Corp Law Week 13 Thursday

Continue problem question 1

How was K entered into? Was it through agent or company signing doc itself in accordance with s
127? This will determine our analysis

Start with due execution assumptions. If they apply, remaining question of whether that is the end
of the matter or whether you have to go on and prove substantive authority

Bedrock lease – PP duty maybe breached

Other duty identified was duty to avoid conflict of interest – this concerns K for supply (packaging) –
Fred. Clear case of conflict of interest – he gets a cut of the profits

 ‘real sensible possibility of conflict’ – maybe we need more – Fibbs

 Has he been excused?
o Has there been full aporoval at G?
o Was there full disclosure at GM?
 Do internal rules provide provisiosnt aht excluse him?
o No written constitution – RR’s apply
o This is public company – so section 194 does not apply (only for pty companies)
 So he has breached duty to avoid conflict of interest and he has NOT been excused
 Think also of s 182 – improperly used position to gain advantage
o First he said nothing, didn’t disclose anything according to s 191
o He also participates in the vote – breach of s 195

Question 2 – Smaccas

D’s who vote through would be in trouble for voting it through – D who brought it would be in
trouble for not researching it properly, etc. – often the case

We are advising liquidators and trade creditors

Liquidator can bring action directly in company’s shoes, so we will be considering to what extent
company has claim against director for breach of duty. As for creditors, as a general rule, no director
duties are owed to them, so they do not have direct right to enforce director duties (because duties
are owed to company). However, if creditor wanted to bring own action, most they could do is bring
action under insolvent trading provisions with consent of court. As part of liquidator bringing case,
anything recovered

If we are asked to advise SH, need to describe bringing action with the flowchart in which Foss is at
the top

SH remedies and actions

Above the substantive issues of breach, also talk about who can act on these issues and bring action

Preliminary issues

 Pty company
 Governed by replaceable rules, except for supplementary provision of art. 10A
  Board
o Bill = MD/CEO (so executive director)
o Chris = CFO (executive director)
o Grace (non-executive director)
o Lucy – chair/corporate lawyer (non-executive director)
o Ron (non-executive director)

There are 3 key events/tranactions

1. Tempe project
o Big change in business operation
2. Lettuce First acquisition
o Problem: paid way over fair value
o Duty of care, best interest, and conflict
3. Termination of Bill
o Want to pay him $2.5 million – generous sum

NOTE: Need to talk about difference of the application of the law to executive directors and non-
executive directors

Relevant duties in this problem question: Deal with this question duty by duty – to avoid repetition.
Then under each duty, deal with each of the transactions under each of these duties

 Duty of care
 Best interests
 No conflicts
 Insolvent trading

Proper purpose duty is NOT relevant on this facts – on the facts, nothing to suggest self-dealing
(McCann), trying to change board/ownership, takeover situations. If you see one of these scenarios,
this should be suggesting proper purpose

First let’s look at best interests duty

 LAW: Harlows Nominees v Woodside. Court doesnot consider commercial merits, completely
subjective, dD’s in best place to consider best interests – common law business udgment
rule. Where line drawn is where discussion is such thatno reaosable D could have considered
it to be in best interests (iBell Group). Must be some nexus b/w corporate benefit where
stakeholder interests are considered (Hutton v West Coast Railway).
 Lets look at w.r.t. Tempe project - Bill
o Subjective inquiry – subjectively, has Bill acted in best interests of company as a
whole?
 Yes subjectively
 Long-term aim although statement about customers, employees and society
at large, is about brand repositioning and improving company prospects –
this does have nexus to bringing profits to SH’s
o Let’s turn to aspect of duty that requires consideration to creditors – Kinsela
 Does it apply? i.e. zone of insolvency point
 Plainer it is that creditor’s money is at risk, more consideration must be
given
  Company has recently suffered downturn – this could just be less profits,
doesn’t necessarily mean in zone of insolvency. Maybe they are insolvent –
short term liquidity (think of temporal liquidity)
 They may be ok because they are trying to turn around company’s prospects
– the company’s situation is not so precarious that they should need to
consider creditors
 So they should be fine
 Let’s look at this duty w.r.t Lettuce First purchase
o Benefit of company as a whole issue?
 Looked to bolster their prospects
o Issue with creditors here – as per previous discussion
 Here, at this time, they have greater degree of problems than at time of
tempe transaction
 Nothing to show they accounted for creditor interests
 They have not turned their mind to any creditors
 They did not do any modelling or due diligence
 This concludes breach of best interest duty
o Potential claim liquidator has for breach of duty, particularly because interests of
creditors were not taken into account

Duty of care, skill and diligence

 Let’s look at this w.r.t. Tempe project

o With executive D’s, they have employment K’s so will either have express term or an
implied term under labour law, saying they need to exercise reasonable level of care
and diligence as of expected person with their level of experience – this general law
duty. Statutory duty set at this level also
 Executive D’s: Bill would be assessed by what competent MD would have
done. Chris will be assessed by what CFO would have done.
 Non-executive D’s: D’s would be subject to statutory duty.
 Best way to think about non-executive D’s is that duty is split up into
diligence/care part as well as skill part. W.r.t. diligence/care,
standard is minimum (legislation says it is minimal level – probably
not much more than basic level of financial literacy). w.r.t skill part,
person is subject to higher standard
o In Lucy’s case, she would be expected of higher standard for
legal issues facing company
o ‘not great on numbers’ will not be an excuse
 Minimum standard: Must ask questions if things not clear, exercise
independent judgment, D’s cannot just nod their head
o Let’s start with non-executive directors (Ron, Lucy, Grace) – have they discharged
duty?
 No questioning, didn’t even think about it
 Company is completely changing course and these 3 have really just fallen
into line with Bill without doing much more else
 Ron – abstained
 Failed to discharge duty of care
  In Permanent Building Society, MD tried leaving it with other D’s
when he left the room – court said this was wrong for him to do
that.
 On the facts, ron has done this, but he is a non-executive D. we
don’t know how much insight he has into the problems.
 So if you see situation where D is excusing themselves in instances
where decision being made, compare case to Permanent and see
whether you have stronger or weaker case
 Lucy
 Lawyer
 oth
o How about 2 executive Directors?
 MD – would competent MD have done what Bill had done? NO
 CFO – would competent CFO have done what Chris did? NO
 Reliance on information (first 8 minutes of part B – see recording)
o Reliance on information
o S 189 is relevant here
 First: whether independent assessment of information made?
 W.r.t. tempe -
 W.r.t. bill termination - Didn’t appear other D’s made independent
assessment of Lucy’s point about terminating Bill
 Reliability and confidence of person
 W.r.t. tempe and lettuce first, other directors may say they didn’t
want to call in doubts about Bill’s MD competence
 W.r.t. termination of bill
o Reliance is not a defence to duty of care

Let’s look at duty of conflicts now

 Ron does not disclose interest/involvement with Lettuce First

o Is he excused?
 No dislcosuer or approval at GM – so no excused on this basis
o Under internal rules?
 Potentially relevant s 194 RR applying to propreiaty comapneis
 Problem with this section on facts though – s 194 requires disclosure of
interest in accordance with s 191- he has not made necessary disclosure so
does not get benefit of s 194
o Conclusion: ron will appear to have breached this duty

Now let’s turn to insolvent trading

 Go over threshold concepts – prerequisite 1

o We have director here
 Prerequisite 2: debt incurred
o Appears to be evidence that company incurred debt
 Prerequisite 3: was company insolvent or become insolvent?
o Assessed on cash flow basis – refer to s 95A
o Not enough detailed information on facts to pinpoint when company became
insolvent
 o Appears to be short-term liquidity problem, which courts have said is not a problem
per say. But problem continues – refer to comment about ‘anything above will push
company over the edge’
o By time of bill’s termination, there were certainly in zone of insolvency but we don’t
know precisely when
o We assume prerequisite satisfied
 Prerequisite 4
o Objective test – reasonable grounds
o Suspicion – Kitto J (more than mere idle wondering) then Goldberg J in McLellan
isaying less than firm belief – these represent two ends of spectrum.
o This suspicion likely satisfied
 So we are now in the regime having satisfied threshold concepts
 Did they fail to prevent company incurring debts? Yes
 Was there awareness (actual or deemed)
o Would someone in their position have been aware of grounds for suspecting
insolvency? Yes
 Defences now
o First defence – were there reasonable grounds to expect insolvency?
 ‘more than mere hope’: Tour Print International
 D’s would say because of what repositioning was doing, they would think
money would start coming in
 Think about the time period though
 Mclellans case – Goldberg said if things like financing, possible to sell assets,
growth occurring, need to think about probability of it materialising to
satisfy cash-flow necessary to pay debts. E.g. think about company about to
sign agreement which would be immediately operative and bring immediate
benefits to company
 compare this to here, where mjor strategic reposition in which it is
uncertain when benefits would start flowing through
 here, probably no reasonable grounds for expectation
o Second defence – reasonable reliance
 Must be adequate information
 W.r.t. Grace, not sure what Chris was providing
 Must show actual reliance
 W.r.t. grace, not clear whether she was relying on it or not
 W.r.t. other directors, doesn’t appear they relied on Chris’ info
o Third defence – absence
 W.r.t. grace, although sick, she was still taking part in company’s
management and decision. So this defence may only help her with decision
on lettuce first acquisition
o Fourth defence –
 Most relevant to Lucy, because she votes against the Lettuce First
transaction. Reasonable steps taken to prevent company? For someone who
is chair and lawyer, you would think she’d be more forceful

Now turn to remedies

o Equitable triggered by
 o Duty off care
o Best interests
o No conflicts
o Compensation triggered on
o Duty of care
o Duty of care
o Compensation
o Contravention orders
o Contravention orders
o Duties 1-3
o Insolvent trading has its own remedy regime
o Rescission nto relevant to anything here – nothing on facts bringing this up (we didn’t go
over corporate contracting issues)
o Requriements for rescission are breach of director’s duty arising in equity and if
counterparty is aware of breach, transaction becomes voidable
o SH remedies not relevant because we are not advising SH’s, we are advising liquidator

Consider any escape hatches

For executive, assess against standard of a reasonable director with the level of experience and skill

For non-executive, think about it in the 2 ways