LECTURE 1 (Company & its characteristics)

Significant cases

Salomon v Salomon & Co {page 27}

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

A one-person company may borrow money from its controller on a secured basis, who will rank ahead of its unsecured creditors on company’s insolvency.

A company is a separate legal entity even if a single person owns all its shares.

Lee v Lee’s Air Farming {page 29}

A one-person company is a separate entity from its controller who may also be its sole employee.

MacLeod v The Queen {page 30}

A person who was the sole director and shareholder could be convicted under s 173 of the Crimes Act 1914 of fraudulently applying company property for his own use, in a case where the company is insolvent or in financial difficulties, and the conduct of the sole director & shareholder in reducing value of the company’s assets is detrimental to creditors.

The self-interested “consent” of the shareholder, given in a furtherance of a crime against the company, cannot be said to represent the company’s consent.

Gilford Motor Co v Horne {page 35}

The courts may lift the corporate veil if a company has been used as a sham or to avoid a legal obligation.

Re Darby {page 35}

The corporate veil may be lifted if a company is used as a vehicle for fraud.

Walker v Wimborne {page 32}

Directors of a company that is a member of the group cannot act in the best interests of the group and disregard the interests of the company’s shareholders and creditors.

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Pioneer Concrete Services Ltd v Yelnah Pty Ltd {page 33}

A holding company and its subsidiary are two separate legal entities. Corporate veil will be disregarded if there is evidence that companies in a group

operated in a partnership.

Smith, Stone & Knight Ltd v Birmingham Corporation {page 39}

Corporate veil may be lifted where a subsidiary is an agent for its holding company 6 requirements to establish that a subsidiary carried on business as agent for its holding

company (before disregarding Salomon principle): Subsidiary’s profits must be treated as holding company’s profits Holding company must appoint persons conducting the business Holding company must be the head & brain of the trading venture Holding company must govern the venture & decide what should be done &

what capital should be embarked on it Business’s profit must be made by holding company’s skill & direction Holding company must be in effectual & constant control

Briggs v James Hardie & Co Pty Ltd {page 40}

The courts may be prepared to make a parent company liable for its subsidiaries’ tort.

CSR Ltd v Wren {page 40}

A controlling company may owe a duty of care to its subsidiary’s employee if it has a sufficiently strong degree of control over the subsidiary’s activities.

CSR Ltd v Young {page 41}

A controlling company may owe a duty of care to its subsidiary’s employee if it has a sufficiently strong degree of control over the subsidiary’s activities.

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LECTURE 2 (Company registration, company types, replaceable rules)

Significant cases

Ashbury Railway Carriage & Iron Co v Riche {page 89}

Under the doctrine of ultra vires, companies were legally capable of engaging only in businesses set out in the objects clause.

Company contracts outside the objects’ scope were regarded as void and of no legal effect.

Eley v Positive Government Security Life Assurance Co {page 92}

Provisions in a constitution that give members rights in some other capacity than that of a member do not have contractual effect (in other words, members only have right as members, no more, no less).

An employee should have entered into a separate contract independent of the constitution

Forbes v New South Wales Trotting Club Ltd {page 92}

A constitution does not have the effect of an enforceable contract between a company and non-members, even if a constitution purports to give them rights.

Spectators only have rights as a spectator.

Shuttleworth v Cox Bros & Co (Maidenhead) Ltd {page 94}

If the constitution does not adequately provide a procedure for removal, the members can resolve to alter it under s 136(1) without exposing the company to liability for wrongful dismissal.

The director should have had a separate contract independent of the constitution.

Gambotto v WCP Ltd {page 97}

An alteration that involves an expropriation of shares is valid, only if the expropriation is for a proper purpose and fair in all circumstances.

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LECTURE 3 (Corporate Management/Directors)

Significant cases

Automatic Self-Cleansing Filter Syndicate Co v Cunninghame {page 267}

If the board has full management powers, shareholders cannot override the directors and involve themselves in the management of their company.

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LECTURE 4 (Directors’ duties – Part 1)

Significant cases

Percival v Wright {page 324}

Directors do not owe fiduciary duties to particular shareholders, except in special circumstances.

Directors only owe fiduciary duties to the company as a whole & not to individual shareholders.

Coleman v Myers {page 324}

A director may owe fiduciary duties to an individual shareholder when in close contact with the individual member so that the director caused the member to act in a certain way detrimental to them.

Factors giving rise to a fiduciary duty to individual shareholders: Dependence upon information & advice Existence of a relationship of confidence Significant transactions for parties The extent of positive action taken by or on behalf of director

Brunninghausen v Glavanics {page 324}

A fiduciary duty owed by directors to shareholders where there are negotiations for a takeover/acquisition of the company’s undertaking, would require directors to loyally promote all shareholders’ joint interests.

Nature of a transaction may give rise to a director owing fiduciary duties to a shareholder.

Walker v Wimborne {page 32/page 399}

Directors prejudice creditors’ interests if they cause the company to enter into arrangements that reduce the pool of company assets that would otherwise be available to be shared among creditors.

Equiticorp Finance Ltd (in liq) v Bank of New Zealand {page 328}

An intra-group transaction entered for the benefit of the (company) group may also have collateral/derivative benefits for the subsidiary.

There is no breach of duty if it’s proven that the 1 st company indirectly benefitted from the assistance given to other companies in the group.

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Parke v Daily News {page 329}

Directors should not consider employees’ interests at the expense of shareholders’ interests.

A payment to employees will be in the company’s interests where their employment continues because its industrial relations may be improved, but not in this case.

Kinsella v Russell Kinsela Pty Ltd {page 404}

Shareholders cannot ratify a director’s breach of duty that involves prejudicing creditors’ interests. (In other words, shareholders can only ratify directors’ breach of duty when the company is going concern.

McNamara v Flavel {page 403}

The director breached the equivalent of s 184(3) and was guilty of a criminal offence. The director made improper use of information that the company was in financial

difficulties when he transferred the business name to the advantage of his other company, detrimental to creditors.

Spies v R {page 404}

Creditors cannot bring a civil action to recover their losses against directors who are in breach of duty.

Fiduciary duties are owed to the company and only the company has the right to sue directors who act in breach of their duties.

Ngurli Ltd v McCann {page 331}

Directors breach their duty if they issue shares for the purpose of maintaining their position of control.

Howard Smith Ltd v Ampol Petroleum Ltd {page 332}

It is improper to issue shares for the purpose of creating a new majority shareholder, or to manipulate voting control within the company.

Whitehouse v Carlton Hotel Pty Ltd {page 332}

It is improper to issue shares for the purpose of creating a new majority shareholder, or to manipulate voting control within the company.

General rule was based on Howard Smith Ltd v Ampol Petroleum Ltd case.

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LECTURE 5 (Directors’ duties – Part 2)

Significant cases

Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co {page 346}

A breach of duty arises whether the director’s undisclosed interest in the contract is direct or indirect.

Directors must disclose their interests in transactions with their company.

ASIC v Adler {page 337/page 351}

A director who causes a company to enter into an agreement conferring unreasonable personal benefits on the director and fails to make adequate disclosure of the conflict of interests, acts “improperly” for the purposes of s 182 and also lacks good faith for the purposes of s 181.

A contravention of s 181 does not require a director to gain a benefit from the conduct. It is sufficient to establish that the conduct was carried out in order to gain an advantage.

A person commits a criminal offence if their involvement in the contravention of s 208 is dishonest: s 209(3).

A proposed benefit to a related party that contravenes s 208 may be stopped by the court where an application for an injunction is brought under s 1324.

Regal (Hastings) Ltd v Gulliver {page 353}

Directors have a fiduciary duty to disclose personal profits that arise from their position, regardless of whether the company had suffered any losses or benefitted from it.

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

The directors, who personally profited, acted in good faith and the company had not been deprived of a business opportunity because it did not have the required funds. The successful action only benefited the purchasers of Regal (Hastings) Ltd who had contracted to pay an agreed price. The return of profits to Regal (Hastings) Ltd meant that they succeeded in obtaining a reduction from the contracted purchase price.

Directors in similar circumstances may now be able to avail themselves of s 1318, which permits the court to relieve an officer from any liability for negligence, default, breach of trust/duty if it appears that they have acted honestly.

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Cook v Deeks {page 359} A breach of fiduciary duty regarding corporate opportunities occurs where a director,

while negotiating a contract for the company, without appropriate disclosure and approval, arranges for the contract to be diverted from the company to the director personally or to another company in which the director is involved.

Wright v Gasweld Pty Ltd {page 363}

Confidential information includes trade secrets, customer lists and pricing information. 5 factors to be considered in deciding whether information was confidential:

Skill & effort expended to acquire information; The degree to which the information is jealously guarded by the employer, not

readily available to employees & could not be acquired by others without considerable effort/risk;

Whether it was plainly known to the employee that the material was regarded by the employer as confidential;

Industry usage & practices; Whether the employee in question has been permitted to share information only

by reason of their seniority or high responsibility within the employer’s organization.

ASIC v Rivkin {page 590}

A person is an “insider” for the purposes of s 1043A prohibitions if: The person possesses “inside information” (defined in s 1042A); & The insider knows or ought reasonably to know that the matters specified in s

1042A definition of “inside information” are satisfied in relation to the information

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LECTURE 6 (Directors’ duties – Part 3)

Significant cases

ASIC v Rich {page 379/page 384}

The chairman of a listed company has special responsibilities and is subject to a different standard of care and diligence than is applicable to non-executive directors.

Related to breach of s 180(1).

Daniels v Anderson {page 381}

Directors are required to take reasonable steps to place themselves in a position to guide and monitor management of a company:

Directors must become familiar with the company’s business when they join the board

Directors have a continuing obligation to make inquiries and keep themselves informed about all aspects of the company’s business operations, regardless of their knowledge and experience level.

Directors must also be familiar with their company’s financial position by regularly reviewing its financial statements as they cannot avoid liability for insolvent trading by claiming they do not know how to read financial statements.

Directors must also pay attention to other aspects of the company’s business which might reasonably be expected to attract inquiry (even if it is not their area of expertise).

Directors are allowed to make business judgments and take commercial risks, but not on the basis that ignorance and a failure to inquire are protection against liability for negligence.

Directors cannot ignore corporate misconduct and then claim they did not see the misconduct and did not have a duty to look

Sheahan v Verco {page 382}

Directors are required to take reasonable steps to place themselves in a position to guide and monitor management of a company.

In this case, smaller minimum standards were applied to non-executive directors of a smaller company.

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Gold Ribbon v Sheers {page 383}

A non-executive director with special skills/experience in the company’s business has a duty to give benefits of that skill/experience to the company.

They cannot avoid liability for negligence simply by asserting that they relied on the company’s executive directors & officers.

South Australia v Clark {page 386}

Executive directors may breach their standard of care if they do not ensure that the company has appropriate management systems in place & the systems are not functioning properly.

ASIC v Adler {page 388/page 391}

Executive directors may breach their duty of care by causing the company to enter into transactions that exposes it to risks without producing any beneficial prospects.

Vines v ASIC {page 386}

Executive directors may breach their duty of care if they fail to enquire and obtain information in circumstances where a reasonable executive director occupying a similar position would have done so.

In relation to contravening s 180(1)

ASIC v Plymin {page 410/page 412}

Section 588G(2) requires proof that a director failed to prevent the company from incurring the debt.

“Failing to prevent” covers inactivity or failure to attempt to prevent the company from incurring debt.

Section 588G(2)(a) requires proof that the director is aware that there are reasonable grounds for suspecting the company’s insolvency. It is sufficient if the director was aware of facts which would cause a reasonably competent non-executive director to suspect that the company was insolvent at the time it incurred a debt.

A director who has delegated the monitoring of the company’s financial position to another person upon whom the director relies may have a defence under s 588H(3), but not in this case.

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Tourprint International Pty Ltd v Bott {page 411}

A director does not establish the s 588H(2) defence by showing that they were completely unaware of the company’s financial position.

Contravening of s 588G(1) for not informing himself about the company’s true financial position either before becoming a director or while being a director.

Under s 588H(2), it is a defence if the director proves that, at the time when the debt was incurred, the director had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt & any other debts at the time.

Deputy Commissioner of Taxation v Clark {page 413}

Directors who are absent from management because of illness or some other good reason at the time when company incurs debt in question may have a defence [s 588H(4)]

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LECTURE 7 (Company’s relations with outsiders)

Significant cases

Royal British Bank v Turquand {page 115}

The rule in Turquand’s case allows persons dealing with a company to assume that its internal proceedings were properly carried out.

Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd {page 128}

The customary authority of a company secretary is limited to matters of an administrative nature (ex employing staff & ordering cars)

Northside Developments Pty Ltd v Registrar-General {page 128/129} The rule in Turquand’s case does 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

Customary powers of a secretary do not include authority to mortgage company’s land Common law rule could not be relied upon where outsiders actually knew of

irregularity, or circumstances were such that they were put on inquiry (related to s 129 assumptions)

Customary powers of a director do not include making contracts for company

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd {page 118} A representation by a company that the agent had authority to contract on its behalf

must be made by a person(s) who had “actual” authority to manage company’s business either generally or in respect of those matters to which the contract relates.

For apparent authority to arise, the principal must represent/hold out to the outsider that the agent had authority to contract for the principal.

Richard Brady Franks Ltd v Price {page 123} A person may assume that a company’s officers and agents properly perform their

duties. Common law rule – A company cannot avoid a contract entered into on its behalf by an

officer who has breached his/her fiduciary duty where the outsider acts in good faith without noticing breach of duty.

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Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd {page 125} The s 129(5) & (6) assumptions may apply even if the officer who signs or witnesses a

document does not occupy the designated position.

Tesco Supermarkets Ltd v Nattrass {page 105} Senior managers may be the directing mind and will of the company. The board of directors may delegate some part of management, giving to their delegate

full discretion to act independently of instructions from them. Criticised for narrow approach in imposing criminal liability on companies.

Brambles Holding Ltd v Carey {page 107} Occasionally, more than one person may be regarded as a company’s directing mind &

will. In some situations, separate pieces of information known by several people can be

aggregated and attributed to their company.

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LECTURE 8 (Shareholders’ remedies)

Significant cases

Charlton v Baber {page 524} The court decided that leave (permission) could be granted to bring legal proceedings in

the name of a company in liquidation.

Scottish Co-operative Wholesale Soc Ltd v Meyer {page 515} Diverting corporate opportunities from the company may amount to oppressive or

unfair conduct

Sanford v Sanford Courier Service Pty Ltd {page 516} Paying very high director’s salaries and low dividends to shareholders may be oppressive

or unfair conduct.

Shamsallah Holdings Pty Ltd v CBD Refrigeration & Airconditioning Services Pty Ltd {page 516} Directors’ failure to review dividend policy in light of company’s changing and improving

circumstances is oppressive, especially when directors are increasing their own remuneration at the same time.

Morgan v 45 Flers Avenue Pty Ltd {page 516} The mere fact that dividends were not as high as they could have been is not necessarily

an indication of unfairness. A decision by directors to pay themselves large bonuses and fees is not oppressive or

unfair if company’s profitability had increased significantly because of their efforts.

Dosike Pty Ltd v Johnson {page 516} There was no oppressive or unfair conduct if the company only paid salaries to directors

who worked in a business and not to a director who did not.

Re Spargos Mining NL {page 517} It may be oppressive or unfair if directors breach their fiduciary duties and do not

permit the company to take action against them.

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Jenkins v Enterprise Gold Mines NL {page 518} There was oppression or unfairness where the directors pursued to further their own

interests or others’ interests to the company’s detriment (or minority shareholders’ detriment).

Hannes v MJH Pty Ltd {page 518} Directors who have breached their duty & are also majority shareholders may act

oppressively or unfairly if, as shareholders, they vote to ratify their breaches. Ratification can only be made by disinterested shareholders.

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd {page 516} In family companies, it may be oppressive or unfair to exclude a family member from

the company’s management.

Ebrahimi v Westborne Galleries Ltd {page 529} It is just & equitable to wind up a company that is a “quasi-partnership” if there has

been a breakdown in mutual trust and confidence existing among shareholders. One “partner” attempted to “freeze out” the other from management of company’s

business. The minority shareholder was excluded from management of company affairs and lost

the right to share profits, leading to the winding up.

Re Yenidje Tobacco Co Ltd {page 530} The just and equitable ground is established where shareholders are “deadlocked” to

the extent that the company is unable to function properly. The company is wound up on just & equitable ground due to the continuing and

irresolvable deadlock.

Re Tivoli Freeholds Ltd {page 531} A company may be wound up on just & equitable ground where it ceases to carry on

business for which it was formed.

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LECTURE 9 (Share capital & dividends)

Significant cases

Salomon v Salomon & Co {page 27} Non-cash consideration must be consideration recognized by contract law. Partners or sole trader may sell their property to a newly formed company that they

control and in return it allots them shares.

Greenhalgh v Arderne Cinemas Ltd {page 181} Company subdivided all existing 10-shilling shares into 2-shilling shares, ranking equally

with subdivided shares held by Greenhalgh. The effect was to diminish Greenhalgh’s proportion of votes and it meant that he does not have sufficient shares to block passing of special resolutions.

Greenhalgh argued that the voting rights attached to his shares were varied without the shareholders’ consent as required by the articles.

It was held that voting rights were not varied even though they were affected in a business sense (in other words, increasing the number of shares in another class is not a variation of class rights).

White v Bristol Airplane Co {page 182} A bonus issue to ordinary shareholders was held not to “affect, modify, vary, deal with

or abrogate” the rights of existing preference shareholders. Even though the bonus issue dilutes % of votes of preference shareholders at meetings,

it does not affect their strict legal rights, which is the right to have 1 vote per preference share.

Trevor v Whitworth {page 183} A company is generally prohibited from reducing its issued share capital because this

may prejudice creditors’ rights. [The law does not expect capital to be returned to shareholders ahead of creditors]

The share capital reduction would diminish available funds of company to pay its creditors.

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Examples of financial assistance: Company lends money to a person for acquiring company shares Company guaranteeing a person’s loan where it is used to acquire company shares Company providing its own assets as security for a person’s loan where proceeds of loan

are used to acquire company shares

Cases illustrating financial assistance: ASIC v Adler Hunters Products Group Ltd v Kindley Products Pty Ltd Independent Steels Pty Ltd v Ryan Darvall v North Sydney Brick & Tile Co Ltd ZBB (Aust) Ltd v Allen

Sanford v Sanford Courier Services Pty Ltd {page 516} Under s 232, failure to pay dividends to shareholders may be oppressive or unfair

conduct. A distribution of significant profits was made to majority shareholders while the

minority shareholder was excluded after he no longer remained as director.

Australasian Oil Exploration Ltd v Lachberg {page 228} It is improper to declare a dividend from the sale of its most valuable asset. A company has no capital profits available for dividend purposes, unless there has been

an accretion to the paid up capital. If a company wishes to pay a dividend from realised increases to its fixed assets, it has to

revalue all its fixed assets. If there is a surplus over paid up capital after revaluation, it may be included in profits and distributed by dividends.

Hilton International Ltd v Hilton {page 231} A dividend should not be paid if the company is insolvent, or the payment results in the

company becoming insolvent. Payment of a dividend by an insolvent company may constitute a breach of duty by

directors, in which they may be held personally liable to repay the dividend amount to the company.

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LECTURE 11 (Corporate insolvency)

Significant cases

Re Pacific Hardware Brokers (Qld) Pty Ltd {page 734/741} The sole director of an insolvent company used company funds to purchase an

engagement ring for his fiancée. The use of company funds in these circumstances amounted to an un-commercial

transaction under s 588FB and the director has to pay the ring’s purchase price to the company under s 588FF(1)(a).

The Court will not make orders that prejudice non-parties to a transaction.

Ziade Investments Pty Ltd v Welcome Homes Real Estate Pty Ltd {page 736} A company does not have to be insolvent for an unreasonable director-related

transaction to be voidable.

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