ASX listed companies

- The main reason is that they have a greater ability to raise capital to grow a larger business.
- There are two alternative minimum shareholder requirements that a company must meet.
o 500 shareholders each holding a parcel of shares with a value of at least $2000; or
o 400 shareholders each holding a parcel of shares with a value of at least $2000, 25 per
cent of whom are unrelated parties of the company.

VII. Holding and subsidiary companies – related bodies corporate

a. Definition:
- Subsidiary:
- [s46(a)] a body corporate is regarded as a subsidiary of another body corporate if,
and only if the other body:
 Controls the composition of the board of directors of the subsidiary [s46(a)(i)]; (can
exercise a power to appoint or remove all or a majority of the directors [s47])
 Is in a position to cast, or control the casting of, more than one-half of the maximum
number of votes that might be cast at a general meeting of the subsidiary [s46(a)(ii)];
or
 Holds more than one-half of the issued share capital of the subsidiary: [s46(a)(iii)].
(However, where a company is merely holding the shares in a fiduciary capacity,
such as trustee, the shares are not treated as being held by a holding company
[s48(2)]
- Wholly-owned subsidiary:
A body corporate is a wholly-owned subsidiary if none of its members is a person other
than:
 Its holding company;
 A nominee of its holding company;
 Another wholly-owned subsidiary of the holding company; or
 A nominee of such a wholly-owned subsidiary.
- [s187] a director of a wholly-owned subsidiary is taken to act in good faith in the best
interests of the subsidiary if
o The constitution authorizes the director to act in the interests of the holding
company,
o The director acts in good faith in the best interests of the holding company and
o Subsidiary remains solvent.
- Ultimate holding company:
- [s9]a body corporate is defined as an ultimate holding company of another if:
o That other body corporate is a subsidiary of that holding company; and
o The holding company is not itself a subsidiary of another.
- Related bodies corporate:
- [s50] body corporate is:
 A holding company of another body corporate;
 A subsidiary of another body corporate; or
 A subsidiary of a holding company of another body corporate

RMIT Vietnam Help Desk Team. By An Vu Page 11

 SEMESTER 2/2012

b. Deficiencies of definition:
- s46 definition of subsidiary company has significant loopholes. Under the old group
accounting provisions, an unincorporated entity, such as a trust, could not be considered as a
subsidiary even though it was controlled by the holding company => the trust’s assets and
liabilities did not have to be consolidated in the group’s balance sheet => May 2000, it
should pass “control test” in ss50AA.
- [ss 50AA(1)] provides that an entity controls a second entity if the first entity has the
capacity to determine the outcome of decisions about the second entity’s financial and
operating policies.
VIII. Foreign companies:
- [s 601CD] A body corporate incorporated outside Australia is referred to as a “foreign
company” and is not permitted to carry on business in Australia unless it is registered with
ASIC.
IX. Trustee companies:

CONSTITUTION AND REPLACEABLE RULE – chap 4

1. INTERNAL MANAGEMENT
 Companies have considerable flexibility in deciding the rules that govern their internal management which deal
with
a. Powers of directors
b. Meetings of directors and shareholders
c. Right of shareholders
d. The share transfer process.
 A company’s internal management may be governed by replaceable rules contained in the Corporation Act or
by a constitution or by a combination of both [s134]
2. REPLACEABLE RULES

RMIT Vietnam Help Desk Team. By An Vu Page 12

 SEMESTER 2/2012

 Replaceable rules: sections in the Corporations Act that govern a company’s internal administration and
management.
 The replaceable rules apply to companies formed after 7/1998 and those companies formed before that date
which have repealed their constitutions [s 135(1)(a)(i) and (ii)].
 A company may be formed with a constitution that replaces or modifies any one or all of the replaceable rules [s
135(2)]
 [s135] some replaceable rules apply only to proprietary companies
Example: [s194]: deal with proprietary company replaceable rule.
 [s249] deal with the appointment of proxies, is a replaceable rule for proprietary companies but mandatory for
public companies.
 [s135(3)]: a failure to company with applicable replaceable rule is not of itself a contravention of the
Corporation Act. However, injunction may be be sought on the basis of a breach of statutory contract
established [s140]: Smolarek v Liwszyc
A. One-person proprietary companies
 Does not need formal rules governing its internal management.
 [s135(1)] the RR does not apply to such companies. Also don’t need a constitution
 Instead of a constitution or RR, C.A has a number of basic rules that apply specifically to single
director/S.H prop comp:
1.The biz of the comp is to be managed by or under the direction of the director who may also exercise
all the powers of the comp: the power to issue shares, borrow money and issue debentures
[s198E(1)]
2.Director may execute a negotiable instrument [s198E(2)]
3.The director may appoint another director by recording the appointment and signing the record
[s201F]
4.The director is to be paid any remuneration for being a director that the company determines by
resolution: s202C
 These rules apply only while the company is a single director/S.H prop comp. The RR become applicable
as soon as the company issues shares to another person or appoints additional directors

B. Companies limited by guarantee C. No liability companies

 Many RR like deal with dividend or  Internal management can’t be governed
transfer and transmission of shares, are solely by the RR.
inappropriate.  S112(2) requires these comp to have a
 Internal management can’t be governed constitution stating that:
solely by the RR and such companies  Its sole objects are mining purposes; and
should have a constitution  The company has no contractual right to
 While these comp ought to have a recover calls made on its share from a
constitution, their internal rules may be shareholder who fails to pay them
governed by a combination of both the  While these comp ought to have a
rules in their constitution as well as constitution, their internal rules may be
selected RR. governed by a combination of both the
rules in their constitution as well as
selected RR.

3. THE COMPANY’s CONSTITUTION

A. Statutory requirements
 Three ways to adopt a constitution:

RMIT Vietnam Help Desk Team. By An Vu Page 13

 SEMESTER 2/2012

1. S136(1)(a): a new company may adopt a constitution on registration if the persons named in the
application for the company’s registration as having consented to become members, agree in writing
to the terms of the constitution before the application is lodgeded
2. S136(1)(b) A company that is registered without a constitution may adopt one by passing a special
resolution
3. S136(1)(b): A court order is made under s233 (the oppression remedy) that requires the company to
adopt a constitution.
 Public comp having a constitution are required to lodge a copy with ASIC.
 S136(5): A copy of the constitution and relevant special resolutions must be lodged within 14 days of the
comp adopting or modifying the constitution
 S139: if a member makes a written request, a company must send a copy of its constitution to that member
within 7 days.
B. Consent of constitution
 There are no mandatory content requirements for constitutions.
 A constitution sets out the rules governing matters such as the rights of S.H, the conduct of S.H’s and
director’s meeting, powers of directors and their appointment and remuneration.
 Three ways for a comp limited by guarantee to omit the word Ltd regarding s150(1)
 Requires the comp to pursue charitable purposes only and apply its income in promoting those
purposes.
 Prohibits the comp making distributions to its members and paying fees to its directors
 Requires the directors to approve all other payments the comp makes to directors.
 S112 require NL’s constitution to state its sole objects are mining purposes and that the comp has no
contractual right to recover calls made on its shares from a S.H who fails to pay them
 ASX Listing Rules 15.11: listed comp must have a constitution that is consistent with the ASX Listing Rules.
 The comp has only one class of ordinary shares [ASX Listing Rule 6.2]
 S.H have 1 vote per share on a poll [ ASX Listing Rule 6.9 ]
C. Interpretation of constitution.
 Constitution are regarded as business document
 Dome Resources NL v Silver: the courts interpret their provisions in a similar way to commercial contracts so
as to give the a “business like interpretation”.
 Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd: Courts are reluctant to imply further terms or permit
evidence of an intention to depart from or add to the written provisions as this increases uncertainty and
detracts from the entitlement of S.H and others to rely on the written consumption as containing the full and
complete constitution.
D. Objects clause.
S125(2) A comp’s constitution may contain an object clause that identifies and restricts the biz and activities
in which the comp may engage. [Mandatory b4 1984, not after that]
4. LEGAL CAPACITY AND POWERS OF A COMPANY.
A. Section 124:
 S124: comp now have the same legal capacities as a human being
 S124(1): A comp has the legal capacity and powers of an individual and a body corporate:
 issue and cancel shares (not apply to Ltd by guarantee]
 issue debentures
 grant option over unissued shares in a comp
 distribute any of the comp’s property among members, in kind or otherwise;
 give security by charging uncalled capital;
 grant a floating charge over the comp’s property
RMIT Vietnam Help Desk Team. By An Vu Page 14
 SEMESTER 2/2012

 arrange for the comp to be registered or recognized as a body corporate in any place outside
Australia
 do anything that it’s authorized to do by any other law
 s124(2): A comp’s legal capacity to do sth is not affected by the fact that the comp’s interests are not
served by doing a particular thing. This section aim to protect outsiders by enabling them to enforce
contracts with a comp even though the contract involved an abuse of power by the comp’s directors or
controlling S.H
B. Abolition of doctrine of ultra vires
 “Ultra vires” (beyond the power of the company): Any company contract or transaction that was not
within the scope of one of its objects. The doctrine of ultra vires stated that such contracts or
transactions were void and had no legal effect: Ashbury Railway Carriage & Iron Co v Riche.
 The doctrine of ultra vires operated together with the doctrine of “constructive notice”. It means
people dealing with a comp were regarded as being aware of a comp’s objects merely because they
were set out in the constitution.
 The doctrine of constructive notice has been largely abolished by s130(1)
 Original purpose: to protect a comp’s S.H and creditors.
1.S.H: have a right to expect that their capital would be used only for the objects specified in
the company’s constitution.
2.Creditor: to ensure that their loans to the comp would only be used for its stated objects.
 The doctrine of ultra vires has been abolished by the combined effect on ss124 and 125. The doctrine
could only have application to a comp whose constitution contained an objects clause or other self-
imposed restriction or prohibition on the exercise of its power.
 If a comp has an objects clause, s125(2) provides that an act is not invalid merely because it is
contrary to or beyond any of its objects.
 S125(1): if a comp’s constitution contains an express restriction or prohibition on the exercise of any
of its powers, the exercise of such a power is not valid merely because it is contrary to such an
express restriction or prohibition.
 Contravention of a company’s constitution may have other consequences even though they can’t
affect the validity of the comp’s contracts. Allegations that a company acted contrary to its objects or
other restrictions or prohibitions in the comp’s constitution may be an element in legal action against
the comp’s directors breach of duty. A failure to comply with the constitution may also be contrary
to the interests of members as a whole or oppressive and allow a member to seek a remedy under
s233.
 S461(1)(k): It may also allow a member to obtain an order for the winding up of the company on a
just and equitable ground
5. EFFECT OF CONSTITUTION AND REPLACEABLE RULES
A. Contractual effect.
 S140(1): a comp’s constitution and RR have contractual effects between:
o S140(1)(a): the comp & each member
o S140(1)(b): the comp & each director and comp secretary
o S140(1)(c): a member and each other member
 Under s140(1)(a) contract, it’s effective not only btw the comp and the persons listed in the
application for registration, but also btw the comp and any persons who became a member after the
comp was registered.
 In case a comp is formed with only the RR, those rules have the effect of a contract btw the comp
and its present and future members whether or not they consented to the RR.

RMIT Vietnam Help Desk Team. By An Vu Page 15

 SEMESTER 2/2012

 S136(2): A comp may modify or repeal its constitution, or a provision of its constitution by special
resolution. A special resolution is also required if a comp wishes to adopt a constitution to modify or
replace any RR that apply to it.
 Main purpose of s140: provide a way for the parties to the statutory contracts to enforce compliance
with a company’s constitution and any RR that apply.
 The appropriate remedy for breach of contract: a court injunction or declaration to enforce
compliance with the constitution or applicable RR
 The contract rights under s140(1) do not apply to by-laws made under a power conferred by the
constitution
 By-laws: detailed rules by which particular constitutional powers are implemented but do not have
the same status under s140(1) as the comp’s constitution.
B. Contract between company and members
 S140(1)(a): comp’s constitution & any applicable RR have contractual effect btw the comp and each
member the comp can take action against its members to force them to comply with the
provisions in the constitution or applicable RR where they are unwilling to do so voluntarily.
 Hickman v Kent
 Fact: Hickman was member of the comp and began a court action complaining about the comp.
however regarding comp’s constitution, disputes btw it & its members should be referred to
arbitration Hickman was obliged to refer his disputes to arbitration.
C. Enforcement of constitution by members
 A member is able to force the company to comply with the provisions of its constitution.
 Not all provisions in comp’s constitution have contractual effect. In Hickman v Kent, it was held that
members may enforce only those provisions that confer rights on members in their capacity as
members.
D. Outside capacity
 Members can’t enforce provisions in the constitution that purport to give them rights in some other
capacity than that of a member, such as solicitor or promoter.
 Provisions in a constitution that give members rights in some other capacity than that of a member
do not have contractual effect.
 Eley v Positive Government Security Life Assurance:
 Fact: comp’s constitution provided that he was to be its permanent solicitor and could only
be dismissed for misconduct. There was no employment contract. Eley also received an
allotment of shares in consideration of the work he did in forming the comp. Then the
comp ceased to employ him.
 Ruling: the constitution conferred no rights on a member where the member seeks to
enforce a right in a capacity other than as a member. Eley was seeking to assert aright in
his capacity as solicitor of the company. To do so, he should have entered into a separate
contract independent of the constitution.
 S232: members don’t have to show that a breach of the constitution or applicable RR affects them
in their capacity as a members. A member need only prove that a breach is contrary to the interests
of members as a whole, oppressive or unfair to gain a remedy under that section.

E. Non-members
 A constitution doesn’t have the effect of an enforceable contract between a company and
non-members even if a constitution purports to give them rights.

RMIT Vietnam Help Desk Team. By An Vu Page 16

 SEMESTER 2/2012

 Case: Forbes v NSW Trotting Club

 Fact: the committee of the comp excluded Forbes, a professional punter. Forbes
tried to overturn this exclusion but failed since he wasn’t a member of the club. His
only right was that of a spectator.
F. Contract between members
 S140(1)(c): constitution and applicable RR have contractual effect btw one members and others.
 It also assumes importance where a comp’s constitution contains a pre-emption clause. Such clauses
give S.H rights of its first refusal to buy other S.H’s shares or to sell their own shares to the remaining
S.H.
 Registration of transfers of shares effected in breach of a pre-emption clause is void and the register
may be corrected under s175: Carew-Reid v Public Trustee.
 Case: Re Caratti Holding Co Pty Ltd:
 Fact: comp’s constitution empowered the majority S.H to compulsorily acquire the shares of
a minority S.H  it was disallowed for other reasons including oppression.
 S254D: pre-emption rights to existing S.H on the issue of addition shares.
 S254D(1):existing S.H are the first to offered. The number of shares offered to each S.H must be in
proportion to the number of shares that class that they already hold.
G. Contract between the company and its directors and secretary
1.Shuttleworth v Cox Bros
 Fact: comp’s constitution has a provision that appointed a person for director for life. Then it
altered its constitution to add an additional for removal  that director was dismissed.
 The court held that the clause appointing him as a director for life was subject to the statutory
power given to companies to alter their constitution. He didn’t have a separate contract
independent of the constitution.
2. Carrier Australia Ltd v Hunt
 Fact: Hunt had a service agreement to be director. The agreement was stated to subject to
comp’s constitution. Then the comp changed the constitution and terminated Hunt.
 Court decided that comp could alter its constitution but also liable for damages for breach of
contract.
E. Remedies: Injunction and declaration for breach of s140(1)(a) or (c). obtain damages for wrongful
dismissal in case of breach of s140(1)(b)
6. ALTERATION OF CONSTITUTION AND REPLACEABLE RULES.
A. Statutory requirement
 S135(2): a comp may displace or modify any one or more of replaceable rules that applies to it by
adopting a constitution
 S136(1)(b): a company adopts a constitution if it passes a special resolution to that effect
 S136(2): A special resolution is also required to modify or repeal a constitution or provision of a
constitution.
 S137(a): Unless a different date is specified, a special resolution adopting, modifying or repealing a
comp’s constitution takes effect on the date the resolution is passed.
 S136(5): A public comp has to lodge with ASIC a copy of a special resolution adopting, modifying or
repealing its constitution within 14 days after it is passed. If a special resolution of a public company:
o Displaces a RR with a constitution, it must also lodge a copy of the constitution with
ASIC within that period; or
o Modifies its constitution, it must also lodge a copy of tha modification with ASIC
within that period.
 S138: ASIC may direct a company to lodge a consolidated copy of its constitution.
RMIT Vietnam Help Desk Team. By An Vu Page 17
 SEMESTER 2/2012

B. Limits on right to alter constitution

1.Under the C.A
a. Entrenching provisions
 S136(3): a comp’s constitution may contain provisions that restrict the comp’s ability to
modify or repeal its constitution by imposing further requirement for such alterations
over and above a special resolution.
 S136(4): An entrenched provision may itself also be entrenched.
b. Section 140(2)
 S140(2): a member is not bound by a modification of the constitution made after
becoming a member so far as the modification
o Requires the member to take up additional shares; or
o Increases the member’s liability to contribute to the share capital of, or
otherwise to pay money to, the company; or
o Imposes or increases a restriction on the right to transfer the shares already held
by the member.
c. Variation of class rights
 It’s applied when its share capital is divided into shares of different classes.
 S246B: class rights can be varied or cancelled only with the approval of a special
resolution of both the company and the holders of the affected class.

d. Oppression remedy
 S232 enables members to apply to the court for a remedy if the majority votes in favour
of a resolution altering the constitution or RR that is contrary to the interests of the
members as a whole, oppressive, unfairly prejudicial or unfairly discriminatory to
members.
2.Common law
a. Why are restrictions imposed?
Balance btw the interests of majority and minority S.H
b. Alteration valid unless improper or oppressive.
An alteration which did not involve an expropriation of shares was valid unless it was either
beyond any purpose contemplated by the constitution or oppressive.
c. Expropriation of shares
Gambotto v WCP Ltd

Fact: A bidder acquired 99 per cent of the company’s shares and sought to alter the company’s
constitution to allow any members entitled to over 90 per cent of the issued shares to
compulsorily acquire all other issued shares.
The court held that an expropriation to secure taxation and administrative advantages for the
majority shareholders was not for a proper purpose.
Rule: An alternation that involves an expropriation of shares is valid only if the expropriation is
for proper purpose and is fair.

Grey Eisdell Timms v Combined Auctions Pty Ltd

RMIT Vietnam Help Desk Team. By An Vu Page 18

 SEMESTER 2/2012

Fact: a competitor was trying to take over the company by buying shares from its non-
pawnbroker members. Special resolution was passed to alter the constitution to limit
shareholding and expropriate shares of non-pawnbrokers.
Rule: The court held that the expropriation would only be justified if the minority’s continued
shareholding would be detrimental to the company and expropriation was a reasonable means of
eliminating this detriment.
In the circumstances, the expropriation was not justified because the fact that significant
numbers of current members were not pawnbrokers meant that the alteration was not needed to
protect the company’s business. Further, it was oppressive because it was a means of ensuring
that the managing director obtained a controlling shareholding in the company.

d. Fainess: consider two elements:

- Requires the majority to disclose all relevant information leading up to the alteration. It also
requires the shares to be valued by an independent expert; and
- Price to be paid to the expropriated shareholders should not be less than the market price.
However, the current market price is not necessarily the sole criterion of fairness. Other factors
include assets, dividends, and the nature of the corporation and its likely future.

CHAPTER 5: THE COMPANY’S RELATIONSHIPS WITH OUTSIDERS

Which individuals are capable of entering into the contract for the company?
There are two ways:
o Organic theory: where the company contracts directly in its own name.
o An agent acts for the company: It involves the application of the principles of the law of agency.
[S126]: companies are capable of being bound by the acts of their agents in the same way as natural persons.
1. THE DIRECTING MIND AND WILL AND A COMPANY
a. Organic theory:
o The actions of the organ of a company are the actions of the company itself and their state of mind is the state of
mind of the company.

RMIT Vietnam Help Desk Team. By An Vu Page 19

 SEMESTER 2/2012

o Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd

 Fact: Lennard was the active director of the company and took an active role in the management of
the ship. The ship carried oil owned by Asiatic Petroleum. Because of the unseaworthy state, it
caught fire and was destroyed. Company wanted to avoid the liability by claiming that loss arose not
from its default but the default of Lennard himself.
 Rule: Person (directing mind and will of a company) may be under the direction of the shareholders
in general meeting may be the board of directors itself, or that person has an authority coordinate
with the board of directors given to him under the articles of association, is appointed and removed
by the general meeting.
o Meridian Global Funds Management Asia Ltd v Securities Commission
 Fact: A company’s chief investment officer caused the company to contravene the NZ substantial
shareholder provisions and concealed this from the company’s directors. He had authority to enter
into share transactions.
 Rule: His knowledge of the breach was attributed to the company. Company cannot claim lack of
knowledge as a result of its failure to properly monitor its officers and employees.
b. Who is the directing mind and will:
 A company may be likened to a human being. It has a brain that controls what it does. It also has hands
which act in accordance with directions from the centre.
 H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd – Denning LJ explained:
o Some people in the company are mere servants and agents who are nothing more than hands to do
the work and cannot be said to represent the mind or will. Others are directors and managers who
represent the directing mind and will of the company, and control what it does. The state of mind of
these managers is the state of mind of the company and is treated by the law as such… So here the
intention of the company can be derived from the intentions of its officers and agents.
c. Management
o Tesco Supermarkets Ltd v Nattrass
o Facts: Company owned a chain of supermarkets. At one store, a large advertisement was displayed
stating that a particular item was on sale at a reduced price. After all reduced-price items had all
been sold, a shop assistant put out on display the same items marked at the normal, higher price.
This was not reported to the store manager and the advertisement remained in the window. A
customer saw the advertisement and tried to buy the item at the reduced price.
o Rules:
 Directing mind can be employees of the company to whom managerial powers have been
delegated. However, only those managers who are entrusted with a “significant degree of
freedom” from supervision of higher authority are so regarded.
 In this case, the court stated that the store manager did not have the necessary responsibility
or control of the company’s operations to be identified as the controlling mind and will of
the company.
d. Company secretary
o A secretary is so regarded when what he or she does is referable to the company’s day-to-day affairs and
administration.
e. Change in control
o The company may change its mind where the control of the company changes, and adopt the intention and
purpose of its new controllers.
f. The mind and will of more than one person:
o Occasionally more than one person may be regarded as a company’s directing mind and will.

RMIT Vietnam Help Desk Team. By An Vu Page 20

 SEMESTER 2/2012

o Brambles Holdings Ltd v Carey

 Fact: A carrying business delegated responsibilities to ensure that the business complied with the
relevant legislation to three employees: the main driver, the heavy haulage supervisor, and the
operations manager. The main driver was sick => operations manager replaced another person
improperly => charged by maximum loads
 Rule: The operations manager knew, or ought to have known that proper loading instructions had not
been given to the driver => the court decided the operations manager was the directing mind of the
company.
g. Aggregated knowledge:
o In some situations separate pieces of information known by several people can be aggregated and attributed
to their company.
o The knowledge of various company officers may not be aggregated where information has not been
communicated to a company officer in the normal way.
o Re Chisum Services Pty Ltd
 Fact: At the time of the payment the bank’s branch manager was unaware of information published
that a petition to wind up the company has been presented. The branch manager was aware the
company was experiencing financial difficulties but did not believe it was insolvent. However, the
information was noted by the officers at the bank’s head office. The liquidator argued the knowledge
and beliefs of the branch manager and the officers in the head office could be combined to indicate
the bank had the necessary suspicions.
 Rule: The court held that there was no “super mind” that allow the knowledge of its various officers
to be aggregated for the purpose of ascertaining its state of mind.
2. CRIMINAL LIABILITY OF COMPANIES.
Companies are subject to the criminal law in much the same way as individuals.
The court must prove:
o The illegal acts were committed, and
o The defendant had the intention to commit the criminal act (“mens rea”)
Criminal Code:
o [s12.1(2)] a body corporate may be found guilty of any offence, including one punishable by imprisonment.
While the company cannot be imprisoned, it can be fined.
o Section 3.1(1): a criminal offence consists of physical elements and fault elements. Physical element of an
offence includes conduct or the result of conduct. A fault element for a particular physical element may be
intention, knowledge, recklessness or negligence.
o [s12.2]: physical element of an offence is attributed to a company if it is committed by an employee, agent or
officer acting within the actual or apparent scope of their employment or within their actual or apparent
authority.
o [s12.3(1)]: A fault element in relation to a physical element of an offence must be attributed to a company that
expressly, tacitly or impliedly authorized or permitted the commission of the offence.
o [s12.3(2)] The means by which such authorization or permission may be established include:
 Board of directors or a high managerial agent intentionally, knowingly or recklessly carried out the
relevant conduct or expressly, tacitly or impliedly authorized or permitted the commission of the
offence. This does not apply if the body corporate can prove that it exercised due diligence to prevent
the conduct, authorization or permission of the high managerial agent; (knew this act and express allow
this act)
 Corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-
compliance with the relevant provision; and (ignore or do not care about this fault)
RMIT Vietnam Help Desk Team. By An Vu Page 21
 SEMESTER 2/2012

 A body corporate failed to create and maintain a corporate culture that required compliance with the
relevant provision. (weak environment)
o [s12.3(6)] definition of “high managerial agent” and “corporate culture”.
 High managerial agent is an employee, agent or officer with duties of such responsibility that their
conduct may fairly be assumed to represent the body corporate policy.
 Corporate culture means an attitude, policy, rule, course of conduct or practice existing within the body
corporate generally or in that part of it in which the relevant activities take place.
o [s12.5(1)] A company can only rely on the mistake of fact defense if:
 The employee, agent or officer of the company who carried out the conduct was under a mistaken but
reasonable belief about the facts that, had they existed, would have meant that the conduct would not
have constituted an offence; and
 The company proves that it exercised due diligence to prevent the conduct. A failure to exercise due
diligence may be evidenced by the fact that the prohibited conduct was substantially attributable to
inadequate corporate management, control or supervision, or failure to provide adequate systems to
convey relevant information to relevant people.
o A strict liability has no fault elements. The defence of mistake of fact is available for such offences.
o An absolute liability has no fault elements and the defence of mistake of fact is unavailable.
3. LIABILITY OF COMPANIES OF TORT
A company is vicariously liable for the negligence or fraud committed by its employees in the course of their
employment. It is on the basis that companies are usually liable in tort.
4. CONTRACTS WITH THE COMPANY
a. Execution of document
o A company can make a contract directly by executing a document. This involves directors or other
authorized persons signing the document as an act of the company.
o A company may execute a document in accordance with the requirements of s127 either by fixing its
common seal to the document or without using a common seal.
i. Common seal
 Since 1998, common seals are optional.
 Under 127(2), a company with a common seal may execute a document by affixing its common seal to a
document and the fixing of the seal is witnessed by the appropriate officers. These are:
 Two directors; or
 One directors and one secretary; or
 For a one-person proprietary company, a sole director who is also the sole company secretary – that director.
 If the seal is affixed to a contract that does not have to be sealed and the affixing or witnessing of the seal is
not in compliance with the constitution, the contract may still be binding on the company.
 MYT Engineering Pty Ltd v Mulcon Pty Ltd: A company was affixed to a deed of company with improperly
witnessed by only one director => contract was still valid because shareholders and members authorized that
director to do so, and agreed the instrument should be executed.
 [s123(2)] a company may have a duplicate common seal.
ii. Without common seal
 [s127(1)]A company may also execute a document without using a common seal if two directors or a
director and a company secretary sign the document.
iii. One-person proprietary companies
 [s127(1)] A sole director who is also the sole secretary may execute documents without using the common
seal by signing the document on the company’s behalf.

RMIT Vietnam Help Desk Team. By An Vu Page 22

 SEMESTER 2/2012

 [s127(2)] A sole director may witness the fixing of the seal of a one-person proprietary company who is also
the sole secretary and sole director.
iv. Significant of s127
 If a company executes a document in accordance with s127(1) or (2), persons dealing with the company are
entitled to rely on s129(5) or (6) to assume that documents have been duly executed by the company, even if
this is not true.
b. Contracts made by agents
o Section 126 allows a company to contract through an agent.
i. Actual authority
 An agent who makes a contract on a principal’s behalf binds the principal to the contract if it is within the
scope of the agent’s express or implied actual authority.
 There is no contractual relationship between the agent and the outsider.
 An agent’s authority may derive from a principal expressly giving the agent authority to enter into particular
contracts on the principal’s behalf => express actual authority.
 The authority is implied from the conduct of the parties and the circumstances. Implied actual authority most
frequently arises when an agent is placed in a particular position by the principal => implied actual authority.
ii. Apparent authority
 A agent’s apparent authority arises if a principal gives the impression that an agent has authority to contract
on the principal’s half.
 In some situations a person may have apparent authority to enter contracts for a principal even though that
person does not have to have actual authority to contract.
 Apparent authority arises when:
 The principal represents or holds out to the outsider that the agent has the requisite authority to make
particular contracts on the principal’s behalf; and
 The outsider relies on the principal’s representation to enter into the contract with the agent who is
purportedly acting on the principal’s behalf.
 A principal is not bound by a contract merely on the representation of the agent.
 The principal may expressly make the representation to the outsider or by conduct. A representation by
conduct may take either one of two forms:
 When principal permits the agent to occupy a particular positions => hold out that the agent has the
customary authority of a person in such a position. (similar to an agent with implied authority resulting from
the position occupied)
 When the principal’s conduct permits the agent to carry out particular tasks on the principal’s behalf that are
beyond the scope of the agent’s customary authority.
c. Authority of the company’s agents
o A company contracts either through an organ such as its board of directors or by means of an authorized
agent such as an officer or employee.
o The question is whether there was an irregularity such as failure to comply with the constitution or
replaceable rules, or whether the contract was within the authority of the agent to whom the power was
delegated.
i. Doctrine of constructive notice
 If the constitution contains a limitation on the authority of the company’s organs, officers or agents, the common law
deemed this limitation to be known by an outsider dealing with the company. This is known as “doctrine of
constructive notice”.
 It has now largely abolished by s130(1).
ii. The rule in Turquand’s case
RMIT Vietnam Help Desk Team. By An Vu Page 23
 SEMESTER 2/2012

 The doctrine does not operate, where the directors or other agents acted outside their authority but this was not
apparent from the constitution or other public documents.
 The rule in Turquand’s case allows persons dealing with a company to assume that its internal proceedings were
properly carried out.
 Royal British Bank v Turquand
 Fact: A company borrowed money from a bank on the authority of two of its directors who authenticated the
company’s common seal. There was no authority given by the general meeting => The company refused to pay
based on the constructive notice.
 Rule: An outsider need not inquire into whether such a resolution had in fact been passed. The company still bound
to the bank because the passing of resolution was a matter internal to the company.
 [s129(1)] adopted Turquand case.
iii. Exception to the rule in Turquand’s case
 The rule will not apply if the person dealing with a company has actual knowledge of an irregularity or is put on
inquiry by the circumstances and fails to make inquiries.
 Northside Developments Pty Ltd v Registrar-General
 Fact: The seal was affixed to a mortgage document from Barclays, witnessed by Sturgess – director and his son –
secretary, who had not been appointed under constitution although lodged document named him as a secretary. Other
two directors did not know of or authorize the execution of the mortgage and purported appointment of the secretary.
 Rule: The Northside was not bound by the mortgage because the seal was invalid. Barclays failed to make inquiry as
to whether the common seal was properly affixed => cannot rely on the Turquand’s case. The situation put Barclays
to upon inquiry was that the transactions were outside its usual business and not for its benefit. He ought to have
suspected an irregularity.
iv. Actual authority of company agents
 An agent’s actual authority may arise expressly or by implication. It arises by implication when the company
appoints the agent to occupy a particular office. Unless expressly limited, the agent’s implied actual authority
extends to all those acts that are customarily done by persons occupying that office.
 Just because a director act in a dominant way does not mean that he or she has actual authority, especially in the
absence of knowledge of the board regarding the director’s activities or where the constitution has not been complied
with. (National Australia Bank Ltd v Sparrow Green Pty Ltd)
 Fact: The constitution provided that at least two directors, or one director and one secretary to execute contracts. One
director had agreed to step aside from management, and then an active director executed a finance agreement, signed
as a sole director and company secretary => company go to liquidation.
 Rule: the remaining director has no actual and apparent authority. It could only be conferred through the constitution
or by resolution of the board. In this case, the management of the company vested in the board, not a single director.
v. Apparent authority of company agent
 The principal must represent or hold out to the outsider that the agent had authority to contract for the principal.
Question is who can hold out for the company by making representation of authority to outsiders ?
 When full management powers are on the board of directors by the constitution or replaceable rules, the board is the
organ that is capable of making the necessary representation.
 Outsiders usually deal with persons to whom the board has delegated the necessary authority, for example the
managing director. When this is the case, the managing director possesses actual authority to do those things
concerned with the management, and also has apparent authority to bind the company to contracts within the scope
of the management powers
 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd
 Fact: Kapoor and Hoon formed a company, each held half of the issued shares, comprised the board of directors. All
material time, Hoon was overseas, Kapoor act as managing director with the approval of the board, although he had

RMIT Vietnam Help Desk Team. By An Vu Page 24

 SEMESTER 2/2012

not actually been appointed to that position. It was held that the company had held out that Kapoor was its managing
director and was therefore bound by his actions. He had apparent authority to employ the architects because this was
within the customary authority of a managing director, they did not examine the constitution or inquire whether the
managing director had been properly appointed.
 Rule: Four conditions:
 A representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to
be enforced was made to the contractor.
 Such representation was made by person or persons who had “actual” authority to manage the business generally or
in respect of those matters to which the contract relates
 The contractor was induced by such representation to enter into the contract, that is, he in fact relied on it; and
 That under its memorandum or articles of association the company was not deprived of the capacity either to enter
into a contract of the kind sought to be enforced, or to delegate authority to enter into a contract of that kind to the
agent. (does not apply in Australia [s125(2)]
 In some instances such a representation may be made by a person who lacks actual authority. The representation then
may not be sufficient to create an agent’s apparent authority.
 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd
 Fact: ADM was a family company. Peter McWilliam, was employed by the company but was not a director. A
committee consisting of Bruce Senior, Bruce Junior and Peter collectively managed the company’s affairs. The
constitution provided for the appointment of a managing director by the board.
 Rule: A representation by the company that an agent was authorized to contract on its behalf cannot come from the
agent themselves.
d. The statutory assumptions: s129
i. Compliance with the constitution:
 [s129(1)]: A person may assume, in relation to dealings with a company, that its constitution and any applicable
replaceable rules have been complied with. This section does not require the person to have knowledge of the
constitution or replaceable rules
 Oris Fund Management Ltd v NAB:
 Fact: OFM’s constitution provided that any two directors could endorse cheques. Stanley, an OFM director, solely
endorsed the cheques and the cheques were then deposited into OFS’s account by NAB. Subsequently, OFM sued
NAB for proceeds of the cheques as the process was not complied with OFM’s constitution.
 Rule: A person dealing with a company can assume that action taken by the company was in accordance with its
constitution.
ii. Person named as officer in public documents:
 [s129(2)]: A person may assume, in relation to dealings with a company, that anyone who appears, from information
provided by the company that is available to the public form ASIC, to be a director or a company secretary:
 Has been duly appointed; and
 Has authority to exercise the powers and perform the duties customarily exercised or performed by a director or
company secretary of a similar company.
 A person may rely on s129(2) even if the person was unaware of the information contained in the ASIC notices or
returns lodes by the company.
iii. Person held out as officer or agent:
 [s129(3)]: A person is entitles to assume, in relation to dealings with the company, that anyone who is held out by the
company to be an officer or agent has been duly appointed and has the authority to exercise the powers and perform
the duties customarily exercised or performed by that kind of officer or agent of a similar company.
 Before being entitled to rely on these assumptions, a person has the onus to prove:
 A holding out by the company that a person is an officer or agent; and

RMIT Vietnam Help Desk Team. By An Vu Page 25

 SEMESTER 2/2012

 That the particular power exercised by the person so held out is within the scope of the powers customarily exercised
or performed by an officer or agent of a similar company.
iv. Officers and agents properly perform their duties:
 [s129(4)]: A person may assume, in relation to dealings with a company, that the officers and agents of the company
properly perform their duties to the company.
v. Document duly executed:
 Without seal:
 [s129(5)]: A person may assume that, in relation to dealings with a company, a document has been duly executed by
the company if the document appears to have been signed in accordance with s127(1).
 With seal:
 [s129(6)]: A person may assume that a document has been duly executed if:
o The company’s common seal appears to have been fixed to the document in accordance with s127(2); and
o The fixing of the common seal appears to have been witnessed in accordance with s127(2).
 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd:
 Fact: A company fixed its seal to a guarantee witnessed by two directors, one of whom was incorrectly described as
the company secretary. That person had not been appointed as secretary. The other party to guarantee may assume
that the guarantee was still duly executed notwithstanding the incorrect designation.
 Rule: Assumptions of s129(5) and (6) may still apply even if the officer who signs or witnesses a document does not
occupy the designated position.
vi. Warranting documents genuine:
 [s129(7)]: A person may assume, in relation to dealings with the company, that an officer or agent of the company
who has authority to issue a document or certified copy a document on its behalf also has authority to warrant that
the document is genuine or is a true copy.
 Ruben v Great Fingall Consolidated:
 Fact: A company secretary forged a share certificate by two forged directors’ signatures and his countersign without
authority. The secretary then lodged the certificate for a loan to himself. Subsequently, the lender was refused
registration as owner of the shares and sued the company. The court held that the forged certificate did not bind the
company  the lender was not the true owner of the shares.
 Rule: under common law, it was doubtful whether a company secretary had requisite authority to warrant that a share
certificate is genuine.
e. Customary authority of officers
i. Individual directors:
 An individual director does not have customary authority to make contracts on the company’s behalf, but is given
power to:
 Witness the fixing of the company’s common seal (s127(2)); and,
 Sign the company’s negotiable instruments, including cheques: s198B
ii. Managing director: has the customary authority to make contracts related to the day-to-day management of the
company’s business
iii. Chair: has the same customary authority as any other individual director.
iv. Secretary:
Panorama Developments Ltd v Fidelis Furnishing Fabrics Ltd:
 Fact: The company secretary hired a car for the purpose of carrying his company’s customers. However, he used for
his own purposes. When he failed to pay the hire charges, the lender argued that company secretary had apparent
authority to enter into that contract.
 Rule: Company secretary has customary authority to enter into contracts connected to the administrative side of the
company’s affairs.

RMIT Vietnam Help Desk Team. By An Vu Page 26

 SEMESTER 2/2012

f. Limitations to the statutory assumptions: s128(4)

i. Knew assumption incorrect
ii. Suspected assumption incorrect
g. The effect of fraud or forgery:
 Person may rely on the assumptions in s129 even if an officer or agent of the company acts fraudulently or
forges a document in connection with the dealings: s128(3). Section 128(3) covers the situation where a
company seal or signatures attesting its application are not genuine but are forged

chap 6: PROMOTERS AND PRE-REGISTRATION CONTRACT

1. Promoters: is one who undertakes to form a company with reference to given a project and to set it going, and
who takes the necessary steps to accomplish that purpose

A promoter includes those who actively undertake the formation of a company. It includes:

 A person who forms a proprietary company to purchase a business previously run by a sole trader
 A person who form company with the objective of selling particular property to the company and arranging
for the shares of the company to be taken up by the others
 An officer who can be said to represent the directing mind and will of the promoter company may also be
regarded as a promoter (Aequitas v AEFC [2001] NSWSC 14)

It excludes solicitors and accountants who do no more than carry out the instructions of the person seeking to
incorporate the company and take no further part in the enterprise.

Passive promoters: a person who takes no active part in the incorporation of a company and the raising of its share
capital, but leaves this to others on the understanding that they will profit from the enterprise, may also be promoter.

Case: Tracy v Mandalay Pty Ltd

Fact: Some shareholders of Mandalay Pty Ltd actively involved, others took no active part but stood to profit and
allowed the other promoters to act on their behalf. → Some others were held to be promoters even though they have
fallen out with the active promoters and stood only to recover their original contributions after commencing
litigation.

2. Duties of promoters:

Fiduciary duties: A promoter has a fiduciary relationship with the company and is therefore under an obligation to
the promoted company to act in a good faith and to avoid conflicts of interest with the company.

The fiduciary duties of promoters are owed for the entire period during which a person is a promoter.

RMIT Vietnam Help Desk Team. By An Vu Page 27

 SEMESTER 2/2012

A person may continue to be a promoter even after the appointment of the board of directors where the directors are
passive and act in the interests of the promoters (Twycoss v Grant).

Disclosure of interests in the contract: A promoter must ensure that full disclosure is made of their interest in any
contract entered into by the company.

Case: Erlanger v New Sombreo Phosphate Co

Fact: ko hieu case de summarise 

Undisclosed profits: promoters have a duty to disclose personal profits that may arise from their position

Case: Gluckstein v Barnes

Fact: this too, chut discuss sau

Fundraising Disclosure:

[s711(2)] requires a prospectus to set out the nature and extent of the interest that a promoter had in

 The formation or promotion of the company

 Property acquired or proposed to be acquired by the company in connection with its formation or promotion
or the offer of securities, or
 The offer of the securities

Remedies for breach of duties:

Rescission:

 The company does not rescind reasonably promptly after becoming aware of the misrepresentation
 The company, after becoming aware of the misrepresentation, does something which indicates that it has
affirmed the K
 It is not possible to restore the parties to their original positions. For example, if the property purchased from
the promoter has undergone a substantial alteration in the hands of the company, it could not be said that the
return of that property to the promoter restores him/her or his pre-contract position
 Prior to the rescission of the contract , innocent third parties acquire some interest in the property

Recovery of secret profit and constructive notice trust order:

[Gluckstein v Barnes case]: the court ordered that the company could recover the secret profit even though it chose
not to rescind the contract. A promoter who is found liable may recover contributions from the other promoters

Where the promoter during the course of promotion acquires property for personal gain instead of for the company,
the company may obtain a constructive trust order and require the promoter to hand in over at cost

Liability under Corporation Acts

Promoters may incur statutory liability

[s711(2) and (3)] require a prospectus to set out certain information with respect to a promoter’s interest in the
formation, promotion and property acquired by the company. [S728(1)] occur when omission if that information
contravenes

RMIT Vietnam Help Desk Team. By An Vu Page 28

 SEMESTER 2/2012

[s729] if a promoter is involved in that contravention, then any person who suffered loss or damage may recover that
loss or damage from the promoter.

Section 131: Contracts before registration

(1) If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company
before it is registered, the company becomes bound by the contract and entitled to its benefit if the
company, or a company that is reasonably identifiable with it, is registered and ratifies the contract:
(a) Within the time agreed to by the parties to the contract; or
(b) If there is no agreed time—within a reasonable time after the contract is entered into.
(2) The person is liable to pay damages to each other party to the pre-registration contract if the company is
not registered; or the company is registered but does not ratify the contract or enter into a substitute for
it:
(a) Within the time agreed to by the parties to the contract; or
(b) If there is no agreed time—within a reasonable time after the contract is entered into.
The amount that the person is liable to pay to a party is the amount the company would be liable to pay
to the party if the company had ratified the contract and then did not perform it at all.

 Section 131(2) also imposes that a liability for damages only on the person who enters into the
pre-registration contract on behalf of a company even though that person may have acted on
behalf of the others (Bay vs Illawara Stationery Supplies Pty Ltd)
(3) If proceedings are brought to recover damages under subsection (2) because the company is registered
but does not ratify the pre-registration contract or enter into a substitute for it, the court may do anything
that it considers appropriate in the circumstances, including ordering the company to do 1 or more of the
following:
(a) Pay all or part of the damages that the person is liable to pay;
(b) Transfer property that the company received because of the contract to a party to the contract;
(c) Pay an amount to a party to the contract.
(4) If the company ratifies the pre—registration contract but fails to perform all or part of it, the court may
order the person to pay all or part of the damages that the company is ordered to pay.

Section 132: Person may be released from liability but is not entitled to indemnity
(1) A party to the pre—registration contract may release the person from all or part of their liability under
section 131 to the party by signing a release.
(2) Despite any rule of law or equity, the person does not have any right of indemnity against the company
in respect of the person’s liability under this Part. This is so even if the person was acting, or purporting
to act, as trustee for the company.

RMIT Vietnam Help Desk Team. By An Vu Page 29

 SEMESTER 2/2012

Chap 12: DIRECTORS

I. Who is a director?

A director of a company is defined in s9 as a person who is appointed to the position of a director or alternative
director regardless of the name given to their position. Unless the contrary intention appears, a person who is not
validly appointed as a director is also regarded as a director if

 They act in the position of a director (de facto director)

 The directors are accustomed to act in accordance with the person’s instructions or wishes (‘shadow
director’)

[s.9] A director includes persons who act in the position of a director even though they have not been appointed to
that position.

A “de facto director” (de facto = “in fact”) is a person that acts like a director by exercising top level management
functions, being the driving force behind the company, or participating in management after expiration of his/her
term as director. [Case: Corporate Affair Commission v Drysdale]

A “shadow director” is a person whose instructions or wishes are customarily followed by the directors. This director
acts on advice given by the person in the performance of function attaching to the person’s professional capacity

A body corporate can be a “shadow director”. Thus, a holding company may be a shadow director of a subsidiary if
the directors of the subsidiary are nominee directors who customarily follow the holding company’s directions or
instructions.

II. Types of directors

An “alternate director” is a person that replaces a director when the real director is unable to attend a board meeting
or unable to exercise director’s powers

A “nominee director” is a person appointed to represent the interests of someone else who is entitled to have a
director position (e.g. majority shareholder, major creditor, holding company, joint venture partner)

A “managing director” is in charge of managing the company’s daily business

RMIT Vietnam Help Desk Team. By An Vu Page 30

 SEMESTER 2/2012

[s. 201J] Replaceable Rule allows the directors to appoint one of more themselves to the office of managing
directors.

Chair of Directors

[s.248E] CA and RR provide that the directors may appoint a director to chair director meetings

[s.249U] an individual may be elected by the directors to chair meetings of the company.

[s.251A] minutes must be signed by the chair of the meeting of the chair of the next meeting.

[s.248G(2)] the chair has a casting vote (la phieu quyet dinh) at directors’ meeting.

The “chairperson” of the board of directors exercises procedural control over meetings, and often is given special
powers which go beyond supervision of meetings (selecting matters and documents to be brought to board’s
attention, formulating policy of board and promoting the position of the company).

The “executive director” is the full time employee who takes part in the daily management of the company’s
business

“Non-executive directors” are those people that are part time, not directly involved in daily management, but attend
board of directors meetings

III. Function and power of the board

 The board of directors’ powers are very broad, and include:

1. Overseeing the company, including its control and accountability systems

2. Appointing and removing the CEO

3. Approving the appointment or removal of senior officers (CEO recommends to board)

4. Providing input and final approval for management’s corporate strategy and performance objectives

5. Monitoring risk management systems, internal control, codes of conduct, and legal compliance

6. Monitoring senior executives’ performance and implementation of corporate strategy

7. Ensuring availability of resources to management

8. Approving and monitoring capital expenditure and capital management/financial reporting

One of the most important functions of the board is appointing and removing the CEO.

IV. The power of management

[RR 198A] states: The business of a company is to be managed by, or under the direction of, its board of directors
who may exercise all the company’s powers (except those powers that the Corporations Act or constitution gives to
the shareholders at a general meeting)

◦ Changing the direction of the company

◦ Selling the only business of the company

Constitutions typically give similar broad management powers to the board of directors (see table on p.266-267)

RMIT Vietnam Help Desk Team. By An Vu Page 31

 SEMESTER 2/2012

Shareholder approval is not required for the board of directors to sell the only business of the company (reference:
Strong v. J. Brough & Son (Strathfield) Pty Ltd, text p. 266)

Shareholders cannot override the management decisions

The power to sell company’s property belongs to the board of directors, this is not done through a general meeting of
shareholders (reference: Automatic Self-Cleansing Filter Syndicate Co v. Cunninghame, text p. 267)

Case Automatic Self-Cleansing Filter Syndicate Co v. Cunninghame: the directors were ordered by a general
meeting to sell company’s property. The directors refused to do this, relying on the constitution similar to s198A as
manage the business of the company. The member argued that the constitution was subject to overriding the rule
that the directors, as agent of the company, were obliged to follow the instruction of their principal as a resolution of
a general meeting. The court against that the constitution gave management powers to the board of directors, which
included the powers to sell the company property and the members could not interfere with the directors in this
respect

The shareholders cannot override the board majority’s decision to bring a lawsuit against some of the directors
(reference: John Shaw & Sons (Salford) Ltd v Shaw, text p. 268)

Case John Saw & Sons (Salford) Ltd v Shaw: The court held that the board of directors was properly exercising
the powers of management vested in it by the constitution and the general meeting could not usurp (chiem doat
quyen luc) this powers.

Separation of ownership and management

The board’s broad powers of management often result in a separation of management from the shareholders, this is
even necessary where there are many shareholders (reference: text p. 268)

However, the interests of the board may be different from the interests of the shareholders… this causes tension
between the board and shareholders

V. Board of Directors Procedure

1. Director’ Meetings

Board of Directors have board meetings with more than one director meeting together informally to discuss
company’s affair.

[Petsch v Kennedy] A discussion between directors will not amount to an effective director’s meeting unless the
directors are aware, before proceeding to business, that the occasion is to be a director meeting.

Note: meeting at a cafe between 2 directors is not a valid board meeting

2. Resolutions

Board of Directors exercise their powers by passing (agreeing on) resolutions

[s.248G] provides that a directors’ resolution must be passed by a majority of the votes cast by directors entitled to
vote on the resolution.

[s.248G(2)] a chair has a casting vote if necessary.

3. Resolutions without meetings

[RR 248A] A resolution of directors can be passed if all the directors entitle to vote on the resolution sign a
document containing a statement that they are in favour of the resolution set out in the document.

[RR.248A(3)] a resolution is passed when the last director signs.

RMIT Vietnam Help Desk Team. By An Vu Page 32

 SEMESTER 2/2012

[RR.248B] a sole director can pass a resolution by recording it and signing the record

[RR.248C] permits a directors’ meeting to be called by a director giving reasonable notice individually to every
other director.

[Derevaux Holdings Pty Ltd v Pelsart Resources] A notice of meeting should contain a clear and full summary of
the business to be dealt with to enable recipients of notice to decide whether they should attend.

Board meetings must comply with procedural rules, board meetings are very formal.

Directors must receive reasonable notice of board meetings (usually defined in company constitution), a casual
meeting on the street between two board members is not a “board meeting” (reference: Corporations Act replaceable
rule section 248C, Petsch v Kennedy, text p. 269)

[s.129(1)] The irregularity, however, does not prejudice outsiders and a person dealing with the company may
presume that the internal rules of the company have been properly obeyed.

4. Quorum

“Quorum” is the minimum number of people needed for a meeting where business will take place.

For board of directors meetings, quorum is the minimum number of directors needed at the meeting for the board to
do any business.

Corporations Act replaceable rule section 248F sets quorum at two directors, regardless of the total number of
directors on the board (reference: Mancini v. Mancini, text p. 270)

Case Mancini v. Mancini: a divorced husband and wife were the only directors of 3 companies. The removal of the
husband as director at meetings of directors is not valid for a number of reasons and one of them is lack of quorum
due to the fact that the constitution requires a quorum of 2.

[s.195] prohibits a public company director from being present and voting at board directors meetings where a matter
in which the director has a material personal interest is considered. The interest director does not count for the
purpose of quorum.

5. Minutes

[s.251A(1)(b)] Proceedings and resolutions of directors’ meetings (including meetings of a committee of directors)
must be recorded in the company’s minute book.

[s.251A(1)(d)] The minute book should also record circulating and other resolutions passed by directors without
meeting.

[s.251A(2)] The chair must sign the minutes within a reasonable time after the meeting

[s.251A(6)] A minute is recorded and signed is evidence of the proceeding or resolution to which it relates, unless
the contrary is proved.

Committee of the Board

[s.198D] allows the directors to delegate any of their powers to a committee of directors.

[s.251A] delegations to a committee must be recorded in the company’s minute book.

The most common committees are the audit, remuneration and nomination committees.

Appointment of directors

RMIT Vietnam Help Desk Team. By An Vu Page 33

 SEMESTER 2/2012

[s.1322(4)] the court may validate such an irregularity as the number of director falls below the minimum numbers
specified in [s201A]

1. Who may be appointed

[s.201B(1)] persons under the age of 18 years cannot be appointed as directors. A director cannot be a body
corporate but must be a natural person.

The same person may be both a director and secretary of a company.

2. Lodgment of directors’ names and details

[s.117(2)(d) & (f)] The application for registration of a new company must set out the name, address; date and place
of birth each person who consents in writing to become a director.
[s.205B(1)] a company must lodge a notice with ASIC, in the prescribed form, of the personal details of new
directors within 28 days after they are appointed.

[s.205D]A company must also lodge notices with ASIC within 28 days if a director’s personal details change or a
person stops being a director.

[s.205B(4) & (5)]A company must also lodge notice with ASIC within 28 days if a director’s personal detail change
person stops being a director.

3. Appointment by general meeting

[s.201G] subsequent appointments of directors may be made by a shareholder’s resolution passed in general meeting.

Hedges v New South Wales Harness Racing Club: a person who has consented to be a candidate for election as a
director cannot withdraw their candidacy between the commencement of the ballot and the declaration of the result.

[s.201E] in the case of public companies, where appointment of directors is by the general meeting, each director
must be individually appointed by separate resolution

[s.201E(1)] more than one director may be appointed by a single resolution if the general meeting has first
unanimously agreed to a resolution to that effect

4. Casual vacancies

[RR.210H] makes provision for the directors to appoint another directors to fill a casual vacancy. A casual vacancy
is any vacancy in the office of directors arising otherwise than the retirement at the end of the term as the directors
die, resign or unable to continue to act as a director.

For Pty Ltd, the appointment of the new directors by other directors must be confirmed by resolution of the
shareholders within 2 months after the appointment is made [s.201H(2)]

For public company, the appointment by the directors must be confirmed by the members at the company’s next
annual general meeting. [s.201(H)(3)].

5. Appointment by sole director/shareholder

[s.201F] a single shareholder/director of a proprietary company may appoint another director by recording the
appointment and signing the record

Share qualification of directors

The constitution may require a director to hold a minimum number of shares in the company. This required number
of shares is called the “director’s share qualification”.

RMIT Vietnam Help Desk Team. By An Vu Page 34

 SEMESTER 2/2012

Disqualification from managing a corporation

[s.206B] automatically disqualified a person from managing corporations if the person is convicted of serious
criminal offences or becomes bankrupt.

The court also has the power to disqualify a person from managing corporations:

 For contravention of a civil penalty provisions (s206C)

 If the person was an officer of 2 or more failed companies (s 206D)
 If the person repeatedly contravened the Corporation Acts (s 206E)

[s206F] ASIC has the power to disqualify a person from managing corporations if the person was an officer of 2 or
more companies became insolvent.

1. Purpose of disqualification provisions

 Protect a company’s shareholder against further abuse
 Punish an offender
 Deter improper behaviors

2. Managing a corporation

[s.206 A] refer to textbook, page 273

3. Automatic disqualification

a. Convicted persons

[s.206B(1)] a person is automatically disqualified from managing corporations if they are convicted (bi ket an) of
certain criminal offences that:

 Concern the making of decisions that affect the business of the corporation or concern an act that has the
capacity to affect significantly the corporation’s financial standing (s.206B(1)(a))
 Are a contravention of the CA that is punishable by imprisonment for a period greater than 12 months or
other offence involving dishonesty that is punishable by imprisonment for at least three months (s.206B(1)
(b)

[s.206B(4)] ASIC may apply to the court before the expiration of the first year of automatic disqualification to
extend the disqualification period for up to a further 15 years.

b. Un-discharged bankrupt

[s.206B(3)] automatically disqualifies a person from managing corporations if he or she is an un-discharged bankrupt

4. Disqualification by court order

a. Contravention of a civil penalty provisions

[s.206C(1)] gives the court power to disqualify a person from managing corporations where the court has declared
under s1317E that the person contravened a civil penalty provisions.

[s.206C(1)] disqualification is for a period that the court consider appropriate. There is no fixed duration of the
disqualification for contravention of a civil penalty provision.

The factors which have led to the longest periods of disqualification showed as the tables in p.275

b. Failed companies

RMIT Vietnam Help Desk Team. By An Vu Page 35

 SEMESTER 2/2012

[s.206D(1)] gives the court powers to disqualify a person from managing corporations for up to 20 years if, within
the last 7 years, the person has been an officer of 2 or more failed companies

[s.206D(2)] a corporation is regarded as having failed if, for example, it is compulsory wound up on grounds of its
insolvency or it enters voluntary administration and its creditors are unlikely to be fully paid.

c. Repeated contraventions of the Corporation Acts

[s.206E(1)] gives the court the power to disqualify a person from managing corporations if the person has at least
twice

 Been an officer of a body corporate that has contravened the Corporation Acts and each time the person
failed to take reasonable steps to prevent the contravention
 Contravened the CA while he/she was an officer
VI. ASIC power of disqualification: refer textbook (p276)

Leave to manage

[s206G (1)] a person who disqualified from managing corporation may apply to the court for leave to manage
corporation or a particular corporation.

[s.206G(2)] the person must lodge a notice with ASIC at least 21 days before applying for court leave

[s.206F(5)] allows ASIC to give the disqualified person written permission to manage particular corporation or
corporations . The permission may be expressed to be subject to exceptions and conditions determined by ASIC.

Managing a corporation while disqualified

[s.206A(1)] A person who manages a corporation while disqualified commits an offence.

[s.588Z] enables a liquidator to apply to the court for an order that a person who contravened s206A be made
personally liable for a specific part of the company’s liabilities.

Termination of appointment as director

A director may be appointed for such a term as is provided by the constitution.

If a director is appointed for a particular term, the appointment terminates at the expiration of that term

A director may also resign from office. [s.230A] a director may resign by giving a written notice of resignation to the
company at its registered office.

VII. Removal of directors

1. Proprietary company directors

Proprietary company shareholders can remove a director only if they are given that right in the RR or constitution.

Some proprietary company constitutions may permit a director to be removed from office by a majority vote of the
other directors.

[s.203C] permits the shareholders to remove a directors contrary to a provision in the RR or constitution may result
in the company breaching the statutory contract contained in s140(1)(b) or an outside contract.

2. Public company directors

[s. 203D] Removing a public company director can only be done by resolution of the public company’s shareholders
even if there are contrary provisions in either the public company’s constitution or a separate agreement between the
director and the company.
RMIT Vietnam Help Desk Team. By An Vu Page 36
 SEMESTER 2/2012

[s.203D(1)]the resolution to remove the directors does not take effect until a successor has been appointed in the case
if the director was appointed to represent the interests of a particular class of shareholders or debenture-holders.

[s.203E] the directors of public company cannot be removed by the other directors notwithstanding anything in the
constitution or any agreement to that effect.

[s.203D(2)] notice of intention to move the resolution removing a public company director must be given to the
company at least 2 months before the meeting is to be held.

[s.203] also permit a public company in general meeting to remove all appointed directors despite its reference to a
singular directors. It is not result in a breach of s.201(A)(2) which requires the public company have at least 3
directors

Where a director removed prior to the expiry of their term, the questions arises whether the directors can restrain the
company from so acting or obtain damages for wrongful dismissal. A director cannot prevent the company from
exercising its right of removal

VIII. Payment and Disclosure of Remuneration and other benefits

1. Fixing remuneration

[Re George Newman & Co] the directors are not entitled to receive any remuneration from the company unless this
is specifically permitted by the shareholders, RR or constitution.

[RR.202A] provides that the directors are to be paid the remuneration that the company determines by resolution.

[s.588FE(6A) provides that unreasonable director-related transactions entered into during the four years prior to a
company’s winding are voidable.

[s.588FDA] an unreasonable director-related transaction includes reasonable payment to directors of their close
associate

The payment of excessive remuneration to directors may constitute oppressive or unfair product under s232,
especially where dividends are either not paid or reduced to a small amount.

2. Disclosure of remuneration, margin loans, and other benefits

Shareholders have a right to know the remuneration and other benefits paid to directors, especially of listed
companies.

a. Unlisted companies

[s.296(1)] details of remuneration and other benefits paid to directors and other key management personnel must set
out in the financial information of public company and large proprietary companies which must comply with
accounting standards.

Under that paragraph, an unlisted company’s financial statements must disclose key management personnel
compensation in total and for each of the following 5 categories:

 Short term employee benefits (including wages, salaries and bonuses) ( if payable within 12 months of the
end of the year)
 Post-employment benefits
 Other long term benefits (include long services leave benefits and bonuses that are not payable within 12
months after the end of the year)
 Termination benefits
 Share- based payments

RMIT Vietnam Help Desk Team. By An Vu Page 37

 SEMESTER 2/2012

b. Listed companies

[s.300(11)]The annual directors’ report of listed companies must provide details of contracts to which directors are a
party or under which directors are entitled to benefit.

[s.300A(1A)] the additional remuneration disclosure must be set out in a separate and clearly identified section of the
directors’ report under the heading “remuneration report”

The contents of the remuneration report should be referred to p280 and s.300A

Termination payment and benefits

Termination payments to director are a significant corporate governance issue.

Section 200- 200J regulate the circumstances in which shareholder approval is required before a benefit may be
given to specified persons in connection with their retirement or termination from the board or managerial office in a
company.

[s.200B(1AA)] shareholder approval requirements apply to benefits given by a company, an associate of a company,
or a superannuation fund in relation to the company.

Certain benefits are excluded from the operation of s 200B(1) and therefore do not need shareholder approval. These
are defined as “exempt benefits” in s200F(1) and include payments or other benefits:

Those are genuine payments by way of damages for breach of contract.

Given under an agreement before the director took up office, as part of the consideration for agreeing to hold office

Those are payments made in respect of leave of absence under an industrial award.

IX. Company Secretary

The secretary is the company’s chief administrative officer

The secretary has customary authority to make contracts connected with the administration of the company
(reference: Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd, text p. 284)

The secretary is responsible for company compliance with various Corporations Act requirements (listed on p.284-
285, reference: Corporations Act, section 188(1))

1. Appointed of secretaries

[s.120] the first secretary of a company is the person specified in the company’s application for registration with their
consent as the proposed company secretary

[s.204D] requires the subsequent secretaries to be appointed by the directors

A company contravenes s 204C if it is not given a signed content to be secretary before the person is appointed.

[s.205B[ requires a company to lodge a notice of the personal details of the secretary within 28 days after they are
appointed.

2. Who may be appointed?

[s.240B(1)] only an individual who is at least 18 years of age may be appointed as a secretary.

RMIT Vietnam Help Desk Team. By An Vu Page 38

 SEMESTER 2/2012

The company secretary is the company’s chief administrative officer.

Statutory responsibilities

 [s.188(1)] makes a company secretary responsible for the following matters:

 s.142 requirement for the company to have a registered office.
 s.145 requirement for a public company’s registered office to be open to the public
 s.346C requirement to respond to an extract of particulars
 s.348D requirement to respond to a return of particulars
 the lodgment of the various notices with ASIC under ss146, 178A, 178B, 178C, 205B, 254X, 349A.
 the lodgment of financial reports with ASIC under 319A(1)

A secretary who contravenes the s188(1) responsibilities commits a strict liability offence :s 188(2)(A).

Section 188(3) gives then secretary a defence if the secretary took all reasonable steps to ensure that the company
complied with the section.

X. Defective appointments

[s.201M] and [s204E] deal with the effectiveness of acts done by invalidly appointed directors and secretaries

[s.128-130] which contain rules about assumptions people are entitled to make when dealing with a company and its
office

RMIT Vietnam Help Desk Team. By An Vu Page 39

 SEMESTER 2/2012

Chapter 13 - Directors’ Duties

A. Corporate Governance :

 Who owes Corporations Act duties ?

 Director : to include a person who has been appointed to the position of director. It also includes a person
who has not been validly appointed but acts in the position of director (a de facto director) as well as a
person whose instructions or wishes the directors of a company are accustomed to act (a shadow director).
 Officer : includes persons who hold certain specified positions including the directors or secretary of the
corporation such as receiver, administrator, and liquidator.

 Purpose: to ensure that the board is accountable to stakeholders, especially shareholders, and that management is
accountable to the board

 Concerns how corporate entities are governed, as distinct from the way the businesses within those entities
are managed

 Provides proper incentives for board and management; helps to provide a degree of confidence that is
necessary for the proper functioning of a market economy

 Is regulated by a mix of:

 legal regulation (Corporations Act and fiduciary (common law) duties, ASX listing rules, accounting
/ auditing standards, etc.); and
 self-regulation (codes of corporate governance which are voluntary, not mandatory)
 the focus of corporate governance is largely on the role and function of the board of directors
 fiduciary / beneficiary: a relationship where the f agrees to act for the b’s benefit – a relationship of
trust and confidence

 8 principles from ASX Corporate Governance Council’s Corporate Governance Principles and
Recommendations 311
 Lay solid foundations for management and oversight
 Structure the board to add value
 Promote ethical and responsible decision-making
 Safeguard integrity in financial reporting

RMIT Vietnam Help Desk Team. By An Vu Page 40

 SEMESTER 2/2012

 Make timely and balanced disclosure

 Respect the rights of all shareholders
 Recognise and manage risk
 Remunerate fairly and responsibly

B. Good faith and Proper purpose:

[s 181] directors have fiduciary and statutory duties to act:

a) in good faith in the best interests of the corporation; and

b) for a proper purpose

I. Duty to act in good faith in the best interests of the company

The Bell Group Ltd v West Pac Banking Corp:

 Rule: Good faith in the best interests of the corporation has both subjective and objective
elements:
 Subjective: Directors must genuinely believe they are acting in the best interests of the company
 Objective: the duty is breached if a director acts in a way that no rational director would have considered
to be in the best interests of the company.

1. Best interests of the company:

a) Present and future shareholders

- When the company is solvent: the directors must act in the best interests of the company’s shareholders as a
collective group: Greenhalgh v Arderne Cinemas Ltd
- When the company is in financial difficulties: the interests of the company correspond to the interests of its
creditors, and directors have a duty to exercise their powers in a way that does not prejudice the company’s ability to
pay its creditors: Walker v Wimborne
- Directors should have regard to both the interests of present and future shareholders as well as the interests of the
company as a commercial entity): Darvall v North Sydney Brick & Tile Co Ltd

b) Individual shareholders

-Percival v Wright:

 Fact: Director agreed to buy a shareholder’s shares but not disclose that there was an impending
takeover bid at a substantially higher price. The shareholder sought to rescind the contract on the
basis that the director failed to disclose the information. This claim was failed.because it was held
that
 Rule: Directors only owe fiduciary duties to the company as a whole and not to particular individual
shareholders .

RMIT Vietnam Help Desk Team. By An Vu Page 41

 SEMESTER 2/2012

 Exception: where there was direct and close contact between director and individual member so that
director caused member to act in a certain way which turned out to be detrimental to them, a director
may owe fiduciary duties to that individual shareholder: Peskin v Anderson

c) Beneficiaries of a trust

- Where a company acts as a trustee, directors of the trustee company may owe a duty to act in the best interests of
the beneficiaries of the trust: Hurley v BGH Nominees Pty Ltd

d) Different classes of shareholders

-The exercise of a power by the directors may benefit one class to the detriment of others: Mills v Mills

-s232 remedy : enables a member to obtain a remedy if a resolution of a class of members was contrary to the
interests of the members as a whole.

2. Nominee directors

-Nominee directors are sometimes appointed to represent sectional interests (individual shareholders, a class of
shareholders, creditors, a holding company, employees or a government body)

-Re Broadcasting Station 2GB Pty Ltd:

 Fact: Fairfax appointed number of directors as nominees to the board of 2GB to represent its
interests. One of the director of 2GB claimed that nominees acted solely in the interests of Fairfax. It
was held that Fairfax nominees directors would be likely to act, and were expected by Fairfax to act,
in accordance with its wishes without close personal analysis of the issues. No evidence that the
nominees directors believed that the interests of Fairfax diverged from the interests of company as a
whole.
 Rule: Nominee directors may act in the interests of their appointor if they honestly and
reasonably believe that there is no conflict between the interests of their appointor and the interests
of the company

-A company’s constitution or a shareholders’ agreement may specifically permit the appointment of nominee
directors to represent the interests of a particular shareholder or creditor: Levin v Clark

-Scottish Cooperative Wholesale Soc Ltd v Meyer:

Fact: The holding company appointed three directors as nominees to its subsidiary. The subsidiary
business is in textile manufacture using yarn purchased from the holding company. After a time, the
holding company stopped supplying yarn and the subsidiary suffered severe loss. It was held that the
subsidiary’s nominee directors appointed by the holding company have acted contrary to the interests
of the shareholders as a whole by failing to defend it from the actions of the holding company.
 Rule: Nominee directors breach their duty where there is a clear conflict between the interests of
the company and their appointer, and the company’s interests are sacrificed.
3. Company groups

-A holding company may appoint its nominees as directors of subsidiaries. Generally the holding company requires
the nominees to act in the best interests of the group of companies as a whole, but if there is a conflict with the
interests of the subsidiary, the nominees must act in the subsidiary’s best interests: Walker v Wimborne.

RMIT Vietnam Help Desk Team. By An Vu Page 42

 SEMESTER 2/2012

-In some circumstances, an intra-group transaction that is entered into primarily for the benefit of the group may
also have collateral or derivative benefits for the subsidiary. There’s no breach of duty if the subsidiary indirectly
benefited from the assistance that was given to other companies in the group. Equiticorp Finance Ltd (in liq) v
Bank of New Zealand

- [s187]: Directors who serve on boards of wholly-owned subsidiaries will be taken to act in good faith in the best
interests of the subsidiary where:

a) constitution of subsidiary expressly authorizes director to act in best interests of holding company;

b) director in fact acted in good faith in the best interests of the holding company; and

c) subsidiary is neither insolvent nor becomes insolvent due to director’s act  to protect the interests of the
subsidiary’s creditors.

- Nominee directors who serve on boards of non-wholly owned subsidiaries must balance the interests of the group
with the interests of the subsidiary’s shareholders generally, including the minority shareholders.

-Re Spargos Mining NL :

 Fact: The directors diverted substantial assets that were used for the benefit of other companies in the group,
which caused considerable loss to shareholders not interested in the other companies of the group. Minority
shareholders were entitled to obtain oppression remedy against the directors.
 Rule: It may be detrimental to the interests of minority shareholders if directors fail to act in the interests
of a particular company and instead treat the company as part of a group.

4. Employees

-Parke v Daily News:

 Fact: Directors distribute proceeds from sale of one of the companies to its employees as compensation. It
was held that these payments were not reasonably incidental to the carrying on of the company’s business, as
it is detrimental to shareholders and the company as a whole.
 Rule: Directors should not consider the interests of employees at the expense of the interests of shareholders.
5. Creditors

-When the company is solvent, the best interests of the company correspond with the best interests of its shareholders
as a collective group.
-If the company is insolvent or in financial difficulty, the interests of the company are those of its creditors.
Directors then have a duty to exercise their powers in a way that does not prejudice the company’s ability to pay its
creditors.

6. Directors’ duties and corporate social responsibility

-Directors may be required to consider the interests of other important stakeholders (apart from shareholders and
creditors): employees, customers, suppliers, the environment, regulators / government, the broader community

II. Duty to exercise powers for a proper purpose

1. Issues of shares
RMIT Vietnam Help Desk Team. By An Vu Page 43
 SEMESTER 2/2012

-The power to issue shares is ordinarily conferred for the purpose of raising capital for the company, providing
consideration for the purchase of property or as a means of remunerating employees of a company .

-Directors breach their fiduciary & statutory duties if they issue shares to:

o maintain control of the company’s management or majority shareholding: Ngurli v McCann

 the share issue is invalidated
o defeat a takeover bid – not OK for purposes of retaining their jobs, but permissible if motivation
is to facilitate an auction for the company’s shares, thereby maximizing the return to shareholders

o create or destroy a majority of voting power

Howard Smith Ltd v Ampol Petroleum Ltd:
 Fact: The company has two major independent shareholders, which controlled 55
percent of the company’s issued capital. The director of the company then issued
sufficient shares to another company to reduce the two majority shareholdings to
minority positions. The court held that the directors had breached their duty as they
were motivated primarily to reduce the combined majority shareholdings to
minority position in order to promote another company takeover bid, although they
issued shares in higher price.
 Rule: Directors breach their duty to act for proper purposes if they use their power
to issue shares for the purpose of creating a new majority shareholder or to
manipulate control within the company, even where share issue is not motivated by
self-interest and directors honestly believe their actions are in the best overall
interests of the shareholders.

-However, shareholders may ratify an improper share issue, where directors obtain shareholder approval at
a general meeting:

 Share issues exceeding 15% of a listed company’s issued capital in a 12-month period
 Share issues to related parties of a listed company such as directors.

-Remedies:

 (Main remedy) Rescind the share issue.

 A shareholder may apply for court leave under s236 to sue the directors in the name of the company if it
is unwilling to take such action against its directors.
 Constitute oppressive or unfair conduct & enable a SH to obtain a remedy under s232.

2. Mixed purposes and the “but for” test

- Where there is more than one purpose (may be a proper purpose and an improper one) for a share issue, an
allotment of shares will be invalidated IF the improper purpose is causative in the sense that, “but for” the
improper purpose, no share issue would have been made: Mills v Mills

- Hannes v MJH Pty Ltd:

 Rule: The director was held for breaching his duty to act for proper purpose because despite many
purposes of share issue, the motivating and the real reason to issue shares to himself and enter into a
service agreement was self-interest and the desire to derive additional personal benefits.

RMIT Vietnam Help Desk Team. By An Vu Page 44

 SEMESTER 2/2012

3. Duties of target company directors seeking to defeat a hostile takeover

4. Use company funds to promote re-election of directors:

- Directors may exercise their powers for an improper purpose where they use company funds to
promote their own re-election against other candidates.
- Advance Bank Australia Ltd v FAI Insurances Ltd:
 Rule: Expenditure of the company funds may not be prohibited, but should be kept to a
minimum and be confined to providing information that promotes an informed decision by
shareholders. In this case, it was held that the directors breached their duty even though they
honestly believed they were acting in the company’s best interests because they resolved to
form a campaign committee that used company funds to promote the re-election of certain
directors and to secure the defeat of candidates nominated by the majority director.
5. Exercise management powers for an improper purpose:
- Directors may breach their duty where management powers are exercised for an improper purpose.
- Permanent Building Society v Wheel:
 Fact: The board of a building society caused the society to purchase land at an over-value.
The purpose of this transaction was to provide the vendor with the money to meet
obligations to a company in which majority of the society’s directors had personal interests.
It was held that the directors acted for an improper purpose, and one of the directors, though
did not participate in the negotiations, was also held acted for improper purpose as he knew
that improper purpose and failed to prevent.
- A director was held to act for an improper purpose if he used his powers to give away the company’s
assets to a family company for no consideration: Bishopsgae Investment Management Ltd v
Maxwell

6. Exercising powers for the benefits of others:

- The Bell Group Ltd v Westpac Banking Corp:
 Fact: The directors of the group arranged for the group to enter into certain transactions with
its banks, which converted unsecured debts into secured debts. The court held that the
directors exercised their power for an improper purpose because they caused the group to
enter into transactions which were for the interests of the banks and the ultimate parent
company, rather than in the interests of the group and its creditors.
 Rule: Directors may breach their duty if they exercise their powers in the interests of a third
party such as a bank or ultimate parent company. Directors of companies in an insolvency
context breach their duty to act for proper purposes if they exercise their powers in a way
that fails to take into account the interests of creditors as part of their obligation to consider,
and act in, the best interest of the company as a whole.

7. Directors’ refusal to register a transfer of shares based on an improper purpose

- Directors must exercise their discretion to refuse to register transfers of shares in good faith and in
the best interests of the company and not for improper purposes: Australian Metropolitan Life
Assurance Co Ltd v Ure
- Refusing to transfer shares for proper purpose where director’s discretion is used
o RR 1072F: where shares not fully paid up or company has a lien on shares

RMIT Vietnam Help Desk Team. By An Vu Page 45

 SEMESTER 2/2012

o RR 1072G: Directors’ power to refuse transfer in Pty. Companies for any reason
- A member may obtain a remedy under s232.

8. Statutory duty to act in good faith and for a proper purpose: s181
[s181(1)]: A director or other officer of a corporation must exercise their powers and discharge their
duties in good faith in the best interests of the corporation and for a proper purpose.
 Consequences of contravening s 181:
- [s1317E]: civil penalty provision: imposed on any person who is involved in a contravention of s181(1) .
Involvement may arise where a person aids and abets, induces or is knowingly concerned in, or party to the
contravention.
- [s184(1)] criminal liability: if director or officer is reckless / intentionally dishonest and fails to exercise
their power and discharge their duties in good faith in the best interests of the corporation or for a proper
purpose  a breach of s181, even though the director possessed the subjective belief that they were acting
for proper purposes

 Directors who permit the corporation to contravene the Corporation Act

- ASIC v Maxwell: Directors may contravene the statutory duties (s 180-183) owed to the company if:
 they authorize or permit the company to contravene provisions of the Corporations Act; and
 the corporation’s interests were jeopardized; and
 the risks to the corporation outweighed any potential countervailing benefits to the corporation; and
 there were reasonable steps that could have been taken to avoid those risks.

9. Duty to retain discretion

- Directors have a fiduciary duty to retain their discretionary powers.
- They will breach this duty if they enter into an agreement with outsiders that requires them to vote in a
certain way at future board meetings  such contracts are ineffective even if the directors are not
otherwise in breach of their duties.

C. Conflicts of interest and disclosure:

-All fiduciaries must not allow a situation to develop where there is a conflict between their duties to the person for
whose benefit they act and their own personal interests.

-Directors who put themselves in a position where it appears that they may act in their own interests breach their
fiduciary duty to avoid conflicts of interest.

-And directors cannot avoid liability by claiming:

 They did not make a profit,
 Their company did not suffer any loss
 Or that the contract was a fair one.[Aberdeen Railway Co. v. Blaikie Bros]
-Duty to avoid conflicts of interest is governed by both common law fiduciary duty & s 181-183 statutory duties.

1. Self-interested transactions with the company

RMIT Vietnam Help Desk Team. By An Vu Page 46

 SEMESTER 2/2012

a) Fiduciary duties: Directors owe a fiduciary duty regarding undisclosed self-interested transactions.

- A breach of the fiduciary duty arises whether the director’s undisclosed interest in the contract is direct or
indirect:
a. Direct interest: a director who contracts personally with the company
b.Indirect interest: the director is a director or SH of another company that contracts with the company

 Transvaal Lands Co. v. New Belgium:

o Fact: Samuel and Harvey were two directors of Transvaal Lands. Besides, Samuel was also a
director, while Harvey was a trustee of New Belgium, and they both owned shares in New Belgium.
At the instigation of Samuel, Transvaal Lands purchased shares owned by New Belgium. After the
purchase was finalized, Transvaal Lands discovered the interests of Samuel and Harvey and sought
to have the contract rescinded. It was held that Samuel had interests in both companies as directors
and shareholder, which was conflicted with his duty to act in the best interests of Transvaal Lands.
Harvey was also held breached of his duty to act in the best for the beneficiaries of the trust.
- directors breach their fiduciary duty only if their undisclosed self-interested transaction is a material interest.
-A person who is a director of two companies that do business with one another may owe fiduciary duties to both
companies: R v. Byrnes
 To avoid liability for breaching their duty:
o [fiduciary duty]: Directors make full disclosure of their personal interests in a transaction and obtain
shareholder approval (ratification), and
o [statutory duty]: pursuant to [s191]: directors who has material personal interest in a matter that
relates to the affairs of the company to give notice of the interest to other directors
-Remedies:
 Rescission of contract: put both parties to the contract in the position they would have been in had no
contract been made [Kinsella v. Russel Kinsella]

b) Financial benefits to directors of public companies: Ch 2E (ss207-230)

- [s207]: Ch 2E is designed to protect shareholders of a public company by requiring prior shareholder

approval before the public company gives financial benefits to directors and other related parties.

- [s230]: Directors are not relieved of any of their duties under Corporations Act or fiduciary duties merely because
shareholders authorise a transaction under Ch 2E

 Shareholder approval needed for financial benefit

- [s208(1)(a)(i)]: a public company may give a financial benefit to a related party if it obtains the approval of its
shareholders.
- [s208(1)(a)(ii)]: “Prior approval” must be obtained no more than 15 months before giving benefit

- [s208(1)]: a public company shareholder approval is required where an entity controlled by a public company gives
a financial benefit to a related party of the public company.

- [s208(1)(b)]: a financial benefit to a related party does not need the approval of the public company’s shareholders
if the financial benefit falls within any exception set out in s 210-216.

o [s210]: transactions that would be reasonable in the circumstances if the parties were dealing ar arm’s length
or the terms were less favourable to the related party than arm’s length terms

RMIT Vietnam Help Desk Team. By An Vu Page 47

 SEMESTER 2/2012

o [s211(1)]: reasonable remuneration as an officer or employee of public company or an entity that controls or
is controlled by the public company.
o [s213]: amounts of money given to or director or spouse of less than $2,000
o [s215]: benefits given to the related party as a member of the public company where the benefits fo not
discriminate unfairly against the other members
 Financial benefits

- “Financial benefit” [s 229(3)] examples: providing finance or property (a), buying or selling asset(b), supplying or
receiving services(d), issuing securities (e)

 Related parties
-“Related party” [s 228]: directors, spouses, de facto spouses, parents, children, business entity controlled by the
aforementioned, entity that acts with a related party on the understanding that related party will receive a financial
benefit if the public company gives entity a financial benefit, etc

 Approval meeting
-Shareholders’ meeting to consider a resolution to approve the giving of the financial benefit
 The company must lodge notice with ASIC at least 14 days before the notice is given to members
s218(1)
 explanatory statement about the proposed financial benefit must fully inform shareholders s211(b)
350

 Interested related parties cannot vote

 A related party or associate to whom the proposed resolution would permit a financial benefit to be given,
cannot cast a vote on the resolution s224(1)
 ASIC may allow if this would not cause unfair prejudice to the interests of any member of the company
s224(4)
 Contravention of s224(1) is an offence whether or not resolution is passed: s224(6) but does not affect the
validity of a resolution: s224(8)

 Consequences of breach (contravention of s208)

 Does not affect the validity of any contract or transaction connected with the giving of benefit
 The public company or entity that it controls is not guilty of an offence: s209(1)(b)
 Civil penalty: s1317E, possible criminal if dishonest: s209(3)

-Remedies:
 Apply for court order for an injunction under s1324

c) Entitlement of interested director to vote

-Public companies:

[s 195(1)]: directors are prohibited from participating and voting at board meetings that consider matters in
which they have a material personal interest

 Exception: [s195(2)] where non-interested directors pass a resolution stating that they are satisfied that
the interest should not disqualify the director from voting or being present:

RMIT Vietnam Help Desk Team. By An Vu Page 48

 SEMESTER 2/2012

 [s196(1)]: ASIC may declare that a interested director of a public company may be present and/or vote if
number of directors present less than a quorum and the matter is urgent:

-Proprietary companies: interested directors may vote if constitution / RR allows

 RR 194: may vote with disclosure to board under s191

 the company cannot avoid the transaction merely because of the existence of the interest

d) Remuneration

-Remuneration is most obvious situation where directors have a material self-interested transaction with the company

-often consists of a variety of components including fixed salaries, performance-based payments, ect.

e) Related party disclosures in financial statements:

- [AASB 124]: the financial statements must disclose the value of all benefits to related parties including such
matters as transactions where a director or other related entity of, or supplier to, the company.

2. Personal profits arising from acting as director

-Directors have a fiduciary duty not to make undisclosed personal profits that arise from acting in their position

-This principle applies even where the company has not suffered any loss, indeed, it may even have benefitted.
There is a breach of duty even if the transaction was fair from the company’s point of view.

- Directors cannot place themselves in a position where it may appear that they are motivated by considerations other
than what is in the best interests of the company.

Regal (Hastings) Ltd v Gulliver:

 Fact: Regal Ltd owned a cinema in Hastings and wishes to lease two more cinemas, then sell the whole
business of the company as a going concern. A subsidiary was form for this purpose with the capital of
5,000 $1 shares. It must be a guarantee on payment of $5,000; however, the company was able to
contribute $2,000. At board meeting, it was decided that the balance would be allotted to the four
directors, company solicitor and persons nominated by the chair. They were allotted 500 shares each in
subsidiary. Gulliver was the chairman and also trustee for the two companies, as well as minority
shareholder in both companies. However, subsequently, instead of selling the business, all shares would
be sold with acquired profit of nearly $3 per share. It was held that although all the transactions were
honestly made, four directors were liable to repay the profits they had made on the sale of the shares.
However, Gulliver, the chairman, was found not to have breached his duty as he held the shares in the
subsidiary as trustee for others and made no personal profits from transaction. The solicitor was also
held breached no duty because, despite gaining profit from the sale of shares, he disclosed his profit to
the appropriate organ of the company, the board of directors.
 Rule: The directors cannot make an undisclosed personal profit arising from acting in their position as
directors.
3. Improper use of position: s182

- [s 182]: A director, secretary, other officer or employee of a corp. must not improperly use their position to:

RMIT Vietnam Help Desk Team. By An Vu Page 49

 SEMESTER 2/2012

a) gain an advantage for themselves or someone else; or

b) cause detriment to the corporation.”
-To contravene s 182, a director, officer or employee must not only improperly use their position but must also do
so “to gain an advantage for themselves or for another person or to cause detriment to the corporation.”
 Contravention of s182 also contravenes a civil penalty provision under s1317E: s182(2)

-“improper” means conduct inconsistent with the “proper” discharge of the duties, obligations and responsibilities
of an officer [Grove v Flavel], and includes:

1. breaching fiduciary duties, even though the director considered that they were acting in the best interests of
the company as a whole and did not intend to act dishonestly: [Chew v R]
2. acting without authority: [R v Byrnes] (two directors, without company authority, affixed and witnessed
company seal) p355
3. allowing company to contravene Corporations Act (where likely to harm company’s interests) p356

-Only necessary to prove that the accused believed that the intended result would cause advantage / detriment (no
need prove advantage / detriment actually occurred): Chew v R

 Examples: Doyle v ASIC (interested director refunded his other company’s share purchase where purchaser
only had an arguable claim for refund); R V Donald; Ex parte Attorney-General (interested director paid
his other companies’ invoices without the usual checking and scrutiny)

4. Bribes and other undisclosed benefits

-Bribes and other undisclosed benefits (secret commissions, etc.) are examples of undisclosed personal profits, and
breach the duty to act in good faith in the best interests of the company as well as s 181 and s 182: Boston Deep
Sea Fishing & Ice Co v Ansell; Furs Ltd v Tomkies

5. Misuse of company funds

-Directors are under a fiduciary duty to use company funds for its legitimate business purposes – duty not to mix
company’s funds with their own or another company’s: Totex-Adon Pty Ltd v Marco

-If directors, without proper disclosure, obtain funds from the company for their personal use, it is no defence for
them to assert that the funds obtained were lent to them: Paul A. Davies (Aust) Pty Ltd v Davies

6. Taking up a corporate opportunity

-Directors must not take up an opportunity that should have gone to their company unless they properly disclose and
gain approval (breach of duties to avoid conflict of interests and to act in good faith in the best interests of the
company, as well as s 181 and s 182)

-Includes diversion of contract – a breach of duty regarding corporate opportunities occurs where
 From company to director personally or to another company in which the director is involved): Cook v Deeks
 Director involves in a business competes with the company arranges for the company to shut down business:
Mordecai v Mordecai

-No defence: directors acted honestly, directors benefitted company by taking up opportunity, company suffered no
loss, company didn’t have the funds to take up the opportunity itself: Regal (Hastings) v Gulliver

RMIT Vietnam Help Desk Team. By An Vu Page 50

 SEMESTER 2/2012

-Directors may keep a corporate opportunity if they make full disclosure to the company’s shareholders (s191 also
to the board) and company gives consent,: Queensland Mines Ltd v Hudson; Peso Silver Mines v Cropper

-Company need not suffer loss to establish a breach of duty: Green v Bestobell Industries Pty Ltd

7. Misuse of confidential information: s183

-Common law: directors have a fiduciary duty not to misuse confidential company information for their own
benefit without appropriate disclosure and approval – includes trade secrets, customer lists, pricing information

-5 factors to consider in deciding whether information is confidential Wright v Gasweld Ply Ltd: page 363

-[s 183]: “A person who obtains information because they are, or have been, a director or other officer or employee
of a corporation must not improperly use the information to: a) gain an advantage for themselves or someone
else; or b) cause detriment to the corporation.”

-[s 183]: only need to prove defendant believed an advantage / detriment would result (no need actual advantage /
detriment)

-Courts are divided over whether information must be “confidential”: Es-me Pty Ltd v Parker (need not be secret
but must be confidential); McNamara v Flavel (liability depends on how information was acquired, and not whether
it was confidential)

-The fiduciary and statutory duties regarding the misuse of information are an instance of the wider duty to act in
good faith in the best interests of the company: Southern Real Estate Pty Ltd v Dellow

- A director who contravenes s 183 may also contravene s 181: Marson Pty Ltd v Pressbank Pty Ltd

-Misuse of information about a company’s insolvency:

 Directors may contravene s 183 by making improper use of information that one’s company is in financial
difficulties to gain an advantage for oneself over the company’s creditors: Grove v Flavel
 Director transferred for no consideration a valuable asset owed by his insolvent company to another company
that he controlled: McNamara v Flavel

8. Competing with the company

-Directors involved with a competing business generally breach their fiduciary duty.
-Exception for non-executive directors: Bell v Lever Bros Ltd (note: still may not use or disclose confidential
info)
9. Disclosure of interests
-Conflict of interest situations require directors to disclose to shareholders at a general meeting and obtain consent
(“ratification”): Furs Ltd v Tomkies; Regal (Hastings) v Gulliver - although constitution may require to be
disclosed to and approved by the company’s directors

-Duty breached if disclosed information is misleading or inadequate: Southern Cross Mine Management Pty
Ltd v Ensham Resources Pty Ltd 361

- [s 191(1)]: a director who has a material personal interest in a matter that relates to the affairs of the company to
give notice of the interest to the board (in addition to shareholders, per common law) 370

RMIT Vietnam Help Desk Team. By An Vu Page 51

 SEMESTER 2/2012

-[RR 194]: directors of proprietary companies may have an interest in contracts with the company and may vote on
it at board meeting, with disclosure to board

-[s192(5)]: s191 does not apply to a proprietary company that has only one director

-Contravention of s191 &192 does not affect the validity of any act or transaction: ss191(4) &192(7) but constitutes
an offence

-[s 205G]Disclosure to the ASX is required where directors of listed companies hold interests in the company or a
related body corporate

f) Duty to use reasonable care, skill and diligence (s 180(1), fiduciary, negligence)

- General rule: Directors /officers are under a duty to exercise a reasonable degree of care and diligence - imposed
by tort (civil wrongdoing) of negligence, directors’ fiduciary duty, and s 180(1).

 diligence = being constant and persistent in one’s effort to accomplish something

-Directors /officers will breach their duties of care and diligence & be liable to pay damages to the company if:

1. breached standard of care and diligence (not careful enough);

2. their carelessness caused the injury; and
3. the kind or type of loss suffered was reasonably foreseeable

-Directors / officers will avoid liability for breaching their duties if they satisfy the business judgment rule defence
in s180(2).

A. Current standards of care, skill and diligence

-Common law (minimum standard): directors are required to make inquiries about their company’s financial
position and to have the skills to understand a balance sheet and profit and loss statement – be “reasonably
informed”: Daniels v Anderson 378

-Statutory law: s 180(1): directors / other officers must use the degree of care and diligence that a reasonable
person would if they:
 were a director/officer of a corporation in the corporation’s circumstances; and
 occupied the office held by, and had the same responsibilities as, the director/officer 378

-General tort law principle: factors to determine how careful a reasonable director/officer would have been when
making decisions that involve a risk of harm are: ASIC v Vines 379
 magnitude of the risk of harm and the probability of it occurring;
 seriousness of the loss;
 expense, difficulty and inconvenience of reducing risk

I. Corporation’s circumstances

RMIT Vietnam Help Desk Team. By An Vu Page 52

 SEMESTER 2/2012

-s180(1)(a): a corporation’s circumstances are one of the factors in deciding the degree of care and diligence which a
reasonable person would exercise in a particular case
 A reasonable chair would have known abt deteriorating financial condition & acted accordingly: ASIC v Rich
-“Circumstances” to be considered include:
 type of company;
 size and nature of its enterprise;
 constitution;
 composition of board and distribution of work between board and other officers 379

II. Director’s office and responsibilities

-s180(1)(b): the office held by a director/officer and their responsibilities are relevant factors in deciding the degree
of care and diligence which a reasonable person would exercise in a particular case
-“Responsibilities” may vary from company to company – involves consideration of constitution, way work is
distributed and experience and skills of the particular director

-Directors are expected to attend board meetings unless exceptional circumstances prevent them doing so such as
illness or absence from the State: Vrisakis v ASC 389

 Otherwise unable to participate in the governance of the C: Gold Ribbon (Accountants) Ply Ltd v Sheers

i. Non-executive directors

-Non-executive directors are not directly involved in the daily management of the company’s business.

-Listed public companies, non-executive directors are subject to a minimum standard*: Daniels v Anderson 381

-Even small company non-executive directors are:

 subject to minimum standards*: Sheahan v Verco, and
 have a duty to safeguard the company’s interests: ASIC v Adler 382

**“Minimum standard”: must take reasonable steps to place themselves in a position to guide and monitor the
management of a company (although not involved in day to day operation of the business)

-Non-executive directors have a duty to safeguard the company’s interests: ASIC v Adler 383

-Non-executive directors with special skill or experience have a duty to give the company the benefit of these
(standard of care is what a reasonable director with the person’s background and experience would have done): Gold
Ribbon (Accountants) Pty Ltd v Sheers - cannot avoid liability for negligence simply by asserting that they relied
on the company’s executive director and officers 383

-Non-executive directors may breach their duty of care if they act in a way that exposes the company to a risk of
suffering harm: ASIC v Macdonald (No 11) (approval of false and misleading public statement) 384

ii. Chair

-The chair of a listed company has special responsibilities and is subject to a higher standard of care and diligence
than is applicable to non-executive directors: ASIC v Rich 384-385

iii. Executive directors and officers

RMIT Vietnam Help Desk Team. By An Vu Page 53
 SEMESTER 2/2012

-All directors, whether executive or non-executive must take reasonable steps to place themselves in a position to
guide and monitor the management of a company: Daniels v Anderson
-Executive directors have special responsibilities commensurate with their positions; thus subject to higher standards
than non-executive directors (include all responsibilities of non-executive directors)
-High managers, such as chief executive officers and managing directors, have the overall responsibility for the
day-to-day management of the company’s business, and may breach their standard of care if they:

 don’t ensure that the company has appropriate management systems in place and that those systems are
functioning properly: South Australia v Clark 386
 fail to monitor management effectively: Daniels v Anderson
 fail to inquire and obtain information: Vines v ASIC 386
 cause the company to enter into transactions that expose it to risks without the prospect of producing any
benefit: ASIC v Adler 388
 allow the company to engage in conduct breaching the law (thus exposing the company to risk): ASIC v
Sydney Investment House Equities Pty Ltd 388-389

B. The business judgement rule defence: s 180(2)

-Purpose: lawmakers do not want to discourage entrepreneurial risk-taking

-s180(2): Provides a “safe harbour” re statutory and common law duties of care and diligence if director / officer can
show: 390

 judgement made in good faith and for proper purpose; and

 no material personal interest; and
 directors/officers reasonably informed themselves to the extent they reasonably believed appropriate;&
 the judgement was rationally believed to be in the best interests of the corporation

-Can not rely on the business judgment rule if fail to apply any of above: ASIC v Adler 391

C. Reliance defence: s189

-s189: affords protection to directors who reasonably rely on information or advice from others – covers statutory
and common law duties 392

-The reliance must be made in good faith and after making an independent assessment of information/advice, having
regard to the director’s knowledge: s189(b)

 Directors have a positive obligation to be informed and satisfy themselves that the person they are relying
upon is competent and reliable: Duke Group Ltd v Pilmer 392

D. Responsibility for actions of delegates defence: s190

-s190: directors responsible for acts of delegates (delegates under s198D include a committee of directors, a director,
an employee of the company or any other person; must be recorded in the company’s minute book in accordance
with s251A)

-Unless they believed on reasonable grounds that delegate would exercise power in conformity with Corporations
Act and constitution, in good faith, after making proper inquiries: s190(2) 393

RMIT Vietnam Help Desk Team. By An Vu Page 54

 SEMESTER 2/2012

 s190(2) requirement is satisfied, a director will not be responsible for the acts of a delegate (fraudulently,
negligently or outside the scope of their delegation)

E. Consequences of contravention s 180(1), fiduciary & negligence

-Although content of common law and statutory (s 180) duties of care & diligence are the same, consequences of
breach are different 394

 Common law breach:

 company can sue director / officer for damages
 shareholders can sue in the name of the company under s 236 with prior permission of court

 Statutory breach: [s 180(1) is a civil penalty provision under s 1317E – not an s184 criminal offences]
 possible fine up to $200,000: s 1317G
 compensation to company for damage suffered: s 1317H
 disqualification from management: s 206C

g) Directors of insolvent companies - Duty not to prejudice creditors’ interests (s 181-183 &
fiduciary)

-When a company is insolvent or in financial difficulty (doubtful solvency), shareholders cease to be the key
stakeholders and the duty to act in the best interests of the company means directors must not prejudice the
interests of the company’s creditors (by doing acts which reduce company assets that would otherwise be available
to creditors) – if doing so, directors breach their statutory duties in s181 (best interests of the company), s182
(improper use of position) and s183 (improper use of information) 398-399

-Breaches:

1. loans to group companies where there was no prospect of repayment: Walker v Wimborne 399
2. loans to group companies at less than market rates: Ring v Sutton
3. refinancing transactions that gave banks a security interest in the company’s assets and priority over existing
creditors of the company: Bell Group v Westpac Banking Corp (No 9) 399-400
4. loan guarantees provided by wholly owned subsidiary on behalf of holding company , where the subsidiary is
insolvent: ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd [note that s 187 allows subsidiary
directors to act in holding company’s best interests if subsidiary is solvent] 400-40

-Ratification of shareholders: Shareholders can’t ratify a directors’ breach of duty that involves prejudicing the
interests of creditors: Kinsela v Russell Kinsela Pty Ltd 404

-Creditors can’t bring a civil action to recover their losses against directors who are in breach of duty (because
duty is owed to company). But when company is wound up, liquidator can sue directors in breach of duty and
amounts recovered are available for creditors.

-Breach of statutory duties: civil penalty provisions – both ASIC and company may apply for a compensation order
s 1371J(2)

RMIT Vietnam Help Desk Team. By An Vu Page 55

 SEMESTER 2/2012

h) Directors of insolvent companies - Duty to prevent insolvent trading (s 588G)

-A director is under a duty to prevent the company incurring debts if there are reasonable grounds for suspecting
that it is insolvent: s 588G 405

-Contravening directors are liable to pay compensation to the company of an amount equal to the loss suffered by
unsecured creditors: ss 588J, 588K, 588M - four alternative defences: s 588H; civil penalty order pursuant to Pt
9.4B or a criminal offence under s588G(3)

-Section 588G

1. Who is liable? The duty to prevent insolvent trading applies to a person who is a director at the time when
the company incurs the debt: s588G(1)(a)
 “De facto directors” and “shadow directors” (defined in s 9) are covered by s 588G 405

2. “Incurring a debt”: A debt is incurred when company subjects itself to an unavoidable obligation to pay a
sum of money at a future time: Hawkins v Bank of China 406

 buying goods and services on credit,

 borrowing money from a bank or other lender: Commonwealth Bank of Australia v Friedrich,
 leasing business premises from a landlord: Russell Halpern Nominees Pty Ltd v Martin,
 paying a dividend,
 entering an uncommercial transaction (s 588FB)
 making a reduction of share capital to which Div 1 of Pt 2J.1 applies,
 buying back shares (even if the consideration is not a sum certain in money),
 redeeming redeemable preference shares that are redeemable at its option;
 issuing redeemable preference shares that are redeemable otherwise than its option;
 financially assisting a person to acquire shares in itself or a holding company;

3. When is a debt incurred? Importance of determining when the debt was incurred: s588G(1)(b) requires
proof of insolvency when debt was incurred or proof that company became insolvent by incurring the debt
407

4. “Insolvency”: s95A: the company’s inability to pay its debts as and when they become due & payable
 “solvent” defined in s 95A(1): able to pay all debts, as and when they become due and payable
 not solvent = insolvent: s 95A(2)

5. Two presumptions of insolvency (may be rebutted by evidence to the contrary: s588E(9))

a. s 588E(3): proof of insolvency on any date within 12 month period prior to winding up leads to
presumption that company was insolvent for entire period
b. s 588E(4): failure to keep or retain adequate financial records – contravenes either s286(1) or (2) –
Kenna & Brown Pty Ltd v Kenna

RMIT Vietnam Help Desk Team. By An Vu Page 56

 SEMESTER 2/2012

6. Reasonable grounds for suspecting: s 588G(1)(c): – objective test using the standard of reasonableness
appropriate to directors of reasonable competence and diligence: ASIC v Plymin 409

7. Failure to prevent from incurring debt: s 588G(2):

a. was aware of grounds for suspecting insolvency; or
b. a reasonable person in same circumstances would be aware

-Four alternate defences: s 588H

1. s 588H(2): director had reasonable grounds to “expect”, and did expect, that the company was solvent and
would remain so: Tourprint International Pty Ltd v Bott 411

2. s 588H(3): delegation and reliance on others – requirements:

a. Director had reasonable grounds to believe, and did believe, that a competent and reliable person was
responsible for providing the director with adequate information about whether the company was solvent
and that the other person was fulfilling that responsibility: ASIC v Plymin; and
b. The director expected, on the basis of information provided by the other person, that the company was
solvent and would remain solvent even if it incurred that debt and any other debts that it incurred at that
time: Metropolitan Fire Systems Pty Ltd v Miller 412

3. s 588H(4): directors was absent from management because of illness or for some other good reason (had
material personal interest) at the time when the company incurred the debt: Deputy Commissioner of
Taxation v Clark

4. s 588H(5): director took all reasonable steps to prevent the company from incurring the debt: Byron v
Southern Star Group Pty Ltd (not simply by telling the company’s managing director that he had
reservations & didn’t agree with the company incurring further debts)
 s588H(6): encourages directors to make prompt use of the voluntary administration provisions

-Consequences of contravention s588G – court may order: 414

 director to pay compensation, usually payable to all unsecured creditors: ss588J,588K,588M
 director to pay pecuniary penalty under s 1317G (civil penalty provision)
 disqualification from managing corporations under s 206C
 s588G(3) criminal offence - punishable by a fine/imprisonment/both where dishonesty involved

-Liability for unremitted taxation:

o Directors may become personally liable for unremitted amounts if their company fails to remit them (may
be liable not only for actual amounts but also for amounts estimated as being liable)

o Directors will not be penalized if one of the following occurs:

 The company pays the unremitted amount;
 The company enters an agreement relating to the unremitted amount;
 An administrator is appointed; or
 The company goes into liquidation.

o 2 defenses:

RMIT Vietnam Help Desk Team. By An Vu Page 57

 SEMESTER 2/2012

 The director, because of illness, took no part in management;

 The director took all reasonable steps to ensure deductions were paid; or complied with the 4 alternative
courses of action by the due date.

-Employee entitlements:
The Corporations Law Amendment introduced amendments which were aimed at assisting employees of insolvent
companies to recover their entitlements:
 The insolvent trading provisions were extended to include uncommercial transactions.
 A new offence that penalizes persons who deliberately enter into agreements and transactions for the
purpose of avoiding employee entitlements: s 596AB.
 In addition to criminal offence, s 596AC provides for payment of compensation.

-Fraudulent conduct:
It is an offence under s 592(6) for any reason to be knowingly concerned in the doing of an act by a company with
the intent of defrauding creditors of the company and other person or for any other fraudulent purpose (only need
to prove intention, not necessary in fact defrauded): Coleman v R 418
 That person be personally liable to the company without limitation of liability for an amount up to the
whole of its debts: s 593(2)

i) Remedies and penalties for breach of duty

A. Company’s remedies (fiduciary)

-Directors’ duties are owed to the company and therefore the company is usually the proper plaintiff to remedy
wrongs done to it by the directors. 422

 [Tavistock Holdings Pty. Ltd v. Saulsman] accounting for profits of director

 The manager was liable to compensate the company to the extent it was unable to recover
its losses from the director and his company
 [Green v. Bestobell] accounting for profit of outsider
 The court lifting the corporate veil where a company is formed to assist someone in his
breach of duty
a. Damages or compensation: place company in the position it would have occupied if no breach of duty had
occurred
 [Markwell Bross Pty Ltd v. CPN Diesels Pty Ltd] If a director breaches the fiduciary duties
owned to the company and it suffers loss as a result, the company may apply for the equitable
remedy of compensation.
b. Account for profits:
 The companies may obtain an order that the officer hand over the profit made in breach of duty to
the company [Tavistock Holdings Pty. Ltd v. Saulsman]
c. Rescission of contract: put both parties to the contract in the position they would have been in had no
contract been made [Kinsella v. Russel Kinsella]
d. Injunctions: an order which requires a person to refrain from doing a particular thing [Thomas Marshall
(Exporters) Ltd v Guinle]
e. Return of Property and Constructive Trusts: recover assets that have come into the hands of third parties
[Paul A Davies Pty Ltd. v. Davies] 424-427

B. Civil / criminal penalties (s 180-183)

-For breaches of s 180-183, there are 3 types of civil penalty orders:

RMIT Vietnam Help Desk Team. By An Vu Page 58
 SEMESTER 2/2012

o a pecuniary penalty order (payable to ASIC): s 1317G(1);

o a compensation order (payable to the company or persons harmed): s 1317H; or
o a disqualification order: s 206C 428
 contravention of s 181, 182 or 183 (not 180) with dishonesty is a criminal offence: s 184
 protection for whistleblowers s1317AA-1317AD

j) Exoneration and relief for breach of duty

A. By the company

-General rule: Shareholders have the power to excuse directors for breach of their common law fiduciary (not
statutory) duties to a solvent company 438
 s239(1): merely because the conduct has been ratified/approved by a general meeting does not mean that a
person cannot bring the legal proceedings against directors in the name of the company
 s239(2): however, court may take the ratification/approval into account in deciding

-Exception:
 Where it amounts to oppressive or unfair conduct under s 232: Hannes v MJH Pty Ltd (for example,
where breaching directors control majority of shareholder votes and vote for own ratification)
 Where it’d constitute a misappropriation of company resources: Bell Group Ltd v Westpac Banking Corp
 Where company is insolvent (failure to take into account the interests of creditors): Kinsela v Russell
Kinsela Pty Ltd (shareholders may ratify directors’ breaches of duty to SHs, but not to creditors)

-Ratification by board: Queensland Mines Ltd v Hudson (disclosure to the board of directors and its assent was
sufficient to enable a director to retain his profits

B. Exemption from liability and indemnification

a) By the company
-Abolished common law: possible for a company to provide in its constitution that directors were exempted from
liability for loss caused by negligence but honest acts or omissions

-A company/related body corporate must not: 439

-exempt an officer or auditor from liability to the company: s 199A(1); or

-s 199A(2) indemnify an officer or auditor against a liability:

a) owed to the company; or

b) under a civil penalty or compensation order; or

c) owed to someone else that did not arise out of conduct in good faith.

-Legal costs incurred in relation to actions taken by ASIC/liquidator before commencing proceedings for court order
may be indemnified even if ASIC/liquidator are later successful: s199A(3)

b) By the court

RMIT Vietnam Help Desk Team. By An Vu Page 59

 SEMESTER 2/2012

-A court may relieve officers and certain others specified in s1318(4) from liability (excluded offence) if it appears
that they acted honestly and ought to be excused either wholly or in part: s 1318(1) + may be indemnified for legal
costs in relation to the proceeding: s199A(3).

Directors’ and officers’ insurance

-A company is prohibited from paying premiums insuring directors and officers against liability arising out of
conduct involving a wilful breach of duty in relation to the company or improper use of position or information
under s182 and 183.

-Restriction applies irrespective of whether the premiums were paid directly or through an interposed entity: s199B

-Where an indemnity/payment of an insurance premium contravenes s199A or 199B, it is void to the extent of the
contravention: s199C(2)

Chapter 11: Debentures and loan capital

I. Distinction between Share capital and Loan capital
- The basic distinction between share capital and loan capital is that a shareholder is a member of the
company, whereas a lender is an external creditor.
II. Borrowing powers of Companies
- [s124(1)] A company has the power to borrow in the same way as an individual. It also has the
power to issue debentures and give security over its property for loan and granting floating charges
over its property.

RMIT Vietnam Help Desk Team. By An Vu Page 60

 SEMESTER 2/2012

- [s125(1)] this is despite any express restriction or prohibition contained in the company’s
constitution, if it has one.
- The outsider can rely on s129(1) to assume that the constitution has been complied with if directors
have a limit imposed by the company’s constitution.
III. Debentures
1. Definitions:
 A debenture includes an undertaking by a company to repay as a debt, money deposited with
or lent to it.
 Three types of debentures: Mortgage debenture (land), debenture (tangible property), and
unsecured note.
2. Convertible debentures or notes:
 These provide the holders with a right that allows them to convert the debentures into shares.
 Holders may be prepared to accept a low interest rate in exchange for the eventual right to
become shareholders and to participate in the success of the company.
3. Application of fundraising provisions:
 [s727] requires disclosure document for the offer of debentures lodging with ASIC.
4. Requirement for trust deed and trustee:
 Trust deed: document of loan contract.
 Trustee: Person (legal owner) and debenture holder (beneficial owner)
 A trustee must be appointed where the borrowing company is required to issue a disclosure
document.
 [s283AA] a corporate body must enter into a trust deed and appoint a trustee before the
body: (3 situations) (p 238)
 [s283AB] requires the trust deed to provide that the following are held in trust by the trustee
for the benefit of the debenture-holders:
o Right to enforce the borrower’s duty to repay
o Any charge or security for repayment; and
o The right to enforce any other duties that the borrower and guarantor have under the
terms of the debentures, the provisions of the trust deed, or Ch 2L of the CA.
 [s283AC] restrict the range of entities that are eligible to act as a trustee for debenture-
holders.
 [s283AC(2)] a person may only be appointed or act as trustee if the appointment will not
result in a conflict of interest or duty.
5. Borrower’s and guarantor’s duties:
 [s283BB] the general duties of a borrower include the duty to:
o Carry on and conduct its business in a proper and efficient manner; and
o Make all its financial and other records available for inspection by the trustee and
give the trustee any information, explanations or other assistance required about the
matters relating to those reports.
 [s283BC-283BF] impose a number of specific duties on borrowers:
o Notify ASIC the name of trustee (s283BC)
o Replace the trustee if this becomes necessary. (s283BD);
o Inform the trustee about any charges it creates (s283BE); and
o Give the trustee and ASIC quarterly reports about certain specific matters (s283BF).
 [s283BI & 283CE] A borrower and guarantor commit a criminal offence if they
intentionally or recklessly contravene any of the statutory duties imposed upon them.
6. Trustee’s duties:
 Trustee is subject to a range of duties listed in s283DA.
 For example: [s283DA(a)] a trustee must exercise reasonable diligence to ascertain whether
the property of the borrower and of each guarantor will be sufficient to repay the amount
deposited or lent when it becomes due.

RMIT Vietnam Help Desk Team. By An Vu Page 61

 SEMESTER 2/2012

7. Statutory rights of debenture-holders:

 [s318] a borrower must give the trustee a copy of its financial report, director’s report and
auditor’s report by the deadline for the financial year set by s315.
 [s313(1)] give the trustee a copy of the auditor’s report within 7 days after providing the
original to the company or its members.
 [s313(2)] the auditor must also provide a report on any matters prejudicial to debenture-
holders’ interests within 7 days of the auditor becoming aware of the matter.
 [s283EA] gives the debenture-holders who hold 10 per cent or more of the nominal value of
the issued debentures the power to direct the borrower to call a meeting of debenture-
holders.
8. Register of debenture-holders:
 [s168(1)(c)] A company that issues debentures is required to set up and maintain a register
of debenture-holders.
 [s171] register of debenture holders must contain: name and address, and amount of the
debenture held.
IV. Company charges
1. What is a charge:
 A charge involves a borrowing company giving a lender security over its property.
 If the borrowing company that has granted a charge defaults under the loan agreement, the
secured creditor is entitled to take possession of the secured property and sell it.
 [s124(1)(f)] A company has the power to grant floating charges over its property.
 [s124(1)(e)] It may also give security by charging its uncalled capital.
2. Fixed and floating charges:
 A fixed charge attaches to specific property owned by the borrowers. It does not necessarily be in existence at the
time the charge is given. The company is unable to dispose of the charged assets without the lender’s consent.
 A floating charge floats above specified categories of assets. The company is free to dispose of these assets in the
normal course of business and to replace them by acquiring the same category of assets in the future.
 When the company defaults or goes into liquidation, the charge ceases to float and drops down (to crystallize) to
attach itself to the specified categories of assets then owned by the company, and become a fixed charge over the
assets of the company held at the time of crystallization or acquired afterwards.
 Distinction between fixed and floating charges:
o If the company defaults, a secured creditor with a fixed charge is entitled to take possession of the secured property,
sell it and use the proceeds to repay the debt owed by the company.
o [s433] Subject to the floating charges, the secured creditor is required to use the proceeds of sale to pay debts to
certain unsecured creditors (such as employees) who have priority before repaying the floating charge secured
creditor.
o [s433 & s561] holders of fixed charges stand in a stronger position than floating charge-holders.
o [s262(1)] all floating charges are registrable with ASIC, but only the types of fixed charges specifically mentioned in
s262(1) need to be registered.
o United Builders Pty Ltd v Mutual Acceptance Ltd: whether a charge is fixed or floating charge depends on the
intention of the parties. A charge is a floating charge if:
 It is a charge on a class of assets – present and future;
 That class is one that in the ordinary course of the company’s business would be changing from time to time; and
 Until some future step is taken by or on behalf of those interested in the charge, the company may carry on its
business in the ordinary way as far as concerns the particular class of assets.
o Whitton v ACN: A charge over book debts was a fixed charge where the company was prohibited from dealing with
or disposing of its book debts.
o National Westminster Bank plc v Spectrum Plus Ltd: A charge is granted over the book debts. The court held that
this was a floating charge despite the description of the charge as “fixed” because under the term of the charge, the
chargee did not take control of the account, and the charger company retained the right to access and draw on the
money in the account.
 Disposal in ordinary course of business:

RMIT Vietnam Help Desk Team. By An Vu Page 62

 SEMESTER 2/2012

o A floating charge enables the borrowing company to dispose of the charged property in the ordinarily course of its
business without obtaining the lender’s consent.
o Reynolds Bros (Motors) Pty Ltd v Esanda Ltd: The court held that transactions are within the ordinary course of
business if they are made for the purpose of carrying on the business. This is so even where a particular transaction is
exceptional in nature provided its purpose is to maintain the company as going concern.
- Fire Nymph Products Ltd v The Heating Centre Pty Ltd: The suppliers agreed to take back all units previously
supplied by it. The transaction was held to be not “in the ordinary course of the ordinary business” of a company.
The agreement was a means by which FNP attempted to recover money from an insolvent debtor by return of stock
and use of THC’s sale facilities.
3. Crystallization of floating charges:
 Crystallization occurs when a floating charge transforms into a fixed charge.
 From the time of crystallization, the borrowing company loses the ability to dispose of the items of property covered
by the floating charge in the ordinary course of business.
 When crystallization occurs:
o The company is being wound up or ceases to carry on business.
o Under the loan agreement:
 Defaults in payment of interest
 Breaches restrictions on future borrowings;
 Allows the value of charged assets to decline below a minimum amount; or
 Ceases to deal with charged assets in ordinary course of its business.
 A charge may crystallize without anyone being aware of it and both the borrower and lender may continue to act as
though the charge is still floating.
4. Priorities between floating charges and later fixed charges:
 A later fixed charge ranks ahead of a floating charge, as long as it was given before the floating charge crystallized.
o This is so, even if the later chargee had notice of the existence of the earlier floating charge: Re Hamilton’s Windsor
Ironworks.
o Even if the debenture creating the floating charge restricts the power of the company to grant later fixed charges, the
later mortgagee may still have priority if the mortgage is a legal mortgage as opposed to an equitable mortgage and
the later mortgagee did not have notice of the earlier floating charge and the restriction contained in it.
o Protection for floating charge holder: where a company creates a floating charge, it must lodge with ASIC a notice
including particulars of restrictions on the creation of later charges. [s263(1)(a)(iii)], which constitutes constructive
notice [s130(2)].
o The mortgagee or chargee may take priority over the holders of the earlier charge if the prior chargee has permitted
the company to represent that it is free to deal with unencumbered assets.
5. Negative pledges:
 A negative pledge is a contractual promise given by a borrowing company that it will not
grant charges in favour of other creditors without the prior consent of the negative pledge
lender.
6. Retention of title clauses:
 Retention of title clauses is a term in a sale of goods contract which provides that ownership
of the goods does not pass to the buyer until the goods are paid for.
 This protection arises because title to the goods remains with the seller, whereas title usually
passes on delivery. Where the buyer becomes insolvent before payment, the seller is able to
regain possession of the goods as the owner.
 In the absence of retention of title clause, the seller would stand in line as a creditor with no
rights to the goods.
 Aluminium Industries Vaassen BV v Romalpa Aluminium Ltd: Contract contained retention
of title clause for the sale of aluminium foil. Some of the foil was sold by the buyer to third
parties. The court held that the effect of the retention of title clause was to make the buyer a
bailee of the foil until payment took place => the buyer had obligation to account to the
seller for the proceeds of the sales.

RMIT Vietnam Help Desk Team. By An Vu Page 63

 SEMESTER 2/2012

 Chattis Nominees Pty Ltd v Norman Ross Homeworks Pty Ltd: a fiduciary relationship
which permits tracing only arises where the purchaser is required to keep the proceeds of
sale separate from other funds. (tracing: recover the proceeds of resale of goods that were in
the purchaser’s possession)
 Associated Alloys Pty Ltd v ACN: if the goods were used in a manufacturing process, the
buyer was to hold the proceeds from the sale of the finished goods in trust for the seller.
 Trust Bank Central Ltd v Southdown Properties Ltd: An unpaid vendor may be unable to
claim goods under retention of title clause where the goods are affixed to land and become
fixtures. In such a case, ownership of the goods passes to the owner of the land.
7. Invalidation of charges:
 [s266] A charge may be invalidated where notification of details of a charge is not lodged
with ASIC and the company granting it is placed in liquidation or voluntary administration
within six months of its creation.
 [s588FA-588FJ] permits the liquidator of an insolvent company to avoid certain
transactions:
o Unfair preference [s588FA]; or
o Uncommercial transaction [s588FB]; or
o Unfair loan [s588FD]
 [s588FC] unfair preferences and uncommercial transactions are referred to as “insolvent
transaction” if the company was insolvent when they were entered into.
 [s588FE] insolvent transactions and unfair loans are voidable transactions.
o Unfair preference: during or after six months ending on the relation-back-day.
[s588FE(2)]
o Uncommercial transaction: during or after two years ending on the relation-back-
day.
o Unfair loan: whenever made. [s588FE(6)]
 [s588FJ(2)] a floating charge created during the six months ending on the relation-back-day
is void as against the company’s liquidator, except so far as it secures:
o An advance paid to the company; or
o Interest on such advance;
o The amount of a liability under a guarantee or other obligation undertaken at or after
that time
o An amount payable for property or services supplied to the company at or after that
time; or
o Interest on an amount so payable.
 [s588FJ(1)] does not apply if it is proved that the company was solvent immediately after
the creation of the floating charge.
 Cuthbertson & Richard Sawmills Pty Ltd v Thomas: Two directors had given security over
their homes and transferred proceeds to the company. This led to the conclusion that the
whole of the funding transactions, including the charge, were undertaken for and on behalf
of the company => the charge was valid on the ground that it was part of an undertaking on
behalf of or for the benefit of the company for purposes of s588FJ(2)(c).
8. Charge in favour of officers:
 [s267(1)] Where a company creates a charge in favour of an officer or an associate and the
officer takes steps to enforce the charge within six months of its creation, the charge is void
unless the leave of the court is obtained to enforce it.
 [s267(3)] Leave of the court may be granted if the company was solvent at the time of
creation of the charge and it is just and equitable to enforce the charge.
 [s267(2)(a)] the enforcement of a charge within the meaning of the section requires the
taking of control or exercise of dominion over the charged assets. This may occur by the
appointment of a receiver or the institution of legal proceedings.

RMIT Vietnam Help Desk Team. By An Vu Page 64

 SEMESTER 2/2012

 Re The 21st Century Sign Co Pty Ltd: The secretary was granted a floating charge over the
company’s assets. About four months later the secretary demanded payments. When the
company failed to comply, she appointed a receiver. The company was subsequently wound
up. The court held that the notice was a step in enforcing the charge for the purpose is
s267(2) and the charge was void because prior leave of the court had not been obtained
under s267(1).
 400 Lonsdale Nominees Pty Ltd v Southern Cross Airlines Holdings Ltd: A letter
threatening to take legal proceedings or seeking an undertaking about future action and
advising another party of a claim of an interest in property also does not constitute
enforcement of a charge.
 Abalcheck Pty Ltd v Pullen: this case consider the power of s267(3).The directors and
shareholders agreed to sell all their shares to a purchaser, Powell. It was agreed that the
balance was to be secured by a charge granted by the company over its assets. After the
charge was executed the vendor shareholders resigned their directorships and the purchaser
was appointed to the board. Within six months of the creation of the charge, the purchaser
defaulted in paying an installment. The court refuses to grant leave because granting leave
would mean that the company would not be entitled to sue for damages caused by the
invalid appointment of the receivers………. (p248)
 IPT Systems Ltd v MTIC Corporate Pty Ltd (p248): Leave of the court was required under
s267(1) if IPT was a “relevant person” under s267(7)in that it was associated with an officer
of MTIC. Both companies had a common director but this in itself did not make IPT an
associate of the director. IPT would be an associate if it acted in concert with the director
under s15(1)(a). This requires that a common purpose was decided upon between IPT and a
director of MTIC which had a “base or pejorative” element to avoid the letter or spirit of the
legislation => inappropriate to draw such an interference and s267 did not apply.
V. Registration of charges:
- [s265(1)] ASIC is required to keep a publicly accessible database – the Australian Register of
Company Charges.
- The main purpose is to enable a potential creditor of a company, who proposes to lend money on
security of particular property, to find out whether the company has already given a charge over that
property to another creditor.
- [s130(2)] Persons dealing with a company are taken to have constructive notice of the information
contained in the ARCC maintained by ASIC.
1. Registrable charges:
 [s262] sets out the charges (whether legal or equitable) that must be registered. Only those
charges specifically mentioned in s262 must be registered with ASIC. (types of charges)
(p.249)
 Fixed charges over partnership interests and commercial contracts do not require
registration.
 United Builders Pty Ltd v Mutual Acceptance Ltd: The company gave a charge over its
share in a partnership. This charge was held to be a fixed charge => not required to be
registered under the predecessor to s262(1). The company then gave a later floating charge
that was duly registered. It was held that the registered floating charge was subject to the
priority of the earlier fixed charge even though it was not registered.
 [s262] Charge on land are specifically excluded and do not have to be registered with ASIC
because there is already provision for the registration of interests in land in the Titles Office
registers of the various States.
2. Procedure for lodgment and registration of charges:
 Notification of details:
o [s263(1)] A company that creates a charge must ensure that a notification of details
of a charge is lodged with ASIC.
o [s263(1) and (2)] Together with this notice, the company must lodge a copy of the
document creating the charge, or a copy of the debenture or a statement in writing
RMIT Vietnam Help Desk Team. By An Vu Page 65
 SEMESTER 2/2012

verifying the execution of the first debenture or document creating or evidencing the
charge.
o [s263(1)] time for lodgment is within 45 days after the creation of the charge.
o Esberger & Son Ltd v Capital & Countries Bank: A charge is created on the date of
execution of the instrument of charge and not the date when the money is actually
advanced.
o [s265(2)] the time and date of lodgment of a notice of charge, together with the main
particulars, are kept by ASIC.
o [s265(3)] From this time, the charge is deemed to be registered.
 Extension of time for lodgment:
o [s266(4)] the time limit for lodging a notice of charge may be extended by the court.
o The court may exercised its discretion where the failure to lodge within the
prescribed time was accidental, due to inadvertence or not of a nature to prejudice
the position of creditors or shareholders.
 Provisional entry in register:
o [s265] provides for provisional entry in the register. This enables charges to be
registered despite the fact that stamp duty may not have yet been paid or the notice
is in some respects defective.
o [s265(9)] the charge is deemed to have been registered from the date of the
provisional entry.
o [s265(7)] if the company does not provide the required further particulars within the
prescribed time, the charge is deemed to be registered only on the date when the
information is entered in the register.
o [s265(4)] A charge may also be lodged where stamp duty has not been paid on the
application document.
o [s265(5)] evidence of proper payment of stamp duty must be forwarded to ASIC
within 30 days.
3. Priorities of registrable charges:
 Time of registration:
o [s279-s282] set out a system of priorities between the holders of competing
registrable charges over the same property. The general rule is that registered
charges have priority according to the time they were registered.
 Exceptions to time of registration rule:
o The holder of a registered floating charge is deemed to have consented to a
subsequently registered fixed charge gaining priority where the fixed charge was
created before the floating charge crystallizes.
o [s279(3)] This is so unless there was breach of a provision in the document creating
the floating charge which prohibited or restricted the creation of future charges and
notice of this provision was lodged with ASIC before the creation of the subsequent
registered fixed charge.
o [s280(1)(a)] a prior-registered charge (prc) loses priority over a subsequently
registered charge (src) where the (src) was created before the (prc) and the holder of
the (prc) is proved to have had actual or constructive notice of the (src) at the time
the prior registered charge was created.
o [s280(1)(b) A registered charge generally has priority over an unregistered charge
unless the unregistered charge was created first and the holder of the registered
charge can be proven to have had actual or constructive notice at the time of the
creation of the registered charge of the existence of the unregistered charge.
o [s281(b)] Unregistered charges take priority according to their time of creation.
 Present and prospective liabilities: (p.252)
4. Effect of failure to lodge notice of charge:

RMIT Vietnam Help Desk Team. By An Vu Page 66

 SEMESTER 2/2012

 [s262(11)] A charge on the property of a company is not invalid by reason only of the failure
to lodge a notice of the charge with ASIC.
 [s266] if a notice of charge is not lodged within the prescribed 45-day period and the
company goes into liquidation or has an administrator appointed or executes a deed of
company arrangement within six months, the charge will be void as against the liquidator,
company administrator or the deed’s administrator.
o => prevent person avoiding disclosure of the existence of a charge until just before
the company goes into liquidation and then at the last moment registering the charge
and acquiring its benefits.
 Wilson v Dunn: it is sufficient to lodge a notice that gains only provisional entry in the
Register, even if this entry is subsequently deleted.
 A charge is valid against a liquidator or administrator even though notice of the charge is
lodged after the commencement of winding up or appointment of an administrator, as long
as it is lodged within 45 days of the creation of the charge.
 Where the charge is void against a liquidator or administrator, the charge remains a creditor,
but without security => become merely an unsecured creditor.
5. Assignment and variation of charges: p253
6. Satisfaction and release of property from charge:

J J Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd: A charge was lodged that carelessly left out
the charging clause which identified the property to be charged. Chargor goes into liquidation =>
chargee applies for the order that the debenture be rectified to include the charge clause as it had
appeared in an earlier debenture. => the court declined because to do so would prejudice the rights
of unsecured creditors (the court should not assist one creditor to improve its position relative to
other creditors.

7. Lodgment of notice by chargee:

 Failure to lodge the proper notices may adversely affect the rights of charges by affecting
the priority of charges.
 [s270] enables notices to be lodged with ASIC by any interested person, including the
chargee.
 [s270(2)] failure to lodge a notice is an offence by the company and any defaulting officers.
8. Rectification of register:
 [s274] application may be made to the court for an order that an omission or misstatement in
the register be rectified.
 [s266(4)] this power of the court is exercisable in similar circumstances as where the court
will grant an extension of time for lodging a notice of charge.
9. Company’s register of charges:
 [s271(2)] details of charges, including those that do not need to be registered under s262(1)
are required to be entered in a register of charges kept by the company.
 The company must keep the register open for inspection by creditors, members and others.
VI. Personal property securities reform:
 Borrowing money on security of personal property is an important source of funds for both
companies and individuals.
 Personal property is any form of property other than real estate and includes both tangible
property and intangible property.

Chap 23: receivership

1. Receivers and Controllers

RMIT Vietnam Help Desk Team. By An Vu Page 67

 SEMESTER 2/2012

Receivership is a form of external administration that involves the appointment of an independent, experienced
and insolvency practitioner called a receiver.

Receivers are usually appointed by the secured creditors

[Role]: take possession of secured property, sell it and, out of the proceeds, repay the secured debt owed by the
company.

Receivership is an effective means whereby a secured creditor can enforce rights in relation to the debt without
resource to the courts.

At common law, receiver is a person who is appointed to collect and receive the debts and other property belonging
to another person.

Debenture trust deeds usually provide for the appointment of a receiver in the event that the company defaults in its
obligation under the trust deed.

The receiver collects and sells the property secured by the debentures in behalf of the debenture- holders and
distributes the proceeds to them.

2. Distinction between “receiver” and “receiver manager”

[Re Manchester & Milford Railway Co (1880)]: A receiver merely took the income and paid necessary outgoings
and the manager carried on the trade and business.

Both a receiver and receiver and manager of the property of a corporation are included in the s9 definition of officer.

Under [s 90], a receiver of the property of a body corporate is deemed to be also a manager of the corporation if that
person manages the affairs or has power under the terms of the appointment to manage the affairs of the body
corporate

[s.420] gives wide powers to all receivers, including the power to carry on the business of the corporation

[s.416-434] a receiver in relation to the property of a corporation includes a receiver and manager unless a contrary
intention appears

Controllers and managing controllers

Under [s.9], a controller in relation to property of a corporation is:

 A receiver, or receiver and manager, of that property, or

 Anyone else who (whether or not as agent for the corporation) is in possession or has control of that property
for the purpose of enforcing a charge

Secured creditors have an alternative to receivership if a debtor company defaults under its loan agreement. They
have the right to take possession of secured property personally and are referred to as “mortgagees in possession”.

Secured creditors who take possession of property for purposes of enforcing a charge come within the s9 definition
of “controller”

Secured creditors may also appoint an agent to act on their behalf. They are also regarded as a controller.

RMIT Vietnam Help Desk Team. By An Vu Page 68

 SEMESTER 2/2012

3. Who may be a receiver?

[s.418(1)(d)] a receiver must be a registered liquidator. Only natural person become registered liquidators and hence
receivers.

[s.418(3)] Certain authorized corporations, such as authorized trustee companies, may act as receivers, even though
they are not registered liquidators

[s.418(1)] Certain persons disqualifies from being appointed or acting a receiver of the property or part of the
property of a corporation. (p.643 - refer to the list)

4. Appointment of a receiver
1. Appointment by secured creditors:

Debentures trust deed usually provides for the appointment of a receiver or receiver manager if the company defaults
in its obligation under the debentures.

The appointment of receiver by debentures-holders is also referred to as a private appointment or an appointment

out of court

A debenture trust deed usually gives debenture-holders or their trustee the power to appoint a receiver if the
borrowing company defaults in paying any due installment.

Most debentures allow a receiver to be appointed in a wide variety of situations other than company’s default:

 Default in payment
 The company ceases to carry on its business or is operating at a loss
 Any person files an application to wind up the company
 The company reduces its capital
 The security is put at risk by a failure to maintain or insure it

The appointment of joint and several receivers must be specifically authorized by the debenture deed (Velcrete Pty
Ltd v Melson 1995)

2. Defective Appointment

Secured creditor must comply strictly with the term of the debentures when adopting a receiver

The secured creditor does not have to possess knowledge of these grounds at the time of appointment [Retail Equity
Pty Ltd v Custom Credit Corp Ltd)

Where a receiver discovers a breach of debenture, this may be relevant to justify the receiver’s appointment
[Canberra Advance Bank Ltd v Benny]

If there is some defective appointment, a receiver who takes possession of the secured property may be liable in
damage to the company as a trespasser.

An appointment of a receiver may also be ineffective because of some defect in debenture itself. [Ex: if the charge
created by the debenture requires registration under s 262 and it is not required, it is unenforceable as against the
liquidator or administrator of the company s266)

RMIT Vietnam Help Desk Team. By An Vu Page 69

 SEMESTER 2/2012

[s.267]: where a company creates a charge in favor of officer or their associates and they purport to take a step in the
enforcement of the charge within six months of its creation, the charge is void unless prior leave of the court is
obtained to enforce it.

[s.267(2)] the appointment of a receiver (or the entry into possession of the secured property) is regarded as “ a step
in the enforcement of the charge”.

[s 418A]: persons may apply to court for an order re whether appointment was valid.

[s 419(3)]: court may protect receivers / controllers from being sued for improper appointment if reasonable belief
that appointment was proper.

Prudent receivers usually obtain an indemnity (sự đòi bồi thường hư hỏng) from the secured creditor to protect
themselves from being personally liable as a consequence of a defective appointment or invalid debenture.

3. Application by the court

s 1323(1)(h): allows ASIC to apply to the court for the appointment of a receiver of the property of a person or a
company in the following circumstances:

 investigation is being carried out re: an offence under the Corporations Act
 prosecution or civil proceeding has begun re: a contravention of the Corporations Act

Court may appoint receiver if it considers it necessary to protect the interests of any persons to whom the company
may be liable.

The person seeking the remedy must show that the interests of the persons to whom the company is or may become
liable require protection and a lesser remedy would be inadequate (Beach Petroleum NL v Johnson (1993))
[ s 1323(1)] also enables the court to make other orders apart from the appointment of a receiver. This section freeze
the property of a person where there is an investigation being carried out by ASIC into conduct that contravene or
may contravene Corporation Acts.

[s 1323(1)(h)] the powers of a receiver appointed under s 1323 (1) are limited to preventing a company from dealing
with its property and do not extend to sales of assets and investigations to determine whether offences had been
committed (ASC v Aust- Home Investment Ltd 1993)

Q: Where it is just and convenient

Receiver or receiver-manager may also be appointed by state or territory supreme court

[s.62] of the Supreme Court Act 1958 gives the court power to appoint a receiver where it appears to be just and
convenient to do so.

The court can also appoint a receiver where the secured property is in jeopardy, even though the company has not
defaulted or the events that justify the appointment of a receiver by debenture-holders have not yet occurred.

[Bond Brewing Holdings Ltd v National Australian Bank Ltd] It was held that the court had no power to permit
an unsecured creditor of a company in financial difficulties to apply for the appointment of a court-appointed
receiver to manage the affairs of the company in the absence of consent or non- opposition company

RMIT Vietnam Help Desk Team. By An Vu Page 70

 SEMESTER 2/2012

[s247] requires a person who obtains a court order for the appointment of a receiver or appoints a controller under
the powers contained in an instrument or for the purpose of enforcing charge to lodge a notice this effect within 7
days of the order or appointment.

Court-appointed receivers are officers of the court and have more strict duties than privately appointed ones

4. Effect of appointment:

A receiver’s appointment does not affect the “legal personality” of the company (company still owns secured
property) and does not displace the directors (though their ability to exercise powers of management is affected).

[s.418A] despite the appointment of a receiver and manager or controller, the directors retain certain powers as the
directors can still initiate legal proceedings in the name of the company

[Deangrove Pty Ltd v Commonwealth Bank of Australia]: It was held that where a company in receivership has a
claim against the debenture holder and the receiver declines to pursue the claim, the directors are entitled to initiate
and maintain proceedings in the name of the company, provided the directors offer the company a satisfactory
indemnity against the cost

5. Powers of a receiver

[s.420(2)] gives certain specific powers to receivers in addition to those conferred upon them by the terms of the
court order (court-appointed receivers) or instrument (privately appointed receivers):

 enter into possession and take control of property

 lease, let, hire or dispose of property
 borrow money on security of property
 convert property into money
 carry on any business of the corporation
 execute any document, bring/defend any proceeding or do any other act in the name of the corporation
 make an application for winding up

[s.420(1)] confers upon a receiver the general power to do all things necessary or convenient to be done for or in
connection with, or incidental to , the attainment of the objectives for which the receiver was appointed.

[s 420B(1)] “Managing controller” (includes receivers) of property may apply to the court for an order authorising
the sale of specified property despite the existence of a prior charge that has priority over the controller’s charge.
Sale must be in best interests of corporation and its creditors, and won’t unreasonably prejudice rights/interests of
prior charge holder. Order may be subject to certain conditions (for example, paying prior charge holder first)

Power to obtain information:

[s. 429]: 14 days after controller notifies company of appointment, directors and secretary must submit report to the
controller of the affairs of the company

[s. 430]: controllers can also require that reports be submitted to them by others, such as present/former
officers/employees, and promoters

[s. 431]: controller can inspect any books of the corporation re secured property

RMIT Vietnam Help Desk Team. By An Vu Page 71

 SEMESTER 2/2012

Re Jet Corp of Australia: s 431 inspection allowed of photocopies of company records held by auditor when it is
required by a receiver. However, s 431, enable the receivers inspect audit notes that were not part of the original
documents

6. Effect of liquidation on the powers of the receivers

s 420C(1): With approval of liquidator or court, receiver may do whatever is necessary to carry on the corporation’s
business (Gosling v Gaskell 1897)

s 420C(3): Receiver carries on the business of the corporation as agent of the company. Although receiver is liable
to creditors for debts and expenses incurred in carrying on business during the receivership, receiver has a right of
indemnity from the company’s assets or the appointing creditor.

A receiver may also exercise other powers after winding up commences .A receiver can take possession of assets and
may take legal action in name of and on behalf of the company under the statutory power contained in s420(2)(k)

7. Duties of receivers
A. Common Law duties

A privately appointed receiver and manager’s primary duty is owed to the secured creditor appointor, but he also
owes duties to the company, in respect of the appointment as its agent, as well as to other secured creditors

A receiver must act in good faith (includes honesty and not recklessly sacrificing the company’s interests) and use
powers for sole purpose of securing repayment (Downsview Nominees Ltd v First City Corp Ltd (1993))

A receiver breach their common law duty to act in good faith if they arrange for the sale of the secured property at a
gross undervalue

Case: Forsyth vs Blundelli

A mortgagee advertised an auction to sell the secured property. The mortgagee enters into the contract to sell the
property at 120,000 while the property is bidding up to 150,000. Court prevented to complete the sale because the
mortgagee had not acted in a good faith and that he was either grossly careless or at least displayed a calculated
indifference to the mortgagor’s interests

Court-appointed receiver and manager owes a duty to be fair and impartial, but is not an agent for persons with
interests in the property: Cape v Redarb Pty Ltd (No 2)

B. Statutory duties

Receivers are included in s 9 definition of “officers,” so are subject to duties imposed by s 180-184

s 420A: controllers must take all reasonable care to sell property at not less than market value or for the best price
that is reasonably attainable, having regard to existing circumstances

s424: where there is any doubt as to the course of action a receiver should take, the receiver can apply to the court for
direction.

A creditor who appoints a receiver is required to notify ASIC of the appointment within 7 dasy after making the
appointment 427(1)(a);

[s.429(2)]A controller must forthwith serve a notice of the appointment on the company

RMIT Vietnam Help Desk Team. By An Vu Page 72

 SEMESTER 2/2012

[s.427(2)] A controller must also lodge a notice of their address with ASIC within 14 days

[s.428] said that publicise appointment with statement on public documents such as invoices, order forms and
checks.

[s.421A] Managing controller must prepare report about company’s affairs..

[s.432] Controller must prepare accounts, to be lodged with ASIC every six months

(s 433(3):]The most important duties of a privately appointed receiver are to sell the secured property and distribute
the proceeds to the secured creditor. However, a receiver appointed under a floating charge must pay certain debts
first (s 433(3), workers’ compensation insurance, certain auditor’s fees and unpaid employee wages)

[s.422] Controllers have a duty to report misconduct to ASIC. This is similar to the obligation imposed on liquidators
by s.533. A receiver must make a report where it appears that:

 a company’s present or former officers or members have been guilty of an offence in relation to it
 a person who took part in the formation, promotion, administration or winding up of the company may have
misappropriated any of its money or property or may have been guilty of negligence, default, breach of trust
in relation to it
8. Liability of receivers

[s 419(1]): Receivers may become personally liable for certain debts incurred by them in the course of the
receivership. Where they incur such debts within the scope of their agency (agent of company), they’re entitled to be
reimbursed by company, unless it has insufficient funds. So receivers usually obtain an indemnity from the
debenture-holders to be protected from personal liability.

Define certain debts: for services rendered, goods purchased, or property hired, leased, used or occupied (s 419(1))

[s.419A(2)] A controller is personally liable for rent payable by the corporation, starting 7 days after appointment or
entrance into possession of property

A receiver is not personally liable for debts arising from contracts entered into by the company prior to appointment
that are completed during the receivership.

A receiver and manager, being an agent of the company, may even repudiate contracts made prior to the
commencement of receivership without incurring personal liability (George Barker Ltd v Eynon 1974)

9. Breach of duties

[s.180-184]: breach of duties of directors

[s.597-598] (discussed with liquidation). These provisions enable the court, on application by ASIC or a liquidator,
to examine the conduct of a controller. If the controller is found guilty, frauds, the controller to compensate the
company for the loss or damage

[s.423(1)]: court may take such actions as it thinks fit against controllers who breach duty

[s.423(2)]: where controller is guilty of misfeasance (improper doing of a lawful act), neglect or omission, court may
order receiver to make good any loss sustained by the corporation or other such order as it thinks fit

RMIT Vietnam Help Desk Team. By An Vu Page 73

 SEMESTER 2/2012

[s 1321]: broad range of remedies for persons aggrieved by any act, omission or decision of, among others, receivers
ASIC v Forestview Nominees Pty Ltd (under s 1321, must show error of law or significant factual error or
unreasonableness, not merely a discretionary decision or qualitative judgement)

Case: ASIC v Forestview Nominees Pt y Ltd

ASIC brought winding up proceedings against a company in receivership. A director requested that the receiver and
manager provide funding to oppose the winding application, but the receiver and manager refused to do so and the
director sought an order under s1321. The court declined to intervene against a discretionary or evaluative decision
or qualitative judgment made by a receiver and manager. The scope of intervention by the court under s1321 was
limited to cases where person bringing the appeal could show error of law or significant factual error or
unreasonableness such that the decision should not stand.

10. Termination

Receivership normally ends when secured debt is discharged and the debts of receivership or the controller are paid

[s. 438B]: liquidator may apply for court order terminating receivership (order may be granted only if receiver’s
objectives have been achieved as far as is reasonably practicable)

Court may remove a controller for misconduct (s 434A), or other situations, such as not acting in the interests of
debenture holders as a whole

CHAP 24: VOLUNTARY ADMINISTRATION

1. Voluntary Administration

An appointed administrator takes complete control of an insolvent company for a short period of time

Two reasons for voluntary administration under s435A:

1. to maximize the chances of the company or its businesses remaining in existence (“rehabilitation”);
or

RMIT Vietnam Help Desk Team. By An Vu Page 74

 SEMESTER 2/2012

2. if rehabilitation is not possible, to achieve a better return to creditors than would result from an
immediate winding up (reference: text p. 661)

[s435C] is first part of voluntary administration: the appointment of an independent, experienced insolvency
accountant as administrator of the company, with power to take control of the company, plus a moratorium (freezing)
on claims against the company (reference: text p. 661)

[s439A] is second part of voluntary administration: a creditors’ meeting is held where decisions are made regarding
the company’s future, 3 possible outcomes:

1. deed of company arrangement (DOCA)

DOCA = under which the company may have the opportunity of being restored to a viable financial state to the
ultimate advantage of its creditors, shareholders, employees and other stakeholders

2. winding up, or

Winding up takes the form of a creditors’ voluntary winding up the administrator as company liquidator

3. end voluntary administration and return control to directors & shareholders (reference: text chart p.
662)

Voluntary administration terminates and control of the company to handed back to its creditors and shareholders

2. Appointment of voluntary administration:

[s.436A] Decision to appoint an administrator and start voluntary administration is usually made by a company’s
directors.

[s.436A] resolution passed by a majority of directors may appoint an administrator if they believe that the company
is insolvent or is likely to become insolvent at some future time. Liquidator (under s.436B) or creditor (under
s.436C) could also appoint an administrator.

a) By directors

Directors may appoint an administrator after the company is in receivership even though they had not obtained the
receiver’s consent (reference: Re Genasys Pty Ltd, text p. 664)

[s.436A(2)] when winding up has commenced, the directors lose their ability to appoint an administrator. Also, the
director cannot appoint an administrator if a provisional liquidator has already been appointed to the company.

[s.588M]Directors are encouraged to take early action and put the company into voluntary administration by the
threat of personal liability under the insolvent trading provisions. Directors’ personal liability to pay compensation
for breaching s588G arises only if their company goes into liquidation.

Directors may avoid personal liability for contravening s588G if pursuant to s588H (5) they can establish that they
took all reasonable steps to prevent the company from incurring debt when there were reasonable ground to suspect
that it was insolvent.

[s.588H(6)] directs the court to have regard to any action the director took with a view to appointing an
administrator, when that action was taken and the result of the action.

RMIT Vietnam Help Desk Team. By An Vu Page 75

 SEMESTER 2/2012

[s.440J] [during voluntary administration, creditors cannot enforce any directors’ personal guarantees of company
debts]

b) By liquidator

[s.436B(1)] a liquidator or provisional liquidator may appoint an administrator if they believe that the company is
insolvent or is likely to become insolvent

[s436B (2)] allows liquidator or provisional liquidators to appoint themselves, or their partner or employees, as
administrator if the appointment is approved by either the creditors or with the leave of the court

c) By chargee

[s.436C (1)] an administrator may also be appointed by a creditor who has a charge over the whole, or substantially
the whole, of a company’s property

[s.436(2)] the right of the charge to appoint an administrator ceases one winding up has commenced

[s.436D] one an administrator has been appointed, a further appointment of an administrator cannot be made

[s.450 A (1)] Notice must be given if this is done. ASIC must be notified within 1 day, and an announcement in a
national newspaper must be made within 3 days

Duration of administration

(s.435C(1)) Voluntary administration officially starts on the first day of the administrator’s appointment.

While a company is under administration, there is a stay of moratorium on all claims against the company.

Voluntary administration ends on either:

◦ date of creditors’ meeting to decide company’s future, if the decision is to end administration and
return control to directors or to wind up the company (s439C); or

◦ if creditors decide to execute a DOCA, both company and administrator must execute the DOCA
within 15 business days and then the voluntary administration ends (s444B(2)), BUT if the company
fails to execute the DOCA within 15 days, the voluntary administration ends and the company is
deemed to have entered into a creditors’ voluntary winding up (s446A(1))

◦ if creditors fail to pass any resolution, the voluntary administration automatically ends and directors
regain control: s 439E(3)(e)

3.The administrator

Who may be appointed?

A voluntary administrator must be:

◦ a registered liquidator (s448B), and

◦ independent of the company, its officers, creditors and auditor (s448C; s532)(reference: text pp.
666-667

RMIT Vietnam Help Desk Team. By An Vu Page 76

 SEMESTER 2/2012

Investigation of company:

[s. 438A(a)] As soon as possible after appointment, an administrator must investigate the financial position and
circumstances of the company and then decide what course of action is in the creditors’ interests (reference: text p.
668, note: similar to receiver)

Because of the short time limits imposed by the legislation, an administrator is generally not required to carry out an
investigation in the same detail as liquidator (case: Hagenvale Pty Ltd v Depela Pty Ltd).

Directors must:

◦ hand over all “books” such as registers, records, accounts, documents, in their possession and if they
know where others are, must disclose the location (reference: s438B(1))

Book is defined under s.9 as include a register and any other record, accounts and documents.

◦ give the administrator a statement about the company’s business, property, affairs and financial
circumstances within seven days after administration begins (s438B(2))
◦ the directors must also be available to provide such further information as the administrator
reasonably requires. A failure to provide the required assistance under s438B is an offence.
◦ Persons are not entitled, as against the administrator, to retain possession of books of the company or
claim or enforce a lien on such books. (s.438C(1)]
◦ A secured creditor, however , may retain possession of books under a charge, but the administrator
may inspect them and make copies (s.438C(2))

[s.438D(1)]during the course of investigation of a company’s affairs, it appears to the administrator that an officer or
member of the company may have committed an offence, misapplied or retained property of the company or
breached a duty to the company, the administrator must lodge a report about the matter and give assistance to ASIC.

4.Powers

[s.437(A)] The administrator has general powers to take control of the company’s business, property and affairs, as
well as either carry on, terminate or dispose of the company’s business or property (reference: text p. 668)

This section gives administrators the power to sell all or part of the company’s assets and business before the
second’s creditor meetings (Re Global Food Equipment Pty Ltd)

[s.437A]The administrator acts as an agent of the company (note similar to receiver), and the administrator is an
officer for purposes of the s129 assumptions relating to agents.

[s.437C (1)] No one else may act as a company officer without the administrator’s consent.

The administrator is an officer for purposes of ss180-184 statutory duties.

However, the administrator cannot destroy a third party’s rights to property created before the voluntary
administration (Osborne Computer Corp Ltd v Airroad Distribution Pty Ltd)

Case: Osborne Computer Corp Ltd v Airroad Distribution Pty Ltd (text p. 669). This section did not give
the administrator the power to take control of computer components in the possession of a computer assembler where
those components were subject to a pledge created prior to the commencement of administration.

RMIT Vietnam Help Desk Team. By An Vu Page 77

 SEMESTER 2/2012

[s.442A]The administrator may remove and appoint directors, act in the company’s name (execute document, sue,
etc.) and whatever else is necessary for the purposes of the VA (reference: text p. 669)

[s.442B]The administrator may disregard crystallization of a floating charge into a fixed charge (meaning
administrator can treat it as a floating charge) where crystallization happens after appointment.

The administrator may dispose of the business and property without a shareholders’ meeting (Brash Holdings Ltd v
Shafir), unless the property is charged against or is leased property (s442C(1)), in which case it must be sold in the
ordinary course of business, or with chargee/owner’s consent, or with leave of court.

5.Liabilities and Indemnity

[s.443A(1)] The administrator is personally liable for debts incurred in the course of the administration for services
rendered, goods bought or property leased or used. This personal liability encourages third parties to do business
with the company so as to enable it to trade out of difficulties (reference: text p. 670)

Cases: Molit Pty Ltd v Lam Soon Australia Pty Ltd. The Federal Court held that an administrator was not liable for
damages caused by his removal of fixtures and fittings leased premises. A liability for damages was not a debt for
purposes

(s443B) The administrator has a 7 day period to decide whether to continue the company’s rental of property, if the
lease is continued then the administrator has personal liability for the rent if the company does not pay

 (s443D)Although the administrator is personally liable for debt, the administrator is also entitled to indemnity out of
the company’s property for the debts
 [s.443E(2)] where a floating charge has crystallised and has become the fixed charge prior to beginning of the
administration and the charge has taken steps to enforce the charge, the right of indemnity of the administrator does
not take priority over the chargee’s debt unless agreed to by the chargee.
 [s.443F(1)] the administrator’s right of indemnity is secured by a lien on the company’s property.
 [s.443F(2)] This lien has priority over the charge only in so far as the right of indemnity has priority over the debts
secured by the charge
 [s.556(1)(c)] If the company goes into liquidation after voluntary administration, the administrator’s right of
indemnity has priority over the company’s unsecured debts and has priority over floating charges [s.443E(1)], but
the administrator’s indemnity does not have priority over fixed charges (reference: text p. 671)
 [s.449(A)]An administrator’s appointment cannot be revoked unless a creditor or the ASIC applies to the court for an
order revoking the administrator’s appointment, and the court order will only be given by a judge if revocation of the
appointment would be better for administration of the company as a whole – not just better for one creditor.

Lien =quyền cho phép nắm giữ vật thế chấp cho đến khi thanh toán hết nợ.

Indemnity = sự bảo đảm bồi thường khỏi bị hư hỏng mất mát

6.First meeting of creditors

The administrator must have a first creditors’ meeting within 8 business days after the administrator is appointed
(reference: text p. 673).

At the first creditors’ meeting, the administrator and creditors decide:

RMIT Vietnam Help Desk Team. By An Vu Page 78

 SEMESTER 2/2012

 whether to appoint a committee of creditors to consult with and receive reports from the administrator and, if
so, its composition (s436E(1));( s436F)
 whether to pass a resolution to remove the administrator appoint a replacement (s436E(4))

7.Meeting to decide the company future

 [s.439A(5)] The administrator must call for and give notice of a meeting within the “convening period,” meaning
within 20 days after the voluntary administration begins.
 [s.439A(2)] The actual meeting must occur within 5 days after the end of the convening period reference: text p. 673)
 [s.439A(3)]Written notice must be given, and the meeting must be publicized in a national newspaper, at least 5 days
before the meeting is scheduled to occur
 [(ss.439A(6) or 447A)] A court can extend the “convening period”
 [s.439B(2)]A creditors’ meeting may be adjourned (started, stopped, and started again), but the meeting must be
concluded within 45 business days.

[s.435C(3)] If no decision is made about the company’s fate, then the administration ends and control goes back to
the directors (reference: text p. 674)

The administrator must give the following information to creditors:

◦ administrator’s report about the company’s business, property, affairs and financial circumstances
(s439A(4)(a))

◦ statement of administrator’s opinion about whether the company should execute a DOCA, wind up,
or end the administration with control going back to directors, and which of the options would be in
the creditors’ interests (s439A(4)(b), text p. 675)

Voting at creditors’ meetings is usually simple majority based on the number of creditors and/or amount of debt
owed to each creditor (text pp. 676-77; s600A gives a court power to set aside resolutions in some situations)

8.Effects of administration

[s.437C(1)] Officers of the company lose their rights to exercise their powers once a voluntary administration is in
place.

Where a company is under administration, its property can only be dealt with the administrator Officers who attempt
to exercise their powers during a voluntary administration may be guilty of an offense [s.437D(5)] and have to pay
compensation [s.437E(1)]

Share transfers and alterations in status of members are void if made during a voluntary administration, unless the
administrator consents or a court authorizes the action (s437F(1), (8))

Moratorium = mentioned a short period (about a month) when creditors cannot enforce their rights under a
debt. (s.440 A – s.440 J)

 [s.440D]From the time of appointment of the administrator, a civil proceeding cannot be brought against the
company or the company’s property except with the administrator’s written consent or leave of court (court order
allowing it) (text p. 678)
 [s.440F]Rights of a “judgment creditor”, a creditor that has already gone to court to get an order giving the creditor
permission to do something with company property, to enforce a judgment against the company are restricted

RMIT Vietnam Help Desk Team. By An Vu Page 79

 SEMESTER 2/2012

 [s.440B] Charges over the company’s property cannot be enforced except with the administrator’s written consent or
leave of court (text p. 679)
 [s.440A(1)] Winding up cannot proceed
 [s.440C] Owners and lessors (landlords) of property used by the company cannot take possession of property without
the administrator’s written consent (text p. 680)
 [s. 440J(1)] Creditors cannot enforce personal guarantees against a director, spouse or relative of a director regarding
a liability of the company

Some exceptions cases:

[s.441A] A secured creditor with a charge over “the whole, or substantially the whole, of the property of a company
under administration” can enforce the charge within 10 business days after notice of appointment of the
administrator (text p. 681)

[s.441B] A secured creditor who takes possession of property before the administrator was appointed may continue
to enforce the charge during voluntary administration

[s.441F] Owners and lessors (landlords) of property used by the company who started to enforce their rights before
the voluntary administration can continue enforcement during voluntary administration

[s.441C ]A creditor holding security over perishable goods (easily spoiled, like food) may enforce a charge during
voluntary administration, because they are perishable (text p. 681).

Perishable = dễ bị thối

[s.441B(1)]The court may order a chargee (person holding a charge over company assets), receiver or other person to
refrain from performing a function or exercising a power that would otherwise be allowed by (text p. 682)

9.Deed of Company Agreement

A DOCA is 1 of the 3 possible outcomes of voluntary administration (others are winding up or termination of
voluntary administration and return of control to directors)

[s435C(2)(A)]The DOCA is a popular way of achieving the goal of voluntary administration, save the company or
get a better return for the creditors than liquidation would give creditors If creditors vote in favour of a proposed
DOCA and the company and the voluntary administrator execute the deed, then the voluntary administration ends.

Creditors make a cost-benefit analysis and decide whether liquidation or DOCA produces a better outcome for them
(reference: text p. 682)

DOCA contract terms can be quite varied, but typically include:

1. An extended additional moratorium to allow the company to pay debts incurred prior to voluntary
administration;

2. the company, under the control of the DOCA administrator, is permitted to continue operating its
business;

3. there is a compromise in which creditors agree to accept payment of a lesser amount in final
settlement of their debts;

RMIT Vietnam Help Desk Team. By An Vu Page 80

 SEMESTER 2/2012

4. then an orderly sale of all the company’s property over an agreed period of time (reference: text p.
683)

5. the DOCA may provide for differential treatment of creditors, some better than others even if the
creditors have the same or similar loans/charges (reference: text p. 683)

6. If creditors resolve/agree that the company should execute a DOCA, they must appoint a “deed
administrator” aka DOCA administrator, who is often the voluntary administrator (s444A(2))

The “deed” (DOCA contract) must include provision/handling for:

a. property of the company available to pay creditors’ claims

b. length of any moratorium period and what the moratorium applies to

c. extent to which the company is released from its debts

d. any conditions for the deed to come into operation or to continue in operation

e. when the deed terminates

f. priorities among creditors bound by the deed

g. the day on or before which admissible claims must have arisen, i.e. when creditors need to make
claims for payment to the deed administrator (reference: s444A(4), text p. 683)

[s.444B(2)] The company must execute the DOCA within 21 days after the meeting of creditors when the creditors
decide to do a DOCA, unless there is a court order extending the deadline (text p. 684)

[s.446A(1)] If the company fails to execute the deed within the allowed time, the company will be treated as if it has
entered into a winding up and the administrator is treated as liquidator.

[s.444C(1)]If creditors resolve/agree that the company should execute a DOCA, creditors and others are bound by
the deed (DOCA contract) even before it is executed, and they cannot back out once they have agreed (text p. 684)

[s.444D(1)]Unsecured creditors are bound by the deed (DOCA contract) terms for claims arising on or before a day
specified in the deed, even if they did not themselves agree to it

[s.444D(2)] Secured creditors and property owners & lessors (landlords) may enforce their security and rights
against company property unless they agreed to be bound by the deed (DOCA contract) or the court limits their
rights by court order (s444D(3); text p. 685)

(s444E(1)-(3))A DOCA prevents creditors or others from seeking a winding up and protects the company from
proceedings against the company or its property

[s.444G] A DOCA is binding on the company, its officers, members and administrators (text p. 686)

[s.445A]The “deed” (DOCA contract) can be changed at a creditors’ meeting by resolution as long as notice of the
meeting describes the proposed changes.

Termination of DOCA: the DOCA can end by creditors’ resolution, court order, or by the terms of deed (DOCA
contract)

RMIT Vietnam Help Desk Team. By An Vu Page 81

 SEMESTER 2/2012

The DOCA can turn into a winding up of the company.

At two stages, while a company is under voluntary administration or subject to a DOCA, the company’s creditors
may resolve to wind up the company (text p. 689):

1. at meeting to decide company’s future (s439A)

2. at meeting to terminate a DOCA (s445F)

CHAP 25: LIQUIDIATION

Liquidation = winding up

Liquidation/winding up can happen whether or not companies are still solvent (pp. 697-98)

I. “Insolvency” (s95A, pp. 701-02): s95A(1)“person is solvent if they are able to pay all of their debts as they
become due. If not => insolvent (s95A(2)) ”

 Calzaturificio Zenith Pty. Ltd. v NSW Leather: cash flow test, ability to pay debts as they are due at a
given point in time (not balance sheet-assets v. liabilities)

 Sandell v Porter: Not just temporary lack of liquidity, must have inability to utilize assets to meet
debts

 Austin Australia Pty Ltd v De Martin & Gasparini Pty Ltd: “the usual indicia of insolvency”

1. A history of dishonored cheques;

2. Suppliers require paying cash on delivery;
RMIT Vietnam Help Desk Team. By An Vu Page 82
 SEMESTER 2/2012

3. Special arrangement with creditors;

4. Inability to produce timely, audited accounts;
5. Unpaid tax, workers compensation or superannuation;
6. Demand from bankers to reduce overdraft and other evidence of deteriorating relations
with bankers;
7. Receipts of letter of demand, statutory demand and court processes for debt.

II. Insolvency: Compulsory (Mandatory) Winding Up:

Procedure for s459P(1) people to get court order for winding up the company (pp. 700-01):

 Applicant must advertise that an application for winding up has been filed

 Applicant files signed Affidavit verifying debt is owed

 Applicant must notify ASIC of application

Court must make its decision within 6 months.

Court could grant or deny application.

Court could also issue injunction (order) preventing a person from further proceeding with an application for
winding-up if the wrong person is filing (not 459P(1) person), or if the application itself fails to show company
insolvency.

To prove insolvency, an applicant for winding-up can either show that s95A definition of insolvency is met, or rely
on certain “presumptions” from s459C(2) if they happened within the three months before the application for
winding-up is filed:

1. Company fails to comply with a creditor’s statutory demand for payment (procedure for statutory demand is
in s459E(2), demand for payment must state amount owed, be in writing, using required government
form, signed by creditor, giving company 21 days to pay, personally served on company, with affidavit
by creditor verifying debt)(reference: text pp. 704-05)

2. Company failure to pay judgment debt in full

3. Receiver is appointed on floating charge

4. Court order appointing a receiver on a floating charge is issued

5. Person takes possession of company property to enforce a charge

6. Person is appointed to take possession of company property to enforce a charge

(s459C(2); pp. 703-704)

Creditor statutory demands for payment are the most common basis for supporting an insolvency winding-up
application, but

Company can apply to the court for an order setting aside the creditor’s statutory demand within 21 days after the
statutory demand is made if the demand itself is not proper (e.g. if debt is disputed) (reference: s459G) or
RMIT Vietnam Help Desk Team. By An Vu Page 83
 SEMESTER 2/2012

Company can apply to the court for an order setting aside the statutory demand at any time because the demand itself
is defective (e.g. irregularity in demand document, misstatement of amount, incorrect description of debt,
incorrect description of person or entity) (reference: s459J(1), text pp. 705-07)

 Topfelt Pty Ltd v State Bank of NSW: demand that requires specified amount “together with
applicable interest” is defective because the statutory demand must be an exact amount.

 Zhen Yun (Aust) Pty Ltd v State Bank of SA: wrong dates included in demand were a defect in the
statutory demand, allowing set aside.

s459G allows the statutory demand, but the company can dispute the amount owed or claim the creditor also owes
the company money (s459H), then an “admitted total owed” must be calculated and the company has 7 days to pay
that amount

III. Compulsory (Mandatory) Winding Up Without Insolvency

Companies can be required by the court to enter winding-up even if they are solvent

Same people that can apply for winding-up in insolvency can apply even if solvent

If company files for winding-up while solvent, must have majority shareholder approval before court will order
winding-up (note: special resolution with 75% vote not required here)

s461 grounds for compulsory, solvent winding-up include:

 Company has passed resolution for winding up

 Company fails to begin business within one year after registration

 Company has no shareholders

 Directors acted in self-interest or unfair to shareholders (s461(1)(e)

 Company acting in oppressive way to shareholders (s461(1)(f) and (g))

 ASIC or APRA issues opinion that company should be wound-up (s461(1)(h) and (j))

 Court decides it is just and equitable to wind-up company (s461(1)(k)

(pp. 708-710)

IV. Voluntary Winding Up: Two Types

1. Members’ Voluntary Winding-up (ss495-496)

 Company must be solvent and directors must issue declaration confirming solvency and file it with
ASIC before seeking winding-up (s494), if insolvent must follow insolvency winding-up
procedures

 Wind-up process started by shareholder special resolution, 75% vote required (unlike compulsory
winding-up) (s491)

RMIT Vietnam Help Desk Team. By An Vu Page 84

 SEMESTER 2/2012

 If special resolution passes, a liquidator is appointed by the shareholders at a general meeting and the
shareholders supervise the liquidator (s495)

 Company cannot resolve to do voluntary wind-up if any application for winding-up has been filed
with a court

2. Creditors’ Voluntary Winding-up (ss497-500)

 Company must be insolvent, but voluntary is cheaper than compulsory winding-up because no
court involvement

 Creditors’ voluntary winding-up can occur if creditors must resolve to wind-up company (see voting
p. 727), or company fails to execute approved DOCA, or creditors terminate DOCA, or if company
tries members’ voluntary winding-up but it turns out the company is insolvent

V. Once winding-up commences, the effects:

 Unsecured creditors share equally in distribution of assets, but lose their rights to individually file law suits
to enforce right to payment by company

 Secured creditors keep rights to take possession and sell secured property (s471), and can still appoint
receivers even after winding-up commences

 Company continues to exist, but directors lose their powers to manage the company (s471A), shareholders
cannot transfer shares, the company cannot carry on business except for purposes of winding-up, and all
documents must have “in liquidation” in the name (s541).

 Employees in Compulsory Winding-Up are automatically dismissed (fired), in Voluntary Winding-Up they
are not automatically dismissed

 Receivers can continue their work because a company can be in receivership and liquidation at the same time

VI. Liquidator’s Appointment:

Liquidator’s consent prior to appointment is always required, and liquidator usually must be registered (s1282), and
must be independent (s532(2)) (s1282(2) sets out the qualifications of a liquidator, p714)

 If compulsory winding-up, the court order appoints the liquidator from a list of registered liquidators (s472)

 If members’ voluntary winding-up, the shareholders appoint the liquidator (s495)

 If creditors’ voluntary winding-up, usually creditors appoint the liquidator, but if it started as a members’
voluntary winding-up but then the company was determined insolvent and creditors do voluntary winding-up
then the liquidator appointed by the shareholders can continue (s496)

(pp. 713-714)

VII. Liquidator’s Powers and Duties:

Liquidator’s Powers:

RMIT Vietnam Help Desk Team. By An Vu Page 85

 SEMESTER 2/2012

 Assume all powers of board of directors (s471A)

 Carry on business of company as necessary for the beneficial disposal or winding up of the business (s477)

 Pay creditors in full based on s556 priorities (s477)

 Make compromises with creditors and contributories on claims/liabilities (s477)

 Bring/defend legal proceedings (s477)

 Collect and sell company property, incl. legal claims (s477) (see “recovery of assets” p. 731)

 Sign documents on company’s behalf (s477)

 Appoint agents (s477)

 All things necessary to wind-up company (s477)

 Access company books, including getting court order requiring persons such as receivers to hand over books
(ss483(1) and 500(3)), or have officers/others examined/interviewed (p. 728).

 Court approval is required if liquidator wants to enter contract lasting more than three months or wants to
compromise a company debt over $20,000 (s477(2A) and (2B))

Liquidator’s Duties:

 Liquidator is agent of company with fiduciary duties and duties of care (similar to ch. 13 director’s duties)

 Liquidator is an “officer” for s9 definitions, with officer’s s180-s184 duties

 Liquidator must be independent, required to act impartially

 “official liquidators” are court-appointed and are officers of the court with public responsibilities to
investigate past activities and discover/report breaches of the Corporations Act

 Specific Duties (pp. 723-725):

 Notify ASIC of liquidator’s appointment within 14 days (s537)

 Open new bank account called “liquidator’s general account”

 Become familiar with the company’s affairs and record all actions

 Collect, preserve, sell and distribute company assets (ss474, 477)

 Report violations of law, including Corporations Act or crimes (s533)

 De-Register the company (s480) and file final report to ASIC (s509)

Remedies for Liquidator’s Breach of Duties: same as officer

civil penalties, disqualification, repay company, criminal liability

RMIT Vietnam Help Desk Team. By An Vu Page 86

 SEMESTER 2/2012

VIII. Voidable Antecedent Transactions

 Most transactions by the company after winding-up commences are void, unless made by the liquidator, a
receiver, or approved by the court (p. 731)

 Some transactions before winding up can be voided

 Types of antecedent transactions that can be voided:

 Unfair preferences (s588FA)

 Uncommercial Transactions (s588FB)

 Unfair Loans (s588FD)

 Unreasonable Director-Related Transactions (s588FDA)

 Transactions to Defeat Creditors (s588FE(5))

 Invalidation of Floating Charges (s588FJ)

For a liquidator to void an antecedent transaction, the liquidator must show 3 elements:

1. The transaction is one of the types of antecedent transaction that can be voided, as listed in the Corporations
Act, and

2. It was an “insolvent transaction” meaning the company was insolvent at the time of the transaction or
became insolvent because of the transaction (s588FC), and

The transaction happened during some specific time period before winding up and is therefore “voidable” at the
liquidator’s option (s588FE) (time period is six months to ten years depending on whether “related” to the company
and type of antecedent transaction (p. 740)

Unfair Preferences (s588FA(1)) exist if:

 The company and creditor are parties to the transaction, and

 The transaction results in the creditor receiving more than the company owes or more than the
creditor would receive on winding-up (pp. 732-734)

 Example: Rothman Exports v. Mistmorn: series of payments just before liquidation led to creditor
receiving more that it would have received on winding up. Unfair preference.

Uncommercial Transactions (s588FB) exist if:

 A reasonable person in the company’s circumstances would not have entered into the transaction,
taking into account the transaction’s benefits and detriments to company, benefits to other party, and
any other relevant matter (pp. 734-735)

RMIT Vietnam Help Desk Team. By An Vu Page 87

 SEMESTER 2/2012

 Example: Director used company money while company insolvent to buy engagement ring for
girlfriend (Re Pacific Hardware Brokers) (p734) (remedy: court ordered the director to pay back the
amount)

Unfair Loans (s588FD) exist if:

 The company is required to pay interest or charges on the loan that are so high in relation to the
loan’s principal as to be extortionate (exorbitent/outrageous) (see pp. 735-736 for examples)

Unreasonable director-related transactions (s588FDA) exist if:

 The company makes a transaction with a director or close associate, and a reasonable person
would not have done it (pp. 736-737) s9 defines a close associate of a director as a relative or de
facto spouse of a director as well as a relative of the spouse.

 Example: Ziade Investments v. Welcome Homes: a few months before liquidation, company gave
mortgages to parents of sole director

Transactions to Defeat Creditors (s588FE) exist if:

 The company made a transaction in the past 10 years in order to defeat or interfere with a creditor’s
rights upon winding-up of the company

 Example: Re Solfire Pty. Ltd.: directors took security for previously unsecured loan to company and
then caused company to repay debts, leaving company with no money, solely in order to avoid
judgment debt

Transactions that discharge liability of guarantor-related entities:

Where the director arrange for repay of debt under which he guaranteed ahead of other debts.
This usually also results in unfair reference.

S588H: allows the liquidator to recover the value of such a discharge of liability.

IX. Voidable Antecedent Transactions: Remedies and Defenses:

 All of the above transaction are VOIDABLE at the liquidator’s option

 Remedies: For all of the above transactions, the liquidator may apply to the court for an order under
s588FF(1):

 Requiring person to pay amount of benefit back to company

 Declaring an agreement void, or

 Releasing or discharging debt/security given by a company (pp. 739-741)

 Defenses:

 s588FG does not allow a court to make an order that prejudices a third party that acted in reliance on
the transaction in good faith and did not know the company was insolvent (Re: Pacific Hardware:
cannot get the ring back from the girlfriend, only the money that the ring cost from the director) (p.
741)
RMIT Vietnam Help Desk Team. By An Vu Page 88
 SEMESTER 2/2012

See p741 for details of s588FG(2) defense

YX. The Pari Passu Rule and Priorities:

Before winding-up, the first/earlier claim wins, using the priority system discussed with charges, but

In winding-up, the “Pari Passu” rule (set out in s555) says that unsecured and all other creditors participate equally
in the distribution of company assets, and if there are not enough assets to pay liabilities each creditor gets a
proportional share of the assets

There are a few exceptions to Pari Passu, meaning some creditors still get preference, in the following order (see p.
748 for details):

1. Cost of recovering company property to pay creditors

2. Cost of application for winding-up

3. Winding-up expenses, including liquidator report costs, audit costs

4. Liquidator remuneration/pay (s556)

5. Employee entitlements such as wages, retirement contributions, etc.

For dividends or profit-distributions owed to shareholders, s563A says payment is postponed until after all creditors
paid, then paid if money left-over. But if company debts are owed to a shareholder for some other reason, not
because he/she is a shareholder, then payment is not postponed (Example: Sons of Gwalia Ltd. v. Margaretic,
shareholder who was misled into buying shares can prove damages and be treated as other unsecured creditors, text
p. 750)

Chapter 9: MEMBERSHIP
- Right and liabilities of members:
o Vote at general meetings
o Receive dividends
o Liable to pay calls made by a company [s254M(1)]
o Liable to contribute towards the payment of its debts (unpaid shares) when company is wound up
[s514-529]
o Get “surplus” on winding up. [s485]

BECOMING A MEMBER:

- When company registers

- Company converts from limited by guarantee to limited by shares
- Applying for and receiving share issue
- Getting a transfer from an existing member
- Transmission of shares through bankruptcy or death of a member
- Exercising an option on shares
- Buying shares at strike price under a call warrant
- Convertible notes
a) Consenting to membership in application for registration:

RMIT Vietnam Help Desk Team. By An Vu Page 89

 SEMESTER 2/2012

- [s117(2)(c)] The application must state the names and addresses of each person who consents to become a
member.
- [s120] Persons become members on registration is issued with the specified number of shares.
- [s169] Persons’ names must be entered in the register of members.
b) Register of members:
- [s.168(1)(a)] and [s.169] must have required information about shareholders and the shares they own
- [s231(b)] A person must agree to become a member and to have their name entered in the register of
members before the person becomes a member.
a. Required information: (p.204)
b. Location:
 [s172(1)] The place must be in Australia.
 [s172(2)] The address at which the register is kept must be notified to ASIC within 7 days after
it is established or moved from its registered office or principal place of business.
 [s178] The details of the branch register must be included in the principal register.
c. Right of inspection:
 [s173(1)] A company must allow anyone in inspect its share register.
 [s173(2)] Shareholders may inspect the register without charge.
d. Prohibited use of register information:
 [s177(1)] a person must not use or disclose information obtained from a register to contact shareholders or send
material to shareholders.
 [s177(1B)] Contravention of s177(1) is an offence of strict liability.
 [s177(2)] They may be liable to compensate anyone who suffers loss or damage as a result of the contravention.
 [s177(3) and (4)] The company can claim any profits made by a person as a result of contravention.
o Two exceptions: if the disclosure of the information is:
 Relevant to the holding of shares recorded in the register or the exercise of the rights attaching to them; or
 Approved by the company.
(Explanatory: a person may use register information for purposes such as contacting shareholders in relation to
takeovers or in order to influence company management about the operation of the company).
 IMF Ltd v Sons of Gwalia Ltd: IMF sought a declaration from the court that s177(1A) permitted it to use the register
to contact past and present Sons of Gwalia shareholders and invite them to participate in a class action against their
company and its directors because many investors had acquired shares as a result of misleading information about
the company’s financial position.
o The court refused to make the declaration and held that the use of share register information for this purpose is not
permitted by s177(1A). IMF’s proposed use of the information was in effect an attempt to market its services. The
invitation to join the proposed litigation was not connected with the “holding of the share recorded in the register or
the exercise of the rights attaching to them”. Rather, it was connected with the circumstances in which investors
became members of Sons of Gwalia by purchasing shares.
 [s177(1A)] permits a person to use a share register to send them offers to buy their shares.
 National Exchange Pty Ltd v ASIC: National Exchange used Onesteel Ltd’s share register to find out the names and
addresses of shareholders holding small parcels of shares to send them offer to buy their shares at market value.
o => National Exchange engaged in misleading and deceptive conduct under s1041H because the overall impression of
offer letters suggested that the total price for the shares was payable in full immediately on acceptance of the offer,
when in fact it would be paid over 15 years in equal annual installments.
e. Significance of the register:
 [s176] In the absence of evidence to the contrary, a register is proof of the matters shown in it.

RMIT Vietnam Help Desk Team. By An Vu Page 90

 SEMESTER 2/2012

o Re Clifton Springs Hotel Ltd: Pask made an application for shares and forwarded payment to the company => His
name was entered in the register of members but no notice of allotment or acceptance was sent to him. The
company subsequently went into liquidation and the liquidator included Pask on a list of contributories as a holder
of partly paid shares. The court refused and Pask was held to be a member because his name was entered in the
register.
 Maddocks v DJE Contructions Pty Ltd: the court held that a person does not become a member until the person’s
name is entered in the share register.
 However, where the register is altered in contravention of the constitution, the entry in the register is void and the
transferor remains the legal owner of the shares.
o Sung Li Holdings Ltd v Medicom Finance Pty Ltd: A company’s constitution provided that a transfer of shares was
only to be registered if authorized by the board. The board did not meet to approve the transfer, but the transferee’s
name was registered. It was held that the transferee could not be recognized as the owner of the shares until the
board approved of the transfer.
 Only a person registered as a member can gain rights under provisions of the Corporations Act applicable to
members.
 BWN Industries Pty Ltd v Downey: a mortgagee with security rights over shares was unable to requisition a meeting
of members under the predecessor of s249D through notice given by a receiver manager.
f. Correction of a register:
 [s175(1)] a company or a person aggrieved may apply to the court to correct a register kept by the company.
 [s175(2)]The court may order the company to correct the register and to compensate the applicant for loss or damage
suffered.
 [s175(3)] Where a register is corrected by order of the court , the company must lodge notice of the correction with
ASIC.
 McLaughlin v Daily Telegraph Newspaper Co: McLaughlin became incapable of managing his business affairs
because of mental illness. He authorized his wife to deal with his property => She sold shares in the company, signed
the transfer which was then registered by the company. Neither company nor the transferee had notice of
McLaughlin’s insanity. Sometime later McLaughlin recovered, share price increased substantially and large
dividends has also been declared. He applied to the court for rectification of the register of the company, claiming
that he did not know that he was executing power of attorney and his wife was aware of this.
 The court found that this was so, therefore the power of attorney was void => purported transfer was void =>
Company was ordered to rectify its registers. McLaughlin was ordered to pay over to the company the proceeds from
the sale of shares received by his wife.
 Bothranch Pty Ltd v Monitronix Ltd: The capital of the company had been altered in an irregular manner because its
directors had not been properly appointed. This resulted in purported allotments of shares being invalid. The first
remedial step was to rectify the register in order to ascertain who the members were, so the register of a company
was corrected under a predecessor of s175.
 Correction of shares is an appropriate remedy sought by a member who can show that the directors were exercising
powers for an improper purpose by issuing shares in breach of their fiduciary duties.
 The register may also be corrected where a transfer of shares occurs in breach of the constitution or replaceable rules,
for example : Carew-Reid v Public Trustee : pre-emption clause is not complied with.
 Homestake Gold of Australia Ltd v Peninsula Gold Pty Ltd: Transfers of shares to minors were held to be ineffective
and the transferor was restored to the register.
c) Minors as members:
 Minor, that is persons under 18 years of age, may be shareholders of companies. A
contract under which a minor acquire shares is a voidable contract.

RMIT Vietnam Help Desk Team. By An Vu Page 91

 SEMESTER 2/2012

 Minor shareholders are liable to pay calls, if the calls are made prior to repudiation (từ
chối, thoái thác), but they are not liable to pay calls made after they repudiate.
 While the minor may avoid further obligations after repudiation of the contract,
generally, money paid for the shares is irrecoverable. In order to recover money paid,
the minor must show total failure of consideration.
o Steinberg v Scala: A minor applied for shares which she was duly allotted. She
paid the amount due on allotment and the first call. She did not receive any
dividends and did not exercise any rights attaching to the shares. While still a
minor, she repudiated the contract and sought to recover money she had paid.
This claim is unsuccessful. There had not been total failure of consideration.
She had paid for the shares and they had been duly allotted to her. She obtained
what she had bargained for despite the fact that she had obtained no tangible
benefit as a result of being a shareholder.
d) List of members in extract of particulars: (p 209)

DISCLOSURE OF INTERESTS IN SHARES:

 On death, the deceased’s executor or trustee becomes entitled to the legal interest in the deceased’s shares.
 On bankruptcy, the bankrupt’s shares vest in the trustee of bankruptcy on behalf of the bankrupt’s creditors.
 [s1072E(10)] except as provided by that section, no notice of a trust must be entered on a register and the
company is not regarded as recognizing the existence of any trust.
 [s1072E(9)] A company may, however, consent to marking its register in such a way as to identify that the
shares are held by a trustee.
 [s1072E(11)] In case of proprietary companies, a person who holds shares as a trustee for a body corporate
must notify the proprietary company of that fact.
 [s671B-671C] The provisions oblige persons entitled to not less than 5 per cent of the voting shares of a
listed company to disclose to the company full particulars of their entitlement in the shares.

SHARE CERTIFICATES:

a) Statutory requirements:
 [s1070C(2)] A share certificate is prima facie evidence of the title of a shareholder to the number of
shares specified.
 Where a share certificate has been duly issued but the shareholder’s name has not been entered in the
register of members, the shareholder may be a member for the purposes of an application under s232.
This is despite the operation of s176 which states that the register is prima facie evidence of the matters
contained therein (Re Independent Quarries Pty Ltd).
 [s1070C(1)] a share certificate must state:
o The name of the company and its jurisdiction of registration;
o The class of shares; and
o The amount unpaid on the shares.
b) Liability of company for issue of incorrect share certificate:
 A share certificate is not a contractual document but merely a certification by the company of the
information contained in it.
 Because a share certificate is prima facie evidence of the title of the member to the shares, the
company is liable at common law for any loss arising from an error in the share certificate.

RMIT Vietnam Help Desk Team. By An Vu Page 92

 SEMESTER 2/2012

 Once a share certificate has been issued by the company and someone changes position in reliance
on it, the company is estopped, or prevented from denying the truth of its contents.
o Re Bahina and San Francisco Rail Co: B relied on a share certificate that stated A was the
owner of a certain number of shares => B purchased those shares. After B became
registered as the holder, it discovered that A was not the true owner. He had forged the
signature of the true owner, C, on a transfer and had forwarded this forged transfer together
with a stolen share certificate made out in C’s name to the company. The company without
negligence or fraud, issued the certificate to A.
 The court held that C, as true owners, was entitled to have his name restored to the
register. B’s name was removed from the register, and had rights against A based on
A’s fraud. The company was held liable to B for damages because it was prevented
from denying to him that A was the true owner. The company could only
compensates B by paying damages, being the value of the shares at the time the
company refused to register B or when B’s name was removed from the register.
 Estoppel may arise where a purported transfer of shares is later found to be invalid.
c) Forged certificates:
 A company is generally not liable if the certificate is forged.
o [s128(3)] However, if the forgery is the result of fraudulent acts of an officer, agent or employee of the company, the
assumptions is in s129 permit an outsider to assume that the certificate is validly executed and is otherwise genuine.
In such case, the company is bound by the share certificate even though it has been forged.

TRANSFER OF SHARES:

a) Transferability of shares:
 Shares in the company generally are presumed to be transferable without restrictions.
 [s1070A(1)] shares are transferable as provided by the company’s constitution (proprietary company)
o EX: [s1072G] (replaceable rule) directors of proprietary company a discretion to refuse
to register a transfer for any reason.
b) Instrument of transfer:
 A contract for the sale of shares is not complete until the shares are transferred and the name of the
transferee is entered in the register of members.
 [s1071B(2)] prohibits the company, notwithstanding anything in its constitution, from registering a
transfer unless a “proper” instrument of transfer has been delivered to the company. An instrument
of transfer documents the transfer of ownership of shares from an existing shareholder to another
person.
 [s1072F(2)] directors are not required to register a transfer unless the transfer and any share
certificate has been lodged at the company’s registered office.
 [s1072F(1)] the transferor remains the holder of the shares and a member until the transfer is
registered and the name of the transferee is entered in the register of members.
c) Procedure for transfer of shares:
 [s1072F(2)] unlisted company requires a share transfer to be executed and together with the share
certificate, delivered to the registered office of the company.
 Poliwka v Heven Holdings Pty Ltd: Any other requirement set out in the constitution, such as
approval of directors, must also be met.
 [s1071G(4)] an instrument of transfer is deemed to be certified if it bears the words “certificate
lodged” or words to that effect.

RMIT Vietnam Help Desk Team. By An Vu Page 93

 SEMESTER 2/2012

d) Unregistered transfers:
 For a sale of shares to be complete, usually there is a contract between the transferor and transferee
=> The transferor hands over the duly executed transfer and share certificate to the transferee =>
transferee lodges the completed transfer and certificate with the company => the company registers
the name of the transferee in the register of members and issues a new share certificate in the
transferee’s name.
 Problem: for some reason the share transfer is not registered by the company. Effect: the company
recognizes the transferor as holder of the shares until their name is removed from the register and
replaced by the name of the transferee.
o Regard to transferee and transferor, property in the shares passes at the time the transferor
hands over the signed transfer and share certificate. The transferee becomes the beneficial
owner as soon as the contract is made.
o Niord Pty Ltd v Adelaide Petroleum NL: from this time on, the seller holds the shares as
trustee for the buyer. The buyer is said to have an equitable interest.
o The unregistered buyer is entitled to direct the seller how to exercise voting rights.
 Re Fernlake Pty Ltd: if the seller fails to obey the directions of the buyer, that vote is
valid in terms of the company but the buyer can bring an action against the seller
either for breach of contract or breach of trust.
e) Restriction on transfer of shares:
 [s140(2)] prevents modification of the constitution to increase or impose restrictions on the right to
transfer shares without a member’s consent in writing.
 Greenhalgh v Mallard: As shareholders are presumed to have a prima facie right to transfer their
share, any restriction contained in the company’s constitution must be clear and unambiguous.
 Andco Nominees Pty Ltd v Lestato Pty Ltd: a restriction on the transfer of shares in the constitution
did not apply:
o To a transmission of shares on the death or bankruptcy of a shareholder;
o To a compulsory transfer of shares by court order; or
o To a transfer of shares from a retiring trustee to a new trustee.
f) Refusal to register transfer or transmission of shares:
 [s1072G] directors of proprietary company have the power to refuse to register a transfer of shares
for any reason.
 [s1072(3)] (replaceable rule) applicable to all companies and allows directors to refuse to register a
transfer of shares if the shares are not fully paid up or the company has a lien over the shares.
 [s1071E] If the company refuses to register a transfer, it must send the transferee notice within two
months after the transfer was lodged with it.
o Breach of this requirement Is an offence.
o Re Swaledale Cleaners Ltd: the company may lose rights to deny registration to the
transferee.
1. Reasons for refusal:
 The person wishing to challenge the refusal must prove that the directors acted in bad faith
or for improper purposes.
 Re Smith and Fawcett Ltd: A company constitution provided that “the directors may at any
time in their absolute and uncontrolled discretion refuse to register any transfer of shares”.
The father of an applicant, who was the shareholders, died, the applicant, as executor of his
father’s estate, sought to be registered as the holder of those shares. The director refused to
register unless 2000 shares were sold to a certain director at a stated price.
RMIT Vietnam Help Desk Team. By An Vu Page 94
 SEMESTER 2/2012

 The applicant failed as he could not prove that the directors had acted in bad faith.
(directors had only to be exercised bona fide in the interest of the company).
 Equiticorp Industries Ltd v ACI International Ltd: ACI refused to register transfers of shares
to Equiticorp. The constitution provided that the directors could refuse to register the transfer
if it would result in a foreign person controlling more than 15 per cent of the voting shares. It
was held that Equiticorp was not a foreign person and ACI was required to register the
transfer.
2. Without just cause:
 If the director refuses to register a transfer of shares, the transferee may apply to the court
and if the court is satisfied that the refusal to register the transfer was without just cause, the
court may order that the transfer be registered or make such order as it thinks just and
reasonable,
o [s1071F] including an order providing for the purchase of the shares by a specified
member or by the company itself.
 Re Winmardun Pty Ltd: Waters was appointed as the trustee of the deed. Under the deed,
shareholder’s property vested in the trustee. Waters sought registration from the directors of
a transmission of the shares to him. While the directors did not formally refuse to register
the transmission, they indicated that they would not register the transmission to Waters on
the grounds that he was not a family member. The directors argued that this was not in the
company’s best interests.
o The court held that the reasons given by the director did not provide a foundation for
the formation of a bona fide opinion by them that it would not be in the company’s
best interests to register Waters as a shareholders => without just cause =>
However, the court refused to order that the company purchase the shares and
instead order that Waters be registered as a shareholder of the company.
3. Unsolicited offers to purchase shares off-market: (p. 217)
 [s1019K] Sellers who have accepted unsolicited offers to purchase their shares off-market
have the right to refuse to transfer their shares to the buyer if the offer documentation either
did not comply with the Div 5A requirements or contained a misleading or deceptive
statement.
 [s1019E(1)] Under Div 5A, unsolicited offers may only be made by the offeror who sends
an offer document in printed or electronic form addressed to a particular offeree.
 [s1019G(1)] The offer document must be dated and cannot remain open for more than 12
months after this date.
 [s1019G(2)] An offer may withdrawn by the offeror but must remain open for at least one
month after the date of the offer.
 [s1019G(3)] An offer may only be withdrawn by sending a withdrawal document addressed
to the offeree.

CHESS (Clearing House Electronic Subregister System): (p.217-218)

a) Purpose of CHESS:
 Enable ASX to compete effectively with overseas stock exchanges by offering an efficient
settlement system.
b) Sponsorship:
c) Clearing and Settlement operating rules:

RMIT Vietnam Help Desk Team. By An Vu Page 95

 SEMESTER 2/2012

TRANSMISSION OF SHARES: (p.219)

 Transmission of shares occur by the operation of law if a shareholder dies, become incapable
through mental or physical incapacity or becomes a bankrupt. => shares vest in the deceased
shareholder’s personal representative or the trustee of bankruptcy. The procedure for transfer of
shares does not apply.
 Where shareholder dies leaving a will => the executor named in the will become his/her personal
representative => becomes legal owner of the shares even though not registered as a member.
 [s1072A(1)] If the shares were owned solely by the deceased shareholder, the company will only
recognize the personal representative as being entitled to the deceased shareholder’s interest in the
shares.
 [s1072A(2)(b)] The personal representative has the same rights as the deceased shareholder, whether
or not registered as the holder of shares.
 [s1072A(3)] If the personal representative chooses to be registered, the company must register the
representative as a shareholder => then subject to the right and liabilities as if the shares had
remained registered in the name of the deceased ([s1072E(2)].

LIABILITY OF MEMBERS:

 [s516] the liability of members of a company limited by shares is limited to the amount, if any, unpaid
on their shares.
 [s254M(1)] partly paid shares: liable for the calls
 [s515] every present and past member is liable to contribute to the property of the company to an amount
sufficient for payment of its debts, costs of winding up and adjustment of rights as between its
contributories.
 [s521] a past member who has ceased to be a member for more than one year prior to the
commencement of winding up is not liable to contribute.
 [s523] extended to 3 years in the cases of an unlimited company having converted to a limited company.

CESSATION OF MEMBERSHIP:

 Where shares are transferred and the transfer is duly registered, the transferor ceases to be a member. The
death of a member also results in cessation of membership.
a) Forfeiture of shares:
 [s254G] immediate forfeiture on a no liability company without the need for a resolution of the directors.
o Diversified Mineral Resources NL v Amusmet Investments Pty Ltd, shares automatically forfeited
14 days after the date of a call, despite the existence of litigation that involved a dispute over
whether the shares were fully or partly paid at the time of the call.
 [s254Q(2)] Forfeited shares must be offered for sale by public auction within 6 weeks after the call has
become payable.
 Shares may also forfeited under the company’s constitution for reasons other than non-payment.
o Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd: the constitution provided for the forfeiture of
shares of shareholders who were not suppliers of sugar to the company so as to enable the company
to retain its co-operative status => forfeit fully paid shares for no consideration did not amount to a
reduction of capital as no payment was made by the company to the shareholder whose shares were
forfeited.
b) Surrender of shares:

RMIT Vietnam Help Desk Team. By An Vu Page 96

 SEMESTER 2/2012

 A shareholder cannot surrender partly paid shares because this would breach the principle that a
company must maintain its share capital. It would constitute an indirect way for a company to hold
shares in itself and would result in part of the issued capital being extinguished.
o Trevor v Whitworth: A valid surrender of shares may only occur where they are liable to be
validly forfeited.
c) The company’s power of lien:
 Similar to the power of a company to forfeit and sell shares after non-payment of a call that the
company’s right of lien over partly paid shares for all money called or payable at a fixed time in
respect of that shares => often set out in constitution and usually extends to all dividends payable on
the shares.
 A lien is the right to hold property of another as security for payment of a debt. The company may
then sell the shares over which it has a lien.

CHAPTER 14: SHAREHOLDER’S MEETING

 [s249Q] A meeting of a company’s shareholders must be held for a proper purpose.
 [s249R] It must be held at a reasonable time and place.

TYPES OF MEETINGS

1. Annual General Meetings

a. Requirement to hold AGM:
 [s250N(1)] a public company must hold its first AGM within 18 months after its
registration.
 [s250N(2)] thereafter, AGM must be held at least once in every calendar year and within 5
months after the end of a company’s financial year.
 [s250N(3)] The requirement to hold AGM each year must be met even if other meetings are
held in that years.
 [s250N(4)] A public company that has only one shareholders is not required to hold an
AGM.
 [s250P(1)] A company may apply to ASIC to extend the period within which an AGM must
be held.

RMIT Vietnam Help Desk Team. By An Vu Page 97

 SEMESTER 2/2012

 [s250P(2)] The application must be made before the expiration of time during which the
AGM was required to be held.
 [s250P(2) and (4)] ASIC may extend the time for holding the AGM for a specified period
and may impose conditions.
o Exicom Ltd v Fururis Corp Ltd: An extension will only be granted if there is good
cause to postpone an important right of shareholders to expect that an AGM will be
held within the required times.
b. Business of AGM:
 Give shareholders the opportunity to obtain specified information about company’s past
performance and future plans and enables shareholders to question the directors regarding
the affairs of the company and to question the auditor about the content of the auditor’s
report aor the conduct of the audit.
 [s250R(1)] Business of an AGM may include these item even if these are not referred to in
the notice of meeting:
o Consideration of the annual financial report, directors’ report and auditor’s report.
o Election of directors; and
o Appointment of the auditor and fixing of the auditor’s remuneration.
 [s317] the directors of a public company that is required to hold an AGM must lay the
following reports before the AGM: financial report, directors’ report and auditor’s report for
the last financial year.
 Shareholders must be given a reasonable opportunity to ask questions or make comments
regarding the company’s management. (s250S, s250SA,s250T, s250PA, s249N)
2. Extraordinary general meetings
 A general meeting other than AGM is often referred to as an extraordinary general meeting.
3. Class meetings
 Where a company issues different classes of shares, the CA provides for the calling of meetings of
classes of shareholders in certain circumstances.
 The right attaching to a class of shares may only be varied with the consent of the holders of three-
quarters of the issued shares of that class.
 Re Australian Consolidated Press Ltd: class meetings are held separately from general meeting.
4. Adjourned meetings
 Smith v Paringa Mines Ltd: directors generally have the power to adjourn general meetings but not
postpone them. Notice need not be given unless required by the constitution.
 [s249M] requires new notice to be given if a meeting is adjourned for more than one month.
 Bell Resources Ltd v Turnbridge Pty Ltd: Unless permitted by the constitution, once a notice of
meeting has been sent specifying a particular time and place for the meeting, meeting cannot be
cancelled and another called in its place.
 [s249W(1)] A resolution passed at a meeting resumed after an adjournment is passed on the day of
the resumed meeting and not on the date of the adjourned meeting.

CALLING MEETINGS

1. By directors
 [s249C] permits any director to call a meeting of the company’s shareholders.
 [s249CA] an individual director has the right to call a shareholders’ meeting despite anything in the
company’s constitution.

RMIT Vietnam Help Desk Team. By An Vu Page 98

 SEMESTER 2/2012

2. At shareholders’ request
 [s249D(1)] The directors of a company must call and arrange to hold a general meeting on the
request of shareholders holding at least 5 per cent of the voting shares or of at least 100 shareholders
who are entitled to vote at the general meeting.
 [s249D(2)] The request must state any resolution to be proposed at the meeting and must be signed
by the shareholders making the request.
 [s249D(5)] The directors must call the meeting within 21 days after the request is given to the
company and the meeting must be held not later than 2 months after the request.
 [s249E(1)] If the directors fails to call a meeting within 21 days, shareholders holding more than 50
per cent of the votes of all shareholders who made the request may call and arrange to hold a general
meeting.
 [s249E(2)] The meeting must be held within three months after the request is given.
 [s249E(3)] the company must assist shareholders to call a meeting by providing a copy of the
register of shareholders to the shareholders requesting the meeting.
 [s249E(4)] the company must pay reasonable expenses incurred by the shareholders in calling and
arranging the meeting.
 [s249E(5)] A director is not liable where it can be shown that reasonable steps were taken to comply
with s249D.
 [s249Q] A meeting of shareholders must be held for a proper purpose.
o NRMA v Scandrett: If the purpose of the request to hold a meeting is to consider and pass a
resolution, this is a proper purpose, and it is not relevant that the shareholder requesting the
meeting is motivated by ill will or self-interest.
o Humes Ltd v Unity APA Ltd: directors may validly refuse to call a general meeting
requested by shareholders if the purpose of calling the meeting is to harass the company and
its directors. The court held that a meeting is not called for an improper purpose just because
a proposed resolution is likely to be defeated causing inconvenience and expense to the
company, its directors and majority shareholders.
 Directors may also validly refuse to call a meeting if its sole purpose is to pass a resolution that
interferes with the directors’ exclusive power to manage the company’s business.
o NRMA v Parker: The proposed resolution purported to direct the board over a matter that
NRMA’s constitution exclusively vested in the directors. As this resolution could not
effectively be passed by the members and this was the sole object of the meeting, it was held
that the directors were entitled to refuse to act on the request.
3. By shareholders
 [s249F] Shareholders with at least 5 per cent of voting shares may also call a general meeting
without first requesting the directors to call the meeting. (rarely because the shareholders must pay
the incurred expenses)
 Pinnacle VRB Ltd v Ronay Investments Pty Ltd: The director may postpone the meeting in
accordance with the company’s constitution where they act in good faith.
4. By court order
 The court has powers to order that a meeting be called if it is impracticable to call a meeting in any
other way.
 [s249G] the application may be made by any director or shareholder entitled to vote.
o Re Totex-Adon Pty Ltd and the Companies Act: It was held to be impracticable to call a
meeting because one of the two shareholders entitled to vote at meetings refused to co-
operate in calling a meeting. It was ordered that a meeting be called and that the presence of
RMIT Vietnam Help Desk Team. By An Vu Page 99
 SEMESTER 2/2012

one shareholder holding voting shares would constitute a quorum despite a provision in the
constitution that required a quorum of two shareholders.

NOTICE OF MEETINGS

 Shareholders must be given written notice of a forthcoming meeting. The purpose of the notice is to enable
shareholders to know what business will be considered at the meeting so that they can decide whether to
attend and how to vote.
 Where notice is given that particular business will be transacted at a meeting, no other business can be
proceeded with unless all the shareholders are present and consent.
 Efstathis v Greekk Orthodox Community of St George: a genuine amendment that comes within the scope of
the business stated in the notice may be properly considered.
 Failure to give notice is a procedural irregularity.
o [s1322] such irregularity are not invalidated unless a substantial injustice is caused.
1. Amount of notice
 [s249H] As a general rule, notice of at least 21 days must be given of a meeting of a company’s
shareholders.
o The constitution may specify a longer minimum period of notice.
 [s249HA] despite anything in the company’s constitution, listed Australian companies must give 28
days’ notice of shareholders’ meetings.
 [s203D and 329] Notice of intention to move a resolution to remove a director or auditor must be
given to the company at least two months before the meeting is to be held.
o [s203D(2) and 329(1A)] However, if the company calls a meeting after the notice of
intention is given, the resolution may be passed even though the meeting is held less than
two months after the notice is given.
2. Who must receive notice?
 [s249J(1)] (replaceable rule) Written notice of a meeting of shareholders must be given individually
to each shareholder entitled to vote and to each director.
 [s249J(2)] notice to joint shareholders must be given to the joint shareholder named first in the
register of shareholders.
 [s249K] An auditor is entitled to the same notice and to any other related communications that a
shareholder is entitled to receive.
 [s249J(3)] Notice may be given by post, fax or email or any other means permitted by the
constitution.
o [s249J(4)] the notice by post: 3 days after posting, fax and email: after it is sent
o [s249J(5)] email notice is taken to be given on the business day after the notice is made
available.
3. Shorter notice
 A company may call a meeting on shorter notice than 21 days if it obtains shareholder approval to
do so
 [s249H(2)] if the meeting is an AGM, all shareholders entitled to attend and vote at the AGM must
agree to the shorter notice beforehand, while in the case of other general meetings the holders of at
least 95 per cent of votes must agree beforehand.
o [s249H(3)] shorter notice is not allowed where the meeting is to consider a resolution to
remove a director or appoint a replacement.

RMIT Vietnam Help Desk Team. By An Vu Page 100

 SEMESTER 2/2012

o [s249H(4)] shorter notice is not allowed where the meeting is to consider a resolution to
remove an auditor.
4. Content of notice
 [s249L] Specified information in the notice:
o Place, time, date and technology used to facilitate a meeting
o General nature of meeting’s business
o Intention to propose a stated special resolution, if any; and
o If a shareholder has a right to appoint a proxy, this must be stated as well as whether the
proxy must be a shareholder. A shareholder must also be informed of the right to appoint
two proxies and to specify the proportion of votes each proxy is appointed to exercise.
 [s249L(3)] Notice must be worded and presented in a clear, concise and effective manner.
5. Misleading information
 Directors have an obligation to ensure that the content of notices of meetings and accompanying
explanatory documents sent to shareholders contains full and fair disclosure and is not misleading.
 Chequepoint Securities Ltd v Claremont Petroleum NL: where the information is misleading, the
holding of the meeting may be restrained. If the meeting is held, resolutions passed may be
overturned.
 Need to make full and fair disclosure must be balanced against the need to avoid confusing.
o Fraser v NRMA Holdings Ltd: A complex proposal about which there were difficult
questions of commercial judgment was to put to a large number of shareholders, many of
whom had little experience in dealing with shares or corporate re-organizations. The court
considered that it was appropriate for the information provided to be selective and confined
to matters that were realistically useful in the circumstances.
 [s1309] Where a notice of meeting is accompanied by information that is false or misleading in a
material respect or has omitted information that make it misleading, an officer who furnishes the
information may be guilty of an offence.
o Browne v Panga Pty Ltd: in circumstances where opposing or dissenting directors are not
given an opportunity to express their views or comments, a heavy onus is cast on the
directors to ensure that the information is fair.
o Fraser v NRMA Holdings Ltd: this may sometimes be an appropriate means of providing
full information to shareholders to enable them to make a properly informed judgement.

PROCEEDINGS AT MEETINGS

1. Use of technology (p.452)

2. Quorum
 Quorum is the minimum number of shareholders whose presence is necessary for a meeting to be
able to validly transact business.
 [s249T(1)] (replaceable rule) quorum for shareholders’ meeting is two and the quorum must be
present at all times during the meeting.
 [s249B] resolutions of single shareholder companies may be passed by the shareholder recording it
and signing the record.
 [s249T(2)] If a shareholder has appointed more than one proxy or personal representative, only one
of them is counted.
 If the quorum is not present within half an hour after the appointed time of the meeting, it is
adjourned to the time and place determined by the directors.

RMIT Vietnam Help Desk Team. By An Vu Page 101

 SEMESTER 2/2012

o [s249T(3)] If the directors make no such determination, the meeting is adjourned for one
week to be held at the same time and place.
o [s249T(4)] If there is no quorum at the resumed meeting, the meeting is dissolved.
3. Chairing meetings
 The chair is the person in charge of the meeting, with responsibility for ensuring that the meeting is
properly conducted.
 [s249U(1)] (replaceable rule) directors may elect an individual to chair shareholders’ meetings.
 [s249U(2)] The directors at a meeting must elect a person to chair the meeting if they have not
previously done so prior to the meeting, or if the previously elected person is not available for the
meeting.
 [s249U(3)] If the directors do not elect a chair for the shareholders’ meeting or the chair is
unavailable, the shareholders must make the election.
 Kelly v Wolstenholme: the court held that a chairman is a person who has control of a meeting. A
person cannot merely say at the meeting that “I am the chairman” without actually exercising
procedural control over it.
o Procedural control over the meeting involves nominating who is to speak, dealing with the
order of business, putting questions to the meeting, declaring resolutions carried or not
carried, asking for any general business and declaring the meeting closed.
 [s251A(2)] the chair of the meeting or the next meeting is required to sign the minutes of the
meeting.
 Corpique (No 20) Pty Ltd v Eastcourt Ltd: The chair closed the meeting on legal advice that the
proposed resolutions were not in compliance with the company’s articles. The resolutions sought to
remove two directors, including the chair, and appoint two directors in their place. After closing the
meeting, the chair and some other shareholders left the meeting, which then purported to pass the
resolutions.
o It was held that the chair was wrong in stating that he did not have the power to put the
resolutions. However, he acted honestly and bona fide and was entitled to accept the legal
advice given to him. In these circumstances, it was not open to some of the shareholders to
continue the meeting after other shareholders had left in reliance upon the decision of the
chair
 Shareholders may continue a meeting against the ruling of a chair if a lack of bona fide on the
chair’s part can be shown.
 A chair cannot stop a meeting just because proceedings have developed in a way that the chair
opposes.
4. Voting
 [s250E(1)] Generally, on a show of hands each shareholder has one vote and on a poll each
shareholder has one vote for each share held.
 [s250J(1)] A resolution put at a general meeting must first be decided on the show of hands unless a
poll is demanded.
 [s250J(2)] A declaration by the chair is conclusive evidence of the result of voting on a show of
hands.
 A poll may be demanded on any resolution.
o However, [s250K] the company’s constitution may provide a poll cannot be demanded on
any resolution concerning election of the meeting chair or adjournment of a meeting.

RMIT Vietnam Help Desk Team. By An Vu Page 102

 SEMESTER 2/2012

 [s250L(1)] a poll may be demanded by at least 5 shareholders entitled to vote, shareholders with at
least 5 per cent of votes or the chair.
 [s249Y(1)(c)] a proxy may join in a demand for a poll.
 A replaceable rule gives the chair the power to determine when and how the poll must be taken
o However, a poll on the election of a chair or on the question of an adjournment must be
taken immediately. [s250M]
5. Proxies
 [s249X(1A)] A proxy may be an individual or a body corporate.
 [s249X(1)] shareholder who is entitled to vote may appoint a proxy to attend and vote for the
shareholder at the meeting.
 [s249X(2)] the appointment may specify the proportion or number of votes that the proxy may
exercises.
 [s249X(3)] a shareholder holding two or more voting shares may appoint two proxies who may each
exercise half the votes if the appointment does not specify the proportion of votes each proxy may
exercise.
 [s249Y(1)] A proxy has the rights of the appointing shareholder to speak at the meeting, to vote in
accordance with the appointment and to join in demand for a poll.
 [s249Y(2)] the company’s constitution may provide that a proxy is not entitled to vote on a show of
hands.
 By attending a meeting, the shareholder impliedly revokes the appointment of the proxy.
 [s250A(1)] To be valid, a proxy appointment form must be signed by the appointing shareholder and
state the shareholder’s name, the company’s name, the proxy’s name.
 [s250A(6)] the appointment does not need to be witnessed.
 [s250B] A proxy’s appointment must be received by the company at least 48 hours before the
meeting.
o [s250B(5)] the constitution may reduce this period.
o [s250B(3)] An appointment may be sent to the company by post or fax or to the company’s
electronic address.
o [s250B(4)] A company may specify in the notice of the meeting that an appointment of a
proxy is ineffective if the transmission to a fax number or electronic address is not verified
in a particular way or the appointment authority is not produced at the meeting.
 Shareholder may direct how the proxy should vote => “directed proxy”
o [s250A(4)(a)]Proxy need not to vote on a show of hands, but if the proxy votes, they must
vote as instructed.
o [s250A(4)(c)] If the proxy is the chair; the proxy must vote on a poll and must vote as
instructed;
o [s250A(4)(d)] If the proxy is not a chair; voting on a poll is optional, but if they do vote, the
proxy must vote as instructed.
 Campbell v Jervois Mining Ltd: A company sent blank proxy form to shareholders
with a statement that the chairman intended to vote undirected proxies in favour of
resolutions to be put to the meeting. At the meeting, the chairman changed his mind
and voted the proxies against the resolutions. It was held that the chairman was able
to change his mind as the statement send to shareholders only indicated his intention
at that time. Shareholders who submitted undirected proxies were directing the chair
to vote as he saw fit at the meeting.

RMIT Vietnam Help Desk Team. By An Vu Page 103

 SEMESTER 2/2012

 Withlam v ASIC: Withlam, chair of NRMA, was appointed by 4000 shareholders

 Without specific voting instructions => “open proxy”
6. Corporate representatives
 [s250D(1)] A company that own shares in other companies may appoint a corporate representative to
exercise all the powers the body corporate could exercise at meetings of the shareholders, creditors,
or debenture-holders or relating to circulating resolutions or resolutions of one shareholder
companies.
 [s250D(2)] the appointment may set out restrictions on the representative’s powers.
 [s250D(3)] While more than one representative may be appointed, only one may exercise the powers
of the body corporate at any one time.
 Atkins v St Barbara Mines Ld: the court distinguished between a proxy and corporate representative.
A representative “is really a statutory example of an official acting as an organ of the company
rather than as a mere agent”. A proxy is an agent of the corporate shareholder.
o [s250B(1) and (2)] documents appointing a proxy must be given to the company at least 48
hours before the meeting.
o Representatives cannot be required to notify their appointments before the meeting.
7. Resolutions
a. Ordinary and special resolutions
 [s9] a special resolution must be passed by at least 75 per cent of the votes cast by
shareholders entitled to vote on the resolution.
o [s249L(c)] it also requires notice specifying the intention to propose the resolution
and stating the resolution.
 Passing special resolution where:
o [s136(2)] seeks to modify or repeal its constitution.
o [s256C(2)] it wishes to reduce its capital by selective reduction.
 [s246F(3)] Certain resolutions must be lodged by a public company with ASIC within 14
days of their passing.
 A special resolution of a class of shareholders also requires 21 days’ notice.
o [s246B] a special resolution of a class of shareholders must be passed before the
rights of the holders of that class can be varied.
b. Resolutions without meetings
 Proprietary company circulating resolutions:
o [s249A(2)] A proprietary company with more than one shareholder may pass a
resolution without holding a general meeting if all shareholders entitled to vote on
the resolution signs a document containing a statement that they are in favor of the
resolution. => “circulating resolutions”
o [s249A(3)] Shareholders may sign separate copies of the document if the wording of
the resolution and statement is identical in each copy.
o [s249A(4)] the resolution is passed when the last shareholder signs.
o [s329] circulating resolution cannot be used to remove an auditor.
 One shareholder companies:
o [s249B] pass a resolution if the shareholder records the resolution and signs the
record.
o [s251A] resolutions passed this way must be recorded in the company’s minute
book.

RMIT Vietnam Help Desk Team. By An Vu Page 104

 SEMESTER 2/2012

c. The Duomatic principle

 States that where all shareholders entitled to attend and vote at a general meeting of a
company assent with full knowledge and consent to some matter that could have been
carried into effect at a general meeting, that assent is as binding as a resolution in a general
meeting would have been.
o Bodikian v Sproule: the Duomatic principle does not enable shareholders to exercise
powers that they do not have under the constitution.
o Parker and Cooper Ltd v Reading: shareholders of a company informally ratified a
debenture granted by the directors that was beyond their powers. => the company
was held bound by the unanimous ratification of the shareholders because the
transaction was intra vires the company and was honest and for the benefit of the
company.
o Herrman v Simon: this doctrine does not operate where substantial rights are varied
or where shareholders are not fully aware of the effect of the matter agreed to on
their rights.
o Re Duomatic Ltd: Only the consent of voting shareholders is required for such
informal assent.
d. Shareholders’ resolutions and statements.
 [s249N] shareholders can require a company to put resolutions to be considered at a general
meeting.
o Shareholders with at least 5 per cent of the votes or at least 100 shareholders entitled
to vote may do that.
 [s249O(1)] shareholders’ resolutions must be considered at the next general meeting
occurring more than two months after the notice is given.
 [s249O(2)] notice of the resolution must be given to shareholders in the same way as notice
of a meeting is given.
 Under s249P(6) the company must distribute a copy of the statement to all shareholders in
the same way it gives notice of a general meeting.
o The company is responsible for the cost of distributing the statement to shareholders
if it receives the statement in time to send it out to shareholders with the notice of
meeting.
 Shareholders may require the company to circulate their own proposed resolutions and
statements.
o [s249P(2)] the request to distribute a statement may be made by shareholders with at
least 5 per cent of the votes or at least 100 shareholders entitled to vote.
 A company need not comply with a request if the statement is more than 1000 words long or
defamatory.
8. Minutes
 [s251A(1)] A company must keep minute books in which it records proceedings and resolutions of
meetings of the company’s shareholders and directors, including meetings of committees of
directors.
 Resolutions passed by shareholders or directors without a meeting must also be recorded. This
includes resolutions of one shareholder companies and circulating resolutions.
 [s251AA] the minutes of listed Australian companies must also record details about votes cast by
proxies.

RMIT Vietnam Help Desk Team. By An Vu Page 105

 SEMESTER 2/2012

 [s251A(2)] minutes must be recorded within one month and be signed within a reasonable time after
the meeting by the chair of the meeting or next meeting.
 [s251A(3)] where a resolution is passed without a meeting, the minutes must be signed by a director.
 [s251A(5)] the minute books must be kept at the company’s registered office, approved by ASIC.
 [s251A(6)] the recording and signing of a minute is evidence of the resolution or proceeding to
which it relates unless the contrary is proved.
 [s251B(1) and (2)] shareholders are entitled to inspect and request copies of the minutes of meetings
of shareholders and the resolutions of shareholders passed without meetings.
9. Irregularities
 [s1322(2)] procedural irregularities are not invalidated unless the court is of the opinion that the
irregularity has caused or may cause substantial injustice which may not otherwise be remedied by
order of the court. In such case, the court has power to declare the proceedings invalid.
o Bell Resources Ltd v Turnbridge Pty Ltd: a resolution was passed reducing number of
directors. This was held to be a procedural irregularity because it had not been approved by
the directors, required notice had not been given and the nature of this item had not been
specified in the notice as required. This caused substantial injustice because it deprived
shareholders of notice of important and fundamental resolutions. The resolution was
declared invalid under the equivalent of s1322(2).
o Re Compaction Systems Pty Ltd: the injustice must be real and not theoretical or
insubstantial.
o Although procedural irregularity is given wide meaning, it does not extend to a failure to
give notice to half the shareholders of a proposal to amend the company’s constitution and
to resolving to amend the constitution without the knowledge of those shareholders.
o Jordan v Avram: The court could not validate such procedures under s1322.
 Chew Investment Australia Pty Ltd v General Corp of Australia Ltd: GCA called an extraordinary
general meeting to consider resolutions required under ASX Listing Rules. Peppinck held proxies for
10 shareholders including CIA. His demand for a poll was rejected by the chair in contravention of
the articles. It appeared that the resolutions would have been defeated on a poll. CIA sought orders
under s1322(2) declaring that the resolutions passed by the general meeting be declared invalid as
there was an entitlement under the articles to a poll. The court granted the application as there was a
clear injustice that prevented the exercise of voting rights, particularly because of the listing rule that
required the resolutions to be passed and the fact that a poll would have resulted in the defeat of the
resolutions.
 The procedure for a nomination of a person for election as a director at a general meeting of a
company is not “a proceeding” within the meaning of s1322(2).
o Wesgo Ltd v Gabriel: it is not necessary part of an annual general meeting to require
nominations in advance.
 Where a company accidentally omits to give notice to a person entitled to attend a meeting and the
meeting is required to be held under the CA, the meeting is not invalidated unless the court so
declares.
o [s1322(3) and (3A)] an application for such an order may be brought by a shareholder who
did not receive notice or by ASIC.
 [s1322(4)(a)] Any interested person may apply to the court for an order declaring that any act or
proceeding is not invalid by reason of a contravention of the CA or a provision of the corporation’s
constitution.

RMIT Vietnam Help Desk Team. By An Vu Page 106

 SEMESTER 2/2012

 The court may validate proceedings at meetings if the irregularity is essentially of a procedural
nature and the parties to the contravention acted honestly.
o [s1322(6)] An order validating proceedings cannot be made unless it is in the public interest.

Chapter 17: Members’ remedies

A. Statutory Remedies:
1/ Oppressive or unfair conduct:
- [s232]: members has the wide range of remedies if they can show that the conduct of a company’s affairs is
contrary to the interests of the members as a whole, oppressive, unfairly prejudicial, or unfairly
discriminatory.

a) Accepted applicants:
- [s234(a)]: a member of a company, even though the application relates to an act or omission that is against
the member in a capacity other than as a member.
- [s234(b)]: a person removed from the register of members because of a selective reduction.
- [s234(c)]: a past member if the application relates to the circumstances in which they ceased to be a member.
- [s234(d)]: a person to whom a share has been transmitted by will or by operation of law.
- [s234(e)]: a person whom ASIC thinks appropriate having regard to investigations it is conducting, or has
conducted, into the company’s affairs or matters connected with the company’s affairs.

b) Conduct where a remedy may be sought:

 company’s affairs:

- includes conduct of the directors, majority shareholders and substantial shareholders, as well as the company
itself.
- [s 53]: company’s affairs also include a reference to:
o the promotion, formation, membership, control, business, trading, transaction and dealings, property,
liabilities, profits and the income, receipts, losses, outgoings and expenditure;
o the internal management and proceedings;
o the power of persons to exercise, or to control the exercise of , the rights to vote attached to shares in
the body corporate or to dispose of, or to exercise control over the disposal of, such shares
- Morgan v 45 Flers Avenue Pty Ltd:
o Fact: Flers Avenue (FA) Pty Ltd owned 45% shares in Metal Recyclers (MR) Pty Ltd. Morgan
brothers controlled FA and were also appointed nominees directors of MR. Richard brothers were
members of MR and also directors of MR. Due to disputes arising, one of Morgan brothers resigned
as director of MR and became manager of rival company. The board of MR subsequently resolved to
distribute bonuses and fees to its remaining directors, disregarded the brother, who had resigned. He
sought an order under s232 for the compulsory purchase of his shares in FA.
o Rule: the order was refused. It was held that a nominee director, in participating in the board
decisions, could not be said to be acting in the affairs of the appointer company. This is because they
have an overriding duty to act in the best interests in the company on whose they sit.
- A refusal by directors to allow shareholders to inspect the financial records of the company and its
subsidiaries was not “conduct” in the affairs of the company: Baker Davis Supply Co Pty Ltd v Dernacourt
Investments Pty Ltd.

 Acts or proposed acts:

RMIT Vietnam Help Desk Team. By An Vu Page 107

 SEMESTER 2/2012

- [s232(b)]: a single act by or on behalf of a company may constitute conduct that is contrary to the interests of
the members as a whole, oppressive, unfairly prejudicial or unfairly discriminatory. The conduct may also
consist of an act that is merely proposed and has not yet occurred.

Resolutions or proposed resolutions:

- [s232(c)]: conduct of the company’s affairs may also take the form of a resolution or proposed resolution of
members or a class of members.

 Omissions:
- [s232(b)]: enables a member to obtain a remedy where a company with sufficient profits persistently refuses
to pay dividends (Sanford v Sanford Courier Service Pty Ltd)

c) meaning of oppressive and unfair:

- “oppressive conduct” is:
o conduct that is “burdensome, harsh and wrongful” : Scottish Co-operative Wholesale Soc Ltd v
Meyer; or
o involves “some overbearing act or attitude o the part of the oppressor”: Re Jermyn Street Turkish
Bath
- unfairness is determined objectively. A director’s conduct may be regarded as oppressive or unfair if no
reasonable director would hace acted in that way.
- Wayde v NSW Rugby League Ltd:
o Fact: NSW League removed a club, Wests, from its competition. The decision was taken by the
League’s directors honestly in pursuit of the object of fostering the game of rugby league and
serving its best interests. Wests brought an application for a remedy under s232 to restrain League
from proceeding with the exclusion. However, it was held that while the decision was harsh on
Wests, it was one that a reasonable board could have made, and Wests could not show that the
actions of League were oppressive, unfairly prejudicial or unfairly discriminatory.

 Conduct contrary to the interests of the members as a whole:

- [s232(d)]: a remedy may also be grated if it is satisfied that the conduct was contrary to the interests of the
members as a whole
- S232 remedy may be still available where there was conduct that was contrary to the interests of the
members as a whole even though that conduct was not necessarily oppressive or unfair.

 Examples of oppressive and unfair conduct:

(i) Diversion of corporate opportunity:

- s232 provides a remedy for minority shareholders if the majority shareholders divert a corporate opportunity
to themselves or their associates.
- Scottish Co-operative Wholesale Soc Ltd v Meyer:
o Fact: A company was formed for the purpose of purchasing yarn and selling material. The majority
shareholders, who also controlled the board of director, also owned a mill that wove the yarn and
then sole material to the company. When the majority’s mill stopped selling material to the
company, the activities of the company were severely curtailed. It was held that this constituted
oppressive conduct under s232 and ordered the majority buy shares of the minority.
o Rule: Divert corporate opportunities from the company may amount to oppressive or unfair conduct.

(ii) diversion of profits:

- The majority may act oppressively or unfairly where minority shareholders are excluded from being
directors and a significant proportion of profits are paid in the form of high directors’ fees and low dividends
to shareholders.
- Sanford v Sanford Courier Service Pty Ltd:
RMIT Vietnam Help Desk Team. By An Vu Page 108
 SEMESTER 2/2012

o Rule: The majority acted oppressively towards the minority because they excluded the minority from
the profits of the company, by diverting business away from the company to another company and
by payment of high salaries, provision of motor vehicles and retirement benefits while refusing to
pay dividends.

(iii) exclusion from management:

- In family companies, it may be oppressive or unfair to exclude a family member from the company’s
management.
- Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd:
o Fact: A family company has three directors. One of the director was excluded from the involvement
in the company’s decision-making process while still remained a director. It was held that there was
oppressive and unfairly prejudicial conduct.
- Where a company is a joint venture or quasi-partnership between two or more independent investors, it may
be oppressive or unfair to exclude one of the investors from the company’s management.

(iv) Directors’ failure to act in the interests of the company:

- It may be oppressive or unfair if the directors breach their fiduciary duties by failing to act in the company’s
best interests and do not permit the company to take action against them.
- Re Spargos Mining NL:

 Improper share issue:

- directors who have breached their duty and are also the majority shareholders may act oppressively or
unfairly if, as shareholders, they vote to ratify their breaches.
- Hannes v MJH pty Ltd:
o Fact: Hannes was the governing director and controlling shareholder of a family company. However,
without disclosure and approval of other shareholders, Hannes and another director resolved to issue
additional shares to Hannes. They also agreed that Hannes be employed under a service contract and
decided to establish superannuation for Hannes. Shareholders sought for remedy under s232, arguing
that the board’s decisions were oppressive or unfairly prejudicial or discriminatory.
o Rule: It was held that Hannes’ dominant motive in relation to the share allotment and service
contract was self-interest as he sought to provide himself with additional financial benefits at a time
when his relationship with other shareholders was deteriorating. As a majority shareholder, he could
not ratify his own breaches of duty . The particular decisions made by the directors could only be
ratified by the disinterested shareholders.

 Remedies:
- [s233(1)]: the court has wide powers to make any order it considers appropriate if shareholders can prove
that the conduct of a company’s affairs is contrary to the interests of the members as a whole, oppressive,
unfairly prejudicial, or unfairly discriminatory.
- The orders may be:
o The company be wound up: s233(1)(a);
o The existing constitution be modified or repealed: s233(1)(b);
o Regulating the future conduct of the company’s affairs: s233(1)(c);
o For the purchase of the shares of any member by other members or a person to whom a share has
been transmitted by will or by operation of law: s233(1)(d);
o For the purchase of the shares with an appropriate reduction of the company’s share capital:
s233(1)(e);
o The company institute or defend legal proceedings or authorize a member to institute or defend
legal proceedings in the name of the company: s233(1)(f) and (g);
o Appointing a receiver or a receiver manager: s233(1)(h);

RMIT Vietnam Help Desk Team. By An Vu Page 109

 SEMESTER 2/2012

o Restraining a person from engaging in specified conduct or from doing a specified act: s233(1)
(i);
o Requiring a person to do a specified act: s233(1)(j).

2/ Proceedings on behalf of the company (Statutory derivative action):

- [Part 2F.1A]: enables shareholders and other eligible applicants to bring legal proceedings on behalf of a
company where the company is unwilling or unable to do so itself.

 Accepted applicants:
[s236(1)]: the following persons may bring proceedings on behalf of a company:
- a member, former member or person entitled to be registered as a member of the company or of a related
body corporate;
- present or former directors and officers of the company.
- [s237(2)]: the court must grant an application for leave if it is satisfied that each of the requirements
following are met:
o it is probable that the company will not itself bring the proceedings: s237(2)(a)
o the applicant is acting in good faith: s237(2)(b)
o it is in the best interests of the company that the applicant be granted leave: s237(2)(c)
o there is a serious question to be tried: s237(2)(d). This criterion requires the applicant to show an
arguable case as the courts do not consider the merits of the applicant’s case in depth at this stage
o the applicant gave notice to the company at least 14 days before making the application of the
intention to apply for leave and reasons for applying, or it is appropriate to grant leave even though
notice was not given: s237(2)(e)

 Ratification by general meeting:

-[s239(1)]: shareholder ratification does not prevent a person from bringing proceedings on behalf of the
company or applying for leave to do so.
-[s239(2)]: However, the court may take ratification into account in deciding what ultimate order it should
make.

 Costs:
-[s242]: the court may make any order it considers appropriate about the legal costs of the applicant, the
company or any other party to the proceedings. Such orders can include an order requiring indemnification
by the company for the applicant’s costs.

3/ Section 1324 Injunctions:

-[s1324(1)]: the court has a discretion to grant an injunction restraining a person from engaging in conduct
that contravenes the Corporations Act
a) Contravention of Corporations Act:
- conduct that constitutes a contravention of the Corporations Act includes conduct that is regarded as a
criminal offence under the Corporations Act.
- A person, who issues a disclosure document that contains a material statement that is misleading or
deceptive, contravenes s728 which is a criminal offence. S1324 allows the court to grant an injunction to
restrain the person from issuing such document.
- s1324 also applies to a breach of the Corporations Act that is not a criminal offence.
- S1324 does not apply to the conduct that merely contravenes a provision in a company’s constitution or
the replaceable rules. According to s135(1), this is not regarded as a contravention of the Corporations Act,
but may be remedied as a breach of contract under s140(1).

RMIT Vietnam Help Desk Team. By An Vu Page 110

 SEMESTER 2/2012

- s1324 also restrains a conduct that contravenes a section of Corporations Act, which is designated a civil
penalty provision. This includes ss 180-183 (statutory duties of officers), s588G (insolvent trading), s208
(related party transactions), and other sections dealing with share capital transactions.

b) Who may apply?

- Only ASIC or a person whose interests have been affected by the conduct can apply to the court for a s 1324
injunction: Broken Hill Pty Co Ltd v Bell Resources.
- A contravention of the Corporation Acts is taken to affect the interests of a creditor or member of a company
if:
 The insolvency of the company is an element of the contravention; or
 The company contravenes the share buy-back, financial assistance or share capital reduction
provisions contained in ss257A, 260A and 256B, respective: s1324(1).

3/ Winding up:

a) directors act in their own interests:

- [s461(1)(e)]: the court may wind up a company if the directors have acted in their own interests rather than
in the interests of the members as a whole, or in any other manner that is unfair or unjust to other members.
- Re Cumberland Holdings Ltd:
 S461 applies where the board acts unanimously. It also applies where a majority of the directors act
in their own interests or in the interests of one or more of them. Further, it may even apply where a
single director is able to persuade the board to act in that director’s personal interests;
 The words “affairs of the company” are extremely broad and include its business, capital structure,
dividend policy, voting rights, consideration of takeover offers and any matters that are considered
by the board;
 Directors may act in their “own interests” when they act in the interests of another company in
which they may be directors or shareholders.
- Re William Brooks & Co Ltd:
 Fact: The managing director of a successful company used his position to acquire options to
purchase shares that had been issued to the company’s employees. This enabled him to
control the majority of votes at a general meeting of members. He also managed the business
without consulting other directors, and paid substantial bonuses to employees.
 Rule: It was held that the director had committed serious and persistent breaches of his
fiduciary duties. As he acted in his own interests and in a manner that was unfair or unjust to
members, the court ordered that the company be wound up under s461(1)(e)
b) Oppressive and unfair conduct:
- [s461(1)(f) and (g)]: Where the grounds for a remedy under s232 are established, a member may also apply
to have the company wound up.

c) just and equitable ground:

- [s461(1)(k)]: the court may order the winding up a company if it is of opinion that this would be just and
equitable.
- This section appears to overlap with s 461(1)(e),(f),(g), and s232.
- Any member has right to apply for a winding up on these grounds even if the company is solvent and able to
pay its debts.
- The courts have wound up companies on the just and equitable ground in a number of different
circumstances:
 A breakdown in the mutual trust and confidence of members: it is just and equitable to wind up a
company that is a “quasi-partnership” if there has been a breakdown in the mutual trust and
confidence that should exist among shareholders.
 Deadlock: The just and equitable ground is established where the shareholders are deadlock to the
extent that the company is unable to function properly.

RMIT Vietnam Help Desk Team. By An Vu Page 111

 SEMESTER 2/2012

 Fraud, misconduct or oppression: the court may wind up the company on the just and equitable
ground if there has been fraud, misconduct or oppression. This grounds has been largely
incorporated into s232.
 Failure of substratum: A company may be wound up on the just and equitable ground where it
ceases to carry on the business for which it was formed.
- Re Tivoli Freeholds Ltd:
Fact: A company was form for the purpose of carrying on the business of theatre proprietor.
However, a fire severely damaged the buildings and the theatre activities ceased. With the approval
of the general meeting, the board then sold the land and used surplus funds to acquire shares in other
public companies. A minority shareholder sought a remedy to wind up the company on the grounds
of oppression. It was held that it was just and equitable that the company be wound up. This was
because the company was acting entirely outside what could fairly be regarded as having been
within the general intention and common understanding of the members when they became
members.

4/ members’ right to inspect books:

 At common law:
- A member has to establish that inspection was necessary with reference to a particular dispute; and
- The interest of the shareholder must be a “special interest” greater than that of other shareholders

 to restrict an approach that shareholders do not generally have the right to challenge the management
decisions of directors.

 Statutory right:
- [s247A(1)]: A member may apply to the court for an order authorizing the member or another person to
inspect books of the company. The court may only make such an order if it is satisfied that the member
is acting in good faith and the inspection is to be made for proper purpose.
- Unity APA Ltd v Humes:
o Fact: Unity held 36% Humes’ share capital and made a hostile takeover offer. Humes then
purchased a steel business with the consideration of a placement of shares, in order to dilute
Unity’s shareholding to 19%. Unity applied for an order under s247A, authorizing accountant
and lawyer to inspect and make copies of books relating to the purchase of steel business.
o Rule: the court granted such access, and held that Unity may have sought information to assist
its takeover but the dominant purpose was to ascertain whether the directors were in breach of
duty and whether the Humes proposal should be opposed.
- An application may be granted to inspect the books of a holding company where a subsidiary has entered
into a transaction that may threaten the value of the shareholder’s investment in the parent company:
Intercapital Holdings Ltd v MEH Ltd.

B. Duties of controlling members:

- Where a special resolution alters the constitution in a manner that gives rise to conflict of interest or
advantages, the special resolution is valid unless it is beyond any purpose contemplated by the
constitution or is oppressive: Gambotto v WCP Ltd.
C. Enforcement of members’ personal rights:
1/ The rule in Foss v Harbottle:
- The rule in Foss v Harbottle and its exceptions once restricted a member’s rights to sue in the name of
the company.
- Has two aspects:
 Internal management rule:

RMIT Vietnam Help Desk Team. By An Vu Page 112

 SEMESTER 2/2012

- The aim of the internal management rule was to prevent individual shareholders, who were disgruntled
with the running of their company, bringing a multitude of actions that would have to be defended by the
company or its directors.
- The rule recognized that in the affairs of the companies, the will of the majority prevails (prevail: chiếm
ưu thế)

 Proper plaintiff rule:

- This rule recognizes that a company is a separate legal entity.
- Where a wrong is done to the company, it is the proper plaintiff in any legal proceedings which seeks to
remedy it.
- Applies whether the wrong against the company is caused by the directors, controlling members or
outsiders.

 Effect of rule:
- The rule in Foss v Harbottle placed a major obstacle in the way of minority shareholders.
- A company was unlikely to decide to bring an action against the majority shareholders, complaining of
their breach of duty.
- The majority shareholders were also unlikely to bring an action complaining of an irregularity in the
internal management of the company, where the irregularity worked to their advantage.

2/ Exceptions to the rule in Foss v Harbottle:

- If a member was able to establish standing under one of these exceptions to the rule, they could bring an
action against the company, its directors or other members.
o A member could complain of an infringement (sự xâm phạm) of personal rights as a member.
Such rights could be conferred by Corporations Act or the company’s constitution.
o A member could bring a legal action in the name of the company to enforce a right of the
company. This usually arose where the company’s directors breached their duty to the detriment
of the company.

3/ Personal rights:

a) Corporations Act and constitution:

- Personal rights may be conferred by the Corporations Act. For example, s246D confers a right on
holders of classes of shares to bring an action to prevent the majority from altering the constitution so as
to vary class rights otherwise than in accordance with the procedure laid down in CA or constitution.
- Personal rights can also be conferred on a member by replaceable rules or constitution. S140 states that a company’s
constitution and any applicable replaceable rules have the effect of a contract between the company and each
member and between a member and each other member.
b) Expropriate of shares:
- A member has a personal right to prevent the company altering its constitution to expropriate their shares if their
expropriation is not for a proper purpose of is unfair: Gambotto v WCP Ltd.
- [s664A(3)]: For a person who has a full beneficial interest in at least 90 percent of any class of securities in a
company to compulsorily acquire the remaining securities in that class.
- [s664A(1)]: An independent expert’s report must be provided to minority securities holders setting out whether, in
the expert’s opinion, the terms of the compulsory acquisition give a fair value for the securities and reasons for the
opinion.

c) voting rights:
- a member has a personal right to have their votes at general meeting counted: Pender v Lushington.

RMIT Vietnam Help Desk Team. By An Vu Page 113

 SEMESTER 2/2012

d) conduct of meetings:
- This is similar to a member bringing an action to enforce personal rights under the constitution or replaceable rules to
have an election of directors properly conducted.

e) improper share issue:

- A shareholder has a personal right to bring an action where it is alleged that an issue of share was made for an
improper purpose: Residues Treatment & Trading Co Ltd v Southern Resources Ltd.

f) ultra vires acts:

- Individual shareholders could bring an action at common law complaining that the company was acting or intending
to act on some matter that was ultra vires.
- In this sense, ultra vires refers not only to acts that were beyond the objects and powers set out in the memorandum
but also to illegal acts of the company.
g) special majority:
- The rule in Foss v Harbottle prevented a shareholder from bringing an action where the general meeting was able to
ratify the misconduct or irregularity by ordinary resolution
 Where this ratification required more than a simple majority and this was not obtained, a member could bring an
action.

h) fraud on the minority:

- A shareholder was entitled to sue at common law if the actions of the majority constituted a fraud on the majority.
- “fraud on the minority” means an abuse of power whereby the majority secures an unfair gain at the expense of the
minority.
- Part 2F.1A also gives members rights to bring legal proceedings on behalf of the company with the leave of the court
when there is frauf on the minority.
- Where the minority is made up of the injured parties, they have a personal right of action against both the majority
and the company itself.

SHARE CAPITAL – CHAP 8

 Issuing shares to investors is one of the main sources of funds for a company limited by shares.
 Share capital (equity capital) is the total amount of money or other property that investors provide to company in
consideration for the shares issued to them. Directors usually have the power to issue shares and raise equity capital
for a company.
 S92: shares come within the definition of securities.
 When shares are issued they are allotted to the holders who become members after their names are entered in the
register of members.

Nature of shares.

A share is an item of intangible property also known as a “chose in action”.

RMIT Vietnam Help Desk Team. By An Vu Page 114

 SEMESTER 2/2012

Pilmer v The Duker Group: Once issued, a share comprises a collection of rights and obligations relating to an
interest in a company of an economic and proprietary character, but not constituting a debt.
S1070A(3): ownership of a share is capable of being divided into legal and equitable interests.
1. Share options
 Share options may be granted by the company or by another person. A company grants an option when it
agrees to issue shares to a person at a future date.
 Another form of option arises when a person, other than the company grants someone else an option in
relation to shares.
 An option-holder is not a member of the company until the option is exercised
 A convertible debenture or note has similarities to a share option because it entitles the holder to convert a
loan to the company into shares at a future date. The debenture holder, or note holder in effect has an option
to take up shares in the company at a future date.
 S170: companies have to maintain a register of option-holders and copies of option documents containing
the required particulars.
 Companies often grant share options to their directors and executives as part of their remuneration.
 S300: Disclosure of about options granted to directors as part of their remuneration must also be made in an
unlisted company’s annual directors’ report and in the financial reports of the company  similar disclosure
is also required for options granted for the five most highly remunerated officers other than directors:
s300(1).
 S300A(1): a greater disclosure requirements regarding share options granted by listed companies.
 S300A(1)(e)(ii) and (iii): the disclosure includes the value of options granted to those people as part of their
remuneration as well as the value of options that they excercised during the financial year.
2. Stock
 Stock is a collection of shares expressed in units of money.
 Characteristics: a holder can freely divide stock into amounts of any value. Each unit of stock can then be
sold individually.
 S254F: Companies are prohibited from issuing stock or converting shares into stock.
3. Bearer shares
 Bearer shares/share warrants: documents sealed by a company which state that the bearer is entitled to
specified shares.
 A bearer share is a negotiable instrument which means it is transferable by delivery and a person who takes it
for value without notice takes it free of any defect in title of the person from whom it is taken.
 Share warrant is similar to an option over shares in a company.
4. Stapled securities
Stapled securities are two or more securities that are linked and cannot be sold separately
5. Paid up capital
a. Authorized share capital abolished
 Companies are no longer required to state the amount of their authorized capital.
 Bank of Hindustan China & Japan Ltd v Alison: an allotment of shares in excess of the authorized capital
was void.
 However, company can have constitution that directors may not issue shares in excess of a stated limit.
b. No par value
Amendments made in 1998 abolished the concept of “par value shares”.
S254C states that shares no longer have a par value even if issued before the 1998 amendments became operative
6. Fully and partly paid shares

RMIT Vietnam Help Desk Team. By An Vu Page 115

 SEMESTER 2/2012

 S254A(1)(c): a company may issue fully paid shares or partly paid shares.
 Fully paid shares: the investor has paid the entire issue price of the shars. Shareholders who own fully paid shares
have no obligation to contribute further money to the company.
 S254M: a person who holds partly paid shares is liable to pay calls on the shares unless the company is a no liability
company.
 S515: a member is liable to contribute to the company’s property to an amount sufficient to pay the company’s debts
and the costs of the winding up
 S516: a shareholder need not contribute more than the amount (if any) unpaid on the shares.
 S477(22)(ca): a liquidator has the power to make a call.
 Wright v Mansell: a liquidator can make calls whether or not calls are permitted by the company’s constitution
 The amount unpaid on partly paid shares is called “reserve capital” / “uncalled capital”. The issued share capital of a
company comprises paid up capital and reserve capital.
 S1224(1)(e): a company may give security over its uncalled capital.
 S254N: a company’s shareholders may pass a special resolution that has the effect of restricting the company’s right
to make calls to situation where the company becomes insolvent and goes into form of external administration such
as voluntary administration/liquidator.
 S169(3)(f): the amount unpaid on shares, if any, must be stated in the register of members.
7. Issue of shares
a. Contractual rules
i. Offer and acceptance
 Byrne v Van Tienhoven: acceptance by post is deemed effective when posted.
 Household fire & Carriage Accident Insurance Co v Grant: a notice of allotment sent by the company was lost in the
mail. The applicant was held to be member and therefore liable on a call even though he did not receive
communication of acceptance. The requirement of communication of acceptance was impliedly dispensed with by
the offeror in using the post
 An offer lapses if not accepted within a reasonable time
 Ramsgate Victoria Hotel Co v Montefiore: it was held that an investor’s offer to take up a share issue lapsed after a
period of 5 months after being sent to the company. Thus, the application for shares was no longer capable of
acceptance by the company when it purported to allot the shares.
ii. Rights issues
 A right issue involves a company offering to issue shares to existing shareholders in proportion to shares held. A
contract is formed when the shareholder accepts the company’s offer.
 A renounceable rights issue is one that gives the shareholder the power to sell her or his rights prior to the closing
date.
iii. Issue of fewer shares than applied for
Application forms for share issues usually provide that applicant agrees to take the number of shares applied for or
any lesser number that is allotted. This prevents problem arising where the number of shares applied for exceeds the
number the company proposes to issue.
iv. Allotment and issue of shares
It follows that the allotment is one step in the broader process of an issue of shares.
b. Restrictions on allotment
i. Minimum subscription
 S723(2): if a disclosure document states that the securities will not be issued unless an application for a minimum
number of securities are received or a minimum amount is raised, the person making the offer must not issue any of
the shares until that minimum subscription condition is satisfied.

RMIT Vietnam Help Desk Team. By An Vu Page 116

 SEMESTER 2/2012

 S722: application money received from investors must be held in trust until the minimum subscription condition is
fulfilled and the securities are issued.
 S724: if the minimum subscription condition is not satisfied within 4 months after the date of the disclosure
document, the company must:
 Repay the money received from the applicants; or
 Give the applicants a supplementary or replacement disclosure document that changes the terms of the officer
and one month to withdraw their application and be repaid; or
 Issue the securities to the applicants and give them a supplementary or replacement disclosure document that
changes the terms of the offer and one month to return the securities and be repaid.
 S727(1): if securities are issued in contravention of s724, applicants have the right to return the securities and have
their application money repaid. This right applies even where the company is being wound up and therefore confers
a priority on applicants in liquidation.
 S737(2): applicants may exercise this right by written notice to the company within one month after the date of the
issue
 S737(3): the directors of the company are personally liable to repay the application money if it is not repaid by the
company
ii. Financial market quotation
 Unless an application for listing is made within 7 days after the date of the disclosure document and the securities are
listed within 3 months of that date, any issue or transfer of the securities in response to an application under the
disclosure document is void.
 S723(3): the offeror must return money received from applicants as soon as practicable.
 the offeror must also act in accordance with S724(2).
iii. Expiration of disclosure document
 Ss711(6), 714(2),715(3): a disclosure document must state that no securities will be issued on the basis of the
document after the specified expiry date. This date must be no later than 13 months after the date of the disclosure
document.
 S725(3): if an application for securities is received by the company after the expiry date, the company must either:
 Return application money received; or
 Give the applicants one month to withdraw their application or return the securities that have been issued.
c. Validation of improper issue of shares.
 S254E: the court has wide power to validate or confirm otherwise invalid share issues.
 Re swan Brewey Co Ltd: the company issued substantial numbers of shares to several other companies, which turned
out to be its subsidiaries. The allotments to them were void under a provision corresponding to s2259C which
prohibited a subsidiary holding shares in its holding company. The companies sought to have the allotments
validated by the court under a predecessor to 254E.
 Court held that in the exceptional circumstances of the case, it was “just and equitable” to validate the allotments so
as to assist a large number of innocent people who would otherwise be victims of invalid allotments.
Kokotovich Construction Pty Ltd v Wallington: an allotment of shares was validated because the parties had
proceeded for 20 years on the basis that shares had been properly issued and an order validating the issue was just
and equitable.
 The court rejected this argument that its discretion under the predecessor of s254E should only be exercised where
the validation was contentious.
d. Consideration for share issue.
 An allottee must pay the company the issue price of the shares which is the consideration for the share issue. Mostly,
consideration is cash. The issue price of shares is the consideration for the share issue.
 Re Wragg Ltd: companies may issue shares for a non-cash consideration.

RMIT Vietnam Help Desk Team. By An Vu Page 117

 SEMESTER 2/2012

 Non-cash consideration must be consideration recognized by the law of contract.

 Re White Star Line: it was held that the value of the consideration for an allotment of shares must be more than
“sufficient” consideration required under the law of contract.
 S117(2)(k)(ii): the application for registration of a company limited by shares must, among other things, set out the
amount (if any) each member agrees in writing to pay for each share.
 S117(2)(l): the application for registration of a public company that is limited by shares must set out the prescribed
particular about the share issue if shares will be issued for a non-cash consideration.
 S2254X requires a company to lodge a notice of share issue with ASIC.
8. Classes of shares
a. Preference shares.
 The most common classes of shares are ordinary and preference shares.
 Preference shares: Holders have preferential rights to receive dividends ahead of ordinary shareholders. They have
the right to receive dividends at a fixed percentage of the issue price of their shares. They also have restricted voting
rights.
 Ordinary shares: the dividend entitlement is not expressed in terms of a fixed percentage of the issue price of their
shares. The holders receive dividends if the company has surplus profit after payment of preference shareholders’
dividends.
i. Participating preference shares.
 Participating preference shares: have to right to receive additional dividends as well as their preferential dividend
entitlements. Case Re Plashett Pastoral Co Pty Ltd: Holders is presumed at common law to be entitled to receive
surplus capital after the repayment of their capital contribution.
 Non-participating preference shares: the entitlement is not expressly stated in the company’s constitution ( Will v
United Lankat Plantations Co Ltd)
ii. Cumulative preference shares
Holders have the right to be paid arrears of dividends in subsequent years ahead of ordinary shareholders.
Webb v Earle: preference shares are presumed to be cumulative if the company constitution is silent on the matter.
iii. Deferred shares
Holders have the rights to dividends if a prescribed amount has been paid to ordinary shareholders.
iv. Voting rights
Example of limited voting rights are rights to vote only:
 During a period when dividends are in arrears;
 On a proposal for reduction of capital; or
 On a proposal to wind up the company.
v. Setting out preference shareholder rights
The main rights attaching to preference shares must be set out in the company’s constitution according to s254A(2)
and 254G(2)
 Repayment of capital;
 Participation in surplus assets and profits;
 Cumulative or non-cumulative dividends;
 Voting, and
 Priority of payment of capital and dividends in relation to other shares or other classes of preference shares.
vi. Consequences of failure to set out preference shareholders’ rights.
 A contravention may mean that the issue to preference shareholders is illegal
 The courts do allow actions for recovery of money paid under an illegal contract by parties who are not in pari
delicto (equal fault).
 Preference shareholders may also apply to the court under s254E for an order validating the improper issue to them

RMIT Vietnam Help Desk Team. By An Vu Page 118

 SEMESTER 2/2012

 S254A(2) and 254G(2) prohibit the issue of a conversion into preference shares only if the rights are not set out in
the constitution or otherwise approved by special resolution.
b. Redeemable preference shares.
S254A(1)(b): a company may issue redeemable preference shares.
S254A(3): Redeemable preference shares may be redeemed at a fixed time or at the option of the company or
shareholders.
S254J(1): Redeemable preference shares may be redeemed only on the terms on which they were issued.
Heesh v Baker: A redeemable preference shareholder is not a creditor.
S254K: a company may only redeem redeemable preference shares
 If they are fully paid (s254K(a)); and
 Out of profits or the proceeds of a new share issue made for the purpose of the redemption (s254K(b))
If a company does not redeem redeemable preference shares out of profits, the redemption involves a reduction of
capital and the requirement of ss 256B and 256C must be complied with.
Company’s director may contravene the insolvent trading provision in s588G and personally liable under s588M if
the company becomes insolvent when it redeems any redeemable preference shares.
c. Variation of class rights
i. Statutory provisions (p179)
The class rights provisions protect the holder of particular classes of shares against attempts by the directors or
controlling shareholders to vary or cancel those rights.
S246B: varying and cancelling class rights

If constitution sets out the procedure for Rights may be varied or cancelled only
varying and cancelling class rights where the procedure in the constitution is
followed: s246B(1)
If a company does not have a constitution or Rights may be varied or cancelled only
the constitution for varying and cancelling  By special resolution of the company; and
class rights  By special resolution passed at a meeting of
the holders of the affected class; or
 With the written consent of members with at
least 75% of the votes of the affected class:
s246B(2)
s254A(2) and 254G(2): require a company that issues share preference shares or convert ordinary shares into
preference shares to set out in its constitution or otherwise approve by special resolution certain specified rights of
preference shareholders.
S246F(1): company must lodge, within 14 days, a notice with ASIC setting out particulars of any division of shares
into classes or conversion of shares from one class to another.
S246G(1): a member may request a copy of the document or resolution from the company
ii. Application to set aside variation
S246D(1): gives members of a class the right to apply to the court to set aside a variation or cancellation of their
rights or a modification of the constitution to allow their rights to be varied or cancelled, if the members in a class do
not all agree to the variation, cancellation or modification.
S246D(2): the application must be made by members with at least 10% of the votes of the class concerned and must
be made within 1 month after the variation, cancellation or modification is made
S246D(4): the members of the class who want to have the variation, cancellation or modification set aside may
appoint one or more of themselves to make the application on their behalf.
S246B(3): to enable a member to bring an application, the company must give written notice of the variation to
members of the class within 7 days after the variation is made.
A variation, cancellation or modification takes effect one month after it is made.

RMIT Vietnam Help Desk Team. By An Vu Page 119

 SEMESTER 2/2012

S246D(3): if an application is made to set it aside, it takes effect when the application is withdrawn or determined
S246E: if all the members in a class agree to a variation, cancellation or modification, it takes effect on the date of
the resolution or consent or on a later specified date.
iii. Remedies
S246D(5):the court may set aside the variation, cancellation or modification if it is satisfied that it would unfairly
prejudice the applicants.
S140(1)(a): if the company does not comply with the procedures in its constitution for varying or cancelling class
rights, this constitutes a breach of the s140(1)(a) contract between a company and its members.
If a company attempts to vary or cancel class rights in convention of ether s246B(1) or (2), affected members of the
class can apply for an injunction under s1324 to prevent the contravention.
A single member of a class may also apply for a remedy under s232 if the variation, cancellation or modification is
oppressive or unfair
Gambotto v WCP: a special resolution to vary or cancel a class right constrained in a company’s constitution may be
invalid if the alteration is beyond any purpose contemplated by the constitution or is oppressive
iv. What is a variation of class rights
S246C(6): new issues of equally ranking preference share is considered as varying the class tights of existing
preference shareholders
Common law meaning of variation of class rights: a variation that affects the strict legal rights of the members of the
class
Table 8.2: variation of class rights under s246C page181
Case Greenhalgh v Arderne Cinemas Ltd
Case White v Bristol Aeroplane Co: a bonus issue to holders of ordinary shares only was held not to “affect, modify,
vary, deal with or abrogate” the rights of existing preference shareholders. While the bonus issued had the effect of
diluting the percentage of votes of preference shareholders shareholder’s meetings, this did not affect preference
shareholders’ strict legal rights. They continued to have the right to vote one vote per preference share
Case House of Fraser Plc v ACGE: a return of capital to preference shareholders is a satisfaction of their rights and
does not constitute a variation of class rights.
v. What is a class of shares
Case Crumpton v MOrrine Hall Pty Ltd: Crupmton owned shares in a home unit company that entitled to certain
rights in respect of one of six units in the building owned by the company. The company altered its constitution so as
to restrict the right of shareholders to lease the units and to allow determinations of the right to occupy in certain
circumstances
 It was held that the shares were divided into different classes despite the fact that the constitution did not refer to the
groups of shares as classes. They were classified of shares because one group had quite different rights to another
one.
case Buckland v Johnstone: a company’s share capital may be divided into classes of shares even though there is
only one holder of a particular class of shares. In such a case, a class meeting would be comprised of a single
shareholder.
9. Share capital transactions
a. The rule in Trevor v Whitworth
“ A company is generally prohibited from reducing its issued share capital because this may prejudice the rights of
creditors”
Trevor v Whitworth: court held that a company had no power to purchase its own shares even if its articles permitted
such an acquisition. The purchase was void. This decision was based on the principle that the capital of a limited
liability company should remain available to creditors.
S258D: a cancellation of shares which have been forfeited under the terms on which they were issued is permitted by
resolution passed at a general meeting.
RMIT Vietnam Help Desk Team. By An Vu Page 120
 SEMESTER 2/2012

Case Bundaberg Sugar Ltd v Isis Central Sugar Mill: forfeiture is not usually detrimental to the interests of creditors
because it does not result in the company providing any consideration for the shares. Where shares are forfeited for
reasons other than non-payment of a call, this is not a reduction of capital if there is no return of money in respect of
the shares to the former shareholder and any liability to pay outstanding calls remains.
Case Re Fowlers Vacola Manufacturing Co Ltd: a reduction of capital that involves a return of capital to holders of
one class of share is not a variation of class right of other classes of shareholders.
i. Self-acquisition prohibition: s259A
S259A: a company must not acquire shares in itself except in any one of the following circumstances:
 In buying back shares under s257A. permitted shares buy-backs are discussed below
 In acquiring an interest in its fully paid shares if no consideration is given by the company or an entity it controls;
 Under a court order; and
 In circumstances covered by s259B(2) and (3). Thse provision deal with situation where a company takes security
over its shares udner an approved employee share scheme or the security is taken in the ordinary course of business
of a lender.
 S259F(1):a company that contravenes the s259A self-acquisition prohibition is not guilty of a criminal offence. In
addition, a contravention does not affect the validity of the acquisition.
 Any person who is involed in a company’s contravention of s259A is in breach of s259F(2) and subject to civil
penalty provisions.
 S259F(3): a person commits an offence if they are involved in a contravention of s259A and the involvent is
dishonest.
ii. Taking security over own shares.
S259B(1): the self-acquisition prohibition has been extended to prevent a company from taking security over its
shares or the shares of a company that controls it
S259B(2) and (3): exceptions to this prohibition arise where the security is under an approved employee share
scheme or is taken by a financial situation in the ordinary course of its business.
b. Permitted share capital reductions
 S256D(1): a company must not reduce its capital unless it complies with the requirements set out in s256B(1):
 S256B(1)(a):Is fair and reasonable to shareholders as a whole; and
 S256B(1)(b): does not materially prejudice the company’s ability to pay its creditors; and
 S256B(1)(c): is approved by shareholders under s256C.
 Various capital reductions are authorized in ss258A-258E and therefore fall outside the s256B(1) requirements
(p185)
i. Fai and reasonable to shareholders
 S256B(1): a permitted reduction of capital must be fair and reasonable to the company’s shareholders as a hold
 Remedy: injunction and prevention the implementation of the reduction
S13241(B): the company has the onus of proving that the reduction is fair and reasonable [ more details about
element of proving  p186 ]
 Case Winpar Holdings Ltd v Kalgoorlie: GKL called a shareholder’s meeting to approve selective reduction of
capital that involved the cancellation of shares held by GKL’s minority shareholder in consideration of a payment to
them of 55 cents per shares ( 8 cents in excess of the determined amount by expert)  majority shareholder has
100% ownership of the company  minority argued it is not fair and reasonable as it gave the majority shareholder
a “special benefit” consisting of both a reduction in the level of head office costs as well as other synergy benefits
from future rationalization of operation.
 Court held that the reduction was fair and reasonable because it gave benfits to both the majority and minority
sharehodlers that they would not otherwise have received. The majority shareholders obtained a benefit from 100%
ownership. However, the minority shareholders also obtained an enahanced price for their shares.

RMIT Vietnam Help Desk Team. By An Vu Page 121

 SEMESTER 2/2012

 Case Re Fowers Vacola Manufacturing: It was held that a reduction of capital that involved a payment only to the
company’s ordinary shareholders was not fair to preference shareholders. Fairness required at least equal tratement
between the ordinary and preference shareholders in the reduction of capital because the company’s constitution
gave the preference shareholders a priority to a return of cpaitla in the case of winding up.
ii. Ability to pay creditors
 S256B(1): a reduction of capital is permitted if it does not materially prejudice the company’s ability to pay its
creditors
 S1324(1A): creditors can apply for an injuction to prevent a reduction of capital if the company’s insolvency is an
element of a contravention of s256B(1)
 S1324(1B): the company has the onus of proving that the reduction does not prejudice its ability to pay creditors
 A reduction of capital that involves a cancellation of shares for no consideration does not require consideration of
creditors’ interests as the company’s financial position remains unaltered.
iii. Shareholder approval
 [s256B(1)(c)] permits a capital reduction if it is approved by shareholders under s256C. The requirement depends on
whether the reduction is an equal or selective reduction.
 [s256B(2)] An equal reduction relates only to ordinary share and is required to have the same terms for each ordinary
shareholders and applies to each shareholder in proportion to the number of ordinary shares held. In other case, it is
a selective reduction.
 [s256C(1)] An equal reduction of capital must be approved by ordinary resolution passed at the general meeting.
 [s256C(2)] selective reduction must be approved by special resolution passed at a class meeting of the shareholders
whose shares are to be cancelled, as well as the special resolution passed at general meeting.
 Winpar Holdings Lttd v Goldfields Kalgoorlie Ltd: held that s256C(2) required the class approval for a selective
reduction involving a cancellation to be obtained at a separate class meeting, distinct from the general meeting at
which the special resolution was passed.
 [s256C(4)] the company must provide a statement with the notice of the shareholders’ meeting, setting out all known
information that is material to the decision on how to vote on the resolution to approve the capital reduction.
 [s256C(5)] the company must lodge with ASIC the notice of the meeting and any accompanying documents before
the notice is sent to shareholders.
 [s256C(3)] Any resolution approving the reduction must be lodged within 14 days after it is passed and the company
cannot make the reduction until 14 days after lodgement.
 [s254Y] If the reduction involves a share cancellation, a prescribed notice must be lodged with ASIC setting out the
number of shares cancelled, the class of share and the consideration paid by the company on the cancellation.
iv. Failure to comply with reduction requirements:
 [s256D(1)] A capital reduction must comply with the requirements set out in s256B(1).
 [s256D(2)] The contravention does not affect the validity of the reduction or any connected transactions.
 [s256D(3)] the company is not guilty of any offence, any person who is involved in a contravention may be liable
under the civil penalty provisions by virtue of s1317E.
 [s256D(4)] a person commits an offence if the involvement is dishonest.
 [s1324] specifically encompasses reductions of capital made in contravention of s256B. The court may grant an
injunction to prevent a person from contravening the Corporation Act.
 [s1324(1A)(b)] A person affected by the contravention may bring the application and this includes a member or
creditor of the company if the insolvency of the company is an element of the contravention.
 [s1324(10)] The application brought under s1324 may also seek damages.
 Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd: the effect of s256D(2) is that the reduction is regarded as valid
and cannot be reversed once it is made.

RMIT Vietnam Help Desk Team. By An Vu Page 122

 SEMESTER 2/2012

 [s588G] insolvent trading

 [s256E] various provisions may be relevant to share capital reduction:
o Financial benefit (chap 13)
o Constitution (chap 4)
o Variation of class rights (discussed above)

S256B(1)(c): permits a capital reduction if it is approved by shareholders under s256C.

c. Share buy-backs
 One way in which the company may reduce its share capital is by buying back its shares from shareholders. => prior
to 1989, Trevor v Whitworth rule prohibited share buy backs.
 [s257A] now permits a company to buy back its own share if:
o The buy-back does not materially prejudice the company’s ability to pay its creditors; and
o The company follows the procedures laid down in s257A-257J.
 [s256A] purposes of the share buy-back rules are the same as for reduction of share capital.
o Addressing the risk of these transactions leading to the company’s insolvency’
o Seeking to ensure fairness between the company’s shareholders; and
o Requiring the company to disclose all material information.
 Reasons for permitting share buy-backs: p.189
d. Permitted share buy-backs
 Five types of buy-backs: equal access schemes; selective buy-backs; on-market buy-backs; employee share scheme
buy-backs; and minimum holding buy-backs.
 [s257B] contains a table that indicates the procedural requirements for each type of buy-back. (p.191)
o It is important to note that shareholders are not forced to sell their shares in a buy-back. They will do so if this is in
their interest.
 General rule: companies are able to buy back up to 10 per cent of their shares within a 12-month period without
shareholder approval and with minimum procedural requirements.
o Does not apply to selective buy-backs.
o [s257B(4)] the 10/12 limit refers to 10 per cent of the smallest number of votes attaching to voting shares during the
last 12 months.
o [s257B(5)] In determining whether this limit has been exceeded, previous buy-back that occurred in the last 12
months and the voting shares that are subject to the proposed buy-back are taken into account.
 Once a buy back agreement has been entered into, all rights attaching to the shares bought back are suspended => no
longer carrying voting rights and the company cannot deal in the shares.
o [s257H] Upon registration of the transfer to the company, the shares must be cancelled.
o [s254Y] Within one month after the shares are cancelled, the company must lodge a notice with ASIC stating the
number and class of shares transferred and the consideration paid.
a) Equal access scheme
 [s257B(2) and (3)] defines equal access scheme: requires offers to be made only to ordinary shareholders to buy back
the same percentage of shares from each and every shareholder.
o All offers must have the same terms and all ordinary shareholders must have a reasonable opportunity to accept the
offers made to them.
 [s257B(3)] Certain differences in the terms of the offers are permissible in cases such as where the shares have
different accrued dividend entitlements and the shares are paid up to different amounts.

RMIT Vietnam Help Desk Team. By An Vu Page 123

 SEMESTER 2/2012

 [s257C(1)] Where the 10/12 limit is exceeded, an ordinary resolution of the general meeting must approve the terms
of the buy-backs agreement before it is entered into or the agreement must be conditional on such an approval.
 [s257C(2) and s257G] The notice of meeting must include all material information known to the company and not
previously disclosed, to enable the shareholders to decide whether to vote in favor of the resolution.
 [s257F] Notice of an intended buy-back setting out the terms of the offer and any accompanying documents must be
lodged with ASIC irrespective of whether the 10/12 limit is exceeded.
b) Selective buy-backs
 [s9] buy-back offers made to particular shareholders to the exclusion of others or offers made to holders of shares
other than ordinary shares.
 More stringent procedural requirements than for other types of buy-backs => shareholders must approve the selective
buy-back either unanimously or by special resolution.
 [s257D(1)] Selling shareholders or their associates cannot vote in favour of this resolutions.
 [s257C(2) and s257G] (above)
 [s257D(3)] documents must be lodged with ASIC.
 [s257D(4)] ASIC has powers to exempt a company from the operation of s257D.
 [s257E, 257F, 254Y] ASIC must be notified at prescribed times both before and after the buy-back.
c) On-market buy-backs
 [s257B(6)] It results from an offer made by a listing corporation on a prescribed financial market in the ordinary
course of trading on that market.
 Shareholder approval by ordinary resolution is necessary only where the buy-backs exceeds the 10/12 limit.
 [s254F] Notice must be lodged with ASIC before the buy-back is entered into; and after cancellation of the shares
[s254Y]
d) Employee share scheme buy-backs
 [s9] the acquisition of shares in a company by or on behalf of employees or directors who hold salaried employment
in the company or a related body corporate.
 Required procedure is identical to on-market buy-backs.
e) Minimum holding buy-backs
 [s9] a buy-back of all of a holder’s shares in a listed corporation if the shares are less than a marketable parcel. The
only applicable procedural requirement is that ASIC is notified of the cancellation.
f) Other relevant provisions
 [s257J] sets out signposts to other provisions that are relevant to buy-backs. These include:
o [s588G] Insolvent trading
 [s588G(1A)] A company that buys back its shares is deemed to have incurred a debt at the time the buy-back
agreement is entered into. => the director may be personally liable for insolvent trading.
 [s588FF] Where a buy-back causes a company to become insolvent, the liquidator of the company may seek a court
to recover the consideration paid to vendor shareholders for the buy-backs as a voidable transaction.
 [s553AA and 563AA] where the company goes into liquidation, and at the time it has not paid the selling
shareholders in full, the shareholders may claim as creditors for the debt but rank after other creditors.
o [s1324] statutory injunction provision
 [s1324(1) and (10)] Where a share buy-back constitutes a contravention of the Corporation Act, this enable a creditor
or member to apply to the court for an injunction or damages.
e. Indirect self-acquisitions
 A company may indirectly acquire control of its own shares by gaining control of an entity that holds those shares.
 [s259C and 259D] regulates indirect self-acquisition.

RMIT Vietnam Help Desk Team. By An Vu Page 124

 SEMESTER 2/2012

 [s259C(1)] the issue of transfer of shares of a company to an entity it controls is void. The controlled entity may be
partnership, trust or other company. Exceptions:
o [s259C(1)(b)] The issue or transfer is to the entity as trustee and neither the company nor the entity has a beneficial
interest in the trust.
o [s259C(1)(c)] the issue is made as a result of an offer to all holders of the class of shares being issued and does not
discriminate unfairly in favour of the entity.
o [s259C(1)(d)] The transfer to the entity is by a wholly-owned subsidiary of a body corporate and the entity is also a
wholly-owned subsidiary of that body corporate.
 [s259C(2)] ASIC may exempt a company from the operation of the s259C prohibition.
 [s259D(1)] Issues or transfers in the situations covered by s259C(1)(c) and (d) must be disposed of within 12 months
of acquisition or the company must cease to control the entity.
 A company may also gain indirect control over its share by gaining or increasing control over an entity that already
holds shares in the company.
o [s259D(1)] the entity must cease holding the shares or the company must cease to control the entity within 12 months
after the company gains control of the entity.
o [s259D(3)] during the period when the company controls the entity, voting rights attaching to the shares cannot be
exercised.
o [s259D(4)] If the company still controls the entity at the end of the 12-month period and the entity continue to hold
the company’s shares, the company commits an offence for each day during which the situation continues.
o The requirements under s259D(1) do not apply where the entity holds the shares as a personal representative or
trustee where neither the entity nor the company has a beneficial interest in the trust.
o [s1322(3B)] If voting rights are exercised in contravention of s259D(3), the resolution on which the voting rights
were exercised will be invalidated by the court if it is of the opinion that a substantial injustice has been caused that
cannot be otherwise remedied.
o [s259D(6)] However, the contravention of s259D does not affect the validity of any transaction.
 The meaning of “control”
 [s259E] A company is regarded as being in control of an entity that holds shares in the company if the company has
the capacity to determine the outcome of decisions about the entity’s financial and operating policies.
 [s259E(3)] A company is not taken to control an entity merely because the company and an unrelated entity jointly
have the capacity to determine the outcome of decisions about another entity’s financial and operating policies.
 [s259E(4)] A company is not taken to control an entity merely because the company is under a legal obligation to
exercise for the benefit of someone other than its shareholders. (trustee)
f. Financial assistance
S260A prohibits a company from financially assisting a person to acquire shares in the company or its holding
company unless certain conditions are satisfied:
 S260A(1)(a):Giving the assistance does not materially prejudice the interests of the company, its shareholders or the
company’s ability to pay its creditors; or.
 S260B: the assistance is approved by shareholders; or
 The assistance is exempted under s260C

The company that provides financial assistance that materially affects the interest of creditors will not contravene
s260A if the company obtains prior shareholder approval.

i. What is financial assistance?

 The company lending a person money to be used to acquire shares in the company;

RMIT Vietnam Help Desk Team. By An Vu Page 125

 SEMESTER 2/2012

 The company guaranteeing a person’s loan where the proceeds of the loan are used to acquire shares in the company;
and
 The company providing its own assets as security for a person’ loan where the proceeds of the loan are used to
acquire shares in the company
 Case Kinarra Pty Ltd v On Q Group: the onus is on the company to show that the financial assistance does not
materially prejudice the company, its shareholders and creditors.
 S260A(2): financial assistance may be given before or after the acquisition of shares and it may take the form of
paying a dividend.
 Case ASIC v Adler: a subsidiary giving financial assistance to assist with the acquisition of shares in its holding
company in contravention of s260A(1). HIH, subsidiary, provided unsecured loan at $10 million to PEE, a company
controlled by Adler when Alder is also a substantial shareholder of HIH.
 Court held that the substance of the transaction was that HIH gave PEE financial assistance to acquire shares in HIH.
Hence, HIH suffered material prejudice as a result of the financial assistance and therefore s260A was contravened.
HIH was materially prejudiced by the fact that it initially exchanged $10 million cash for either an unsecured loan to
PEE or from the equitable rights it obtained against PEE which were of less value than the cash handed over. It was
also held that the $10 million transaction involved multiple breaches of director’ duties.
 Case Hunters Product Group ltd v Kindley Products: a shareholder agreed to buy the shares owned by Hunter’s other
shareholder. Part of the purchase price came from Hunter’s bank account  this amounted to Hunters providing
financial assistance for the purchase of its share was prohibited under a predecessor of s260A
 Case Independent Steels Pty Ltd v Ryan: shareholders of Marlon agreed to sell their shares to another company. The
vendor shareholder were to be paid part of the purchase price from the gross turnover of Independent Steel, a wholly-
owned subsidiary of Marlon.  this payment resulted in a subsidiary providing prohibited financial assistance for
the purchase of shares in its holding company.
 Case Darvall v North Sydney Brick & Tile Co Ltd:p196
 Case ZBB v Allen: p196

Shareholder approval:

 [s260A(1)(b)] a company may financially assist a person to acquire shares in the company or its holding company if
the assistance is approved by shareholders under s260B.
 Must be passed by special resolution at general meeting, or by resolution agreed to by all shareholders.
 [s260B(1)] the person acquiring the shares or an associate may not cast votes in favor of the resolution.
 [s260B(2) and (3)] if the company that gives the financial assistance becomes a subsidiary of an Australian holding
company immediately after the person acquires its shares, the financial assistance must also be approved by a special
resolution passed at a general meeting of that holding company.
 [s260B(4)] If it would be unreasonable, the company does not have to disclose information that has been disclosed
previously.
 [s260B(5)] the notice of meeting and accompanying documents must be lodged with ASIC before being sent to
members.
 [s260B(7)] A special resolution approving the financial assistance must also be lodged with ASIC within 14 days of
being passed.

Exempted financial assistance:

 [s260A(1)(c)] exemptions.
 Table 8.4 (p197).
 Consequences of failing to comply with s260A:

RMIT Vietnam Help Desk Team. By An Vu Page 126

 SEMESTER 2/2012

 [s260D] provides that a contravention of s260A does not affect the validity of the transactions concerned and the
company is not guilty of an offence.
 s260A is a civil penalty provision and therefore any person who is involved in a company’s contravention of s260A
is subject to the civil penalty provisions by virtue of s1317E.

Chapter 7: Prospectus

- [s113(3)]: Fundraising provision apply to public companies only, proprietary companies are not allowed to engage in
official fundraising.
- Purpose of “fundraising” (ie prospectus for issuance of shares) provisions of the Corporations Act is to balance need
for investor protection through disclosure of information, with efficient and credible capital market.
- General prospectus content rule: requires disclosure of all information that investors and their professional advisers
would reasonably require and expect order to make an informed investment decision.
- 4 types of disclosure documents:
o prospectus
o short-form prospectus
o profile statement
o an offer information statement
- [s706]: offer of “securities”(shares) must have disclosure document, unless: (exemptions s708/s708AA)
o small scale offerings: must be “personal” offer, less than $2 million being raised total, and less than 20 issuances of
shares total in 12-month period: s708(1)(7)
o offers to sophisticated investors: large offers, wealthy investors, experienced investors: s708(8),(9),(10)
o offers to senior managers or their relatives: s708(12)
o “right issues”, ie offer of shares to existing shareholders in proportion to their share holdings
- [s718]: disclosure documents must be lodged with ASIC

A. Prospectus:

1/ General disclosure test:

-[s710(1)]: a prospectus must contain all information that investors and their professional advisers would reasonably
require to make an informed assessment of the matters set out. A prospectus must contain this information:

 only to the extent to which it is reasonable for investors and their professional advisers to expect to find the
information in the prospectus; and
 only if the information is actually known or in the circumstances ought reasonably to have been obtained by making
inquiries.

RMIT Vietnam Help Desk Team. By An Vu Page 127

 SEMESTER 2/2012

- [s710(1)]: specifies the following information which must be disclosed in relation to an offer to issue shares,
debentures or interests in a managed investment scheme. This includes:
o the rights and liabilities attaching to the securities offered; and
o the assets and liabilities, financial position and performance, profits, losses and prospects of the body that is to issue
the shares, debentures or interests.
- Normally prospectuses contain information about the following matters:
o Description of the business and its structure, strategy and plans;
o Financial information;
o Information about prospects;
o Risks;
o Description of important contract;
o Use of proceeds;
o Background of senior managers and directors and details of their remuneration;
o Dividend policy;
o Major shareholders and related party transactions;
o Taxation;
o Disclosure about material law suits.
- A person who omits information required by s 710 contravenes s 728(1) (see F. Misstatements, Omissions, and
Remedies below)

2/ forecasts:
- [s728(2)]: a disclosure document that contains a forward-looking statement is regarded as being misleading for
purposes of the liability provisions if the person making it does not have reasonable grounds for making the
statement.
- From the 1999 amendments of Corporations Act, the person making the statement does not have the onus to prove
the existence of reasonable grounds.

3/ alternative disclosure test:

- s713 sets out an alternative general disclosure test in the case of a prospectus for an offer of continuously quoted
securities of a body.
- [s9]: Continuously quoted securities are securities that are in a class of securities that were quoted enhanced
disclosure securities at all times in the three months before the date of the prospectus.
- The alternative general disclosure test does not require the prospectus to contain information regarding
the assets, liabilities, financial position and performance, profits and losses and prospects of the issuing
body.
RMIT Vietnam Help Desk Team. By An Vu Page 128
 SEMESTER 2/2012

4/ specific disclosures:
-[s711]: basic information that must be contained in every prospectus (see table 7.5/page 156)

B. Short-form Prospectuses:
-[s712(1)]: a short-form prospectus is a disclosure document that refers to material in documents lodged with ASIC
instead of that information being included in the prospectus

C. Profile statement:
-[s721(2)]: an approved profile statement may be sent to investors instead of the full prospectus.
-[s714]: a profile statement must:
o Identify the issuing body and the nature of the securities;
o State the nature of the risks involved in investing in the securities;
o Give details of all amounts payable in respect of the securities (including fees, commissions or charges);
o State that a copy of the prospectus is available free of charge;
o Give any other information required by Regulations or by ASIC.
D. Offer information statements:
- [s709(4)]: an offer information statement may be used instead of a prospectus if the amount of money to be raised
by the issuer, when added to all amounts previously raised by it, its related bodies or controlled entities, is $10
million or less.
-[s715]: an offer information statements must:
o Identify the issuing body and nature of the securities;
o Describes the body’s business and what the funds sought to be raised are to be used for;
o States the nature of the risks involved in investing in the securities;
o Give details of all amounts payable in respect of the securities;
o State that the offer information statement has a lower level of disclosure requirements than a prospectus and that
investors should obtain professional advice before investing.

E. “Hawking” and Advertising Restrictions:

- [s736]: A person cannot make “cold calls”, ie they cannot make unsolicited offers of securities for issue or sale in
the course of a meeting or telephone call with potential investor, unless:

o Sophisticated investors
o Professional investors
o Call made by licensed securities dealer about listed securities

RMIT Vietnam Help Desk Team. By An Vu Page 129

 SEMESTER 2/2012

o Call made to established client by licensed securities dealer.

- [s734(5)(a)]: permits some advertising by listed companies. They can advertise before filing disclosure with ASIC if:
o securities issuer identified
o disclosure document will be available
o persons are told to consider the disclosure document before deciding whether to invest
o anyone who wants to apply for securities must do so using the application form in the disclosure document
- [s734(5)(b)]: permits some advertising by unlisted companies. They can advertise before filing disclosure with ASIC
if:
o offer or securities identified
o disclosure document will be available
 anyone who wants to apply for securities must do so using the application form in the disclosure document; or
 provide a statement on how to receive the disclosure document
- [s734(6)]: after publication, advertising MUST say: offers will be made in or with disclosure document, and
application form will be in disclosure document

F. Misstatement, Omissions, Remedies:

-[s728]: prohibits any offer of securities using disclosure document that contains a misleading or deceptive
statements or omits required information

 [s739(1)]: ASIC can make a stop order (like injunction) if it thinks the disclosure document contains
misleading/deceptive statements, omits required information or it thinks that the information is not worded in a clear,
concise, and effective manner

 [s719]: ASIC can also order the company to issue a supplementary disclosure document required

- [s729]: (see table 7.6/page 163) sets out the range of people liable for compensation and the extent of their liability

RMIT Vietnam Help Desk Team. By An Vu Page 130