Reading Guide

Lecture 9

COMMONWEALTH OF AUSTRALIA

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Note: Please come prepared to discuss the Lecture Hypothetical on Oppressive/Unfair conduct in class

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Revision Question Answers: (e), (b), (d), (b)

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Shareholders’ Meetings Reading: Chapter 14CA: Sections 249A-U (except 249K, LA and P); 249X and Y; 250A–C, 250E, J, L, N, P, R, S; 300A; 317; 1322(1), (2) and (4) Cases: Re Totex-Adon Pty Ltd and the Companies Act; Chew Investment Australia Pty Ltd v General Corp of Australia

The general meeting is one of the 2 organs of the company

The will of shareholders is expressed at meetings of the company.

The calling and conduct of meetings is part of the internal regulation of

companies and is governed by the replaceable rules and the

company’s constitution (if any).

The provisions of the Corporations Act dealing with meetings are

designed to ensure that the will of shareholders is reflected in the

running of the company, and that they have an opportunity to gain

information about the company.

Types of Meetings

Shareholders meetings can be described as four types:

Annual General Meeting

Extraordinary general meeting

Class meeting

Adjourned meeting

Annual General Meeting

Who is required to hold an AGM?

A public company with more than 1 shareholder (section 250N(4)), unless a

proprietary company or a single shareholder public company states in its

constitution that an AGM will be held.

When must the AGM be held?

The 1st AGM: Within 18 months after its registration (s250N(1)).

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Future AGMs: AGM must be held at least once in every calendar year

and within 5 months after the end of the company’s financial year

(s250N(2)).

The AGM must be held even if other meetings are held during the year

(s250N(3)).

Can the company extend the time for holding the AGM?

Yes. A company can apply to the ASIC for an extension of time to hold the

AGM (s250P(1)). The application has to be made before the expiration of time

during which the AGM was required to be held (s250P(2)).

What is the purpose of the AGM?

The AGM gives shareholders the opportunity to obtain information about the

company’s past performance and future plans. Furthermore, shareholders

can question directors regarding the affairs of the company.

What is the business of the AGM?

Section 250R provides that the business of an AGM may include any of the

following, even if not referred to in the notice of meeting:

the consideration of the annual financial report, directors’ report and

auditor’s report;

the election of directors;

the appointment of the auditor;

the fixing of the auditor’s remuneration.

What must be disclosed at the AGM?

Section 317(1): The directors of a public company that is required to

hold an AGM must provide before the AGM the financial, directors’ and

auditors report for the last financial year that ended before the AGM.

For listed companies, the directors’ report must contain a remuneration

report that sets out the remuneration paid to directors and the top 5

executives (s300A(1)).

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Can members participate at the AGM?

Yes. The chair of an AGM must allow a reasonable opportunity for the

members as a whole at the meeting to ask questions about or make

comments on the management of the company (s250S), including the

remuneration report if a listed public company (s250SA).

Extraordinary General Meeting

This is the general name given to general meetings which are not AGMs.

The extraordinary general meeting may address resolutions such as the

appointment and removal of directors, amendments to the constitution and

share capital reductions.

Class Meetings

The Constitution and the CA may provide for class meetings. Remember

under section 246B (which we discussed in an earlier lecture):

The rights attaching to a class of shares may only be cancelled or

varied in accordance with the company’s procedure (s246B(1)); and

If there is no procedure, by special resolution of the company and 75%

of the votes in the class whose rights are to be cancelled or varied (this

can be by written consent or special resolution) (s246B(2)). For the

underlined rule, a separate meeting must be called of the class

members.

Adjourned Meeting

The Constitution will typically give the Chairperson power to adjourn meetings

(refer clause 5.6 of Qantas Constitution). To adjourn a meeting is to stop the

meeting and restart it at a later time or date. The Chairperson may adjourn

the meeting:

So that persons who have a material personal interest in a matter

being considered can leave the meeting;

There is no quorum;

To evict persons from the meeting who are not entitled to be there (e.g.

non-members);

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Where time has run out to address all of the agenda items at the

meeting.

When a meeting is adjourned, formal notice of the resumed meeting must be

given if the meeting is adjourned for 1 month or more (s249M - RR).

Calling Meetings

A meeting can be called by:

A Director

Directors at the request of shareholders

Shareholders

Court

By a Director of Company

Any director may call a meeting of the company’s shareholders, unless the

constitution states otherwise (s249C – RR). The decision to call a general

meeting is typically made by the Board of directors, as opposed to a single

director, when it is necessary for the administration of the company’s affairs.

An individual director of a listed company has the right to call a shareholders’

meeting despite anything in the constitution (s249CA).

By the directors at the request of shareholders

What is the rule?

Section 249D(1): The directors of a company must call and arrange to hold a

general meeting on the request of shareholders holding at least 5 percent of

the voting shares or at least 100 shareholders who are entitled to vote at the

general meeting.

What must be contained in the request?

The request must be in writing, state the resolution(s) to be proposed at the

meeting, signed by the shareholders making the request and given to the

company (s249D(2)).

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When must the directors call the meeting?

The directors must call the meeting within 21 days after the request is given to

the company. The meeting is to be held not later than 2 months after the

request is given to the company (s249D(5)).

What if the directors fail to call the meeting?

Members with more than 50% of the votes of all of the members who make a

request under s249D may call and arrange to hold a general meeting if the

directors do not do so within 21 days after the request is given to the

company (s249E(1)).

The meeting must be held not later than 3 months after the request is given to

the company (s249E(2)).

When can the directors validly refuse a request to call the meeting?

A meeting of a company’s members must be held for a proper purpose

(s249Q). 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 (Humes Ltd v Unity APA Ltd);

The purpose of calling the meeting is to pass a resolution that is invalid

(e.g. it interferes with the directors’ exclusive power to manage the co’s

business).

Case Example: NRMA v Parker

Facts: A member requested the calling of a general meeting. The proposed

resolution purported to direct the board over a matter that the constitution gave the

Board sole power over.

Held: As this resolution could not be effectively passed by the members and it was

the sole object of the proposed meeting, it was held that the directors were entitled to

refuse to act on the request.

By shareholders

Section 249F: Shareholders with at least 5% of the voting shares may call,

and arrange to hold, a general meeting without requesting the directors to call

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the meeting. The members calling the meeting must pay the expenses of

calling and holding the meeting (s249F).

By Court

Section 249G: On application by a director or member entitled to vote at the

meeting, the Court may order a meeting of the company’s members to be

called if it is impracticable to call the meeting in any other way.

A situation which would be impracticable is where a minority shareholder in a

small company does not have the voting power to request or call a meeting

because the majority shareholder refuses to co-operate in calling a meeting

(see Re Totex-Adon Pty Ltd and the Companies Act)

Notice of Meetings

What notice is required to call a meeting?

Notice enables shareholders to know what business will be considered at the

meeting so that they can decide how to vote.

General Rule (other than listed public company)

At least 21 days notice must be given of a meeting of a company’s

shareholders. However, if a company has a constitution, it may specify a

longer minimum period of notice (s249H(1)).

Shorter notice

Section 249H(2): A company may call on shorter notice:

An AGM - if all the members entitled to attend and vote at the AGM

agree beforehand;

Any other general meeting - if members with at least 95% of the votes

that may be cast at the meeting agree beforehand (s249H(2)).

When is shorter notice not allowed?

In public companies where the meeting is to consider a resolution to

remove a director or appoint a replacement (s249H(3)).

Where the meeting is to consider a resolution to remove an auditor

(s249H(4)).

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General Rule (Listed Public Company)

Despite s249H or anything in the company’s constitution, a listed company

must give at least 28 days notice of shareholders’ meetings (s249HA).

Who receives notice of the meeting?

Section 249J(1): Written notice of a meeting of a company’s members must

be given individually to each member entitled to vote at the meeting and to

each director. There are a number of methods for giving notice, including

personally, post, fax and electronic means (s249J(2)).

What are the contents of the notice of meeting?

Section 249L:

Time, date and place of meeting;

General nature of meeting’s business

If a special resolution is proposed – an intention to propose resolution

and state resolution

If a member is entitled to appoint 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(1)).

If the information in the notice is misleading, the Court may order an injunction

to restrain the holding of a meeting: Chequepoint Securities Ltd v Claremont

Petroleum NL.

Apart from section 250R CA, the general rule is that only those matters set

out in the notice of meeting can be considered, unless all the members attend

the meeting and agree to vary the agenda. Minor variations to the text of

resolutions are permitted, but the substance of the resolution should remain

unchanged.

Note: Click on this link to view National Australia Bank’s Notice of Meeting and Proxy Forms for its 2009 AGM:

http://www.nabgroup.com/vgnmedia/downld/20091116_NAB2009NoticeOfMeetingAndProxy.pdf

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Proceedings at Meetings

Does the meeting have to take place at one venue?

No. A company may hold a meeting of its members at 2 or more venues using

any technology that gives the members as a whole a reasonable opportunity

to participate (s249S). This contemplates the use of video-conferencing and

electronic communication.

What is the Quorum for a general meeting?

The quorum for a meeting of a company’s members is 2 members and the

quorum must be present at all times during the meeting (s249T(1) – a RR). If

the quorum is not present within 30 mins after the meeting time, the meeting

is adjourned to the time, date and place the directors specify (s249T(3)).

Who chairs the general meeting and how is the chair elected?

Section 249U (a RR): The directors may elect an individual to chair meetings

of the company’s members. This person is usually a director and chairs the

directors’ meetings as well.

The directors at a meeting of the company’s members must elect an

individual present to chair the meeting (or part of it) if an individual has not

already been elected by the directors to chair it or, having been elected, is not

available to chair it, or declines to act, for the meeting (or part of the meeting)

(s249U(2)). If the directors do not elect the chair, then the members can

(s249U(3)).

Voting – Numbers

Company with share capital

Section 250E(1) (RR): Subject to any rights or restrictions attached to any

classes of shares (e.g. in the Constitution), at a general meeting, each

member has 1 vote on a show of hands and 1 vote for each share they hold

on a poll.

Company without share capital

Section 250E(2) (RR): Each member of a company has 1 vote, both on show

of hands and a poll.

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Voting – Process

Section 250J: A resolution put to the vote at a member’s meeting must be

decided on a show of hands unless a poll is demanded (s250J(1)). On a

show of hands, a declaration by the chair is conclusive evidence of the result,

provided that the declaration reflects the show of hands and the votes of the

proxies received. Neither the chair nor the minutes need to state the number

or proportion of the votes recorded in favour or against (s250J(2)).

What is a poll?

According to Holland J in Ryan v South Sydney Junior Rugby League Club:

``The ascertainment of voting strength by the more formal and more

accurate methods of receiving, recording and counting votes is

commonly called a poll but the word `poll' does not itself specify any

particular method or procedure and if one is not prescribed by the

articles or left by the articles to the meeting or the chairman of the

meeting to direct it would be for the meeting to decide the procedure.

When is a poll demanded?

Section 250L: A poll may be demanded at any time during the meeting of

company members by the chair, members with at least 5% of the votes that

may be cast on the resolution on a poll or at least 5 members entitled to vote

on the resolution. The Constitution can reduce the numbers and %.

Proxies

Who can appoint a proxy?

Section 249X: A member of a company who is entitled to attend and cast a

vote at a meeting of the company’s members may appoint a person as the

member’s proxy to attend and vote for the member at the meeting

Note: Section 249X is a RR for Pty Ltd, but a mandatory rule for a public company

What are the proxies’ rights?

Section 249Y(1): A proxy has the right of the appointing shareholder to speak

at the meeting, to vote according to the appointment and to join in a demand

for a poll.

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What if the member attends the same meeting as the proxy?

Section 249Y(3): A company’s constitution (if any) may provide for the effect

that a member’s presence at a meeting has on the authority of a proxy

appointed to attend and vote for the member. However, if the constitution

does not deal with this, a proxy’s authority to speak and vote for a member at

a meeting is suspended while the member is present at the meeting.

Resolutions

What are the types of resolutions?

Ordinary Resolution: Resolution passed by simple majority (>50%).

Special Resolution (s9): 75% of the votes cast by members entitled to

vote on the resolution. For example, the CA requires a company to

pass a special resolution in circumstances of altering the constitution

(s136(2)) and selective reduction of capital (s256C(2)).

Resolution without general meeting (circulating resolution): A

proprietary company with more than 1 shareholder may pass a

resolution without a general meeting being held if all the members

entitled to vote on the resolution sign a document containing a

statement that they are in favour of the resolution set out in the

document (s249A(2)).

Resolution without general meeting (1 member companies): A

company that has only one shareholder may pass a resolution by the

shareholder recording the resolution and signing the record (s249B).

Can shareholders move resolutions?

Yes. Shareholders with at least 5% of the votes that may be cast or at least

100 shareholders entitled to vote may give a company notice of a resolution

that they propose to move at a general meeting (s249N(1)). If the company

receives notice of a resolution from member(s) under s249N, the resolution

must be put at the next general meeting of the company that occurs more

than 2 months after the notice is received by the company (s249O(1)).

The members may use this procedure, for example, to have a matter included

for consideration at an AGM. However, the request must be provided to the

company at least 2 months before the date of the AGM.

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Procedural Irregularity

What is a procedural irregularity?

Section 1322(1) states that procedural irregularity includes:

The absence of a quorum at a meeting of members or directors

A defect, irregularity or deficiency of notice or time

A procedural irregularity may include giving 20 days notice of a meeting,

rather than 21 days or not providing notice of a meeting to all of the directors.

What is the legal effect of a procedural irregularity?

A “proceeding” under the CA (e.g. directors or members meeting or the

passing of a resolution) is not invalidated because of any procedural

irregularity 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 and by order declares the proceeding to be invalid

(s1322(2)).

Thus, the proceeding is deemed to be valid, despite the procedural

irregularity. This means that if a person wants the proceeding declared

invalid, the onus falls on the person to demonstrate that substantial injustice

has resulted or will result from the irregularity.

The Court can make an order that any act or thing arising out of the

procedural irregularity is valid (s 1322(4)(a)).

What is substantial injustice?

Substantial injustice is a question of fact. The injustice must flow from the

irregularity, not the outcome of the irregularity. For example, a resolution

passed at a meeting (“the outcome”) without a valid quorum (“the irregularity”)

is not a substantial injustice if the resolution would have been passed even if

a quorum was present.

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Members’ Remedies

Oppressive or Unfair Conduct Reading: [17.05] – [17.110] CA: sections 232 – 234; section 53Additional Cases: Re Bright Pine Mills Pty Ltd; Shamsallah Holdings Pty Ltd v CBD Refrigeration & Air conditioning Services Pty Ltd; Fexuto v Bosnjak Holdings Pty Ltd

The remedy for oppressive or unfair conduct is typically used by a

shareholder in a small proprietary company effectively “locked in” to company

because no ready market for their shares exists.

The remedy is not common with public companies, which are more likely than

proprietary companies to have a market for the company’s shares and

aggrieved members will sell their shares rather than incur costs in taking legal

action. Furthermore, publicly listed companies must comply with ASX Listing

Rules which require these companies to gain shareholder approval when they

propose structural changes.

What is the Rule?

Under section 232, the Applicant must prove that:

the conduct of a company’s affairs; OR

an actual or proposed act or omission by or on behalf of a company;

OR

a resolution, or a proposed resolution, of members or a class of

members of a company

IS

contrary to the interests of the members as a whole; OR

oppressive to, unfairly prejudicial to, or unfairly discriminatory against,

a member or members whether in that capacity or in any other

capacity.

How do you answer an oppressive or unfair conduct question?

There is a 4 step process that you can use:

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1. Can the person apply?

2. What is the relevant conduct?

3. Is the relevant conduct contrary to member interests, oppressive or

unfair?

4. What are the remedies?

Can the person apply?

Section 234 CA lists the persons who can apply. The persons include:

Section 234(a): A member of the company, even if the application relates to

something done to the person other than as a member

Section 234(c): A person who has ceased to be a member of the company if it

relates to circumstances in which they ceased to be a member

Section 234(d): A person who has a share as the result of transmission under

a will

Section 234(e): A person whom ASIC has permitted to bring the application

as a result of an investigation

What is the relevant conduct?

Section 232(a): Company’s Affairs

Section 53 CA provides a wide definition of the “affairs of a body corporate”.

This is another way of saying “the company’s affairs”. The definition includes:

the promotion, formation, membership, control, business, trading,

transactions and dealings, property, liabilities, profits and other income,

receipts, losses, outgoings and expenditure of the body;

the internal management and proceedings of the body;

the power of persons to control the rights to vote attached to shares in

the body or to dispose of such shares.

Given the wide definition, any matter that comes before a general meeting or

director’s meeting would be within the scope of the company’s affairs.

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Section 232(b): Actual / proposed act or omission by or on behalf of a company

Act: For example, a single resolution of the board of directors (Wayde v NSW

Rugby League Ltd)

Omission: For example, the company persistently refuses to pay dividends

when sufficient profits exist (Sanford v Sanford Courier Service Pty Ltd)

Section 232(c): Actual or proposed resolution at a general or class meeting

Note that the actual or proposed resolution is not by directors, but by

members at a general meeting or class meeting.

Is the relevant conduct contrary to member interests, oppressive or unfair?

The relevant conduct must be:

Section 232(d): contrary to the interests of the members as a whole;

OR

Section 232(e): oppressive to, unfairly prejudicial to, or unfairly

discriminatory against, a member or members whether in that capacity

or in any other capacity.

A case example of section 232(d) is Re Overton Holdings Pty Ltd. Faye,

Overton’s managing director and majority shareholder, arranged for the

company to lend money to 2 other companies controlled by Faye that were in

financial difficulty. The loans were unsecured and made without the

knowledge of Overton’s other director and minority shareholder.

In relation to section 232(e), the three underlined elements are now

considered as a “composite whole”. This means that the key issue is whether

the conduct is commercially unfair on a member or members.

There is no definition for “oppressive” or “unfairly” in the CA, so the best way

to determine whether the conduct falls under section 232(e) is by looking at

the case law. What we do know from the case law is that:

The result, not the motive must be unfair. This means that conduct may

amount to oppression even though directors and majority shareholders

are acting in what they think are the best interests of the company. The

issue is this: is the effect of the conduct commercially unfair?

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Typical case scenarios where section 232(e) is raised include:

o Disagreements between minority and majority shareholders

o Diversion of corporate opportunity and/or profits

o Exclusion from management

o Improper share issue

o Failure by a person to dispose of their shares

Note: There is also an excellent list of examples at pp 216-217 of the 2009 Corporations Legislation textbook.

Unfair is determined objectively. For example, a director’s conduct is

oppressive or unfair if no reasonable director would have acted in that

way (Wayde v NSWRL Ltd)

Case Example: Wayde v NSWRL Ltd

Facts:

The NSWRL was responsible for the running of the Sydney rugby league football

competition (now known as the NRL). Under the NSWRL’s Memorandum of

Association the company’s objects and powers included the following: “To foster and

control the game of rugby league throughout the State of NSW and the ACT and

generally to take such action as may be considered conducive to its best interests”.

The NSWRL sought to reject an application for admission to the NSWRL competition

by the Wests Football club. This would reduce the number of teams to 12. Wests

brought an application for a remedy under the equivalent of s232.

The NSWRL argued that there were too many games in the competition and the

competition was too long. Players complained that they were playing too much

football, and did not give sufficient time for the players to recover from games and

injuries. A reduction to 12 teams would mean 4 fewer playing days, particularly

during hot weather (which could affect the health of players).

Held:

The NSWRL had power under its Memorandum to determine the number of teams in

the competition.

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The decision to reject ‘Wests’ was made in good faith and in the interests of the

competition as a whole

Although the decision may have been prejudicial to or discriminatory against the

club, this in itself did not satisfy the requirements of s232.

The prejudice or discrimination must be unfair discrimination in the commercial

context. The relevant question was whether the resolution to reduce the number of

teams “so unfair that reasonable directors would not have passed the resolution?”

From an objective point of view the resolution was not so unfair. While the decision

was harsh on Wests, it was one that a reasonable board could have made.

Shareholder disagreements

In determining whether or not conduct is oppressive or unfair the court must

balance the conflicting interests of majority and minority shareholders. The

court will examine the background of the company and the reasonable

expectations of its shareholders. For example, the fact that minority

shareholders are unhappy with a decision is not itself a ground for oppressive

or unfair conduct given that on purchasing shares as minority holders, they

should realise that control of the company lies with persons with substantial

interests in the company.

For example:

In McWilliam v LJR McWilliam Estates Pty Ltd, the Court held that it

was not necessarily oppressive or unfair just because the Board was

pursuing company policies with which the minority shareholders

disagreed. The company amended its dividend policy because of tax

laws and not to act unfairly towards the minority (albeit that the

amendment had the affect of disadvantaging the minority).

In Re H W Thomas Ltd, a minority shareholder could not show that

conduct was oppressive, unfairly prejudicial, or unfairly discriminatory.

At a general meeting of the company, the minority shareholder moved

that the assets held by the company be sold and the proceeds

reinvested in higher income earning investments (i.e. a riskier

proposition). The resolution was not passed. The company was a

family company in which it was common ground that the financial

management of the company had been conservative. It was also

understood that the company was intended to be a source of

employment, rather than a means of obtaining dividend income. In

these circumstances the minority shareholder was not unfairly

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prejudiced by complying with the decision of the majority of

shareholders.

Diversion of Profits and Corporate Opportunities

Case Example: Sanford v Sanford Courier Service Pty Ltd

Facts: Company A diverted its business away to Company B, of which the majority

shareholders and directors of Company A were the sole directors and shareholders

of Company B. Furthermore, company A paid high salaries and provided other

benefits to its directors while refusing to pay dividends, thus denying the minority

shareholder in Company A a share of the profits. In fact, the operating profit of

Company A for the year was $9,714; the salaries paid to the 2 directors were

$51,432 each (a lot of money in 1984!!).

Held: The majority shareholders acted oppressively towards the minority

shareholder as they excluded him from the profits of the company by failing to pay

dividends.

Exclusion from management

Many family companies are run as “quasi-partnerships”, with family members

having a “legitimate expectation” to participate in the management of the

company. An act of blocking this participation may be considered unfair.

Recent Case Example: Mopeke Pty Ltd v Airport Fine Foods Pty Ltd

Airport Fine Foods Pty Ltd (AFF) was a proprietary company. The Bradfield family

and associated interests (Bradfield interests) held 40% and the Lagerlow family and

associated interests (Lagerlow interests) held 60% of the shares in AFF.

There were three executive directors, Mr Steven Petrovski (representing Bradfield

interests), Mr John Lagerlow and Mr Gordon Lagerlow. In January 2005, the board of

directors required Mr Petrovski to resign as director.

The Bradfield interests contended that the dismissal of Mr Petrovski as an executive

director and his consequent exclusion from day-to-day management of the company

constituted oppression.

Held: The Court ordered under section 233 for Lagerlow interests to purchase the

Bradfield interests.

It is typically considered unjust for a majority to use their voting power to exclude a

member from participation in the management without giving them the opportunity to

remove their capital upon reasonable terms. The aggrieved member has a

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"legitimate expectation" that they would be able to participate in the management or

withdraw from the company: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd.

The circumstances as a whole made it unfair for the Lagerlow interests to use their

majority voting powers to remove Mr Petrovski, in the absence of proof of Mr

Petrovski's incompetence, from participation in the daily management of the

business, without giving the Bradfield interests the opportunity to sell their interest at

a fair price.

Improper share issue

In Re Dalkeith Investments Pty Ltd, the Court held that excluding a director

from the opportunity to participate in the decisions of the board to issue

shares (which had the purpose and effect of diluting the directors’

shareholding) amounted to oppressive conduct.

Failure to dispose of shares

The mere fact that a member of a company cannot dispose of his/her shares

is not enough to establish oppression. For example, the other shareholders

may be unwilling to purchase the shares: McWilliam v L J R McWilliam

Estates Pty Ltd.

Inadequate dividends payment

Low dividend payment for an extended period of time can constitute unfair

and prejudicial conduct, especially where the ratio between the net profits that

the company has made and the dividend declared is high: Re Same Weller

and Sons Ltd [1990] Ch 682, where a dividend of 14p had been paid for the

past 37 years and the most recent accounts showed that net profits had

covered the dividend declared by 14 times.

What are the remedies?

Section 233 CA: The Court has a wide discretion with respect to remedies – it

can “make any order … it considers appropriate in relation to the company”.

Section 233 provides a list of orders that the Court can make, including:

Winding up

Repeal or modification of the company’s constitution

Regulation of the future affairs of the company

Purchase of any shares by any member or the company itself

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Company or a member acting on behalf of the company to institute,

prosecute, defend or discontinue specified proceedings

Injunction (both “positive” and “negative” injunction)

Appointment of a receiver or receiver and manager over company

property

Lecture Hypothetical

Facts

A – 5% shareholder

B – 65% shareholder, general manager of company’s business and director

A sought orders under the equivalent of section 233 removing B as a director

and excluding him from all management of the business on the basis that:

As director, B had breached fiduciary duties, failed to call general meetings

despite A’s repeated requests and failed to supply A with financial records

B and the rest of the shareholders argued that the conduct was not unfair and

that if it was, the appropriate remedy would be for the sale of A’s shares to B.

A was partly motivated by the desire to “get” B.

The Court found that:

1. There had been a number of breaches of fiduciary duty by B, but the

amounts involved were very small

2. There had been “serious inadequacies” in the company’s accounting

records

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Questions

• Was A able to apply?

• What was the relevant conduct?

• Was the relevant conduct unfair?

• What remedy do you think the Court ordered here?

Statutory Derivative Action Reading: [17.115] and [17.120] CA: Sections 236, 237 and 242; Section 9 (definition of “officer”); Additional Cases: N/A

A statutory derivative action enables persons, with prior leave of the Court, to

take action on behalf of the company. This differs from oppressive or unfair

conduct, where the applicant (e.g. a member) takes action personally.

However, in particular circumstances, both remedies may apply to the same

factual scenario.

There are two issues in a statutory derivative action:

1. Can the person apply?

2. Will the Court grant leave?

Can the person apply?

Section 236 provides that a former or current member or officer of the

company can apply to the Court for leave to bring a statutory derivative

action.

Will the Court grant leave?

Section 237(2): The court must grant an application for leave if all the

following matters are established:

a) it is probable that the company will not itself bring the proceedings, or

properly take responsibility for them, or for the steps in them; and

The issue is this: what is the probability, based on the circumstances at

the time of the court hearing, that the company won’t take action? Where

the proposed defendant to the contemplated action is an officer of the

company, inaction is easy to identify.

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b) the applicant is acting in good faith; and

Two questions here: Does the applicant honestly believe there is a good

cause of action with a reasonable prospect of success? Is the applicant

bringing the action for a collateral (i.e. alternative) purpose not connected

to the proceedings? For example, an application which puts pressure on

the company directors to resign, have the company buy out the applicant’s

shares or to pay dividends to a particular class of shareholders. The Court

will scrutinise the reasons why a former member or officer is applying for

leave

c) it is in the best interests of the company that the applicant be granted

leave; and

As with section 181, the best interests of the “company” depends on its

solvency. For example in the case of Charlton v Baber, the Court was

satisfied that the legal proceedings against the director for breach of

fiduciary duty would enhance returns to and thereby promote creditor

interests, which were the company’s interests during the company’s

liquidation.

If the applicant (on behalf of the company) intends on taking or defending

proceedings against a third party (i.e. not a related party of the company),

there are particular grounds set out in section 237(3) which create a

rebuttable presumption that granting leave is not in the company’s best

interests. The grounds are pretty much the same as the business

judgment defence to a due diligence action under section 180(2).

d) there is a serious question to be tried; and

This criterion is designed to prevent frivolous claims, but it is not

necessary that the applicant be required to prove the legal issue when

applying for leave. A person only needs to show that there is a probability

of success

e) either:

a. at least 14 days before making the application, the applicant

gave written notice to the company of the intention to apply for

leave and of the reasons for applying; or

b. it is appropriate to grant leave despite the above.

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Who pays for the statutory derivative action?

The applicant who is the party involved in the action on behalf of the

company. However, section 242 states that a court can make any order it

considers appropriate concerning the applicant’s legal costs, which includes

indemnification by the company. L&H notes that courts are reluctant to award

costs even if the applicant is successful. I assume this would limit the number

of statutory derivative claims.

Statutory Injunctions Reading: [17.130] – [17.140] CA: s 1324 Additional Cases: N/A

Rule: Under s1324(1), the court has a discretion to grant an injunction

restraining a person from engaging in conduct that has contravened or

would contravene the Corporations Act.

Positive/Negative Injunction: the court may make any order restraining

the person's conduct or requiring the person to act.

Who may apply? Only ASIC or a person whose interests have been

affected by conduct which relates to a contravention of the

Corporations Act can apply to the court for an s1324 injunction

(s1324(2)).

“Interests have been affected”: Persons who apply need not show that

they suffered any special injury arising from the contravention of the

Corporations Act. However, applicants must establish that their

interests go beyond the mere interests of members of the public

(Broken Hill Pty Co Ltd v Bell Resources). A line of court authority

suggests that shareholders have standing to apply for an s1324

injunction because they have greater interests than a mere member of

the public and their interests could be affected by contraventions of the

Act (e.g. breach of director’s duties).

Winding Up by the Court Reading: [17.145 – 17.180] CA: ss 461; 462; 9 (definition of “contributory”); Additional Cases: Re William Brooks & Co Ltd; Kokotovich Constructions Pty Ltd v Wallington

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Section 461 provides various grounds for a Court to wind up a solvent

company. Despite these grounds, the Court will exercise its discretion very

carefully as it considers that winding up a solvent company is an extreme

step. There are three main issues associated with winding up:

1. Can the person apply?

2. Is there a ground for winding up the company?

3. Will the court exercise its discretion? In particular, is there an

alternative remedy to winding up?

A winding up involves an insolvency practitioner (typically an accountant

known as a “liquidator”) selling off the company’s assets and distributing the

proceeds to the company’s creditors, with the balance (if any) distributed to

the members. The general consequence of this is that the company is

deregistered. Winding up is also known as “liquidation”.

Can the person apply?

Section 462(2) provides that the following persons may apply for an order to

wind up the company:-

the company;

a creditor (including a contingent or prospective creditor) of the

company;

a contributory (see section 9 definition – includes a fully paid holder of

shares in a company with a share capital);

the liquidator of the company;

ASIC;

APRA.

What are the grounds for winding up a company?

The Court may order the winding up of a company under a number of

grounds in section 461(1) CA (e.g. the company has no members, the ASIC

or APRA determines that it is in the public, member or creditor interests or the

company passes a special resolution to have the Court wind up the

company).

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In this course, we will focus specifically on sections 461(1)(e), (f), (g) and (k)

which provide:

(e) directors have acted in affairs of the company in their own interests

rather than in the interests of the members as a whole, or in any other manner

whatsoever that appears to be unfair or unjust to other members; or

(f) affairs of the company are being conducted in a manner that is

oppressive or unfairly prejudicial to, or unfairly discriminatory against, a

member or members or in a manner that is contrary to the interests of the

members as a whole; or

(g) an act or omission, or a proposed act or omission, by or on behalf of

the company, or a resolution, or a proposed resolution, of a class of

members of the company, was or would be oppressive or unfairly

prejudicial to, or unfairly discriminatory against, a member or members or

was or would be contrary to the interests of the members as a whole; or

(k) the Court is of opinion that it is just and equitable that the company be

wound up.

What is just and equitable?

The “just and equitable” ground is known as a “catch all” provision in statute

law. If an act or omission does not fall under any of the grounds in section

461(1)(a) – (j), the Court can still find that it was “just and equitable” that the

company be wound up. This is a question of fact.

Typical examples of situations where it is just and equitable to wind up the

company include:

Management deadlock (re Yenidje Tobacco Company Limited)

Failure of the Substratum (Re Tivoli Freeholds)

Breakdown of confidence in the conduct and management of the

company. This could be due to fraud or other misconduct by the

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Your thoughts: what does sections 461(1)(e), (f) and (g) remind you of? What are the differences between oppressive or unfair conduct and winding up in terms of who can apply and the available remedies? (Hint: also consider section 467(4))

directors (refer Loch v John Blackwood Limited in which the directors

did not provide financial reports to minority shareholders nor had audits

been conducted)

Breaches of the Corporations Act, including breaches of directors’

duties, inadequacy of accounts and record keeping or consistent

breaches of tax laws.

Public Interest (ASIC v Storm Financial)

Case Example: Clarke v Bridges [2004]

Facts: In 2001 Mr C and Mr B decided to open a wine bar in Melbourne. Each man

held two of the four issued shares in a shelf company set up by Mr C’s accountant.

Together they were the only directors. The company leased premises owned by Mr B

and his wife. Within 2 years of the bar opening, the relationship between C and B

deteriorated. The business shut down and was sold. After the proceeds of sale were

used to discharge the company’s liabilities, there remained a surplus of $12,000

which was held in the company solicitor’s trust account. C sought to have the

company wound up approximately 6 months after the business was sold.

Held: The Court held that it was just and equitable to wind up the shelf company on

two grounds:

* Failure of the substratum: the company ceased to carry on the business for which it

was formed (Re Tivoli Freeholds Ltd);

* A deadlock at both Board and shareholder level (re Yenidje Tobacco Company

Limited).

The Court said: It is inappropriate that this company be left in limbo. If it is the parties

will engage in further litigation; I am certain that they will reach no agreement on the

fate of the money in the solicitor’s trust account and will simply take that matter to

court … The only way that I can put an end to this state of affairs is to order a

winding up.

Case Example: ASIC v Storm Financial Ltd [2009] FCA 269

Judgment:

http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2009/269.html?query=^Storm

%20Financial

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Facts: Storm Financial Limited carried on a financial planning business. Mr and Mrs

Cassimatis were the founders and two of three directors of Storm Financial. Due to a

variety of factors administrators were appointed. The Commonwealth Bank (CBA), a

secured creditor, appointed receivers and managers in January 2009 who effectively

took control of the day to day management of the company. The creditors’ meeting

was due to be held on 23 March 2009.

Prior to the meeting, the Cassimatis released an extraordinary proposal for a DOCA

through documents entitled “A Simple English explanation of the DOCA” and “Storm

Financial Limited – The Simple Solution”. When these documents came to the notice

of ASIC, they filed an application to have the company wound up, either on the basis

of insolvency (which we will discuss next week) or that it was just and equitable to do

so (s 461(1)(k)). The administrators had recommended to creditors that the DOCA

be rejected and that the company be placed in liquidation.

Held: It was just and equitable that Storm be wound up under s461(1)(k) because:

* Storm Financial was not trading and there was no likelihood that its former

business would resume

* The interests of creditors would not be served by the DOCA proposed by Mr and

Mrs Cassimatis (see contents of DOCA below)

• The public interest would be served. Placing the company in the hands of

liquidators would be for the wider good of the financial system because the liquidator

could investigate issues including: Could the CBA have saved Storm Financial from

insolvency by providing financial assistance? Were the investments recommended

by Storm to its clients appropriate? Were the actions of Storm and its directors

following the substantial drop in the stock market appropriate?

The DOCA provided, amongst other things:

* $2 million dividend payment made to interests associated with the Cassimatis’ and

currently subject to an injunction, be paid to Storm Financial. However it was likely

that the liquidator would recover the $2 million as an unfair director-related

transaction – in fact the $2 million was subsequently paid back to Storm Financial

* Cassimatis’ and all other Storm officers and employees be released from any future

liability, which would deny a liquidator the ability to sue the directors for breach of

their statutory duties, most notably s 588G

* Cassimatis’ take control of any legal proceedings against CBA. This was not only

inconsistent with an external administration, whereby the receiver, administrator or

liquidator (as the case may be) takes control, but it was likely the Cassimatis’ would

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be joined as parties to any litigation brought by disgruntled investors, thereby

creating a conflict of interest

* The DOCA was proposed to serve the Cassimatis’ interests, not Storm Financial,

which justified ASIC’s decision to bring an application for winding up during the

administration.

Will the Court exercise its discretion?

Note that under section 461, the Court may order winding up, even if one of

the grounds is established.

The Court will not make a winding up order under section 461(1)(e), (f), (g) or

(k) if it is of the opinion that the applicant has some other available remedy

AND that the applicant is acting unreasonably in seeking winding up instead

of pursuing another available remedy: s467(4). Winding up is regarded as a

remedy of last resort and one which should not be granted if a less drastic

remedy is available.

Case Example: Re Dalkeith Investments Pty Ltd

Facts: A divorce between 2 major shareholders resulted in a breakdown in the

mutual trust and confidence between members. As this was irreconcilable, this was a

ground to have the company wound up under what is now s461(1)(k). However, the

court held that a remedy under the equivalent of s232 (oppression) was less drastic

and more appropriate under the circumstances. The company was profitable and

had considerable assets and should not have been wound up. The court ordered the

purchase of the oppressed members’ shares by the remaining members.

Revision Questions

Question 1

Which of the following is an example of “oppressive conduct” within the meaning of Corporations Act 2001 (Cth) s 232?

(a) Where the directors divert a business opportunity to themselves.(b) Where a minority member is improperly excluded from participating in the

management of the company.(c) Where board meetings of a company are conducted in an unfair manner.(d) Where the directors fail to act in the interests of the company.(e) All of the above.

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Question 2

Which of the following is not one of the remedies which can be granted by the court under Corporations Act 2001 (Cth) s 233 where the court finds that there has been oppression?

(a) An order that the shares of a member be purchased by other members or by the company.

(b) An order that a director be disqualified from managing companies for a specified period.

(c) An order that the company be wound up.(d) An order that the company’s constitution be modified or repealed.

Question 3

Which of the following is not entitled to bring a statutory derivative action against a director on behalf of the company?

(a) A former member.(b) A member of a subsidiary of the company.(c) A former director.(d) A creditor.

Question 4

Which of the following is not a requirement which must be satisfied before a court will permit a person to bring a statutory derivative action against a director?

(a) The applicant is acting in good faith.(b) The applicant is a related party of the company. (c) It is probable that the company will not itself bring the proceedings.(d) It is in the best interests of the company that the applicant be granted leave.

Questions 1 – 4 are taken and/or adapted from Commercial Applications of Company Law 8th edition Multiple Choice Questions & Answers CCH Publishers

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