#7386 - Remedies Summary - Corporations Law

Remedies, Penalties and Exoneration

1. Who can bring an action for breach of duties?

   1. The company at the instigation of:

      1. Its board of directors

      2. Its liquidator

      3. ASIC under s 50 ASIC Act

   2. ASIC in its own name – in respect of a breach of statutory duty

   3. A member – in certain circumstances

2. Who has standing to bring an action for other contraventions?

   1. Company for:

      1. Common law remedies (negligence/breach of contract)

      2. Equitable /fiduciary remedies (breach of equitable / fiduciary duties)

      3. Statutory remedies (breach of Act – breach of statutory duty)

         • Compensation order (s 1317H; s 1317J(2))

         • Injunction/damages (s 1324)

         • Intervene in proceedings brought by ASIC (s 1317J(3))

   2. ASIC for:

      1. Civil consequences – ‘civil penalty provisions’ – Part 9.4B

         • Declaration of contravention, pecuniary penalty or compensation order (s1317J(1))

           1. Declaration of contravention (s1317E&F)

           2. Pecuniary penalty order (s 1317G)

           3. Disqualification order (ss 206B–F)

         • Compensation order payable to company (s1317H; s 1317J(1))

         • Injunction/damages (s 1324)

      2. Criminal penalties (ASIC/DPP)

         • where specified (e.g, ss 184, 588G, 209(3)

         • penalties listed in Schedule 3

3. Where transactions are entered into

   1. Transaction entered into in breach of fiduciary duty are voidable Kinsella Unless:

      1. Approval of GM

         • Disclosed and approved by GM

         • Approval by the general meeting can either be in advance of the transaction occurring or by ratification after it has taken place

      2. Modification by constitution:

         • GL position modified by constitution – K is permitted by the constitutional provision and the terms of the provision have been fully complied with.

4. Equity: Where breach of a fiduciary duty or equitable duty

   1. Duty of care, skill and diligence, Conflicts

      1. Equitable damage

         • A company may apply for the equitable remedy of compensation.

         • The aim of this is to place the company, as near as possible, in the position it would have occupied had the breach of duty not occurred.

         • All directors who participate in the breach of duty are jointly and severally liable

      2. No need to prove causation

   2. Duty of good faith/best interests; proper purposes; retain discretions; avoid conflicts (fiduciary)

      1. Equitable compensation

      2. Injunction

      3. Declaration

      4. Specific performance: return of property and constructive trusts

         • Where a director acquired property as a consequences of a breach, the company may seek a declaration that the director holds the property on constructive or resulting trust for the company with the effect that the property is returned

         • Enables a company to recover assets that have come into third parties as the result of breach of duty by director.

         • The third party may be compelled to return the property to the company if the property was received by knowledge of the breach of duty. Knowledge is broad.

      5. Account of profits

         • The company may obtain an order that the officer hand over the profit made in breach of duty to the company

         • Company can be in breach even if they suffered no loss. The directors can still be ordered to disgorge the profits Regal

      6. Constructive trust

      7. Negligence / breach of contract

      8. Common law remedies

      9. Rescission of contract

         • Subject to the company’s constitution, the company may, at its option, rescind the contract Kinsela

         • If the D’s profited from the contract, they are liable to account for the profit

5. Civil Penalty Provisions Statute: Given that D has been found to contravene a civil penalty provision, the court can make the following orders:

   1. Types of civil penalty provisions:

      1. Officers duties 180(1), 181(1) and (2), 182(1) and (2), 183(1) and (2)

      2. Related parties rules 209(2)

      3. Share capital transactions 254L(2), 256D(3), 259F(2) and 260D(2)

      4. Requirements for financial reports 344(1)

      5. Insolvent trading 588G(2)

   2. Pecuniary penalty order (payable to ASIC)

      1. ASIC applies (s1317J(1)); company can intervene (s 1317J(3))

         • Declaration of contravention (s1317E & F), which is a pre-requisite for

           1. Pecuniary penalty order payable to ASIC (s 1317G) of up to $200,000

           2. Each contravention is individual so appropriate penalty must be considered separately

         • Once ASIC applies it is conclusive evidence of the facts

      2. Factors to be taken into account in determining the appropriate penalty (per Finkelstein J in ASIC v Vizard (2005)) –

         • Main consideration is the nature of the offence (cf. character of the defendant and likelihood of further offending)

         • Irrelevant if profit made

         • General deterrence

         • Shaming is not a substitute for formal punishment

         • Early acknowledgment and cooperation earn a reduction in the penalty

   3. Compensation order payable to company (s1317H; ASIC s 1317J(1); companies 1317J(2))

      1. X will seek a compensation order payable to it for the damage suffered

      2. Damage must be a result of contravention – clearly there is a causal connection between breach and loss Adler

      3. Factors in calculating compensation:

         • Not limited to loss: damage includes profits made by other person resulting from contravention 1317G(2)

         • Damage includes devalued property

   4. Disqualification:

      1. Give a declaration is likely under 1317E, ASIC may apply to have court to disqualify D from managing corporations 206(1)(a)(i) but court must be satisfied disqualification is justified 206C(1)(b)

         • Person’s conduct in relation to management, business or property of corporation 206C(2)(a)

         • Any other matters the court thinks appropriate 206C(2)(b)

           1. Broader than merely protecting the shareholder, but also creditors Adler

      2. Other reasons for disqualification:

         • Automatically if:

           1. convicted of a serious offence (s 206B(1))

           2. an undischarged bankrupt, or fails to pay creditors (s 206B(3) & (4))

         • By court if:

           1. has contravened a civil penalty provision of the Act (e.g. breached directors duties) (s 206C)

           2. has mismanaged corporations in the past (ss 206D & E)

         • By ASIC if:

           1. has a history of managing failed companies (s 206F)

      3. Purposes of disqualification:

         • ASIC v Adler (2002)

           1. protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards

           2. protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office

           3. protect those who deal with companies, including consumers, creditors, shareholders and investors

           4. protect against present and future misuse of the corporate structure

           5. act as a deterrence

         • Rich v ASIC (2004)

           1. protect shareholders against further abuse

           2. punish the offender

           3. deter improper behaviour (specifically and generally)

      4. Consequences of disqualification:

         • For the individual (s206A):

           1. Participating in the management of a company, or exercising influence over directors of a company, is an offence (s206A)

           2. Court may give permission to disqualified persons to manage (s 206G)

           3. Penalties:

              1. 50 penalty units and/or imprisonment for 12 months (s1311 and Schedule 3)

              2. Personally liable for debts of company if wound up within 4 years (s 588Z)

         • For decisions / transactions made while disqualified person managed:

           1. If a person acts as director in contravention of s 206A(1)(a), and the board of directors makes a decision in relation to a particular matter - decision is not invalid merely because person was acting in breach

           2. s 206A directed toward the individual who wrongly acted as a director, and not the company itself - possible a person may wrongly be acting as director without the other directors and third parties being aware

6. Statutory Injunction:

   1. ASIC or a person whose interests have been or would be affected grant an injunction on terms it thinks fit:

      1. Contravention of Act 1342(1)(a)

      2. Attempted contravention of Act 1324(1)(b)

      3. Aiding, abetting, counselling or procuring contravention of Act 1324(1)(c) SEE DIRECTORS DUTIES

      4. Inducing contravention of Act 1324(1)(d)

      5. Being directly or indirectly knowing or concerned in contravening Act 1324(1)(e)

      6. Conspiring with others to contravene Act 1324(1)(f)

   2. May be prohibitive 1345(6) or mandatory 1324(7)

7. Criminal

   1. Contraventions of certain provision of the Act are not criminal offences unless the provision is included in the list of penalties set out in schedule 3.

   2. Good faith and proper purpose

      1. Reckless 184(1)(a) or intentionally dishonest 184(1) in failing to discharge duties in best interests 184(1)(c) of corporation or from proper purpose 184(1)(d)

      2. Penalty: 2,000 penalty units; 5 years prison

   3. Misuse of position

      1. If they misuse their position dishonestly 184(2) (by intending to gain advantage/cause detriment or reckless to this)

      2. Penalty: 2,000 penalty units; 5 years prison

   4. Misuse of information

      1. If they misuse information dishonestly 184(3) (by intending to gain advantage/cause detriment or reckless to this)

      2. Penalty: 2,000 penalty units; 5 years prison

   5. Insolvent Trading

      1. Where it can be shown D suspected company’s insolvency when the debt was incurred 588G(3)(a) at time D was a D of company that was insolvent and suspected at time of incurring debt company would be insolvent and acted dishonestly 588G(3)(a)-(d)

   6. Related party transactions:

      1. Where their involvement in a contravention of the Ch is dishonest 209(3)

8. Releases from liability for breach of duty

   1. By the company:

      1. Ratification by the general meeting

      2. Prospective or retrospective

      3. Subject to constitution

      4. Meeting must be fully informed and directors must fully disclose all relevant circumstances to the shareholders and have acted in good faith. If the directors are also shareholders, they are permitted to vote as shareholders in favour of ratifying their own breach of duty (Winthrop...