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Class 16 Directors’ statutory duty to prevent insolvent trading
Corporations Act ss 588G-588U. Note: Definition of insolvency in s 95A; definition of director in s 9.
CORPORATIONS ACT 2001 - SECT 95A
Solvency and insolvency
Definition of insolvency- s95A- cash flow test. Two important changes at insolvency. Insolvency official not directors. Creditors not shareholders. Reasons for insolvency regulation. No creditors free for all. Preserve priorities. Maintenance of capital for creditors. Avoidance provisions for fraudulent and uncommercial transactions. Solvent versus insolvent winding up.
Types and stages of insolvent administration. External administration. Voluntary administration. Appointment of a receiver. Creditors scheme of arrangement. Winding up. Liquidation.
588G is a civil remedy provisions but also provides a way to sue the directors on behalf of the creditors who have been harmed as a result of 588G.
(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.
(a) a person who:
(i) is appointed to the position of a director; or
(ii) is appointed to the position of an alternate director and is acting in that capacity;
regardless of the name that is given to their position; and
(b) unless the contrary intention appears, a person who is not validly appointed as a director if:
(i) they act in the position of a director; or
(ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.
Subparagraph(b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person's professional capacity, or the person's business relationship with the directors or the company or body.
Note: Paragraph(b)--Contrary intention--Examples of provisions for which a person referred to in paragraph(b) would not be included in the term "director" are:
* section249C (power to call meetings of a company's members)
* subsection 251A(3) (signing minutes of meetings)
* section205B (notice to ASIC of change of address).
CORPORATIONS ACT 2001 - SECT 588G
Director's duty to prevent insolvent trading by company
(1) This section applies if:
(a) a person is a director of a company at the time when the company incurs a debt; and
(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and
(d) that time is at or after the commencement of this Act.
(1A) For the purposes of this section, if a company takes action set out in column 2 of the following table, it incurs a debt at the time set out in column 3.
| When debts are incurred | [operative table] | |||
|---|---|---|---|---|
| Action of company | When debt is incurred | |||
| 1 | paying a dividend | when the dividend is paid or, if the company has a constitution that provides for the declaration of dividends, when the dividend is declared | ||
| 2 | making a reduction of share capital to which Division1 of Part2J.1 applies (other than a reduction that consists only of the cancellation of a share or shares for no consideration) | when the reduction takes effect | ||
| 3 | buying back shares (even if the consideration is not a sum certain in money) | when the buy-back agreement is entered into | ||
| 4 | redeeming redeemable preference shares that are redeemable at its option | when the company exercises the option | ||
| 5 | issuing redeemable preference shares that are redeemable otherwise than at its option | when the shares are issued | ||
| 6 | financially assisting a person to acquire shares (or units of shares) in itself or a holding company | when the agreement to provide the assistance is entered into or, if there is no agreement, when the assistance is provided | ||
| 7 | entering into an uncommercial transaction (within the meaning of section588FB) other than one that a court orders, or a prescribed agency directs, the company to enter into | when the transaction is entered into | ||
(2) By failing to prevent the company from incurring the debt, the person contravenes this section if:
(a) the person is aware at that time that there are such grounds for so suspecting; or
(b) a reasonable person in a like position in a company in the company's circumstances would be so aware.
Note: This subsection is a civil penalty provision (see subsection 1317E(1)).
(3) A person commits an offence if:
(a) a company incurs a debt at a particular time; and
(aa) at that time, a person is a director of the company; and
(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
(c) the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in paragraph(1)(b)); and
(d) the person's failure to prevent the company incurring the debt was dishonest.
(3A) For the purposes of an offence based on subsection(3), absolute liability applies to paragraph(3)(a).
Note: For absolute liability , see section6.2 of the Criminal Code .
(3B) For the purposes of an offence based on subsection(3), strict liability applies to paragraphs(3)(aa) and (b).
Note: For strict liability , see section6.1 of the Criminal Code .
(4) The provisions of Division4 of this Part are additional to, and do not derogate from, Part9.4B as it applies in relation to a contravention of this section.
CORPORATIONS ACT 2001 - SECT 588H
Defences
(1) This section has effect for the purposes of proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt (including proceedings under section588M in relation to the incurring of the debt).
(2) It is a defence if it is proved that, at the time when the debt was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
(3) Without limiting the generality of subsection(2), it is a defence if it is proved that, at the time when the debt was incurred, the person:
(a) had reasonable grounds to believe, and did believe:
(i) that a competent and reliable person (the other person ) was responsible for providing to the first-mentioned person adequate information about whether the company was solvent; and
(ii) that the other person was fulfilling that responsibility; and
(b) expected, on the basis of information provided to the first-mentioned person by the other person, that the company was solvent at that time and would remain solvent even if it incurred that debt and any other debts that it incurred at that time.
(4) If the person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company.
(5) It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt.
(6) In determining whether a defence under subsection(5) has been proved, the matters to which regard is to be had include, but are not limited to:
(a) any action the person took with a view to appointing an administrator of the company; and
(b) when that action was taken; and
(c) the results of that action.
CORPORATIONS ACT 2001 - SECT 588J
On application for civil penalty order, Court may order compensation
(1) Where, on an application for a civil penalty order against a person in relation to a contravention of subsection 588G(2) , the Court is satisfied that:
(a) the person committed the contravention in relation to the incurring of a debt by a company; and
(b) the debt is wholly or partly unsecured; and
(c) the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency;
the Court may (whether or not it makes a pecuniary penalty order under section1317G or an order under section206C disqualifying a person from managing corporations) order the first-mentioned person to pay to the company compensation equal to the amount of that loss or damage.
(2) A company's liquidator may intervene in an application for a civil penalty order against a person in relation to a contravention of subsection 588G(2).
(3) A company's liquidator who so intervenes is entitled to be heard:
(a) only if the Court is satisfied that the person committed the contravention in relation to the incurring of a debt by that company; and
(b) only on the question whether the Court should order the person to pay compensation to the company.
CORPORATIONS ACT 2001 - SECT 588K
Criminal court may order compensation
If:
(a) a court finds a person guilty of an offence under subsection 588G(3) in relation to the incurring of a debt by a company; and
(b) the court is satisfied that:
(i) the debt is wholly or partly unsecured; and
(ii) the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency;
the court may (whether or not it imposes a penalty) order the first-mentioned person to pay to the company compensation equal to the amount of that loss or damage.
Note: Section73A defines when a court is taken to find a person guilty of an offence.
CORPORATIONS ACT 2001 - SECT 588L
Enforcement of order under section 588J or 588K
An order to pay compensation that a court makes under section588J or 588K may be enforced as if it were a judgment of the court.
CORPORATIONS ACT 2001 - SECT 588M
Recovery of compensation for loss resulting from insolvent trading
(1) This section applies where:
(a) a person (in this section called the director ) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and
(b) the person (in this section called the creditor ) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and
(c) the debt was wholly or partly unsecured when the loss or damage was suffered; and
(d) the company is being wound up;
whether or not:
(e) the director has been convicted of an offence in relation to the contravention; or
(f) a civil penalty order has been made against the director in relation to the contravention.
(2) The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.
(3) The creditor may, as provided in Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage.
(4) Proceedings under this section may only be begun within 6 years after the beginning of the winding up.
CORPORATIONS ACT 2001 - SECT 588N
Avoiding double recovery
An amount recovered in proceedings under section588M in relation to the incurring of a debt by a company is to be taken into account in working out the amount (if any) recoverable in:
(a) any other proceedings under that section in relation to the incurring of the debt; and
(b) proceedings under section596AC in relation to a contravention of section596AB that is linked to the incurring of the debt.
CORPORATIONS ACT 2001 - SECT 588P
Effect of sections 588J, 588K and 588M
Sections588J, 588K and 588M:
(a) have effect in addition to, and not in derogation of, any rule of law about the duty or liability of a person because of the person's office or employment in relation to a company; and
(b) do not prevent proceedings from being instituted in respect of a breach of such a duty or in respect of such a liability.
CORPORATIONS ACT 2001 - SECT 588Q
Certificates evidencing contravention
For the purposes of this Part, a certificate that:
(a) purports to be signed by the Registrar or other proper officer of an Australian court; and
(b) states:
(i) that that court has declared that a specified person has, by failing to prevent a specified company from incurring a specified debt, contravened subsection 588G(3) in relation to the company; or
(ii) that a specified person was convicted by that court for an offence constituted by a contravention of section588G in relation to the incurring of a specified debt by a specified company; or
(iii) that a specified person charged before that court with such an offence was found in that court to have committed the offence but that the court did not proceed to convict the person of the offence;
is, unless it is proved that the declaration, conviction or finding was set aside, quashed or reversed, conclusive evidence:
(c) that the declaration was made, that the person was convicted of the offence, or that the person was so found, as the case may be; and
(d) that the person committed the contravention.
CORPORATIONS ACT 2001 - SECT 588R
Creditor may sue for compensation with liquidator's consent
(1) A creditor of a company that is being wound up may, with the written consent of the company's liquidator, begin proceedings under section588M in relation to the incurring by the company of a debt that is owed to the creditor.
(2) Subsection(1) has effect despite section588T, but subject to section588U.
CORPORATIONS ACT 2001 - SECT 588S
Creditor may give liquidator notice of intention to sue for compensation
After the end of 6 months beginning when a company begins to be wound up, a creditor of the company may give to the company's liquidator a written notice:
(a) stating that the creditor intends to begin proceedings under section588M in relation to the incurring by the company of a specified debt that is owed to the creditor; and
(b) asking the liquidator to give to the creditor, within 3 months after receiving the notice:
(i) a written consent to the creditor beginning the proceedings; or
(ii) a written statement of the reasons why the liquidator thinks that proceedings under section588M in relation to the incurring of that debt should not be begun.
CORPORATIONS ACT 2001 - SECT 588T
When creditor may sue for compensation without liquidator's consent
(1) This section applies where a notice is given under section588S.
(2) The creditor may begin proceedings in a court under section588M in relation to the incurring by the company of the debt specified in the notice if:
(a) as at the end of 3 months after the liquidator receives the notice, he or she has not consented to the creditor beginning such proceedings; and
(b) on an application made after those 3 months, the court has given leave for the proceedings to begin.
(3) If:
(a) during those 3 months, the liquidator gives to the creditor a written statement of the reasons why the liquidator thinks that such proceedings should not be begun; and
(b) the creditor applies for leave under paragraph(2)(b);
then:
(c) the creditor must file the statement with the court when so applying; and
(d) in determining the application, the court is to have regard to the reasons set out in the statement.
CORPORATIONS ACT 2001 - SECT 588U
Events preventing creditor from suing
(1) A creditor of a company that is being wound up cannot begin proceedings under section588M in relation to the incurring of a debt by the company if:
(a) the company's liquidator has applied under section588FF in relation to the debt, or in relation to a transaction under which the debt was incurred; or
(b) the company's liquidator has begun proceedings under section588M in relation to the incurring of the debt; or
(c) the company's liquidator has intervened in an application for a civil penalty order against a person in relation to a contravention of subsection 588G(2) in relation to the incurring of the debt.
(2) Subsection(1) has effect despite sections588R and 588T.
Redmond [7.135]-7-210].
Director’s Statutory Duty to Prevent Insolvent Trading
Test of insolvency is when a company cannot pay its debts. They must have to pay all their debts as they become due and payable. Appointing a receiver is almost like appointing a one person board of receivers.
A main way to show a company is insolvent is by making a statutory demand on a company under s459F? Compulsory winding up is ordered by the court, sole ground insolvency, persons who may apply are a creditor, contributory, director, liquidator, ASIC. Statutory demand- 459A-F. Mad by creditor for more than $2000. Not paid within 21 days of service. Only ground to resist is to prove solvency. Can prove debt is not owing but only by court application before end of 21 days.
Prohibition on insolvent trading under 588G and H. Example of statutory veil piercing, avoid abuse of limited liability. Tough on directors? Cf USA. Trading out of trouble endgame and creditor protection? Makes directors too cautious? Have to compensate for higher risk? Extension of 588 pierces veil in groups.
Elements of 588G and H. Company must be or be made insolvent; overlapping tests of insolvency- 95A, 588G(1)(b), 588G(1)(c), 588G(2). Company must incur a debt; 588G(2), director’s duty is to avoid the company incurring debt if insolvent. What is debt? Debts must usually be liquidated not damages. Is giving a guarantee, incurring a debt? Contingent or current liability? Is it incurred or imposed? Voluntary act? Taxes- sales, tax, not voluntary. But payroll tax is, because of voluntary act of hiring staff.
Timing of incurring is important.
Liability is imposed on directors s9 CA- includes shadow directors.
Defences are in 588H. Reasons to expect Co to be solvent. Illness or other good reason. FCT v Clarke.
Shareholders’ remedies:
Theme. Protecting the few from the many. The limits of majority power. Protecting the company from the board. Still a shareholder primacy view.
Some legal baselines. Shareholders are property owners- freely dispose of rights including voting rights. Shareholders have no fiduciary duties to each other- including when voting. Shareholders can act in their own interests (cf directors). Directors owe duties to the company. Company is the proper plaintiff- foss v Harbottle. Fruits of litigation belong to the company.
Shareholder remedies: study of increasing list of exceptions under Harbottle.
Four dimensions of shareholder remedies:
Shareholders personal actions.
Shareholders derivative actions
Winding up on just and equitable ground
Oppression remedy.
Shareholder personal actions.
On the contract- s140 CA.
Rights enjoyed as a member and by all members.
Eley v Positive Life Assurance Co.
Hickman v Kent and Romney Marsh Sheep Breeders.
Hickman did not like what was happening in the sheep breeding association he belonged to and he took them to court. There was an arbitration clause requiring Hickman to take disputes to arbitration and the association won.
Bailey v NSW Medical Defence Union.
Sued the medical defence union on the terms of the indemnity. He argued benefit of s140. He had got an indemnity and he enjoyed those rights with other members and he should be able to sue because he has the benefit. Court said indemnity is not part of the constitution and was given as a separate contract. Special contract.
Limit to the types of rights that can be enforced on the contract of the constitution. Invidual rights to vote and get dividends.
The right to receive injunctive relief is a statutory right. So as a shareholder your interests are affected and may get injunctive religief under s1324.
Statutory rights
Rights to enforce s140 contract
Right to seek injunctive relief 1324
Rights to challenge class rights variations 246D
Rights to seek oppression remedy Pt 2F.1
Right to seek winding up on ‘just and equitable’ ground s461 CA
Right to re misleading or deceptive conduct
Sons of Gwalia v Margaretic
S12DA ASICA or s1041H CA
Subscriber or on market purchaser. Holdsworth’s case.
Is a deceived shareholder sueing ‘as a member’ or as a ‘creditor’- nature of claim.
Not a case about fundamental change in shareholder/creditor priority and has now been reversed by statute.
Personal shareholder actions in equity.
A fiduciary relationship owed (exceptionally) by directors to shareholders.
Allotments of shares made for improper purpose.
Company (majority of shareholders) exercises a power to alter constitution that is beyond judicially set limits.
A fiduciary relationship owed (exceptionally) by Directors to shareholders
Coleman v Myers
There was a fiduciary relationship owed to the shareholders and this was exceptional finding because usually have duty to the corporation.
Brunninghausen v Glavanics
Allotments of shares made for improper purposes- must be for capitalising the company or for something similar. That provides company with remedies against a director.
Residues Treatment and Trading v Southern Resources
Emperor Mines made a takeover offer for Southern Resources. Southern Resources issued shares to another company called Square Gold so it wouldn’t be taken over and this company became a major shareholder. The shareholder’s have diminished controlling interest now that there is greater share capital- less premium of control- diluted. The plaintiffs did not have to observe the proper plaintiff rule but had a personal right to defend their share rights with wrongful issue in breach of director duties. This is a particular wrong of directors and not every breach gives a shareholder a personal equitable right to sue and mostly they don’t have one because it won’t be in an identifiable right in their parcel of rights that are being infringed. There is the right of the shareholder to have their say by virtue of their voting rights- and this standing is to preserve this against improper actions by directors.
There can be no ratification to destroy individual rights. Its subject to difficulties about who gets the benefits. It is one straw in the wind towards the view that you need unanimous vote of shareholders to do this- vote in ratification of director’s breach of duty.
Howard Smith v Ampol Petroleum
Dilution of voting power is fundamental to success of these claims as personal
Company (majority of shareholders) exercises a power to alter constitution that is beyond judicially set limits.
Greenhalgh v Aderne Cinemas
The essence of the matter is changing the constitution to reduce the entitlement of some of the shareholders to bonus shares in lieu of dividends for example or change voting rights or other entitlements to return of capital. Clyde along similar lines. In all these cases there was destruction of tangible value but the court said if the company went thought the right procedures they could change the constitution and this power was wide. There are limits though discussed in Gambotto.
Australian Fixed Trusts v Clyde Industries
Gambotto v WCP
There are limits on the general meeting to pass resolutions to monitor or repeal provisions of the constitution of the company. There are other important decisions which have been delivered by superior courts in the last 150 years about the power to monitor and repeal provisions of the constitution because at the centre of that power to what degree can private decisions destroy private property rights. Cth constitution provides for government to acquire or destroy public property but they have to compensate them on just terms. The power of private individuals to destroy or take private property rights is not easy to justify.
They were looking for tax savings and reductions in tax costs from having a single shareholder on the register. Article 20A allowed the majority shareholders to acquire the remaining shares- special resolution passed to allow majority shareholders to acquire the majority shares. The legislature already made it clear though under takeover regime that there is justification for the majority to buy out the minority for fair compensation in a takeover. 20A was passed unanimously. IEL were advised not to vote their share (97%). Those who attended and voted were unanimous. Gambotto took issue with the passage of the article.
Proper purpose for expropriation of shares by modification of the constitution requires that the company be put in danger if the shareholders remain shareholders.
McHugh J thought that tax savings and reductions in admin costs would be an acceptable substantive basis for compulsory acquisition but the rest of the court disagreed.
The oppression requirement is mostly focussed on the procedural side. They are onerous when either the director takes a benefit or there is some benefit going to the majority shareholder.
Shareholder’s derivative actions: NEED TO LOOK AT! THEY MADE A MISTAKE
Abolition of Foss v Harbottle
Part 2F.1A especially s236-242CA
Have there been many shareholder derivative actions since this part was introduced? The exception to the harbottle rule is that if the BOD wont bring an action on behalf of the company and it is a fraud in equity for them not to do (abusing director duties) that the shareholders would apply to the court to stand in the shoes of the company and use the proper plaintiff rule but its hard to do this! So many equitable exceptions that are ill formed and interpreted differently.
Statutory alternative to Harbottle principle. It was meant to provide private actions to regulate the company and act as a check and balance on the board. Harbottle said only members (existing shareholders) could bring actions.
S236 says u can intervene on an action already on foot.
Statutory alternatives to general law
Promoting private actions as regulating the company shareholder activity.
Who can apply?
S236- member, former member, officer or former officer (including a director).
Bringing and intervening in actions on foot.
Co is joined as defendant.
Can include companies in liquidation.
Grounds
Set out in s237CA.
Probable Co will not bring proceedings- other directors and shareholders overwhelming in number and/or attitude against proceedings e.g. Swanson v Pratt, liquidators argue it is uncommercial to bring proceedings e.g. Charlton v Baber, evidence that good reasons not to begin proceedings e.g. Chapman v E-Sports
Swanson wanted the money back from property settlement but everyone else in the company was against bringing proceedings and she tried to use the ability for her to have a private action and court said that she should have gone to the family court to undo the property settlement there. She wasn’t acting in good faith by using corporate procedure for collateral purpose against her husband.
In Chapman he brought the application to pressure the sports worldwide, a company in the sports group, to give back a lot of intellectual property passed from E-sports in company restructuring. Court found that he was harassing to get the deal opened again and get E-sports compensated.
Applicant is in good faith- proof of collateral purposes or interests benefiting the applicant will be fatal e.g. trying to improve a divorce property settlement Swanson v Pratt; trying to pressure other parties to buy applicant out Chapman v E-Sports. But trying to improve the position of creditors will be good faith- Charlton v Baber.
Grounds:
St out s237 CA
Probable co will not bring proceedings- other directors and shareholders overwhelming in number and/or attitude against proceedings e.g. Swansson v Pratt; liquidators argue it is uncommercial to bring proceedings e.g. Charlton v Baber; evidence that good reasons not to being proceedings e.g. Chapman v E-Sports.
Applicant is in good faith- proof of collateral purposes or interests benefiting the applicant will be fatal e.g. trying to improve a divorce property settlement Swanson v Pratt; trying to pressure other parties to buy applicant out Chapman v E-Sports. But trying to improve the position of creditors will be good faith- Charlton v Baber require a current financial interest in co to show good faith, though it sure helps swansson v Pratt.
Best interest of the co leave be granted- must be in best interest of other jurisdictions; consider what is the character of the co, what is the nature of the co’s business and can the defendant meet any judgement swansson v pratt could the substance of redress be gotten otherwise, oppression application? Swansson v Pratt, Charlton v Baber. Contrast Chapman v E-Sports- Bona fide restructuring being undone?
Best interests of the co leave be granted- see also rebuttable presumption in s237(3) CA and s237(4)
There is a serious question to be tried- applicant must show at least a probability that he will succeed Charlton v Baber; there must be good evidence on basis of which court can decide Charlton v Baber; independent of expert evidence might help e.g. liquidators opinions in Charlton v Baber. If proceedings would be uncommercial that will be a factor Charlton v Baber.
Notice has been given to co of application for leave.
Range of orders:
S241 CA- very wide discretion to make orders for future conduct of action.
May appoint independent person to investigate
Powers as to costs orders.
Winding up on just and equitable ground
Part 5.4A especially s461-62 of CA.
Origins in parternership law.
Usually for small companies.
Courts loathe to wind up.
Who can apply?
S462(2)(c)- a contributory holder of fully paid shares or one liable to contributions.
The company.
Creditors, liquidators, ASIC and APRA.
Grounds:
S461(e) directors acting in their own interests not the company’s
Deadlock
Failure of substratum- re Tivoli Freeholds
Their rentals diminished and they sold off theatres until there was one left that burnt down. Before the fire industrial equity limited was the major shareholder and when insurance was paid the company was very cashed up and because of the sale. It noticed the shares were undervalued and then break the company up and sell it. They began to use the money in Tivoli to do corporate raiding and the shareholders did not know they were in a risky investment. There is always room for new fact situations to satisfy this section the court said. The just and equitable winding up is they have done acts that are against what the members believed would occur when they became members. The board was encouraging a line of activities benefiting others and not the company. Allows winding up on just and equitable grounds. The fair understanding that most members entered the company was no longer being pursued. The memorandum set out that the main object of the business was to carry out entertainment properties and the corporate raiding had used 70% of the company’s funds and non unsecured basis and terms that were not commercial because IEL dominated the board with a majority shareholding. 93% of minority of shareholders had decided to dissociate themselves from the company activities. They wanted to wind up on just and equitable grounds.
Quasi partnership companies- Ebrahimi- Westbourne Galleries.
It is from a family company situation becoming poisonous. They had 500 shares each (two of them) in an incorporated company. Expelled Ebrahimi from the board but he has so many shares and no one would want them because the company is dominated and no longer reflects partnership beginnings of company. There was nothing illegal but in this situation the facts matched up with a legal pigeon hole for a remedy. If a corporation is established on an underlying understanding and circumstances depart from that understanding there is room for recognition that rights and obligations cannot be subsumed in normal way of running the company. Equity can get through the usual corporate relationships in exceptional circumstances. This happens where there is an agreement that everyone will run the business and there is a restriction on transfer of shares so you cant get out when you want to and where dividends are with held is a sign.
These headings are not exhaustive.
Range of orders.
Winding up.
Oppression remedy preferred.
Will beneficiary or other operation of law.
ASIC person.
Grounds
S232
Conduct or proposed company’s affairs.
Either
Contrary to interests of members as a whole or
Oppressive or unfairly prejudicial or unfairly discriminatory.
Composite test- Wayde v NSW Rugby League; Morgan v 45 Flers Ave.
Objective test- Wayde v NSW Rugby League
A reasonable director was thought by the court to be overall for the benefit of the NSW rugby league. It was a discriminatory decision to West but it did balance the interests of West and the competition continuing. High bar to get across.
Dissatisfaction with management is not enough- Re G Jeffrey; Thomas v Thomas.
Breaches of Directors duties can suffice- Re Spargos, Jenkins v Enterprise Mines.
In Jeffrey court came to conclusion that there was no secretive behaviour of special payments to the company. The successful brother was making do with the same low dividends. No improperness involved. The management of the company should be allowed to make decisions appropriate for that company.
In Jenkins they refused to get a receiver. There was oppression because the majority had shammed transactions dressed up to look fine.
Range of orders
S233- very wide.
Level of intervention in company’s internal affairs.
Re Spargos, Jenkins v Enterprise Mines.
Conclusions:
Statutory derivative action versus oppression.
Winding up versus oppression.
Personal action- something different
Effectiveness of accountability through law.
Under s588G the duty to prevent insolvent trading is listed. They must be a director at the time when the company incurs a dept or the company is insolvent at the time or becomes insolvent by incurring that debt or there are reasonable grounds for suspecting that the company is insolvent. By failing to prevent the company incurring the debt the person contravenes the section if they are aware at the time there are such grounds for suspecting or a reasonable person in a like position in a company with the company’s circumstances would be so aware. A person commits an offence if their failure to prevent the debt was dishonest.
Note:The defendant’s liability needs to be established only on the balance of probability; Rejfek v McElroy (1965)
S9 defines director as a person appointed to the position of a director or is appointed to the position of an alternate director and is acting in that capacity regardless of the name given to their position. Unless there is a contrary intention a person not validly appointed a director but acts in that position and the directors are accustomed to act in accordance with their instructions or wishes is a director.
Debt: something recoverable by action for debt; Ogden’s Ltd v Weinberg (1906) The obligation must be ascertainable debt involving an obligation to pay a liquidated sum as distinct from e.g. an obligation to pay unliquidated damages or equitable compensation for breach of fiduciary duty by the director; Hawkins v Bank of China (1992)
Several capital management transactions such as the payment of a dividend, the reduction of share K , buying back shares and entering into uncommercial transactions are deemed to be the incurring of a debt within s 588G(1A). [See the table for other examples].
A company is solvent : if and only if the person is able to pay all their debts as and when they become due and payable; Section 95A(1)
Insolvent company: Company which is not solvent ; Section 95A(2)
This is the ‘cash flow’ test for solvency.
The concern is the company’s ability to pay its debts as and when they fall due.
It is not about a “temporal lack of liquidity” but whether the company’s financial position is part of “an endemic shortage of working capital” ; Hymix Concrete Pty Ltd v Garrity (1977)
In determining whether a company is able to pay its debts as and when they become due for purposes of a predecessor provision it is said that “all the cash resources available to the company, including credit resources, are to be looked at and in determining those credit resources there are to be taken into account the times extended to the company to pay its debts, on the one hand, and the times within which it will receive payment of debts owing on the other hand”. Heide Pty Ltd (t/as Farmhouse Smallgoods) v Lester (1991)
The cash resources available to the company include funds which may be obtained by the sale, mortgage or pledge of assets within a relatively short time. Sandell v Porter (1996).
Propositions with respect to determination of insolvency [authorities deleted]:
Whether or not a company is insolvent is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole.
In considering the company’s financial position as a whole, must have regard to commercial realities which is relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash a realisable by sale or borrowing upon security and when such realisation are achievable.
It is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining insolvency.
The commercial reality that creditors will normally allow some latitude in time for payment of their debts does not, in itself, warrant a conclusion that the debts are not payable at the times contractually stipulated and have become debts payable only upon demand.
In assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract unless there is evidence, proving to the court’s satisfaction, that;
There has been an express or implied agreement between the company and the creditor for an extension of the time stipulated for payment or
There is a course of conduct between the company and the creditor sufficient to give rise to an estoppel preventing the creditor from relying upon the stipulated time for payment or
There has been a well established and recognised course of conduct in the industry or as between the company and its creditors as a body, whereby debts are payable at a time other than stipulated in the credit terms or aware payable only on demand
It is for the party asserting that a company’s contract debts are not payable at times contractually stipulated to make good that assertion by satisfactory evidence.
Industry practice and the general state of the economy may be relevant to the question of solvency
When the commitment of financial support from an external source is tenuous or highly conditional, it adds little to the company’s ability to pay debts.
Section 588 E: A company which fails to keep and retain financial records that correctly record its transactions over the previous seven years, its financial position is presumed to be insolvent throughout this period.
Section 295(4)(c) - Except for small proprietary companies, directors must make a declaration as part of the company’s annual report whether there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.
There must have been reasonable grounds for suspecting that the company is insolvent or would become insolvent by incurring that debt.
The adoption of a legal standard of suspicion to replace that of expectation lowers the threshold of apprehension which will engage the section and to that extent exacts a higher standard of oversight by director of their company’s financial condition; 3M Australia Pty Ltd v Kemish (1986)
Suspicion: more than a mere idle wondering, it is a positive feeling of actual apprehension or mistrust, amount to a slight opinion but without sufficient evidence… it is more than a reason to consider or look into the possibility; Queensland Bacon P/L v Rees (1966)
Metropolitan Fire Systems: Einfeld J stated that the suspicion test is one of objectively reasonable grounds which must be judged by the standard appropriate to a director of ordinary competence.
s588G(2) - By failing to prevent the company from incurring the debt, the director contravenes the section if:
The director is aware at that time that there are such grounds for so suspecting OR
A reasonable person in a like position in accompany in the company’s circumstances would be so aware
s588G(2)(a)
First limb expresses a subjective character
It is not necessary for the director to be aware that the company is insolvent, merely that there are reasonable grounds for suspecting its insolvency.
It appears that the limb would be satisfied if a director has knowledge of facts or circumstances concerning the company’s financial condition which compromise reasonable grounds for suspecting insolvency, even though the director fails to appreciate their significance and implication for the company’s insolvency.
s588G(2)(b)
Satisfied even where the director lacks personal awareness, if a reasonable person would have so suspected.
The reasonable person is invested with the characteristic’s specific to the particular director’s office to the particular company’s circumstances.
Explanatory memorandum stated that the company’s circumstances would include the size and type of the company, the nature of its enterprise, the composition of its board, and the distribution of work between the board and other officers.
S588H outlines the defences for contraventions of 588G(2) in relation to the incurring of debt. It is a defence if it is proved that at the time the debt was incurred the person had reasonable grounds to expect and did expect that the company was solvent and would remain solvent. At the time the debt was incurred they had reasonable grounds to believe and did...
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