Corporations Law ILAC - Corporation Law example PDF

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Issues Is Paris, Vienna, and Sydney an officer of Milton Motels Pty Ltd ‘Milton’ under s9 of the Corporations Act (CA)? Has Paris, Vienna and Sydney breached any director’s duties under the CA when Vienna failed to declare information in relation to conflict of interests, Paris continued to conduct business with the knowledge that Milton was insolvent, Sydney who used insider information to purchase shares in Bright Ideas Ltd? If so, what sections of the CA have been breached and what civil penalty provisions and remedies are available? Law: Corporations Act 2001 (Cth) (CA) s9: Definition of ‘officer’, s180(1): Care and diligence, s180(2): Business judgement rule, s181: Good faith, s182: Use of position, s183: Use of information, s191: Disclosure of Personal Interest, s194: Declaration of Interest (Proprietary Company), ss588(G) and (H): Duty to prevent insolvent trading, ss1042-1043: Insider Trading Provisions that focus on all persons, not just directors, ss1317, 1324, 203, 206, 233: Penalties/Remedies Common Law: ASIC v Adler (2002): directors duties/disclosure of personal interest, Cummings and anor v Claremont Petroleum NL (1992): dishonest acts for personal gain, ASIC v Plymin, Elliott & Harrison (2003): insolvent company when unable to pay debts, Salomon v Salomon (1897): established principle of corporations as separate legal entity, Commonwealth Bank of Australia v Friedrich (1991): lifting the veil, ASIC v Vizard (2005): insider trading/duty to act honestly, R v Rivkin (2004) and R v Hannes (2002) insider trading/improper use of position and information, Shafron v ASIC (2012): care and diligence Application Section 9, specifically clauses (a), (b) and (c) in relation to this matter defines an ‘officer’ of a company as a person who is ‘a director or secretary of a company; a person who participates or makes decisions that effect the company and a person who has the capacity to affect the financial standing of the company’ (Slide 21). According to the definition Paris, Vienna and Sydney are considered to be officers of Milton. In a company meeting the directors discussed Vienna’s suggestion to employ Dodgy Brothers Cleaners Pty Ltd to take over Milton’s laundry service. At the meeting Vienna failed to declare information of personal interest specifically relating to her husband and her brother-in-law who were directors of this company. Under s191 Vienna had a duty to disclose information of personal interest, however did not and therefore breaches this section. Vienna also breached s182 when she did not avoid the improper use of her position when she suggested and voted on the matter. Vienna’s actions are reflective of the Cummings case were the directors had been found guilty for using their positions to pass dishonest resolutions in order to benefit themselves. Vienna further neglected her statutory obligations of fulfilling her director duties by breaching numerous sections of the CA as Vienna did not under s180 act with due care and diligence, s181 act in good faith in the best interest of the company and s183 avoid improper use of information. Paris’s conduct, lack of interest in overseeing the company accounts breaches s180(1) that requires directors to exercise their powers and undertake their duties with care and diligence in a manner that a reasonable person would in that position. Paris also breaches s181 which required her to exercise her powers and undertake her duties as director in the best interest of the corporation (good faith) and for proper purpose. Additionally, Vienna and Sydney also have a responsibility to ensure the company is solvent and therefore also breach the same sections of the CA. Paris was advised that the accounts had been overdrawn for two months and that Milton was unable to pay its debts by Nikki, Chief Financial Officer (CFO). Paris has failed in her fiduciary duty and did not discharge her duties with care, diligence or in good faith. Similarly, the Plymin case discussed that the directors were expected to take steps to monitor the company, take an interest in the information provided to them or seek that information from other directors or employees of the company. Paris proceeded to increase Milton’s liabilities in an attempt to attract business whilst Milton was insolvent. Furthermore, the Powell case in determining insolvency found that insolvency is whether at the relevant time, the company is able to pay its debts as they become due, and does not consider if the company may be able to do so in the future if given time to trade profitably. Paris effectively has engaged in insolvent trading by incurring further debt whilst insolvent. Paris also breaches s588G that denotes directors have a duty to prevent a company incurring a debt while it is insolvent. Paris contravenes this section as she is aware of the financial state of Milton when incurring the debt. Paris would have had enough information to reasonably suspect Milton was insolvent in the same way the Plymin case identified that a reasonable person in a like position would have been aware that there were reasonable grounds for suspecting insolvency and should have acted to prevent it.

Paris also neglects her statutory obligations of fulfilling her director duties by breaching s183 as her actions proceeded to cause Milton harm. Sydney, whilst on a business trip befriends businessman Norman who works for Bright Ideas Ltd (Bright Ideas) a public corporation. Norman discloses to Sydney information related to recent lucrative contracts between Bright Ideas and an international corporation that will make substantial profits. Following this conversation Sydney purchases shares in Bright Ideas using her own money. Both Sydney and Norman have engaged in insider trading which refers to the disclosing of non-public, price-sensitive information of publicly held corporations by individual/s with inside informational advantage (Slide 33). Both Norman and Sydney have breached s1042 – s1043 as Norman disclosed sensitive information and Sydney acted on the information. Similarly, in the Rivkin and Hannes cases where both Mr Rivkin and Mr Hannes were prosecuted for insider trading as they had either received or had knowledge due to their position of insider information of a public company and proceeded to purchases shares in that company. Sydney further neglected her statutory obligations of fulfilling her director duties by breaching s182 when she did not avoid the improper use of her position and s183 when she did not avoid the improper use of the information provided to her. Likewise, in the Vizard case Mr Vizard was found guilty of breaching s183 as he held a position of director, had obtained confidential information by reason of his position, had made improper use of that information and obtained an advantage due to improper use. Defences available to Paris and Vienna is s180(2): business judgement rule. This rule stipulates directors who make business judgements will not be liable for the consequences if the decision was made in good faith/proper purpose, with no material interest in the subject matter, that information was sought on the subject matter, and they rationally believed judgement was in the company’s best interest. Conversely, the courts interpreted s180(2) in the Daniels case that business judgement was not a valid defence, as the directors were guilty of contributory negligence, where they had breached the duty of reasonable care, skill and diligence. Likewise, in the Adler case the court concluded that the defence was not valid to protect Mr Adler, as he failed to act in good faith for a proper purpose. It is unlikely that a reliance of a defence in s180(2) would be successful, based on Paris and Vienna’s conduct. Additionally, Paris may argue ss588H which provides defences for directors who contravene ss588G. Again, it is unlikely that this defence would be successful as Paris would need to prove that she took all reasonable steps to prevent the company from incurring a debt. This defence may be rebutted using the Friedrich case in which the director was found to have breached ss588G as he should have known the contents of the accounts and was found personally liable for debts incurred by the company that he had failed to prevent. The Friedrich case also refutes the concept of the ‘corporate veil’. A principle established in the Salomon case that ruled a company is a separate legal entity, separate from its members and with its members not personally liable for the debts of the company except to the extent of their limited liability. However, under ss588G provisions exist to lift the corporate veil in order to take action against a director personally where insolvent trading has occurred. It is also assumed that Nikki as the CFO is an executive officer of Milton as per s9 clauses (b) and (c) therefore the same statutory director duties are applicable. Nikki advised of Milton’s financial state but did not highlight the potential risks/adverse outcomes or act to prevent these. Nikki has also failed in her fiduciary duty and breaches s180(1). In the Shafron case the court found Mr Shafron guilty of contravening the CA as it was not only part of his duty and responsibility to provide advice based on area of expertise but to also raise potential risks/adverse outcomes of that advice. The Shafron case also highlighted that executive officers are not excused from liability under s180(1) simply because they are not the ultimate decision-makers and that being a decision influencer may be sufficient. Conclusion On the balance of probabilities, it is likely that the Federal Court would find that Vienna, Paris and Sydney have breached multiple sections of the CA. The following remedies or civil penalty provisions may be applied by the court: s203 resignation of director by written notice, s203C by resolution to remove a director and appoint another, s206C, D, E disqualification, s1317G penalty up to $200,000 per breach, s1317H compensate a corporation/s for damages including any profits made by any person due to breach, s1324 issue a court injunction to stop the conduct and s233 where the court may make an order it considers appropriate e.g. winding up the company.

PRACTICAL BUSINESS MANAGEMENT TASKS Question 1  ACN 008 419 485, Sydney NSW 2000 Question 2  ABN 80 229 520 143, Kennington VIC 3550 Question 3  Voluntary deregistration is an option available to cease a company as a legal entity particularly if the company is no longer trading. Voluntary deregistration effectively removes the applicant from any obligations as an officeholder. Applications are made via the Australian Securities and Investments Commission (ASIC) which also sets out strict criterion required to be met for eligibility for voluntary deregistration.  There are two options available in order to reinstate a company that has been deregistered. The first option is to apply to ASIC for reinstatement, however the applicant must satisfy a number of criterion to be eligible. If the criterion cannot be met or if ASIC has refused the reinstatement application then the second option to consider is applying to the court to seek an order from the court ordering ASIC to reinstate the company. Question 4  Section 162 of the Corporations Act states that only some kinds of conversion are allowable. For example a type of company listed as a ‘proprietary company limited by shares’ may change to a type of company listed as ‘public company limited by shares’.  There are two main steps that must be undertaken to allow this to happen. The first requires ‘Passing a company resolution’. There are two types of resolutions: ordinary and special. In this case, changing a company’s type requires that a ‘special resolution’ is undertaken. For a resolution to pass, it must meet the criteria outlined by ASIC. Secondly, the following forms must be completed and lodged to ASIC - Form 205 and a Form 206 Application for change of company type. Question 5  4 years and 3 months imprisonment with a minimum of 2 years and 3 months served in prison before becoming eligible for parole.  Beyond reasonable doubt is the standard of proof required to be met in criminal matters....