Part A

Sam, Adrian and Michael call to make an appointment with your firm, Fees Ruthless, Accountants.You have been asked to establish their new company (No-Tax Agents Pty Ltd).You advise them not to bother with their own Constitution, but instead to rely on the replaceable rules in the Corporations Act 2001 (Cth).

Advise who should be appointed as directors of their company in view of the following information:

(a)Sam states that he does not want to be appointed a director or company secretary.He suggests instead that: his family company be appointed as a director; and the company not have a company secretary;

(b)Adrian is currently unavailable for meetings as she has five months still to serve for her last conviction for falsifying company accounts;

(c)Michael is 72 years old and has dementia.A trustee has been appointed to administer his estate.

Part B

Sabrina was appointed a non-executive director of Transuniverse Travel Corporation Limited. After her appointment Sabrina set up an investment company to engage in share trading. As a non-executive director of Transuniverse, Sabrina was often provided with confidential information. Sabrina used this information obtained as a Transuniverse director to make two share purchases and a share sale. Unfortunately, Sabrina actually lost money from the share trades and Transuniverse did not suffer any loss as a result of Sabrina?s conduct.

Given the following circumstances:

?Sabrina admitted that she breached the Corporations Act;

?Sabrina co-operated with the ASIC in the course of its investigations;

?Sabrina was a very well known and respected public figure;

?ASIC and Sabrina agreed that an appropriate period of disqualification was 4 years.

Assuming that Sabrina was found to have breached s183 Corporations Act. Apply the criteria in ASIC v Adler and determine a disqualification period (if any) for Sabrina.

Part C

Arana, Mirabella and John establish a company in which they each take shares. Arana has another job as an accountant and so she contributes most of the money to the new company and receives 60% of the shares in the company. Arana chooses not to become a director of the company. Mirabella and John each take a 20% shareholding and also act as the company?s directors. However, John forgets to submit a written acceptance of his role as a director. During the first year, the company runs well. Given that Arana owns a majority of the shares in the company, she is consulted about any significant decisions by Mirabella and John. If Arana disagrees with the course of action proposed by Mirabella and John, then normally they will compromise to suit Arana. One day while Arana is inspecting the company?s accounts, she notices some accounting anomalies which suggest that Mirabella has been misappropriating funds from the company. Furthermore, Arana believes that the company has been insolvent for some time.

a) Does Arana fit within the definition of an officer under the Corporations Act?

b) Can John avoid liability as a director for insolvent trading by arguing that he was not officially appointed (due to the fact that he did not accept his position in writing)?

2106AFE Company Law - Week 5 Workbook No. Workshop Objective Key Law Key Reading Know it? (Y/N) 1 Explain the law regulating company secretaries 204A, 204B, 204C, 204D, 204E, 204F, 188 [14.6] 2 Identify and explain the types of directors, as well as the powers of the Board of Directors 9 (definition of director), 198A, 198B, 198C, 198D, 201J, 201K, DCT v Austin; Chameleon Mining NL v Murchison Metals Ltd*; Buzzle Operations P/L v Apple Computer Australia*; Standard Chartered Bank v Antico [14.7] - [14.18] 3 Explain how a director is appointed 201B; 201G; 201H; 201M [14.8]; [14.19] 4 Explain the procedure for the calling, holding and decision-making at directors' meetings and the types of resolution 248A, 248B, 248C, 248D, 248E, 248F;s248G; Mancini v Mancini [12.19] 5 Explain who determines a directors' remuneration and obligations of disclosure 202A; 202B 6 Explain how a director of a public and proprietary company is removed 203A, 203C, 203D, 203E [14.20] [14.23] 7 Identify, explain and apply the grounds for disqualifying a director from managing companies. 206A, 206B, 206C, 206D, 206E, 206EAA, 206F, 206G; ASIC v Adler*; ASIC v Vizard* [14.24] - Note: Cases denoted by * are provided in the textbook. Otherwise they are summarised in this workbook. Answers to revision questions: (a), (e), (b) 1 Contents Directors........................................................................................................................3 Types of directors......................................................................................................3 Board of Directors.....................................................................................................7 Holding, calling and convening directors' meetings.....................................................8 Company Secretary....................................................................................................10 Directors: Appointment...............................................................................................12 Directors: Remuneration.............................................................................................13 Directors: Removal.....................................................................................................14 Video: Disqualification of Directors.............................................................................15 Automatic Disqualification - CA..............................................................................17 Disqualification - Breaching a Civil Penalty Provision............................................18 Disqualification - Failed Companies.......................................................................19 Disqualification - Repeated Contraventions of CA.................................................20 Disqualification - Foreign jurisdiction......................................................................20 Disqualification - ASIC............................................................................................21 Managing a Corporation..........................................................................................22 Workshop exercises: to be completed in class..........................................................24 Workshop exercise: for you to do before class..........................................................26 Your questions............................................................................................................26 Revision Questions.....................................................................................................27 2 Directors Why are we doing a week on directors? The CA and the common law impose duties on the directors and other officers of the company. Thus you need to identify whether the person is a director before considering the statutory and common law duties (e.g. duty to act in good faith - section 181 CA). Remember from Week 1 that public companies must have a minimum of 3 directors (s201A(2)) and proprietary companies must have at least 1 director (s201A(1)). Types of directors Who is a director? A director is responsible for managing, or supervising the managing of, the company's business and affairs. In small companies, the director(s) may manage the company's business by working in the business and making day-to-day decisions about its operation. In larger companies, managers, under the supervision of directors, are appointed to make the day-to-day decision making. Section 9 CA defines a director as: A person appointed to the position of director; A person appointed to the position of alternate director regardless of the name given to their position; A person not validly appointed but acts in the position of director (\"a de facto director\"); A person not validly appointed as a director but the directors of the company are accustomed to act according to the person's instructions or wishes (\"shadow director\"). Who is a de facto director? A de facto director is a person who is not validly appointed, but acts in the position of director. The court in DC of T v Austin made these comments about a de facto director: 3 The question of de facto director involves a consideration of the duties performed in the context of the company's circumstances. Relevant factors will be: o The size of the company; o The duties delegated to the person; o How the person is perceived by outsiders; o Whether the person exercises \"top-level\" management functions. For example: In a small company, this is where a person has acted for the company in relation to important matters In a large company, many important matters are delegated to employees and the exercise of such functions does not necessarily indicate that the person is a director. Note: In this case, Mr A resigned as director but continued to negotiate with the ATO regarding the company's tax debts and other creditors. The Court held he was a director. The Court has also described a de facto director as: being the \"driving force behind the company\" despite not having been formally appointed; and a person who continues to participate in the management of the company after expiration of their Commissioner v Drysdale) term of appointment. (Corporate Affairs Who is a shadow director? These are persons who are not validly appointed but whose instructions or wishes are customarily followed by the directors of a company. For example, a holding company may be a shadow director of a subsidiary, if the directors of the subsidiary customarily follow the holding company's directions or instructions: Case Example: Standard Chartered Bank v Antico Facts: Pioneer held, through two wholly owned subsidiaries, 42% of Giant Resources. The only other significant shareholders had between 3% and 10% shareholdings in the company. 4 Pioneer also had nominee directors on Giant's Board. Pioneer exercised management control over Giant. For example, Pioneer (not the Giant Board) made strategic decisions about the sale of some Giant assets and Pioneer required Giant to have financial reporting requirements that were consistent with Pioneer. Held: Pioneer was a shadow director of Giant Resources Note that a person is not a shadow director if the directors act according to their advice given in a professional capacity (e.g. lawyer or accountant). What are the types of appointed directors? Managing Director Section 201J (RR): The directors may appoint 1 or more of themselves to the position of managing director of the company for the period on the terms as the directors see fit. The directors may delegate to a managing director any of the powers that the directors can exercise (s198C - RR). Many companies appoint a managing director (also known as a CEO) to manage the day-to-day business, whereas the Board is responsible for strategic decisions, developing and achieving objectives. As per the Constitution or RR, the MD will be delegated wide powers in large companies, as it is impracticable for the board of directors to carry out all the duties related to running the company. The duties of a MD include being responsible for the senior executives employed by the company. Alternate Director Company constitutions typically provide for the appointment of an alternate director to cover the absence of a director through illness or extended travel (e.g. see clause 6.19 of Qantas Constitution). The main purpose of an alternate director is to ensure that a quorum is achieved for director's meetings. Under section 201K (RR) a director may, with the approval of the other directors, appoint an alternate to exercise some or all of the director's powers. The appointment must be provided to the company. ASIC must be notified of the appointment within 28 days of appointment (s205B(2)). 5 Where the alternate director exercises a director's power, it is as if it was exercised by the director (s201K(3)). Alternate directors owe the same statutory duties as the director. The appointing director can terminate the alternate director's appointment at any time (s201K(4)). Nominee Directors A nominee director may be appointed to represent the interests of particular shareholders or creditors on the board of directors. For example, a director of Giant Resources Ltd was a nominee of the holding company in Standard Chartered Bank of Australia Ltd v Antico. For example, the Constitution may state that company employees can vote to elect a person for company director. Executive and Non-Executive Directors Most publicly listed companies have executive and non-executive directors. Executive directors are employees of the company, whereas a non-executive directors' is not a company employee. The non-executive director is providing services to the company. The appointment of non-executive directors is considered good governance because they bring an independent and broad view to the board's decision making as well as specialised experience and skills to review the performance of the company. Chair of Directors (or Chairperson) The directors may appoint a director to chair meetings (s248E). The main role of the chairperson is to exercise procedural control over a meeting. For example: Who is to speak Dealing with the order of Business in the Notice of Meeting Putting questions to the meeting Declaring resolutions to be carried or defeated Closing meeting 6 In addition, the CA provides that a chairperson: Must sign the minutes of meetings (s 251A(2)); and In the event of deadlock, the chair has a casting vote at directors meetings (s248G(2) - RR). A company must have a chairperson for a meeting. That is clear from the responsibility of the chairperson to sign the minutes of meetings. Under s248E, if an elected chairperson is unavailable or declines to act (e.g. the chairperson has a material personal interest in the matter - s195 CA), the directors must elect another director to chair the meeting or part of the meeting. Board of Directors The Board of Directors is the company's directors, expressed as a collective group. The powers of the Board are determined by the Replaceable Rules, the company's constitution (if any) and the Corporations Act. What are the common Board powers? Oversight of the company including control and accountability systems; Appointment and removal of key staff (CEO, CFO, secretary); Input into and final approval of management's development of corporate strategy and performance objectives; Reviewing and ratifying internal systems (e.g. codes of conduct, legal compliance); Monitoring senior management performance; Approving and monitoring the progress of major capital expenditure; Approving and monitoring financial and other reporting. What are Board Powers under the RR? Section 198A: The business of the company is to be managed by or under the direction of the board. The directors may exercise all the powers of the company except any powers that the CA or the company's constitution (if any) requires the company to exercise in general meeting. 7 This rule demonstrates the two separate organs of the company: ownership (shareholders) and control (directors). This separation means that generally, shareholders cannot override management decisions. What are the Board Powers under CA? Management (s198A - RR) Delegation (s198D) Registration of share transfer (s1072F - RR) Calling directors and members' meetings (s248C and 249C); Determining dividends (s254U) Executing documents (s127) and negotiable instruments (s198B). How does the Board exercise its power? Directors exercise their power by making decisions and passing resolutions at the board meeting. The rules governing board meetings are set out in the RR or the constitution (if any). Holding, calling and convening directors' meetings What is the required notice of a directors' meeting? Notice must be given to all directors when a meeting is to be convened. A directors' meeting may be called by a director giving reasonable notice individually to every other director (s248C - RR). Many constitutions fix a notice period, such as five days under the Qantas Constitution, or the directors by resolution fix meeting dates at the beginning of the year. How many directors must be present at the meeting? A quorum is the minimum number of directors required for a valid meeting. The replaceable rules and constitution (if any) specify how many directors constitute a quorum for a valid board meeting. 8 Unless the constitution says otherwise, s248F (RR) provides that a quorum is 2 directors unless the directors determine otherwise, and the quorum must be present at all times during the meeting. A resolution passed without a quorum is void (see Mancini v Mancini) In determining whether a quorum has been reached, the directors who form the quorum must be entitled to vote. A director is generally not entitled to vote if he or she has a conflict of interest (refer ss191 and 195 CA). For example, a resolution to consider whether the company should enter into a contract in which a particular director has an interest, that director is generally ineligible to vote and accordingly is not counted for the purpose of making up the quorum (Re Austplat Minerals NL). Section 195 CA reflects this common law rule in relation to public company directors. Case Example: Mancini v Mancini (1999) 17 ACLC 1,5701 Facts: Valda Mancini (the plaintiff) and John Mancini (the defendant) were the only directors of three companies. Each held one of the two issued shares in Wesco Industries Pty Ltd (``Wesco Industries''), Wesco Quarry Products Pty Ltd (``Wesco Quarry'') and Wesco Ready Mixed Concrete Pty Ltd (``Wesco Ready''). The parties had previously been married. On 29 June 1999, meetings of the directors of Wesco Industries, Wesco Quarry and Wesco Ready were held. At those meetings, the plaintiff resolved to appoint Mr Ray Azzopardi as a director and remove her former husband (the defendant) as a director. The only persons at those meetings were Ms Mancini and Mr Azzopardi. Ms Mancini claimed she was present in two capacities one as herself and the other as Mr Mancini's attorney. Held: The appointment of an alternate director (Mr Azzopardi) and removal of Mr Mancini as director were invalid because: No notice was given to Mr Mancini of the meetings; No quorum: The constitution of the three companies all required the quorum of a meeting of directors to be 2; Ms Mancini did not have the power to remove a director in the constitution; and the procedure in the constitution allowing the appointment of alternate directors had not been followed. 1 Reference: Part of case headnote in CCH Australian Company Law Cases online database available from the CCH Company, Corporate and Securities Law library, 2013. 9 Must the directors be present at the same place for their meeting? Directors do not have to be physically present at one place. Section 248D permits a directors meeting to be called or held using any technology (e.g. video conferencing) consented to by all the directors. Do you need a directors' meeting to pass a resolution? No. Directors may pass resolutions without a meeting being held by passing a circulating resolution. Under s248A(1) (a RR), a circulating resolution involves: All the directors entitled to vote on the resolution sign a document; The document contains the resolution; The document contains a statement that they are in favour of the resolution provided in the document (s248A(1) - RR). The resolution is passed when the last director signs (s248A(3)). Of course, the Constitution can modify the RR to ease the restrictions on circulating resolutions. For example, clause 6.18 Qantas Constitution requires only majority consent to the circulating resolution. A sole director Pty company doesn't need to worry about convening meetings - the director can pass a resolution by simply putting the resolution in writing (s 248B) When is a resolution passed at a directors' meeting? Section 248G (a RR) states that a resolution must be passed by a valid majority vote (i.e. those directors entitled to vote on the resolution). How are the resolutions recorded? Section 251A(1)(b): Proceedings and resolutions of directors' meetings must be recorded in the company's minute book What is a Board Committee? Companies with relatively large numbers on the board will often delegate various board functions to committees of directors. Section 198D allows the directors to delegate any of their powers to a committee of directors. The committee must exercise powers delegated to it according to the directions of the directors. The effect of the committee exercising a power in this way is the same 10 as if the directors exercised it. The most common committees are those dealing with audits and remuneration (e.g. terms of appointment and remuneration of senior company executives, including the CEO). Company Secretary The company secretary is the company's chief administrative officer who has customary authority to enter contracts connected with the administrative side of the company's affairs, such as ordering office supplies and dealing with ASIC related matters. Unlike directors, a company secretary does not have customary authority to sign a contract relating to the commercial management of the company (e.g. sale or purchase of goods in which the company deals): Panorama Developments case Is every company required to have a company secretary? Every public company must have at least 1 secretary (s204A(2)). A secretary is an officer as per s9 and is subject to the statutory duties of officers and employees in Ch 2D of the Act. Proprietary companies do not have to have a company secretary (s204A(1)) but if it does have one or more, at least one must reside in Australia. Who can be a company secretary? Any person over 18 can be a secretary (s204B(1)). How are company secretaries appointed? Under the CA: Section 204D requires secretaries to be appointed by the directors; Section 204C requires the secretary to provide a signed consent to act as secretary before appointment; and Section 204F (RR) provides that a secretary holds office on terms and conditions that the directors determine. What are the company secretary's responsibilities under CA? Section 188 makes a secretary of a corporation responsible for a range of tasks under the CA, including: o s142 requirement for companies to have registered office; 11 o lodgement of various notices with the ASIC; o s145 requirement for a registered office of public company to be open to public; o s319A requirement for lodgement of financial reports to ASIC. A secretary who contravenes s188 commits an offence (s188(2A)). Section 188(3) however gives a secretary a defence if s/he took all reasonable steps to ensure that the company complied with s188. Directors: Appointment Who can be appointed as a director? A person's eligibility to be a director is found in section 201B and the company's constitution. The person must: Not be under 18 Be a natural person (i.e. not a body corporate). Remember a holding company that is not formally appointed may nevertheless be regarded as a shadow director Not be disqualified from managing corporations unless the person has received ASIC (s206F) or Court permission (s206G) Section 201B of CA provides that if you are 18, human and haven't been disqualified from managing corporations, you can be appointed as a director. How are directors appointed? Unless the constitution says otherwise, directors are normally appointed by ordinary resolution at a general meeting (s201G - RR). The director must provide a signed consent to act as a director before the appointment (s201D). Section 201H provides that directors may also appoint a director. The appointment must be confirmed by member resolution: within 2 months after appointment (for Pty co's); or at the next AGM if a public company. 12 A single director/shareholder of a Pty Co may appoint another director by recording the appointment and signing the record (s201F) and personal representatives of a single director have power in limited circumstances (death, incapacity, bankruptcy). Does the director have to be a company shareholder? No, unless the constitution of a company requires a director to hold a minimum number of shares in the company. What happens if the appointment is defective in any way? Directors and secretaries may act on behalf of the company, albeit that there is a technical defect in their appointment. The Corporations Act provides that an act done by a director (s201M) or a secretary (204E) is effective even if their appointment, or continuance of their appointment, is invalid because the company or director/secretary did not comply with the company's constitution or provision of the Act. As discussed in previous workshops, s129 (2) and (3) protect outsiders. Outsiders are entitled to assume that officers have been validly appointed and have power to act on the company's behalf subject to s128 (4). How long is a director appointed? The members of the company and the Constitution will determine the period of a director's appointment. Members may remove the director and/or the constitution may provide that the director's continuing appointment will be voted on after a period of time. Under ASX Listing Rules, a listed company director (except the managing director) cannot hold office for more than three years without being re-elected. See clause 6.3 of the Qantas Constitution for an example. A director can also resign at any time by providing the appropriate notice, either under the CA or in the constitution. Section 203A (a RR) provides that a company director can resign by written notice delivered to the company's registered office. Directors: Remuneration How much are directors paid? Section 202A CA (a RR): the directors are to be paid the remuneration that the company determines by resolution. The company's constitution may add to or vary this rule (e.g. see clause 6.7 of Qantas Constitution). 13 Note: With a number of companies, the Board will determine the executive director's pay and the members will determine the nonexecutive director pay. The reason for this is that the executive director is a company employee. Members are not responsible for approving employment contracts. Non-executive directors provide specialist expertise - their number is limited by the members. In some companies such as Qantas and Santos, the members will agree to a maximum pool of remuneration available to the nonexecutive directors. How do members find out how much a director is being paid? By direction: Shareholders with at least 5% of the votes that can be cast at a general meeting or at least 100 members who are entitled to vote at a general meeting may direct the Co to disclose all the remuneration paid to each director [s202B(1)]. In director's report: the annual directors' report of listed public Co's must provide details of remuneration and other payments to directors (s300A). Can the Court stop directors from paying themselves too much? Oppressive / Unfair Conduct: The payment of excessive remuneration to directors may constitute oppressive or unfair conduct under s232, especially if dividends are not paid or reduced to a small amount (discussed later). Repayment of unreasonable transactions: s588FE(6A) provides that unreasonable director-related transactions entered into during the 4 years prior to a company's winding up are voidable. The company's liquidator can apply for a court order requiring repayment of these unreasonable amounts. Directors: Removal The rules about the removal of directors vary between public and proprietary companies. Removing Pty co directors is determined by the RR and constitution. The removal of public company directors is set out in the CA. Where a director is removed, s/he cannot prevent the company from exercising its right of removal, however s/he may have remedies outside the CA (i.e. employment law and/or contract law). This is why you have a clause in the employment or service contract for a director saying something like this: 14 The company may terminate this contract without notice to the [employee or contractor] if [employee or contractor] ceases to be a director of the company. Public Companies Can the directors remove a director? A director of a public company cannot be removed by the other directors (s203E). How can the members remove a director? The directors of a public company can be removed by resolution in a general meeting [s203D(1)]. Section 203D overrides the constitution or any prior agreement because it is not a RR. So even if a contract states that a person will remain director for x number of years, s203D enables a majority of members to remove the director beforehand. The members can remove all the directors, as long as they will be immediately replaced (Claremont Petroleum NL v Indosuez Nominees Pty Ltd). This is despite s201A(2), which requires public companies to have at least 3 directors. A notice of intention to remove a director must be given to the company at least 2 months before the meeting is to be held (s203D(2)). A copy of the notice must also be given to the director who can put his/her case to the members in writing and by speaking to the members at the meeting (s203D(3) & (4)). Proprietary Companies Can the directors remove a director? Yes, but only if the constitution says so (if any). How can the members remove a director? The directors of a proprietary company can only be removed by a general meeting if empowered to do so by the RR or constitution (if any). Section 203C (a RR) permits the shareholders by ordinary resolution to remove a director and appoint another person. Video: Disqualification of Directors For a person to be validly appointed as director or company secretary, they must not be disqualified from managing corporations, unless the court or ASIC grants permission. Part 2D.6 CA sets out the disqualification rules. 15 A person can be disqualified by one of three mechanisms: the CA, ASIC and Court. This video summarises the disqualification provisions with reference to the disqualification table below. Disqualification of directors 16 17 Automatic Disqualification - CA When is a person automatically disqualified? Section 206B: A person is automatically disqualified from managing corporations in each of the following circumstances: The person is convicted of an indictable offence that concerns the making of decisions that affect the business or the corporation (s206B(1)(a)(i)); or The person is convicted of an indictable offence that concerns an act that has the capacity to affect significantly the corporation's financial standing (s206B(1)(a)(ii)); or The person is convicted of an offence that is a contravention of CA and is punishable by imprisonment for a period greater than 12 months (s206B(1)(b) (i)); or The person is convicted of an offence involving dishonesty and is punishable by imprisonment for at least three months (s206B(1)(b)(ii)); or The person is convicted of an offence against the law of a foreign country that is punishable by imprisonment for a period greater than 12 months (s206B(1) (c)); or The person is an undischarged bankrupt (s 206B(3)); or The person has not complied with their Personal Insolvency Agreement under Part X Bankruptcy Act or similar foreign law (s 206B(4)) (e.g. by not paying the creditors on time). What is an indictable offence? An offence that can be tried by a judge and jury How long is a person automatically disqualified for? Undischarged Bankrupt: Until discharged Part X Arrangement: Until the terms are complied with The person is imprisoned: five years from his or her release from prison (s206B(2)(b)) 18 The person is not imprisoned: five years from the date of conviction (s206B(2) (a)) Can the ASIC extend the disqualification period? Yes. The ASIC may apply to the court before the expiration of the first year of automatic disqualification to extend the period for up to an additional 15 years (s206BA). Disqualification - Breaching a Civil Penalty Provision What is the rule? Section 206C(1): On application by ASIC, the Court may disqualify a person from managing corporations for a period the Court considers appropriate if a Court: has declared under s1317E that the person contravened a civil penalty provision (e.g. breach of director's duties); and is satisfied that the disqualification is justified. When is disqualification justified? The Court may have regard to the person's conduct in relation to the management, business or property of any corporation and any other matters that the Court considers appropriate (s206C(2)). What are the other appropriate matters? The following factors have been drawn from the NSW Supreme Court decision in ASIC v Adler: Courts have used these factors as precedent in later decisions: 1. Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards 2. The banning order is designed to 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. Protection of the public also envisages protection of individuals who deal with companies, including consumers, creditors, shareholders and investors. 4. The banning order is protective against present and future misuse of the corporate structure. 5. The order has a motive of personal deterrence, though it is not punitive. 6. General deterrence is an object of the legislation. 19 7. In assessing the fitness of an individual to manage a company, it is necessary that the individual have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company. 8. Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty. 9. In assessing an appropriate length of prohibition, consideration is given to the degree of seriousness of the contraventions, the propensity of the defendant to engage in similar conduct in the future and the likely harm that may be caused to the public. 10. It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the defendant's conduct. 11. A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming. Disqualification - Failed Companies What is the rule? Section 206D(1): On application by ASIC, the Court may disqualify a person from managing corporations for up to 20 years if: within the last seven years the person has been an officer of two or more failed companies; and the court is satisfied that the manner in which the corporation was managed was responsible for it failing; and the disqualification is justified. What is a failed company? Section 206D(2) provides a list of situations when a company has failed. Some of the situations are: the company is compulsorily wound up on grounds of insolvency; enters voluntary administration and its creditors are unlikely to be fully paid; or a receiver is appointed in relation to the company. 20 Is the Disqualification justified? The court must have regard to the person's conduct in relation to the management, business or property of any corporation and any other matters considered appropriate (s206D(3)). Disqualification - Repeated Contraventions of CA What is the rule? Section 206E(1): On application by the ASIC, the Court may disqualify a person from managing corporations for a period the Court considers appropriate in one of two situations:Situation 1: Multiple contraventions by company (s 206E(1)(a)(i)) 1. The person has at least twice been an officer of a body corporate that has contravened this Act while they were an officer of the body corporate; and 2. each time the person has failed to take reasonable steps to prevent the contravention; and 3. the court is satisfied that the disqualification is justified. Situation 2: Multiple contraventions by person (s 206E(1)(a)(ii)) 1. The person has at least twice contravened this Act while they were an officer of a body corporate; and 2. the court is satisfied that the disqualification is justified. When is the disqualification justified? The Court may have regard to the person's conduct in relation to the management, business or property of any corporation any other matters that the Court considers appropriate (s 206E(2)). Disqualification - Foreign jurisdiction Section 206EEA was recently added to the CA. On application by ASIC, the Court may disqualify a person from managing corporations for the period that the Court considers appropriate if: 21 The person is disqualified under the law of a foreign jurisdiction from being a director or manager of a foreign company or any activities akin to being a director or manager; and The disqualification is justified. In determining the length of disqualification (if any), the Court may consider the period which the person is disqualified under the foreign law. Disqualification - ASIC What is the rule? Section 206F(1): ASIC may disqualify a person from managing corporations for up to five years if the ASIC can establish five things:1. within seven years immediately before ASIC gives the notice; 2. the person has been an officer of 2 or more corporations; and 3. while the person was an officer, or within 12 months after the person ceased to be an officer of those corporations, each of those corporations was wound up and a liquidator lodged a report under s 533(1) about the corporation's inability to pay its debts; 4. ASIC has given the person notice in the prescribed form requiring them to demonstrate why they should not be disqualified and an opportunity to be heard on the question; and 5. ASIC is satisfied that the disqualification is justified. Section 533(1)(c) requires liquidators to lodge a report with the ASIC if the company may be unable to pay its unsecured creditors more than 50c in the dollar. When is disqualification justified? Section 206F(2) provides a range of factors that the ASIC must and may consider in its deliberations (s206F(2)). ASIC must consider whether any of the corporations were related to one another; and ASIC may consider the person's conduct in relation to the management, business or property of the corporation(s), whether disqualification would be in the public interest and any other matters the ASIC considers appropriate. 22 When does the disqualification commence? ASIC must serve a notice of disqualification (s206F(3)). The disqualification takes effect from the time when a notice is served on the person (s206F(4)). Your thoughts: What are the advantages and disadvantages of the ASIC disqualifying a person over the Court? Managing a Corporation Under s206B-F of CA, a person is disqualified from managing corporations. Section 206A defines \"managing corporations\". If a person manages a corporation whilst disqualified, and has not obtained permission to continue managing corporations by the ASIC or Court, the person is guilty of a criminal offence. The penalty is set out in the Criminal Code, which is a maximum 50 penalty units and/or 1 year imprisonment. Note: The disqualification is not just in respect of being a company officer, but extends to \"managing corporations\" in general. When does a person manage a corporation? Section 206A(1): They: Make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or Exercise the capacity to affect significantly the corporation's financial standing; or communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation: o knowing that the directors are accustomed to act in accordance with the person's instructions or wishes; or 23 o intending that the directors will act in accordance with those instructions or wishes. Are there any circumstances in which a disqualified person can manage a corporation? Yes. A disqualified person can manage a corporation in two circumstances: 1. ASIC may give a person who is disqualified under s206F written permission to manage corporations, which may be subject to conditions and exceptions determined by the ASIC (s206F(5)). 2. The Court may order that a person who is disqualified under ss 206B-E can manage corporations, which may be subject to conditions and exceptions determined by the Court (s206G). The conditions may be related to managing a particular company or companies. 24 Workshop exercises: to be completed in class Exercise 1 (Workshop objective 2) In this exercise I tell a story about Eric Krecichwost, former CEO and founder of Fincorp. Prior to his criminal conviction, the liquidator investigated whether Eric was a director at all times leading up to administration. Eric quit the Board of Directors (BOD) of Fincorp 15 months before the company went into administration. Following his resignation, Eric: Maintained control of marketing and IT departments Was appointed to a senior management position, but was made redundant just prior to the administration Had daily conversations with the Fincorp chairman who sought his opinion on significant strategic and operational issues As sole shareholder, retained the power to hire and fire board members Was still updated on every significant Fincorp decision Attended a number of board meetings but did not vote on Board decisions Was Eric a shadow director or de facto director in the 15 month period prior to administration? Exercise 2 (Workshop objective 4) 25 Exercise 3 (Workshop objectives 3 and 6) Bill and Ben are the directors of a fireworks business called Kaboom Pty Ltd formed in 2000. The company sets up and produces fireworks displays. Bill and Ben both hold shares equally and the shares have equal voting rights. The company does not have a constitution. Ben goes on a holiday overseas and is killed in a plane crash. He leaves his shares in the company to his son Ken, who also replaces Ben as a director of the company (which Bill consented to). Ken thinks that the fireworks business has very little potential for growth and wants to convert the business into an explosives business (e.g. demolishing buildings using explosives). Bill thinks this is a risky venture and moving away from Kaboom's core business of fireworks displays. Every time Bill and Ken hold meetings they end in deadlock with neither agreeing with the others proposals. The deadlock is having a detrimental effect on Kaboom's business as operational decisions cannot be made. Advise Bill as to the sections of the Corporations Act which could break the deadlock and why they (or are not) viable options. In the event that the Corporations Act doesn't assist Bill, what is a business solution to the problem? 26 Workshop exercise: for you to do before class Reinforcing principles covered in Workshop 4 Objective 3 Care for Kids Pty Ltd (\"CFK\") operates four Day Care centres. The company's paid up capital is $750,000, comprising of 1,500,000 ordinary 50c shares. CFK proposes that members be repaid 25c on each 50c share, leaving the paid up capital at $375,000. CFK proposes to borrow $250,000 from the bank to fund the repayment, with the loan secured by mortgage over one of the four child minding centres. The loan period is 15 years and interest rate is fixed at 7.5 % per annum. CFK's major creditor is Educational Toys and Equipment Pty Ltd (\"ETE\") who supplied $450,000 in equipment to CFK. CFK owes ETE $300,000. CFK is required to repay $7500.00 per month to ETE. ETE is concerned that if the repayment to CFK's members goes ahead, CFK will be unable to pay ETE. A snapshot of CFK's accounts before the reduction reveal: Current assets $310,000; Current liabilities $250,000; Non-current assets $920,000; Noncurrent liabilities: $670,000 (which includes the $300,000 owing to ETE ) Advise ETE whether the proposed share capital reduction would be a breach of section 256B(1)(b)? Your questions 27 Revision Questions Question 1 What is a \"de facto\" director? (a) A person who has not been appointed to the board, but who acts in the capacity of a director. (b) A person who may not have been appointed to the board, but the board acts in accordance with their instructions or wishes. (c) A person who is appointed by a director to be their temporary substitute. (d) A person who is appointed to the board to represent the interests of a particular stakeholder group. Question 2 Which of the following statements is FALSE about the requirements for the appointment of a director? (a) The person must consent to the appointment. (b) The person must be an individual and not a company. (c) The person must be at least 18 years old. (d) The person must not be disqualified. (e) The person must never have committed an offence. Question 3 Which of the following statements about directors' meetings is FALSE? (a) According to the replaceable rules, the quorum for a directors' meeting is two directors. (b) According to the replaceable rules, at least 21 days notice of the directors' meeting must be given to each director. (c) According to the replaceable rules, a directors' meeting can be called by a single director. (d) According to the replaceable rules, the directors may pass a resolution without a meeting being held if all of the directors entitled to vote on the resolution sign a document containing a statement that they are in favour of the resolution. Questions 1 - 3 are adapted from Commercial Applications of Company Law 8th edition Multiple Choice Questions & Answers CCH Publishers 28 2106AFE Company Law - Week 6 Workbook No. Workshop Objective Key Law Key Reading Know it? (Y/N) 1 Define corporate governance and describe how it relates to directors duties - [13.1] - [13.3] 2 Identify and describe the differences between statutory duties and general law fiduciary duties - [15.1] & [15.9] 3 Identify and describe the persons who are owed directors' duties, in particular the shareholder primacy rule AWA Case study; Kinsela v Russell Kinsela Pty Ltd*; Darvall v North Sydney Brick & Tile; Brunninghausen v Galvanics* [15.2] - [15.8] 4 Explain and apply section 181(1)(a), in particular the key words: \"officer\"; \"exercise powers and discharge duties\"; \"good faith\"; \"best interests of corporation\