CHAPTER 19
Key Learning Areas
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Companies: Members,
Management and
Dissolution
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When you have studied this chapter, you should be able to:
outline the requirements placed on some companies to produce financial
reports and hold meetings as specified by the Corporations Act;
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explain the rights available to company members; in particular the right
to take action in regard to a breach of their rights or any wrongs done to
the company;
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demonstrate who is actually an officer and/or director of a company;
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explain the duties and consequent liabilities of officers/directors;
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explain the methods by which a takeover of a company may take place;
and
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outline how a company might come to an end, either by agreement of
the members or due to insolvency.
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Setting the Scene
James and Jerry run a small bakery that is owned by a family proprietary company in
which they, their wives and some other family members are shareholders. James and Jerry
are the directors of the company as well as the employees who do the baking and also
manage the incorporated business.
The business has been struggling in the last year. It seems that there has to be some
decision as to whether it needs an injection of capital to revamp its machinery and
infrastructure, or to perhaps find a buyer for the business. To add to the problems of James
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and Jerry, Jerry’s marriage is breaking up, and his soon-to-be-ex-wife (a shareholder) is
demanding that the company prepare financial reports and hold a shareholder meeting to
discuss the value of the company.
James and Jerry visit their accountant, who also doubles as a company secretary for a
number of local companies, and she advises the brothers that they need to make some
decisions fairly soon because the bakery has an overdrawn bank account. Prospectively the
business may not be able to pay suppliers to the business, which may lead to personal
liability for such debts on the brothers themselves.
The alarmed brothers leave the accountant’s office and head back to James’ house, where,
armed with a drink, they access the ASIC website to check on possible directors’ duties for
insolvent trading, and other duties in regard to holding meetings and preparing financial
reports when requested by individual members. They discover that members indeed have
many rights, and they as directors have specific duties in relation to member requests.
The brothers determine to call a meeting of members to discuss the various options open
to the family; it immediately appears that they either go into voluntary administration or
alternatively consider an offer by a bakery chain to buy out the business.
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Chapter 19 : Companies: Members, Management and Dissolution
Introduction
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This chapter considers in particular the role of members of a company, and their rights
to participate within company affairs and access information about the company. The
Corporations Act 2001 (Cth) gives both specific and general rights to members, and
specific powers to take action if their rights have been contravened, or even to undertake
litigation on behalf of the company in certain instances. The chapter also outlines the
definition of officer and director of a company, and the duties that are attached to this
role; in particular, the duty to prevent insolvent trading. Directors have particular
duties in certain circumstances, including to hold meetings and to prepare financial
reports for the members.
This chapter also describes how a company may change through a takeover by new
potential shareholders or even come to an end voluntarily or because of insolvency.
Shareholders (also known as members) of a company are the owners of that company,
and the relationship between them is prescribed by both legislation and the company
constitution. The position of shareholders in public companies is more flexible than
those in proprietary companies — the shares in a public company can be freely
transferred, and if the shares are listed on the Australian Securities Exchange (ASX)
there is a ready market for them. A shareholder in a proprietary company could be
trapped if the company chooses to restrict the transfer of its shares.
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Shareholders and the company
Requirement to prepare financial reports
Financial reports are a means by which shareholders can gauge how well a company is
doing. Similarly, financial reports provide a means by which creditors can assess the
profitability and stability of a company. Potential investors also find financial reports
useful.
A company is required to keep written financial records that:
• correctly record and explain its transactions and financial position and performance;
and
• would enable true and fair financial statements to be prepared: s 286(1).
A company must keep its financial records in the proper accounting form of ledgers,
and not just a collection of butts and receipts: Daniels v Anderson (formerly trading as
Deloitte Haskins & Sells) (1995) 37 NSWLR 438; 16 ACSR 607. Proper record keeping
means that financial reports can be prepared if required. A small proprietary company
does not have to prepare or lodge financial reports with the Australian Securities and
Investments Commission (ASIC) each year (s 292(2)), unless specifically ordered to
do so by ASIC (s 294)), or if the members demand them: s 293. Large proprietary
companies and public companies must lodge their financial reports each year: s 292.
The Corporations Act requires that the financial reports of a company are prepared
properly according to particular requirements so that they reflect its business. The
accounting requirements are found in Ch 2M. The Australian Accounting Standards
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CASE EXAMPLE
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Board (AASB) has the role of developing accounting standards. The ASX also
stipulates rules that must be complied with by listed companies. All the regulations and
rules are designed to make the financial reports as true and fair as possible.
The basic accounting requirements are as follows:
• A company must keep financial records to correctly record all its transactions in the
prescribed form: ss 334–339. These financial records must be in English and
retained for seven years: s 287.
• The directors of a company have a number of duties in relation to financial records;
they have a duty to prepare financial reports that comply with prescribed reporting
standards: s 344(1). The directors must ensure that a profit and loss statement,
balance sheet and cash flow statement are prepared annually (s 295); the financial
records must be in the required format and contain particular information, as per
the accounting regulations. The directors must present the financial reports to the
annual general meeting (s 317); they have a duty to state that the financial reports are
true and fair and comment on the company’s business: s 295(4). Directors must
also comment on the financial reports of the company: ss 298–300. The financial
reports must contain a solvency statement by directors (s 347A) and inform ASIC
if this declaration is negative: s 347B. Directors can be charged for failing to
maintain financial records: Australian Securities Commission v Fairlie (1993) 11
ACLC 669.
• An auditor must be appointed, unless the company is a small proprietary company.
The auditor, who must be an independent person and registered as an auditor, must
comment on the financial reports and their reliability: s 307. Negligence on the part
of the auditor in this regard can lead to litigation.
• Members of a company are entitled to receive a copy of the financial reports
(ss 315–316), though this can now be in a concise form: s 314. Members can also
seek a court order to inspect the company’s financial records where the request is
made in good faith (ss 247A–247B), even where the member is seeking evidence
for a claim of oppression: Cescastle Pty Ltd v Renak Holdings Ltd (1991) 9 ACLC
1333; 6 ACSR 115; see also [19.7]ff.
Australian Securities and Investments Commission v Healey (2011) 196 FCR 291; 278 ALR 618; [2011]
FCA 717 (the Centro case)
FACTS
ASIC brought a case against the directors of a company on the grounds of breaching
their duty of diligence and care when approving the company consolidated financial
reports in 2007. The directors had not adequately checked the status of the
company’s liabilities in the form of borrowings and guarantees. In fact the company
owed some $1.5 billion in current liabilities and $1.75 billion in guarantees, which were
inappropriately reported in the annual financial reports.
ISSUE
Had the directors complied with their duty of diligence and care by delegating
the role of preparing the company’s annual financial reports to their accounting
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staff and the chief executive officer, and relying on a favourable audit from a large
accounting firm?
DECISION The Court found the directors had a duty to ensure they had read, understood and
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focused on the contents of the financial reports before signing off. As directors they
had a duty to understand and monitor the company’s finances; they could not just
rely on their auditors to pick up any errors.
Company meetings
Meetings are the vehicle by which members are able to transact company business and
hold the company controllers to account. Only a public company must hold an annual
general meeting (AGM); this meeting must be held within 18 months of registration:
s 250N. A public company must hold an AGM each calendar year and within five
months of the financial year ending; the meeting must comply with the procedures and
requirements of the company’s constitution (if it has one). At the AGM there is usually
an election of directors, declaration of dividends, tabling of financial reports, and
discussion of ordinary business, where the shareholders can ask questions. A proprietary
company with one member does not need to hold an AGM (s 250N(4)); it can make
any resolution by recording and signing it: s 249B. A proprietary company with more
than one member can also dispense with the need for holding an AGM, by circulating
resolutions in writing and getting members to sign: s 249A. Circulating resolutions
cannot be used for special resolutions, or where such a resolution would not be allowed;
for example, to remove an auditor: s 329.
A general meeting other than the AGM is referred to as an extraordinary general
meeting. Under the Corporations Act, some matters must be decided by a meeting; for
example, a change of status (ss 162–163) or removal of directors: s 203D.
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Notice and meeting procedure
A meeting will consider various resolutions put to it; these can be ordinary or special
resolutions. An ordinary resolution requires only a simple majority of members to
approve it, while a special resolution requires 75 per cent member approval: s 9.
Whether a matter requires an ordinary or special resolution is determined by the
Corporations Act and the company’s constitution. Any notice of a meeting must set
out the place, date and time of the meeting; it must also state the general nature of the
meeting’s business and any special resolution that is to be put: s 249L. Shareholders
must receive sufficient notice of any meeting, whether a general meeting or some other
type. Notice must be in writing and delivered to each member entitled to vote, though
this can be done electronically: s 249J. Under s 249H all resolutions, whether special or
ordinary, require 21 days’ notice be given to shareholders, though listed companies
must give 28 days’ notice: s 249HA. If a company has a constitution, the period of
notice may be longer.
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In circumstances where shareholders regard it as necessary to hold a meeting outside
the usual times, the Corporations Act allows them to convene one. A meeting may be
called by a member holding 5 per cent of the votes that can be cast, or by 100 members
entitled to vote at the meeting: s 249D. Directors will be penalised if they do not then
call a requested meeting: s 249E. A court also has the power to call a meeting: s 249G.
In the case of National Roads and Motorists’ Association Ltd v Snodgrass [2002] 42
ACSR 371; [2002] NSWSC 590, 100 members were able to call a meeting, at a cost
of $2.6 million. In 2006, the government of the time proposed to remove the
‘100 member rule’, but never enacted the draft legislation.
Minutes of meetings must be recorded, and must include all relevant information
and decisions from voting (s 251A); they must be entered within one month of a
meeting being held, and members have the right to inspect them: s 251B.
Members can demand a poll (formal vote) instead of a show of hands: s 250L.
Unless the constitution provides otherwise, voting takes place by a show of hands.
Proxies are able to be appointed in a public company as a mandatory rule, though in a
proprietary company the right to appoint a proxy is a replaceable rule: a company
constitution may displace it and require voting in person.
Shareholders who own the majority of shares have the ability to elect directors and
ultimately to control the company. Majority shareholders can nominate themselves as
directors, or control company affairs to suit their own interests. Smaller shareholders
may then end up with no influence over the affairs of the company, and subject to the
wishes of majority shareholders. Courts do recognise that a majority should rule and
that unpopular decisions do not always amount to oppression: Re G Jeffery (Mens Store)
Pty Ltd (1984) 9 ACLR 193; 2 ACLC 421.
The domination of a company’s affairs by majority shareholders, who use their
power to further their own interests at the expense of the company, is referred to by
various names, such as abuse of power, oppression or fraud on the minority. While the
majority will govern the company, since they can appoint the management, the
dominant members should still act in the interests of all shareholders, including
minority members.
CASE EXAMPLE
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Protection of smaller shareholders
Cook v Deeks [1916] 1 AC 554
FACTS
Two majority shareholders, in their capacity as directors, organised a contract for the
company in which they were directors. Realising the potential profits to be made, they
formed another company and transferred the valuable contract into that company.
The directors then used their majority voting power to approve the scheme.
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Were the directors breaching their fiduciary duty to the company by using their
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ISSUE
DECISION Yes: the Court found that the directors had misused their majority position for their
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own personal gain.
Protection under the Corporations Act
In s 232 of the Corporations Act, there is a provision that allows a court to make an
oppression order under s 233 if:
• 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 proposed resolution, of members or a class of members of a company
is either:
• 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 acting as members or in another capacity.
A member under s 232 also includes a person who has received shares under a will
or to whom shares have been transferred by the operation of law.
Basically the oppression remedy can be used where a member (as defined in s 231)
believes the company’s affairs are conducted oppressively, unfairly, prejudicially or in a
discriminatory manner — the conduct in question could be something that has already
been done, or something proposed. Section 234 sets out who can apply for an order
from a court: this list includes members removed from the register, for example, because
of a reduction in capital). Section 234 also allows a non-member to seek an order if
ASIC believes that person to be an appropriate applicant who has been subject to
oppression.
A court can make a number of orders under s 233(1); these include:
• that the company be wound up;
• that the company’s existing constitution be modified or repealed;
• that the company act in certain (regulated) ways in the future;
• that shares be purchased from a member or by the company;
• that shares be purchased and the capital of the company reduced;
• that the company start or cease legal proceedings;
• the appointment of a receiver;
• restraining a person from some conduct or activity; and
• requiring a person to carry out something.
More drastically, under s 233(3) a court can order the company be dissolved under
s 461 — the general winding-up section. Section 461(e), (f ) and (g) set out the grounds
on which a company may be wound up; generally these include directors’ activities that
are unjust or unfair, or where activities are carried out only in the management’s
personal interests rather than for the members as a whole.
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In recent times, there seems to be a move by the courts to support minority actions
for oppression, particularly where they involve changing the company constitution to
the detriment of some shareholders: Gambotto v WCP Ltd (1995) 182 CLR 432; 127
ALR 417; 16 ACSR 1. Some acts of oppression may be very obviously discriminatory
or unfair, but sometimes a company when attempting to act in the best interests of all
may act unfairly against one group: Residues Treatment & Trading Co Ltd v Southern
Resources Ltd (1988) 14 ACLR 375; 6 ACLC 913.
Other protection under the Corporations Act
There are other provisions in the Corporations Act that allow shareholders to enforce
their rights. Under s 1324, a person can apply to the court for an injunction to prevent
another from carrying out a contravention of the Corporations Act. The court has
the power to make orders where appropriate. Under ss 246B–246E, a shareholder whose
rights are to be affected by a change in the constitution can apply to the court and
have the change set aside if it will unfairly prejudice a class of shareholders. Members
have the right to call a meeting (s 249D), to inspect the company records (s 247A) and
to claim damages for misleading conduct regarding a disclosing document: ss 995, 1005.
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Statutory derivative action
Where a company, its directors or the management are acting improperly — either
oppressively, illegally or in a manner contrary to the interests of the company — a member
or officer can take action on behalf of the company. Normally a person can only take
action on their own behalf; that is, for something that has affected their personal rights.
Historically a company was the only body that could commence legal action on behalf of
the company; for example, against a fraudulent director. The Corporations Act now
allows for a statutory derivative action — a legal action taken on behalf of the company
by a person against a wrongdoer. The power to bring a legal action is derived from statute
(the Corporations Act), so that an interested party can commence a legal action where a
company is refusing to do so. The statutory derivative action rule of s 236 abolishes any
general law right to commence action on behalf of the company; this means there is no
right under the old exceptions to the rule of Foss v Harbottle (1843) 2 Hare 461; 67 ER
189 to commence a legal action.
Section 236 states that a company member, former member, officer or former
officer, or even another person authorised by a court can commence legal proceedings,
or intervene in current proceedings, on behalf of a company. Before commencing
proceedings, the persons outlined in s 236 must be given leave by the court and the
court must be satisfied that the person has demonstrated under s 237(2) that:
• the company is unlikely to bring the proceedings;
• the applicant is acting in good faith;
• it is in the best interests of the company that the applicant be granted leave; and
• there is a serious question to be tried.
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Directors and officers
The Corporations Act provides that a public company must have at least three directors,
two of whom are resident in Australia (s 201A(2)); a proprietary company must have
at least one director, one of whom is a resident: s 201A.
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Section 237 is like a filtering mechanism that prevents frivolous and wasteful legal
actions. Under s 237(3), a court will not grant permission where the proposed action is
against a third party and where the company has considered legal action, but has
decided in good faith that it is not in the interest of the company to commence
proceedings.
If permission is given to a person to bring a statutory derivative action, the court
can make any directions it wishes under s 241, and can make any order it wishes as to
costs under s 242; for example, to make the company pay all the legal costs of the
action.
The role of directors and officers
As a general principle, directors provide the ultimate management and control of a
company. They are more than mere employees; they constitute the ‘company’s will and
mind’ by forming company policy and direction. Directors must monitor all aspects of
the company’s functions, including management. The board of directors is ultimately
responsible for the company’s activities and the decisions of its managers. Directors
hold meetings, which they should attend; they may also be members of company
committees, which are established in larger companies to advise the company on
matters such as auditing, payment of directors, finance, recruitment of directors and
even matters such as health and safety. Meetings held by directors are regulated by law;
they must have a quorum, entail adequate notice of meeting times and places, and keep
records (minutes) of what is decided.
Directors are part of the wider group known as officers of the company. An officer
is defined in s 9 to include directors, the company secretary, executive officers and some
employees and some receivers. An officer is defined as a person who makes or
participates in important decisions to do with the company’s business and its financial
standing: Commissioner for Corporate Affairs (Vic) v Bracht [1989] VR 821; (1988) 14
ACLR 728. Officers may be designated by the title of their appointment and the terms
of their employment: R v Scott (1990) 8 ACLC 752; 2 ACSR 470; 20 NSWLR 72.
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Definition of ‘director’
19.11
The Corporations Act defines a director of a corporate body as any person who is
appointed as a director — regardless of the name given to their position. It further
defines a director as one who acts in the position of director: s 9. The term includes a
person who is not named or properly appointed as a director but assumes the powers
of a director and gives directions like a director (a de facto or shadow director). The
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Appointment of a director
A director must be a natural person, at least 18 and less than 72 years of age: s 201B.
A director over the age of 72 can be reappointed, but only on a year-by-year basis, with
the approval of a meeting of shareholders. This section does not apply to proprietary
companies.
Directors must be appointed according to the provisions in a company’s constitution,
which normally require election by the company at the AGM: s 201G. Where a general
meeting elects directors for a public company, then specific procedures need to be
followed: s 201E. The first directors are selected by the persons wishing to form a
company, and are named in the company’s application for registration: s 120(1). Under
the replaceable rules, a company can appoint a director (s 201G) and directors can
appoint other directors (s 201H), though this can be modified by the operation of the
company constitution.
A director of a one-person company can be appointed merely by the recording of
their appointment and a signing: s 201E.
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definition is designed to catch persons who control and direct a company but hide
behind a lack of official appointment. A person may still be considered to be a director
even where they have resigned but are still employed by the company: Deputy
Commissioner of Taxation v Austin (1998) 16 ACLC 1555.
The definition of ‘director’ is crucial since there are special duties placed on directors;
breach of these duties carries civil and criminal penalties: see [19.27]ff. The section
does not include as a director a person who merely gives advice to the directors on a
professional basis or through a business relationship, even though the directors may act
on it: s 9.
Qualifications of directors
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Although the role of a company director can be demanding, there are no formal
educational, training or experience qualifications required. The constitution of a
company may require qualifications of directors in that they must hold a specific
number of shares — this is known as the share qualification. The company constitution
may impose particular qualifications; for example that a director should belong to a
particular professional organisation.
Disqualification of a director
19.14
The constitution of a company may contain provisions governing the disqualification
of a director. A director may be disqualified for being absent from the company, for
mental illness or because a conflict of interest has arisen between the director’s personal
interests and those of the company.
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There are a number of statutory provisions prescribing when a director may be
prevented from taking office, or if a person is already a director, from continuing to
hold that office, as follows:
• Automatic disqualification:
– where a person is convicted of an offence that relates significantly to the business
or financial standing of the company: s 206B(1)(a);
– where a person has contravened the Corporations Act with a punishment of
12 months’ imprisonment or committed an offence relating to dishonesty with
imprisonment of three months: s 206B(1)(b); or
– where a person is an undischarged bankrupt: s 206B(3).
• Disqualification by court order:
– where a person has been declared by a court to have contravened a civil penalty
order (s 1317) — on application by ASIC: s 206C;
– where a person has been an officer of two or more failed companies and
responsible for their failure — on application by ASIC: s 206D;
– where an officer has twice contravened the Corporations Act — on application
by ASIC: s 206E(1).
• Disqualification by ASIC:
– ASIC can itself disqualify a person from managing a corporation for up to five
years after having given the person a ‘show cause’ notice, which requires them to
show why they should not be disqualified: s 206F. ASIC can serve such a notice
where a person has been an officer of two or more companies wound up for
insolvency and liquidators have lodged reports under s 533.
In a landmark case, Australian Securities and Investments Commission v Somerville
(No 1) (2009) 77 NSWLR 110; 259 ALR 574; [2009] NSWSC 934, six directors were
banned because of phoenix activity; that is, deliberately moving assets from insolvent
companies into newly registered companies in order to escape the claims of creditors,
which included claims of the Australian Tax Office, work claims and outstanding
superannuation (a breach of good faith: s 181(1)). Most significantly in the case, the
solicitor who advised each of the directors and organised the company registrations was
also banned, and fined under s 79(a) as aiding and abetting a breach of director’s duties.
This was the first time an outsider was prosecuted for phoenix activity. In another case,
concerning the directors of James Hardie Industries, ten officers were banned for up to
15 years, with fines ranging from $30,000 to $350,000 each, while the company itself
paid $80,000 in penalties (see Australian Securities and Investments Commission
v Macdonald (No 11) (2009) 256 ALR 199; 71 ACSR 368; [2009] NSWSC 287).
Types of directors
19.15
Different directors may have different titles and different roles in a company. While
there are accepted commercial roles, the true assessment of a director’s role is obtained
by examining the relevant company’s constitution. Types of director include the
following:
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• Chairman of directors: a director who controls the meetings, usually elected by the
other directors.
• Managing director (also referred to as the chief executive officer): an executive
director (s 201J) who is appointed either by the company or the directors themselves;
managing directors normally have wide powers: s 198C.
• Executive director: a director who is a salaried employee, who has rights and duties
as an employee (a non-executive director is governed only by the constitution).
Executive directors may each oversee a particular portfolio, such as production or
personnel.
• Non-executive director: a director who does not participate in the day-to-day
running of the company, but may bring to the board of directors prestige, experience
and a different perspective.
• Governing director: an executive director who commonly owns a majority of
shares in a company and has wide powers from the articles to control the company
directly. This type of director is often the founder of a family business and a
proprietary company.
• Nominee director: a director who represents a company’s interests on the board,
where that company is a shareholder.
• Alternate director: a person appointed to act as a substitute and represent another
on the board, if permitted by the constitution: s 201K.
• Associate director: a director appointed by other directors to gain experience.
Loss of office
A company is restricted in its ability to provide payments or benefits to retiring directors
under ss 200A and 200B. Any benefits given must be approved of by a shareholders’
meeting, unless they fall within the exempt benefits set out in s 200B, which are normal
legal benefits under contract or superannuation law.
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Removal of directors
A director of a public company can be removed under s 203D by a general resolution
of a shareholders’ meeting, despite anything stated in the constitution or agreement
between the company and the director. Special notice of two months is required of
the meeting before the resolution is put (s 203D(2)) and the director has the right to
address the meeting: s 203D(4)–(6). Certain notices must be given to the director
under s 203D; there may be contractual rights applicable on removal that could result
in an action for damages by the director. If a director represents a certain class of
shareholder or creditor then another director may have to be elected to replace them.
The directors of a public company cannot remove a director themselves: s 203E.
Directors of a proprietary company can be removed by resolution under the
replaceable rule of s 203C, but not if this is contrary to the company constitution.
Where the company constitution prescribes a procedure, this must be followed:
s 140(1).
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Payment of directors
Directors occupy a fiduciary position and therefore have no right to payment for their
role as directors. Directors will only receive remuneration that the company determines
by resolution: s 202A. Members holding 5 per cent of votes, or 100 members, can
compel the company to disclose information on directors’ remuneration: s 202B(1).
Under the AASB rules, payments to directors must be disclosed in the annual financial
reports of a company (s 296(1)) — this does not apply to small proprietary companies.
Remuneration reports must disclose all employee benefits, such as wages, bonuses,
retirement benefits, leave allowance, share schemes and termination payments. Listed
companies are required by legislation, and ASX Rules, to make very detailed disclosures
of directors’ remuneration.
19.19
Directors, and other executives, often receive significant payments and benefits at the
end of their period of service (‘even where it occurs involuntarily’); this can be contentious
because benefits are not always linked to performance. Under ss 200–200J, retirement
gratuities and benefits over and above what is required by law must be approved by
shareholders. The recent Corporations Amendment (Improving Accountability on
Termination Payments) Act 2009 (Cth) has widened the previously required shareholder
approval where the benefit is more than one year’s salary, different monetary thresholds
requiring consent according to executive length of service. Executives and directors,
while subject to shareholder approval regarding termination benefits, are of course
entitled to normal employee, contractual and superannuation benefits.
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Directors’ benefits
Directors in proprietary companies can take loans from the company. In public
companies, loans are permitted, but they are regulated: s 208(1). Basically a company
cannot give a benefit to a ‘related’ party unless it falls within the exceptions of
ss 210–216, or is approved by members: ss 217–227. Related parties include the
company directors, relatives of directors and companies associated with the directors.
The types of benefits that can be made are divided into two categories. The first
includes specific benefits, which are essentially part of the payment and perks of the
director’s job (ss 210–216). These include benefits of a reasonable remuneration (s 211)
and small amounts given to directors and their spouses (s 213(1)) — these benefits
must be at arm’s length. The second category includes benefits approved by shareholders,
who must be given an explanatory statement also lodged with ASIC, and regarding
which no recipient has voted: ss 217–219.
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Powers of directors
19.21
Directors are empowered by law to manage the business of the company, unless
restricted by the constitution: s 198A. Power is collectively exercised by the board of a
company, unless the constitution of the company states that the power can be delegated
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to a particular director; for example, the managing director. The company’s constitution
and the Corporations Act will determine the powers available to directors, along with
any special duties placed on them.
A general meeting of shareholders cannot overrule the directors unless the
constitution allows for it: National Roads and Motorists’ Association v Parker (1986)
6 NSWLR 517; 11 ACLR 1. Once appointed, extensive powers are vested in the board
of directors by the constitution. In Automatic Self-Cleansing Filter Syndicate Co Ltd
v Cunninghame [1906] 2 Ch 34, it was held that directors could prevent the sale of
company assets, despite the members having voted otherwise. Once the constitution
has given power to the board of directors for management, then a general meeting
cannot interfere with the exercise of that power. The only remedy available to
disgruntled shareholders is to remove the directors by a resolution, unless there has
been a breach of law or of the company constitution, or oppression.
Duties of officers and employees
Some duties applied to different parties in the company
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Duties prescribed
Parties who may be liable
Duty to prevent a company trading while Directors only
insolvent: s 588G
Directors only
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Duties of disclosure: s 191
Duty of diligence and care: s 180(1)
Directors and officers
Duty of good faith: s 181
Directors and officers
Duties in relation to financial reports: ss 295, Directors
298–300, 317
Auditors (as officers) in some instances
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Duty to maintain a registered office, send in Company secretary (an officer) or directors if no
return of particulars
secretary
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Duties prescribed
Parties who may be liable
Duty not to misuse position: s 182
Directors, officers and employees
Duty not to misuse information: s 183
Directors, officers and employees
Common law duties, such as fiduciary duties
Directors, officers and employees
Directors are both officers and employees of a company. The Corporations Act imposes
some specific duties on directors; for example, the duty not to allow a company to trade
while insolvent: s 588G. However, there are general duties that apply to directors,
officers and employees. Directors are defined as officers, since s 179 refers to ‘officer’ as
including directors, secretaries and some other people who manage the corporation,
such as receivers and liquidators. An officer is defined in s 9 as someone who makes
important decisions within the business and who participates and generally gives
advice (that is acted on) to directors — irrespective of what title that employee might
have. The duties imposed on directors are derived from both common law (general
law) and statute. There are both criminal and civil implications for directors and
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officers, which means these parties can be prosecuted for a breach of duty, or be sued
by a person who has suffered a loss as a result of that breach.
Directors are in a special position, as they are given many powers in relation to the
company. Under these powers a director has access to information and property, which
must be administered in the best interests of the company. Directors are therefore in a
position of trust and have a fiduciary duty towards the company. Directors must always
act in the best interests of the company as a whole, and must perform their duties
properly in consideration of current and future members: Darvall v North Sydney Brick
& Tile Co Ltd (1987) 12 ACLR 537.
Statutory and common law duties overlap and complement each other. For example,
a director who improperly uses his or her position will have contravened ss 180–184 of
the Corporations Act, and will also have contravened a common law duty. Breach of
duty may result in an officer’s removal from office. Contravention might also result in
a criminal prosecution or civil action by the company, ASIC, shareholders or any other
person who has suffered damage.
Statutory duties of directors and officers
Throughout the Corporations Act there are various duties imposed on directors. Some
are direct, such as the duty to call a meeting when requested by members: s 249D. Others
are implied by the Act imposing a penalty; for instance s 588G imposes personal liability
on directors for incurring a debt that cannot be repaid. Under s 191(1), directors have a
duty to disclose any material personal interests they have with the company. If an officer
does not disclose an interest, then a contract may become voidable and the particular
officer may be sued for any losses: South Australia v Clarke (1996) 66 SASR 199; 19 ACSR
606. Under s 296(1), directors have a duty to ensure that the financial reports are audited.
The statutory fiduciary duties of a director are laid out in ss 180–183, which impose
duties of trust and honesty on all officers of the company — not only directors, but also
the company secretary, executive officers and, in some instances, employees.
The duties imposed by ss 180–183 are:
• to act with care and diligence according to the size of the company and the
responsibilities expected of that particular officer: This duty applies to directors and
other officers, and carries a civil penalty, which means there are no criminal
implications if the director or officer has acted carelessly: s 180(1). A court will
examine both the skills of a director and the duties to be performed, and make an
objective decision taking into account the size of the company and the time given to
make decisions as to whether a director has acted diligently and carefully: AWA Ltd
v Daniels (t/as Deloitte Haskins & Sells) (1992) 7 ACSR 759; 10 ACLC 933. A
director is under a duty to familiarise himself or herself with what is happening in
the company and to take an active interest;
• to act with good faith, in the interests of the company and for a proper purpose.
This duty applies to both directors and officers. It basically requires officers to act
honestly on behalf of the corporation: s 181(1). Directors and officers who do not
act honestly will be liable for civil and criminal sanctions;
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• not to use a position to improperly gain some advantage or benefit: s 182(1). This
duty applies to directors, other officers and employees. These persons must not gain
an advantage for themselves or for another person, nor act to the detriment of the
corporation; and
• not to improperly use information to give themselves an advantage or to act to the
detriment of the corporation: s 183(1). This applies to directors, other officers and
employees.
Section 184 distinguishes which statutory duties have both civil and criminal
implications (basically ss 181–183). Section 180(1) — concerning care and diligence
— only carries civil penalties.
ex
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Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171
ASIC brought action against Adler, who was a non-executive director of HIH
Insurance and an officer of a HIH subsidiary, HIHC. Adler in his capacity as an
officer in the subsidiary organised a loan from the subsidiary to another associated
company, PEE, which he controlled. PEE used the money to buy shares in HIH and
boost the market price of that share. Loan money was used to buy shares in Adler’s
own company, and further funds were lent indirectly to Adler himself.
ISSUE
Had Adler breached his duty in that he had improperly used his position in the
company for inappropriate purposes?
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FACTS
DECISION The Court found that Adler had breached a number of statutory duties, such as the
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giving of financial assistance. However, more particularly, Adler had breached ss 181
and 182 in that he had acted dishonestly and had misused his position as an officer.
71 ACSR 368; [2009] NSWSC 287
FACTS
James Hardie Industries Ltd held a group of companies against which significant
claims had been made for compensation for asbestosis suffered by former
employees. The company sought to re-register in the Netherlands, but in order to
do so had to convince the authorities that they would provide for all future medical
claims. The company therefore established a foundation that would hold funds
sufficient to meet future claims; the directors, both executive and non-executive,
assured the ASX, the Government and claimants that this arrangement would meet
all future contingencies. In fact, it transpired that the foundation was hopelessly
underfunded and could not meet future claims, and in fact company management
knew, or should have known, that this was the case.
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ISSUE
Had the directors breached their duty of diligence and care under s 180(1)?
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DECISION The New South Wales Supreme Court found that the non-executive directors had
Australian Securities and Investments Commission v Rich (2003) 44 ACSR 341; [2003] NSWSC 85
ASIC brought action against the chairman of One.Tel and alleged a breach of
diligence and care under s 180(1) for not informing the management of the company
of the poor financial health it was in.
ISSUE
Did the director, who had considerable experience, have a duty to inform the
company’s management of the company’s financial state, and was he liable for
breach of that duty?’
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breached their duty under s 180(1), that their assurances were not diligent and
careful and that their statements were false, deceptive and misleading and a breach
of s 1041H(1).
DECISION The Court considered the responsibility and skills of the chairman, concluding that he
Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57; 219 ALR 714;
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ISSUE
ASIC brought action against a non-executive director of Telstra who used
information gained while a board member to buy and sell assets in order to make a
gain personally.
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had sufficient experience and should have properly judged the financial state of the
company and properly informed the board of the company situation.
Had the director improperly used information gained from his position as a director
to benefit himself?
DECISION The Court found the director had breached s 183. It imposed civil penalties and
banned him as a company director.
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Australian Securities and Investments Commission v Vines (2005) 55 ACSR 617; [2005] NSWSC 85
ASIC brought an action against particular officers of GIO Insurance who were
resisting a takeover bid by AMP. Vines was an officer of GIO, and failed to inform
the board of pending company losses due to a hurricane. The board therefore made
untrue statements about the profitability of the company.
ISSUE
Was this officer liable for not revealing new information about potential liabilities to
new investors?
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DECISION The officers had failed to exercise an adequate duty of diligence and care under
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s 180(1), judged by objective standards of each officer’s skills and experience and
expectations of the office held.
The business judgment rule
While directors and officers have a statutory duty to be diligent and careful under
s 180(1), there is a defence that the decision was a proper one under the circumstances,
even though the decision may later turn out to be not so good for the corporation.
Section 180(2) sets out the criteria for a proper business decision. An individual’s duty
of care and diligence under statute, common law and equity is met where he or she:
• makes a judgment in good faith for a proper purpose;
• does not have a material personal interest in the subject matter;
• informs himself or herself about the subject matter of the judgment to the extent he
or she reasonably believes to be appropriate; and
• rationally believes the judgment is in the best interests of the corporation.
A director or officer’s belief that a judgment is in the best interests of the corporation
will be considered rational unless it is unreasonable for a person in that position to hold
that view. Under s 180(3), a business decision means any decision to take or not take
action in respect of any matter relevant to the business operations of the corporation.
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Directors’ reliance on others
Directors must often rely on employees, professional advisers, experts and committees of
directors for advice or information. Where a director believes on reasonable grounds that
those persons are competent and skilled, and generally the reliance was in good faith, this
will be the basis of a defence that the director acted carefully and diligently. Much will
depend on the director’s actions and whether they gave the matter careful consideration
and, further, how complex the matter was and whether the director had to rely on outside
advice: s 189. Similarly, when a director appoints a delegate (someone to act on their
behalf ), the director will not be responsible for that delegate as long as the director had
reasonable grounds to believe he or she would exercise powers properly and in good faith,
and the director had made proper inquiries into the competency of that person: s 190.
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Common law duties
The common law duties relating to a director include duties particular to a director,
such as carrying out the terms of a company’s constitution, and duties of trust, honesty
and disclosure of interests. There is no absolute list of duties that apply, and since the
duty of trust and the duty to act in the best interests of the company are such broad
concepts, it can be said that the duties are numerous. Directors must acquire some
rudimentary knowledge of company affairs, stay informed of company affairs and
business, attend board meetings and monitor corporate affairs, including the financial
status and statements of the company.
The duties owed by a director include the following:
• A duty to act in the best interests of the company: This duty is primarily owed to
the company and not to the individual shareholders: Percival v Wright [1902]
2 Ch 421. Decisions made on behalf of the company must promote the interests of
the company before individual members. Where, however, company membership is
small, such as in a family company, there may be a fiduciary duty to the members:
Coleman v Myers [1977] 2 NZLR 225. This is because in this case the relationship
between the parties will involve a high degree of dependence on the director for
information and advice. Similarly, where there are only two directors and one
director conceals the true value of a company when buying out his or her fellow
director, there may be a breach of fiduciary duty: Glavanics v Brunninghausen (1996)
14 ACLC 345; 10 ACSR 204.
• A duty to retain discretion and not to delegate to others: Directors have a duty to
retain discretion for decision-making; they cannot give away their ability to make a
decision in the best interests of the company. While directors are permitted to
delegate duties to others (s 198D) unless prohibited under the constitution, they
must believe that the delegate is a responsible person, having made reasonable
inquiries into their competency: s 190.
• A duty of trust, so as to act in good faith and honestly: Dishonesty is a wide
concept and involves more than just theft; it applies to conduct that falls short of
promoting the best interests of the company. It would apply, for example, where a
director has acquired assets of a company for less than their market price: Grove v
Flavel (1986) 43 SASR 410; 111 ACLR 161.
• A duty not to make profits from a position as director: Where profits have been
made only because a person is a director — for instance, because he or she has
access to information — those profits must be paid to the company. There is no
breach of duty where directors have fully informed the shareholders or company of
any potential conflict.
• A duty to avoid a conflict of interest: Where a director is involved with a competing
company, or supplies goods or property to the company, there is a potential conflict
of interest. Unless the director can show full disclosure of any interest, or that the
decision leading to the conflict of interest was made on independent advice to the
company, there may be a breach of duty.
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• A duty not to misuse information gained in the position of director: Information
held by a company is a form of property, and its misuse amounts to a breach of duty.
In Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1, a manager
acquired information that he then used in a new company he personally registered.
The Court found that he had misused information gained in a position of trust, and
equated the position of this officer to that of a director.
• A duty to be diligent and careful: Directors must act professionally; they must
acquaint themselves with company affairs and take an active role in supervising the
management of the company: AWA Ltd v Daniels (t/as Deloitte Haskins & Sells) (1992)
7 ACSR 759; 10 ACLC 933. A non-executive director also has a duty of diligence and
care — for instance, to read company financial statements and to understand company
affairs to the extent of reaching a reasonably informed opinion of the company’s
financial position: Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115.
Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1
A board of directors did not take up an offer of a silver mine. One of the directors,
believing in its potential, formed his own company and took up the opportunity.
ISSUE
Can a director take up a business opportunity if his own company refuses the offer?
Will this be a breach of a director’s duty?
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DECISION The Court found there was no breach of fiduciary duty, even though the information
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had been gained from a position as a director, since the director disclosed all
potential interests to the company.
FACTS
A director secretly prepared tender documents while still employed. He then
resigned and attempted to exercise the tender personally.
ISSUE
Was the use of company information by this ex-officer a breach of duty?
DECISION The Court found that there was a conflict of interest and a concealment, and that
Cooley had breached his fiduciary duty by taking a personal advantage to the
detriment of the company.
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Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405
Mrs Morley was a director for 30 years in a family company, though she never
participated in the business. On the death of her husband, who was also a director,
her son took over the running of the business. The company traded while insolvent,
thus triggering personal liability. Mrs Morley sought to show she was not liable
because she did not know of the breach, nor had she participated in the activities of
the company.
ISSUE
Could Mrs Morley claim her lack of knowledge regarding the finances of the
company meant she could not be liable for the insolvency of the company?
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DECISION The Court found Mrs Morley liable on the grounds that she was a director and should
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have known of the company’s affairs. Her defence of lack of knowledge was rejected;
she could not hide behind ignorance.
John Elliot was a non-executive director of an insolvent company who relied on
assurances as to the company’s solvency made by the managing director, Mr Plymin.
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ISSUE
Was Elliot as a non-executive director liable to creditors for the insolvency of this
company?
DECISION The Court found that Elliot was experienced and astute and could and should have
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Directors’ duty to creditors
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19.27
Part of the justification for the regulation of companies is to protect creditors. In this
context, directors have a duty not to jeopardise the solvency of a company and in turn
the security of creditors.
A breach of the general duty to creditors may occur where directors authorise a loan
to a related company, while suspecting that it may not be repaid: Walker v Wimborne
(1976) 137 CLR 1; 3 ACLR 529. The lending of money at less than market rates by
directors may similarly amount to a disregard for the interests of creditors (if insolvency
occurs): Ring v Sutton (1980) 5 ACLR 546.
Directors are breaching their duty to creditors where they improperly transfer assets
from a company in order to frustrate a debt. Such a breach was established in Kinsela
v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722; 10 ACLR 395, where a company in
financial difficulty transferred its property and business to the directors personally
before the company went into liquidation. Similarly, in Jeffree v National Companies
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Directors may be liable for civil and criminal penalties relating to negligence, breach of
duty or misconduct. Courts may impose a number of sanctions on directors for breach
of duty; these include making directors pay to the company any improper profits they
have made (that is, account for profits), return property improperly taken or pay
damages for negligence or deceit. Contracts held by the directors with the company
may also be rescinded. Directors may also be ordered not to manage a corporation, and
be disqualified from holding any future offices: ss 206A–206C.
Through the Company Law and Economic Reform Program, civil penalties have
been revamped to make them more effective as a means of penalising directors who
have breached the Corporations Act. Section 1317E(1) lists specific civil penalty
provisions, which importantly include breaches of directors’ duties under ss 180–183.
ASIC can make an application to a court for a declaration that a civil penalty has been
contravened (s 1317J); if the court is satisfied that this is the case, then it declares a
breach (s 1317E) and imposes a penalty order (s 1317G) or a disqualification: s 206C.
Penalties can be up to $220,000 and are payable to ASIC. A court can also require a
director to compensate the company: s 1317J. There are defences; a court will not
impose a penalty where it is satisfied the director acted honestly and with good faith so
that they should be excused.
While civil penalties have largely replaced criminal penalties, there is still provision
for criminal penalties where there has been dishonesty, such as in the case of a breach
of the directors’ duties listed in s 184; for example, misuse of position.
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and Securities Commission [1990] WAR 183; (1989) 15 ACLR 217 a director expecting
to lose a court case with a customer transferred property out of the company. The
customer was successful and was left with a claim against an empty company. The
National Companies and Securities Commission successfully prosecuted Jeffree for a
criminal breach of s 182, because he had made improper use of his position as a director
and had acted directly against the interests of a creditor.
While directors must take into account the interests of present and future creditors,
there is no direct means by which creditors can take personal action against directors,
other than under statute; for example, s 588G, which prohibits trading while insolvent.
This principle was established under Spies v R (2000) 201 CLR 603; 173 ALR 529;
[2000] HCA 43.
Excusing a breach of duty
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A company at its general meeting can excuse an officer for a breach of duty owed to the
corporation, or even ratify an action after the event that would otherwise have been a
breach of duty: Bamford v Bamford [1968] 3 WLR 317. Ratification will not be allowed
where it is not in the best interests of the company as a whole, where there is illegal
action, where there is fraud on the minority or where a third party’s interest has become
involved. An officer can apply to a court to excuse himself or herself from a possible
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Duty of directors to outsiders
Although the duty of directors is primarily to the company as a whole, there has been
discussion about widening that duty to apply to persons outside the company. In Parke
v Daily News Ltd [1962] Ch 927; [1962] 2 All ER 929, the directors of a newspaper
proposed to use company funds, from the sale of a newspaper, to make bonus payments
to employees who would lose their jobs. The payments would have resulted in less
money being available to shareholders. Some shareholders objected, and the court
stated that directors must act in the interests of the company as a whole and that there
was no duty owed to the employees.
Under the Corporations Law Amendment (Employee Entitlements) Act 2000
(Cth), ss 596AA–596AI were added to the Corporations Act, and made employers
responsible where employees’ benefits, entitlements and superannuation had been
improperly used while the company was insolvent. Directors who had authorised the
payment or use of employees’ benefits could be pursued by a liquidator, who could seek
compensation and possibly criminal charges.
In respect of creditors, there have been cases where the courts have recognised a
duty: see discussion in the context of the maintenance of capital at [18.55]. There has
been some recent discussion in Australia over whether companies should be more
socially responsible. There has been much comment over the James Hardie company,
which moved to another jurisdiction, leaving an underfunded subsidiary to meet
asbestosis claims against the original company: see [19.23].
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penalty relating to a breach of duty: s 1318. A court may excuse the officer if there has
been proper disclosure or if the directors can show they have acted honestly, even if
negligently, and ought to be excused.
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The company secretary
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The directors of a public company must appoint a company secretary: s 204A(2).
Section 204A also determines the qualifications of the secretary as being over the age
of 18 years, a natural person and resident in the jurisdiction of Australia. A director can
be a company secretary: s 204B(1). The company secretary is not defined in the
Corporations Act, but is designated as an officer in the company and has statutory
duties imposed by the Corporations Act: s 188(1). The constitution of the company
also imposes duties on the company secretary, such as maintaining all company
registers, keeping minutes at directors’ meetings and ensuring general compliance with
the Corporations Act. One of the most important functions of a company secretary is
to lodge the company’s return of particulars (previously called the annual return),
which is a public document that members and the community can inspect. The return
of particulars contains information about changes to company affairs concerning
shares, directors and other matters: s 345. Other secretarial duties include maintaining
a registered office (s 142), lodging notices (s 205B) and sending to ASIC the company
financial reports: s 319.
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Corporate governance
Boards of directors of listed companies must now comply with the Principles of Good
Corporate Governance and Best Practice Recommendations published by the ASX
Corporate Governance Council. The role of corporate governance is to improve the
supervisory role of company boards over the executive management. Corporate
governance sets particular standards of disclosure and ethics to be met by directors
and the board itself. The principles of good governance encourage the appointment
of independent directors and a non-executive chairman, and the creation of committees
that will report on risk, performance and remuneration. Directors should also have
regard to various stakeholders in and outside the company (such as employees, the
community and consumers) as part of corporate social responsibility. The ASX Rules
add to the existing legislative and common law duties already applying to directors.
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The importance and authority of a company secretary was established in Panorama
Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711. In this
case, a company secretary ordered hire cars for his own use, which was an unauthorised
act and outside the secretary’s power. The company refused to pay for the hire of the
cars, and the car hire firm sued. The Court held that, despite the company secretary not
having the power to hire the cars, the company would still be liable for the secretary’s
actions. A company secretary is recognised as an important officer of the company, with
extensive powers and duties. Outsiders are entitled to believe that the secretary has the
authority to make contracts and incur liabilities on behalf of the company: ss 128–129.
Takeovers
A takeover of a company occurs when someone, usually another company (the offeror),
purchases sufficient shares to take control of a company (the target) from the existing
controllers. The offeror buys not only the shares but also control of the target company;
they may have to pay above market rates to gain that control.
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Control of a company
The diversity of shareholders and the amounts they hold mean that it is possible to
control a company with less than 51 per cent of its shares. The Corporations Act takes
the view that a purchaser of 20 per cent of shares in a company can have a significant
influence over the affairs of the company — for instance, by electing himself or herself
as a director.
Purpose of regulating takeovers
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The Corporations Act is designed to ensure that the whole market has an informed
view of a takeover, that offers are made in a competitive manner, that all shareholders
have the opportunity to take part in any offer and that shareholders are treated
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equally: s 602. ASIC plays a considerable role in regulating takeovers; it has a wide
discretionary power to modify the operation of the law and exempt individuals from
compliance: s 730. ASIC provides guidance notes on takeovers, and can intervene if it
believes there has been unacceptable behaviour. It can refer certain takeovers to the
Corporations and Securities Panel for adjudication, if it believes that the spirit of the
Corporations Act is not being fulfilled.
Apart from the Corporations Act, the Competition and Consumer Act 2010 (Cth)
prohibits market domination by one company: s 50. This prohibition is supervised by
the Australian Competition and Consumer Commission (ACCC). Other relevant
legislation is the Foreign Acquisitions and Takeovers Act 1975 (Cth), which regulates
foreign ownership of Australian companies.
Takeover provisions under the Corporations Act
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The Corporations Act prohibits acquisition of a relevant interest in shares over a
benchmark of 20 per cent of the voting shares of a company, unless in compliance with
the provisions of the Corporations Act: s 606(1)(c). A relevant interest in shares is
broadly defined as either direct ownership of the shares or indirect control of some
type: s 608. Compliance is still required by shareholders holding more than 20 per cent
but less than 90 per cent of a company’s shares: s 606(1)(c)(ii).
Associated companies and individuals who have, or appear to have, some agreement
between themselves in acquiring shares will also be subject to the 20 per cent rule: s 610.
The Corporations Act recognises that the 20 per cent rule can be breached by
inadvertence, lack of awareness, mistake or for some reason beyond control so that
takeover provisions will not apply: s 606(5).
Some acquisitions are not prohibited under the Corporations Act (s 611), including
acquisitions:
• as a result of offers under a takeover bid;
• as a result of an on-market takeover bid during the prescribed bid period;
• approved by resolution of a general meeting by the target company;
• that take effect through a creeping takeover: where the buyer has had 19 per cent of
the shares and acquires no more than 3 per cent each six months;
• occurring as a result of a pro rata allotment to all shareholders; and
• resulting from a dividend reinvestment plan available to all shareholders.
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When procedures apply
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Once the benchmark of 20 per cent has been reached, the takeover must comply with
an acceptable takeover procedure unless it is exempt: s 611.
Once a bidder has purchased 90 per cent of the shares in a company, it can demand
that the remaining 10 per cent of shareholders sell the bidder their shares at the offer
price — these rules are set out in Ch 6A of the Corporations Act. Alternatively, the
remaining 10 per cent of shareholders can give notice that they demand the bidder
purchase their shares: s 662C(1).
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Takeover procedures
Besides a creeping takeover, where 3 per cent can be acquired every six months, there
are only two methods of making a takeover bid:
• an off-market bid; and
• a market bid.
These procedures are the only means by which a bidder can exceed a 20 per cent
acquisition.
Off-market bids
An off-market bid is an offer to individual shareholders (as distinct to one on the
securities exchange) in which the bidder offers to buy a specified proportion of a class
of securities (s 618(1)), for a particular price — which might be a combination of
money, other shares or property. If the offer is for cash only, then the price offered must
be as high as any bid made in the previous four months: s 621(4). The offer, once made,
must state that it will stay open for the length of the offer period (s 620(1)(c)) — unless
the offeror warns that it can be withdrawn. The offer must stay open for a minimum of
one month and a maximum of 12 months: s 624.
The steps for making an off-market bid are set out in a table in s 632.They are as
follows:
• the bidder’s statement, together with any offer document, is sent to ASIC, the
target company and the ASX;
• ASIC is notified that the first step has been completed;
• the bidder’s statement and offer are sent to the holders of the shares;
• the bidder informs the target company, ASIC and the ASX that the offers have
been sent; and
• the target company replies with a statement that must be sent to the bidder, the
holders of shares, ASIC and the ASX.
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On-market bids
There are some 13 specific steps required in making an on-market bid for shares, set
out in table form in s 634. These are, generally, as follows:
• the bidder announces the offer to the ASX;
• the bidder prepares a notice of the offer (statement), which must be sent to the
ASX, the target company and ASIC;
• the bidder’s statement and other documents are sent to the holders of the shares;
• a copy of all documents sent to shareholders is then sent to the ASX and ASIC;
• the target company prepares a statement or response, which is sent to ASIC, the
bidder and the holders of shares; and
• then the bidder can make an offer on-market — on the exchange.
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Prohibited behaviour during a takeover
Tactics used by both the bidder and the target are regulated and certain activities are
prohibited; this is particularly so during a hostile takeover. The following activities are
not permitted:
• the bidder disposing of securities during the period in which the bid is made
(s 654A(2)) — unless a different party makes a takeover offer;
• escalation agreements — giving benefits to selected shareholders and not to all
shareholders: s 622;
• the giving of collateral benefits — special benefits to induce certain persons to
accept a bid: s 623;
• dummy bids — where a person makes a bid knowing that it is false or reckless: a bid
must be made within two months of its announcement: s 631; and
• misleading and deceptive statements — neither the bidder nor the target can make
such statements, or significant omissions either deliberately or by omission: s 670A.
Misleading statements can result in civil or criminal liability under different areas
of the Corporations Act, though there are some defences.
There are many defensive tactics able to be used that are legal. These include
advising shareholders that the bid is insufficient, encouraging a friendly takeover by
someone else and even appealing to the ACCC or to the Corporations and Securities
Panel over the behaviour of a bidder. A company has to be careful not to make false
statements either about the company itself or the bidder.
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The bidder in a market bid must offer to buy all the securities in the market
(s 618(3)) for cash (s 621(3)), and the price offered must be equivalent to any bid made
in the last four months: s 624(1). On-market bids must be unconditional and be open
for a minimum of one month or a maximum of 12 months: s 624(1).
The final stages in the life of a company
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A feature of a corporation is that it has perpetual succession, which means that, unlike
natural persons, it cannot die. There are circumstances, however, when a company
reaches the end of its useful life. Commonly a company is created for a short-term
project — once the project is completed the company has no further purpose. The law
provides a process for winding up and bringing the company to an end.
A company may come to an end involuntarily (because creditors wind it up) or
voluntarily (because the members see no further point in keeping the company
going). Members can wind up a company by special resolution, perhaps because it
never commenced business, the company did not meet ASIC obligations, the
company is unable to make a profit, the members wish to return capital to members
or there is a breakdown in relations between members and management. Members
can appoint a liquidator: s 495. A company may be compulsorily wound up by
members who seek a court order, perhaps for oppression or a statutory derivative
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action. The most usual reason for a compulsory winding-up is insolvency, whereby
creditors seek an order to liquidate assets; the members receive what is left over after
the creditors have been paid: s 563A. The different grounds for a court winding up a
company are set out in s 461.
Companies in distress
A company unable to pay its debts as they fall due is insolvent: s 95A. There are a
number of options available to an insolvent company, depending on its assets, its
prospects and the wishes of its creditors. Ultimately a company can be wound up so
that its assets are sold off to pay its debts, but there are procedures that stop short of
that terminal process. It is sometimes in the interests of creditors to keep a company
going, when its business is its prime asset. The Corporations Amendment (Insolvency)
Act 2007 (Cth) gives greater scope for the appointment of liquidators (without
necessarily getting court approval), improves protection for various creditors (including
employees), places greater duties on officers and provides an improved regulation and
registration system over liquidators and receivers that is managed by ASIC.
Where a company defaults on a financial obligation — for example, in relation to
debentures — the trustee for debenture holders has traditionally been able to appoint
a receiver to protect their interests: ss 416–434. A mortgagee is similarly able to appoint
a receiver if the mortgage agreement provides for it. In almost all cases, a receiver is
appointed privately as the exercise by creditors of a right under a security arrangement.
A court has discretionary power to appoint a receiver on the application of creditors,
where it considers it just or convenient to do so and if other legal remedies are
inadequate. The receiver carries on the business of the company with a view to achieving
the best possible result for the secured creditors — the parties who made the
appointment. Unsecured creditors take a secondary position when a company goes into
receivership.
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Voluntary administration
The object of voluntary administration is to maximise the chances of an insolvent
company continuing in existence or, if that is not possible, to achieve a better return for
creditors than would have resulted if the company had been immediately wound up:
s 435A.
The pivotal provisions provide the company, once the administration commences,
with a moratorium on the claims of creditors against the company. Creditors’ claims
against the company are postponed, unless they can be enforced with the consent of
the administrator or a court. In the case of a creditor who holds a charge over all or part
of the company’s property, it is possible to enforce the charge during the period. The
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administrator, who is appointed by the directors, liquidator, provisional liquidator or
holder of a charge, is required to investigate the company’s affairs and report to a
meeting of creditors within 21 or 28 days (depending on the time of year) from the
commencement of the administration. The meeting of creditors is able to determine
the future of the company, and can resolve that the administration be terminated, that
a deed of company arrangement be executed or that the company be wound up.
Where a company is not solvent, creditors are able to initiate the procedure for its
winding up. They may also do this as a result of the voluntary administration. Winding
up is the process of bringing a company’s existence to an end. A liquidator is appointed
by the creditors. The liquidator must be registered under the Corporations Act; he or
she becomes an officer of the company and is responsible for gathering the property of
the company and distributing the proceeds of its realisation to the creditors. As with
bankruptcy, the property of the company must be distributed equally to creditors so
that they are treated fairly.
As with bankruptcy, it is necessary for a creditor of a company to prove their debt to
wind up the company. The liquidator may require this to be proved formally
(Corporations Act s 553D(1)), or it can be proved informally: s 553D(2). The debts
that can be proved are those that existed at the time the winding up of the company
started.
Secured creditors need not prove their debts — they can rely on the asset(s) that
represents their security. As with bankruptcy, a secured creditor is able to surrender
their security and prove the claim as an unsecured creditor. Where the asset does not
cover the amount owing, the secured creditor can claim for the shortfall: s 554E.
The debts that are relevant in the proof process are those that could have been
claimed at the time the winding up commenced. Debts incurred after that time should
only be those related to the administration of the winding-up process; for example, the
receiver’s expenses. Shareholders are able to prove debts such as dividends outstanding,
provided that any debts they owe the company have been paid.
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Priority payments
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Once debts have been proved, they are treated in the same way as in bankruptcy, and
creditors are dealt with equally. If the property available is insufficient to satisfy the
debts, then creditors are paid in proportion to their proved debts: Corporations Act,
s 555. Certain payments that attract priority are set out in the Corporations Act (s 556)
and can be described as the costs of administering the winding up. The liquidator and
administrator are paid first.
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In the process of winding up a company, a liquidator is required to maximise the return
to creditors. It is not unusual for liquidators to launch litigation on behalf of the
company. The usual targets in this regard are auditors, where it is alleged that they have
caused losses to the company as a result of their negligence. The directors of the
company can also be pursued where it is alleged that they have caused damage to the
company as a result of a breach of duty.
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Priority exists for the following classes of payment:
employees’ wages up to the time of commencing the winding up;
workers’ compensation payments;
amounts due to employees for leave; and
retrenchment payments.
Insolvent trading
The Corporations Act offers some protection for the creditors of an insolvent company
through s 588G, under which directors or persons involved in the management of the
company are liable if the company incurs a debt while it is insolvent. There is criminal
and civil liability. The civil liability represents a departure from the usual concept of
separating a company from its members. Section 588G effectively lifts the corporate
veil so that directors can become personally liable for the debts. If no property is left in
the company, then a creditor whose debt was incurred while the company was insolvent
is able to seek recovery from the directors.
There are some defences available to directors against a claim they have permitted
insolvent trading under s 588G:
• where the director, at the time the debt was incurred, had reasonable grounds to
believe the company was solvent (possibly by reliance on a competent person);
• where the director was ill or absent or did not take part in the management when
the debt was incurred; and
• where the director took steps to prevent the company incurring the debts.
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Summary
This chapter has set out to explain:
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■ what the Corporations Act requires of companies in terms of their financial records
systems and annual financial reports;
■ the obligations of public and proprietary companies in regards to meetings;
■ the nature of a claim of oppression on behalf of a member of a company;
■ the statutory rights of company members, including the right to take a statutory
derivative action on behalf of the company where the company is refusing to take action;
■ the powers and duties of company directors and officers and the criminal and civil
liabilities attached to breach of those duties;
■ takeover processes and procedures; and
■ what happens when a company becomes insolvent, and how a company is wound up.
Key terms
Business judgment rule — A defence to a claim of a lack of diligence and care by directors,
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where a previous business decision was made in good faith
Company secretary — an officer of a company who has certain statutory duties on behalf
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of the company
Corporate governance — Principles of good management within a company, using check
and balance procedures
Director — an officer of a company who either has been appointed as a director, or acts in
the position of director
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Fiduciary duty — the common law duty of good faith imposed on officers and employees
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of a company
Insolvent trading — where a company incurs debts and obligations without a reasonable
belief that creditors will be paid
Liquidation — the winding-up process within a company, whereby assets are sold off and
any surplus distributed to creditors and members
Liquidator — a qualified (and registered) person who conducts the liquidation process
Officer — a person within a company who holds a significant position with the ability to
affect the company’s financial standing
Oppression — a claim by a member or former member of a company that the company or
a party has acted unfairly, prejudicially or in a discriminatory manner
Receiver — a qualified party who is appointed by either the company, a court or creditors
to take control of, and make an assessment of, a company’s financial situation
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Statutory derivative action — an action by a member on behalf of their company, by a
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right granted through the Corporations Act
Takeover — the process whereby a party buys up shares of a company and consequently
takes control of the company
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Voluntary administration — where a company appoints an administrator over the
company on the grounds that the company is insolvent and cannot continue trading
Practice questions
1. How does the Corporations Act differentiate between proprietary companies and
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public companies in regard to requirements to produce financial reports and hold
AGMs?
2. What rights are available to a member who believes they have been unfairly dealt
with, particularly when they believe the company is not disclosing certain
information?
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3. What is the liability of a director if their company becomes insolvent and the
director allows the company to continue trading?
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4. What are the statutory duties that relate only to directors? What duties apply to
both directors and officers?
5. How might the appointment of an administrator to a company in difficulties actually
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Websites and further reading
ASIC
ASX
Australian Institute of Company
Directors
Australian Shareholders
Association
Takeovers Panel
<http://asic.gov.au> (search ‘corporate
governance’, ‘financial reports’ or ‘voluntary
administration’)
<www.asx.net.au>
<www.companydirectors.com.au>
<http://australianshareholders.com.au/asa_site>
<www.takeovers.gov.au>
Fitzpatrick, J, C Symes, A Veljanovski and D Parker Business and Corporations Law
(LexisNexis, Sydney, 2011)
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