LexisNexis Case Summaries

Corporations Law
An1I Hargovan
Concise summary of the key teaching cases in corporations law
in Australia
LexisNexis Case Summaries
- Corpo;(l)tions Law provides
a concise summary of the
key cases in Australian
corporations law. The design
of this popular book highlights
catch words, the facts, issue
and decision in each case
so that the principles can
be readily understood and
memorised . This structure
reflects modern case analysis.
The cases have been
selected to align with
current teaching in
corporations law in all
Australian jurisdictions.
An excellent study and
revision resource for
students, this book is a great
quick reference for anyone
wanting to understand the
case law in this area .

Related LexisNexis Titles

• Anderson. D1ckfos. Nehme. Hyland & Dahdal. Corporations Law,
4th ed, 2013
• Fitzpatrick, Symes, Veljanovsk1 & Parker
Busmess and Corporations Law, 2nd ed, 2013
• Harris, Lex1sNex1s Ouest10ns and Answers - ISBN 978-0-409-33878-2
Corporations Law. 4th ed. 2013
• Hams. LexisNexis Study Guide -
Corporations Law, 3rd ed. 2014
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 LexisNexis Case Summaries Contents

Case Number Case Name

Case Number Case Name
26 David Grant & Co Pty Ltd v Westpac
55 Meridian Global Funcfs'1v1anagement Asia Ltd
Banking Corp 29 v Securities Commission 53
27 Deputy Commissioner of Taxation v Clark 30 56 Northside Developments Pty Ltd
28 Re Duomatic Ltd 30 v Registrar-General 54
29 Ebrahimi v Westbourne Galleries Ltd 31 57 Panorama Developments (Guildford)
30 Eley v Positive Government Security v Fidelis Furnishing Fabrics Ltd 55
Life Assurance Co Ltd 32 58 Parke v Daily News Ltd 55
31 Erlanger v New Sombrero Phosphate Co 56
32 59 Peso Silver Mines Ltd (N.P.L) v Cropp,i;,_
32 Forrest v ASIC 57
33 60 Peters' American Delicacy Co Ltd v Heath
33 Freeman and Lockyer (a Firm) v Buckhurst Park 61 Regal (Hastings) Ltd v Gulliver 58
Properties (Mangat) Ltd 34 58
62 Royal British Bank v Turquand
34 Furs Ltd v Tomkies 35 63 Salomon v 'Salomon & Co Ltd 59
35 Gambotto v WCP Ltd 36 64 Shafran v ASIC 60
36 Gerard Cassegrain & Co Pty Ltd (in liq)
65 Smith Stone & Knight Ltd v Lord Mayor,
v Cassegrain 38 Aldermen and Citizens of The City
37 Gilford Motor Co Ltd v Horne 61
39 of Birmingham
38 Gluckstein v Barnes 62
39 66 Spies v R
39 Green v Bestobell Industries Pty Ltd >
40 67 Streeter v Western Areas Exploration
40 Grimaldi v Chameleon Mining NI (No 2) Pty Ltd (No 2) 64
40
41 Hall v Poolman 68 Swannson v RA Pratt Properties Pty Ltd 65
42
42 Hamilton v Whitehead 69 Statewide Tobacco Services v Morley 66
42
43 Harlowe's Nominee Pty Ltd v Woodside 70 Tesco Supermarkets Ltd v Nattrass 67
(Lake Entrance) Oil Co 43 71 Tivoli Freeholds Ltd, Herald & Weekly Times Ltd,
44 Hickman v Kent or Romney Marsh Sheep In The Matter of Tivoli v Freeholds Ltd 67
Breeders' Associaton 44 72 Tracy v Mandalay Pty Ltd 68
45 HIH Insurance Ltd and HIH Casualty and 73 Transvaal Lands Co v New Belgium (Transvaal)
General Insurance Ltd, Re; ASIC v ADLER 44 Lands & Development Co 69
46 Holyoake Industries (VIC) Pty Ltd v V-Flow 74 Vasudevan & Ors v Becon Constructions
Pty Ltd 70
46 (Australia) Pty Ltd & Anor
47 Hodgson v Amcor Ltd; Amcor v Barnes 47 75 Vines v ASIC 71
48 Howard Smith Ltd v Ampol Petroleum Ltd 48 76 Walker v Wimborne 72
49 Industrial Equity Ltd v Blackburn 49 77 Wayde v NSW Rugby League Ltd 73
50 Kinsela v Russell Kinsela Pty Ltd (in liq) 50 78 Westpac Banking Corporation v The Bell Group
51 Lee v Lee's Air Farming Ltd (in liq) (No 3) 74
50
52 Lennard's Carrying Co Ltd v Asiatic Petroleum 79 Whitehouse v Carlton Hotel Pty Ltd 77
Co Ltd 51 80 Re Yenidje Tobacco Co Ltd 78
53 Macaura v Northern Assurance Co Ltd 52
54 Re Mclellan; Stake Man Pty Ltd v Carroll 52

iv
v
 Corporations Law
[1] ACN 007 528 207 PTY LTD (in liq)
v BIRD CAMERON
(2005) 91 SASR 570
South Australian Supreme Court
Corporate groups - Agency relationship
FACTS
.. ~

A professional negligence claim was made against two firms of

accountants (Bird Cameron (Reg) and Bird Cameron Partners) by one
of their former clients (ACN 007 528 207 Pty Ltd (in liq)) in relation
to advice provided by the firm through a limited liability company
controlled by the partners (BPM). The former client claimed that they
had relied on incorrect advice and suffered substantial financial losses.
BPM had very little assets. The client sought to establish that an agency
relationship existed between BPM and the partnership so that the
partners could be liable as principals.
ISSUE Wa~ there an agency relationship between BPM and the
partnership?
DECISION The court held there was no agency relationship. Basenko J
held that BPM operated its own independent business despite the control
exercised by the partners. His Honour was influenced by the fact that
the profits made by BPM were not owned by the partners of the firm.
S ignificantly, the profits, instead, were received and owned by BPM and
distributed to the partners as franked dividends. Relying on this key fact,
his Honour distinguished this c se from Smith Stone & Knight Ltd v Lord
Mayor, Aldermen and Citizens of the City of Birmingham (193 9) 4 ALL
ER 116 (65) where the profits in that case were transferred directly to
the parent company.
Besenko J was critical of the six-point test formulated in Smith,
Stone & Knight Ltd v Lord Mayor, Aldermen and Citizens of the City of
Birmingham to establish an agency Telationship. His Honour accepted
the first criteria, dealing with the treatment of profits as being relevant,
but queried the relevance of the remaining criteria on the basis that they
all related to control. It was held that control itself cannot be a decisive
indicator of agency.
 LexisNexis Case Summaries
[2] ASIC v AXIS INTERNATIONAL MANAGEMENT
PTY LTD (No 5)
(2011) 81ACSR631; [2011] FCA 60
Federal Court of Australia
Corporate fundraising - Prospectus liability
FACTS Section 727(1) of the Corporations Act 2001 (Cth) ('the Act')
prohibits the making, in certain circumstances, of an offer of securities
or the distribution of an application form for an offer of securities that
needs disclosure to investors under Pt 6D.2 unless a disclosure document
for the offer has been lodged with ASIC and none of the statutory
exemptions (ss 708, 708A) apply.
The securities, in this case, comprised shares in Firepower Holdings
Group Ltd (Firepower BVI).The case arose from the company's failure
to issue a prospectus when raising funds via related entities from the
public. None of the statutory exemptions for a disclosure document
under Ch 6D of the Act applied to the company.
ASIC alleged that the company sold shares to the Australian public in
breach of the anti-avoidance provisions ins 707(3 ). That section applies
to the resale of securities and prohibits offers for the sale of securities
by an intermediary within one year of their issue unless a prospectus is
lodged with ASIC.
Mr Johnston was the controlling mind not only of the other related
entities but also Firepower BVI (as director and executive chairman),
the ultimate beneficiary of the funds raised by the sale of its shares.
ISSUE Did the companies and its directors breach the disclosure
provisions under Ch 6D of the Act during corporate fundraising?
DECISION The court found the company and its directors to be in
breach of s 727 of the Act due to the failure to lodge a prospectus with
ASIC. The court made declaration orders and granted publicity orders
to bring this case to the attention of the members of the general public,
some of whom who may have been unaware of this case and may have
had a cause of action.
In civil penalty proceedings in ASIC v Axis International Management
Pty Ltd (No 6) (2011) 84 ACSR 703; [2011] FCA 811, Ward (a director
of a related entity) was disqualified from management for a period of six
years.
Johnson was disqualified from managing a corporation for 20 years.
The court held that the evidence revealed a reckless disregard by
2 3
Corporations Law
Mr Johnston for legal requirements concerning corporate fund raising
and corporate governance generally. Thi\ court explained:
[the evidence] reflect the most serious departure by Mr Johnston from
standards of conduct and statutory compliance required of a director of a
public company. It is the kind of conduct which diminishes investor and
public confidence in the commercial markets ... The irrecoverable losses
to shareholders and creditors have been very substantial ... Mr Johnston
should be excluded for a very long period of time from having access to
within a corporate structure. ....
or control over shareholders investments and the interests of creditors
[3] Re ASIC v FRANKLIN (LIQUIDATOR);
WALTON CONSTRUCTIONS PTY LTD
[2014] FCACA 85
Full Court Federal Court
Insolvency - Liquidators independence; apparent bias
FACTS Liquidators were appointed to two construction companies,
following thj.ir earlier appointment as administrators of the companies.
Pre-administration, the companies entered into a series of transactions
with companies owned or associated with the Mawson Group (MG),
a business advisory and restructuring company. ASIC considered that
these prior transactions required investigation by the liquidators as they
may have been phoenix transactions.
MG referred the construction companies' sole director to LDD, the
liquidators' firm, for the purposes of appointing voluntary administrators.
MG regularly referred work to LDD which derived a significant amount
of fee income from MG.
Relying upon s 503 of the Corporations Act 2001 (Cth), ASIC applied
to the Federal Court to have the liquidators removed and replaced on
the grounds of:
• a reasonable apprehension they lacked independence and impartiality;
and
• their fai lure to disclose to creditors the previous relationship
between the construction companies and MG in their declaration of
independence and relevant relationships (DIRRI requirements under
ss 436DA and 60 of the Corporations Act).
At first instance, Justice Davis of the Federal Court rejected the
application. ASIC appealed the court's decision.
 LexisNexis Case Summaries
ISSUE Was there a real apprehension of bias warranting the removal
of the liquidator? Did the liquidator make proper disclosure of their
independence and relevant relationships?
DECISION The Full Federal Court unanimously upheld part of
the appeal. It agreed with the primary judge that the liquidators had
complied with their DIRR! requirements under s 60 of the Corporations
Act but found that there was a real apprehens ion of bias warranting the
removal of the liquidators.
The court held that the primary judge erred in principle by relying on
the word 'would' instead of 'might' when testing for bias. The question
was held to be one of possibility of bias, not probability.
The Appellate Court held that a fair-minded observer would not
regard the remuneration received by LDD from MG's referral as modest.
Such an observer might apprehend that LDD may not wish to put their
continued receipt of income of significant amounts in jeopardy. Thus,
ASIC had established that such an observer might consider that LDD
had an interest which conflicted with their duties. The court ordered the
removal of the liquidators.
[4] ASIC v HEALEY
(2011) 83 ACSR 484
Federal Court of Australia
Directors - Duties of care and diligence
FACTS The board of directors of the Centro companies approved
the consolidated financial statements and declared, under s 295(4)
the Corporations Act 2001 (Cth) ('the Act'), that the financial
statements complied with the Act and Australian Accounting
Standards. It was later discovered that the financial statements
misclassified $1.5 billion of borrowings as non-current when it should
have been classified as current liabilities (due within 12 months)
under the accounting standards. The directors had knowledge of
guarantees of short-term liab ilities, but the financial statement fai led
to disclose this material information. It took Centro several months
to correct these errors.
ASIC took action against the board of directors of Centro, its Chief
Financial Officer (CFO) and its Managing Director (MD) under s 180(1)
of the Act, alleging breach of duty of care and diligence. The defendants
argued that they were entitled to rely upon the external auditors and the
knowledge and expertise of Centro's audit committee.
4 5
Corporations Law
ISSUE Did the board, CFO and MD (the defendants) breach their
duty of care and diligence and, if so, w&"they entitled to rely on others?
DECISION The defendants failed to take all reasonable steps required
of them and performed their duties without the requisite degree of care
and diligence the law required of them. The court said:
. .. the objective duty of competence requires that the directors have the
ability to read and understand the fin ancial statements, including the
current and non-current, and what those concepts mean.
On the issue of delegation, the court said:
....
understanding that fin ancial statements classify assets and liabi lities as
. . . s 295( 4) .. . imposes ultimate responsibility for those matters [directors
declaration) upon the directors in a way that they cannot delegate ... it
is apparent [read together with the director's obligation under s 344 to
take all reasonable steps to secure compliance with financial reporting)
that the [Act) imposes overall responsibility for the financial report and
the directors' report upon the directors ...
In finding liability for breach of duty and care, the court explained:
. .. each director armed with information available to him was expected
to focus ct matters brought before him and to seriously consider such
matters ... this task demands critical and detailed attention, and not just
'going through the motioni ' or sole reliance on others, no matter how
competent or trustworthy they may appear to be.
Directors cannot substitute reliance upon the advice of management
fo r their own attention and examination of an important matter that
falls specifically within the Board's responsibilities as with the reporting
obligations. The Act places upon the Board and each director the specific
task of approving the financi al statements. Consequently, each member
of the board .. . could not delegate or 'abdicate' responsibility to others.
The court accepted that, to a degree, directors can rely on others and
the processes they put into place to assist them. However, the court held
that this is not exclusively the situation in the case of financial accounts
for reasons given above
In the penalty decision in ASIC v Healey (No 2) (2011) 196 FCR 430,
the court refused to grant judicial forgiveness under s 1317S to all
the defendants despite finding that they all acted with honesty. The
contraventions were considered to be serious. The CFO was banned
from management for two years; the MD received a pecuniary penalty of
$30,000 but no penalties were imposed on the non-executive directors.
The court considered that a declaration of contravention of law, and
the shame resulting from the widespread publicity of the case, was an
adequate sanction in the specific circumstances of this case.
 LexisNexis Case Summaries
[5] ASIC v HELLICAR
[2012] HCA 17
High Court of Australia
Directors' duties of care and diligence - Meetings, minutes -
ASIC as model litigant
FACTS In 2007, ASIC brought civil penalty decisions in the Supreme
Court of New South Wales against the seven directors and three officers
of James Hardies Industries Ltd (JHIL) alleging they breached their
statutory duty of care and diligence under s 180(1) of the Corporations
Act 2001 (Cth) by approving at a board meeting a defective draft ASX
announcement that was misleading.
The primary judge (Gzell J) found that the board had approved
the draft announcement in spite of the board's 'chorus of denial of
recollection', made declarations of contraventions, imposed penalties
and made disqualification orders: ASIC v Macdonal.d [No 12] (2009)
259 ALR 116.
The New South Wales Court of Appeal allowed the appeal,
holding that ASIC did not prove that the board approved the draft
announcement: Morley v ASIC (2010) 81 ACSR 285. Further, the
Court of Appeal held that ASIC owed a 'duty of fairness', similar to
that owed by a Crown Prosecutor, which it had breached by not calling
a key witness present at the board meeting of JHIL when the draft
announcement was under board consideration. The witness had drafted
the minutes of that key meeting. The court held that ASIC's failure to
do so significantly undermined the cogency of its case on this key legal
issue.
ASIC appealed to the High Court of Australia.
ISSUE (1) Did the Court of Appeal properly conclude that ASIC had
fai led to prove that the directors voted in favour of the misleading ASX
announcement? (2) Did ASIC breach its 'duty of fairness' by not calling
a key witness present at the board meeting to give evidence?
DECISION
(1) The seven non-executive directors of JHIL each breached their
duties of care and diligence under s 180(1) by approving the company's
release of a misleading announcement to the ASX. The High Court
accepted that each director voted in favour of the draft announcement.
It reached this finding by placing significant reliance on the minutes of
the board meeting which indicated that the directors approved the draft
announcement. The Chair had signed the minutes as a correct record
and the directors subsequently approved of the minutes at the next
6 7
Corporations Law
meeting. In spite of some inaccuracies in the minutes, the High Court
accepted that the minutes were 'a for~ near-contemporaneous record'
and evidence of the matters recorded in them - the inaccuracies did
not render the entire minutes inaccurate.
(2) The High Court held that ASIC's failure to call the key witness
caused no unfairness to the directors because there was no basis for
inferring that the witness may have given evidence favourable to them.
On the issue whether ASIC has a duty to act as a 'model litigant', the
High Court held:
....
For the purposes of deciding these matters, it is convenient to assume,
without deciding, that ASIC is subject to some form of duty, even if a
duty of imperfect obligation, that can be described as a duty to conduct
litigation fairly.
The High Court remitted the case to the Court of Appeal for
cons ideration on claims to be excused from liability, penalty and
disqualification. The civ il penalty decision in Gillfillan v ASIC (2012]
NSWCA 370, the final outcome of the mammoth James Hardie
litigation, is discussed under the decision in ASIC v Macdonal.d (No 11)
(2009) 71 AfSR 368 [6].
It is useful to note that the CEO (Macdonald) and CFO (Morley)
of JHIL did not appeal to t1'e High Court. The appeal by the company
secretary and general counsel of JHIL (Shafron) was heard separately in
Shafran v ASIC [2012] HCA 18 (64] .
[6] ASIC v MACDONALD (No 11)
(2009).71 ACSR 368
New South Wales Supreme Court
Directors and officers: duties of care and diligence; continuous
disclosure obligations - Company: continuous disclosure
obligations
Not.e: It is re levant to note that this complex case in the James Hardie
litigation considered multiple breaches of law based on multiple sections
of the Corporations Act 2001 (Cth) ('the Act').
The discussion below is confined to a breach of s 180(1) of the Act
arising from the approval of a defective ASX announcement by the
directors and officers of James Hardie - a central finding in this case,
as subsequently affirmed by the High Court decisions in ASIC v Hellicar
(2012] HCA 17 [5] and in Shafran v ASIC (2012] HCA 18 (64] and
relied upon in the civil penalties judgment in Gillfillan v ASIC (2012]
 LexisNexis Case Summaries
NSWCA 3 70; and to the breach of continuous disclosure obligations
by James Hardie.
FACTS James Hardie Industries Ltd (JHIL) restructured in 2001 as
part of a strategy to quarantine itself from legal responsibility for its
subsidiaries' asbestos liabilities and to obtain tax benefits by relocating
to the Netherlands. The litigation arose from events which centred
on the board and management's involvement in a complex divesture
plan which involved the formation of a foundation trust known as the
Medical Research and Compensation Fund (MRCF) which was separate
to the JHIL group. A deed of covenant and indemnity (DOCI) entered
into by JHIL and its two subsidiaries with asbestos claims ensured that
the subsidiaries would not make any asbestos compensation claims
against JHIL. MRCF, instead, was set up to receive and pay out asbestos
claims from victims of this deadly disease.
Contrary to claims in an ASX announcement by JHIL that the MRCF
was 'fully funded' and would provide 'certainty' for legitimate claimants,
in reality, the MRCF had a shortfall in excess of $1 billion to meet all
claims.
In civil penalty proceedings brought by ASIC in 2007, ASIC alleged
that the seven non-executive directors and three officers of JHIL
breached their statutory duty of care and diligence under s 180(1)
of the Act by approving at a pivotal board meeting a defective draft
ASX announcement that was misleading. Management had sent that
document to the board for consideration and approval.
ISSUE (1) Did the approval of the misleading draft ASX
announcement by the ten defendants [seven non-executive directors,
the CEO (Macdonald), the CFO (Morley) and the company secretary
and general counsel (Shafron)] result in breach of their statutory duty of
care and diligence? (2) Did the fai lure by JHIL to disclose information
to the ASX in relation to the DOCI result in breaches of the company's
continuous disclosure obligation under the ASX Listing Rule 3.1 and
the statutory equ ivalent to s 674 of the Act?
DECISION The primary judge (Gzell J) held all the defendants
breached s 180(1) of the Act and were liable under the civil penalties
regime. JHIL had failed to inform the market.
(1)
(a) Non-executive directors (Australia): The five non-executive
directors, based in Australia, had failed to discharge their monitoring
role and their conduct in approving the draft ASX announcement
fell short of the standards required under s 180(1) for the following
reasons:
8 9
Corporations Law
. . . it was part of the function of the directors in monitoring the
management ... to settle the terms of J:bf draft ASX announcement to
ensure that it did not [mislead] ...
The formation of the [MRCF] and the [restructure of the relevant entities]
were potentially explosive steps. Market reaction to the announcement
of them was critical. This was a matter within the purview of the board's
responsibility ...
The non-executive directors', who had relied upon management
and experts, had their reliance defence rejected by the court for the
following reasons: ·• ~
... it is the emphatic nature of the draft ASX announcement [use of
'fully funded'] that is a fault. And this is not a matter for reliance upon
management or outside experts ... [the] task of approving the draft ASX
announcement involved no more than an understanding of the English
language used in the documents.
This decision was affirmed by the High Court decisions in ASIC v
Hellicar [2012] HCA 17.
In the civil_penalty decision in Gillfillan v ASIC [2012] NSWCA 370,
it was held tkat the actions of the five directors in Australia constituted
'a glaring fai lure to discharge their responsibilities on a matter of very
great significance to the company and the wider community' and was 'a
serious departure from the required standard of care and diligence' . Each
director was disqualified from management for a period of two years and
three months and were liable to pay a pecuniary penalty of $25 ,000.
(b) Non-executive directors (USA): Turning attention to the two
non-executives directors based in the USA, who participated in
the board meeting by telephone and claimed that the draft ASX
announcement was neither provided nor read to them, the court
held that both directors breached s 180( 1) by voting in favour of the
resolution. Applying the objective test under s 180(1 ), it was held
their failure to request a copy of that announcement or to abstain
from voting was inconsistent with the actions of 'a reasonable
person in their shoes with their responsib ilities'.This decision was
affirmed by the High Court decisions in ASIC v Hellicar [2012]
HCA 17.
In the civil penalty decision in Gillfillan v ASIC [2012] NSWCA 370,
it was held that a disqualification period was warranted for both the
US directors because they abdicated their responsibility at the board
meeting and that:
[It] is necessary to drive home the importance of a director paying
attention to each significant item of business at a meeting and ensuring
 LexisNexis Case Summaries
that he or she does not vote in favour of a motion on an important matter
without having sufficient material to make an informed judgment.
The USA based non-executive directors were disqualified from
management for a period of 1 year and 11 months each and each were
liable to pay a pecuniary penalty of $20,000.
(c) CEO: The court held that a reasonable person in the position of
the CEO of JHIL would not have voted in favour of a resolution
to approve the draft ASX announcement when he knew or ought
to have known it was misleading. The CEO was also found to have
committed multiple contravention of s 180(1), based on other
legal issues arising from the restructure. The CEO was disqualified
from management for a period of 15 years and was liable to pay a
pecuniary penalty of $350,000: ASIC v Macdonald [No 12] (2009)
259 ALR 116. The CEO did not appeal.
(d) Company secretary and general counsel: The court held that the
company secretary and general counsel (in-house lawyer) had
breached s 180( 1) through fa ilure to warn the board of the emphatic
terms concerning the adequacy of funding and to protect JHIL from
legal risks flowing from the draft ASX announcement.
An appeal to the High Court was unsuccessful: Shafran v ASIC [2012]
HCA 18 [64] .
Based on these facts, and on other contraventions under s 180(1 ),
Shafran was disqualified from management for a period of 7 years and
liable to pay a pecuniary penalty of $75,000: Gillfillan v ASIC [2012]
NSWCA370.
(e) CFO: The court held that a reasonable person in the position of
the CFO would have explained to the board that the funding of the
MRCF was based on a very limited analysis of the cash flow review
undertaken by external consultants. The fa ilure by the CFO to say
anything to the board to dispel the board's erroneous belief that the
cash flow analyses were more significant than they were was held
to be material omission by the CFO to do more and a breach of
s 180(1).
The appeal by the CFO to the New South Wales Court of Appeal on
the issue of liability was unsuccessful but his disqualification period was
reduced from five to two years and the pecuniary penalty from $35,000
to $20,000: Morley v ASIC (2010) 81 ACSR 285. The CFO did not
appeal to the High Court.
(2) The failure of]HIL to disclose the DOCI information to the ASX in
a timely manner and to achieve an informed market for its securities
was held to be a flagrant breach of ASX Listing Rule 3.1 and the
10
Corporations Law
statutory equivalent to s 674 of the Act. The court rejected the view
that a complex series of filings wi~ASIC discharges the statutory
duty of disclosure under s 64 7. It cannot be said, on the basis of such
a convoluted filing practice (and given the need to pay a search
fee to access fi led information), that the information is generally
available and readily observable to the public. The appeal by JHIL
was unsuccessful: Morley v ASIC (2010) 81 ACSR 285.
[7] ASIC v MAXWELL
(2006) 59 ACSR 373; [2006] NSWSC 10~2
New South Wales Supreme Court
Corporate fundraising - Sophisticated investor exemption
FACTS The case arose out of two failed property schemes which raised
funds from the public. ASIC brought proceedings against Coakley,
an accountant and financial planner, for breach of duties under the
corporate fundraising provisions of the Corporations Act 2001 (Cth)
('the Act'). Coakley was retained by a group of companies involved in
fundraising for purposes of claiming the s 708(10) sophisticated investor
exemption (~xperienced investors) from the need to issue a fundraising
disclosure document. ASIC alleged that Coakley had not met many
of the investors, nor invest.gated their financial circumstances before
certifying them as sophisticated investors.
ISSUE Did Coakley's conduct breach the corporate fundraising
prov isions under the Act?
DECISION It could not be said that Coakley had reasonable grounds to
issue written certification that tA.e investors were sophisticated investors.
He fa iled to comply with his duty to inquire and acted in breach of the
requirements of s 708(10). His conduct also contravened the misleading
and deceptive conduct provisions under the Act (s 1041H) and under
the Australian Securities and Investments Commission Act 2001 (Cth)
(s 12DA). He was disqualified from managing corporations for two years.
[8] ASIC v PLYMIN
(2003) 46 ACSR 126; [2003] VSC 123
Victorian Supreme Court
Directors liability for insolvent trading - Defence
FACTS The Water Wheel companies were placed into voluntary
administration. ASIC commenced civil proceedings against the
managing director (Plymin), chairman of the board (Harrison) and Elliott
11
 LexisNexis Case Summaries
(as a non-executive director) for orders that they had contravened the
insolvent trading provisions. Harrison admitted liability, while Elliot and
Plymin defended their actions. Elliot argued in defence that he was unable
to prevent the insolvent trading because he was a non-executive d irector.
ISSUE Should a non-executive director be excused from liability on
the basis that they owe lesser duties to the company?
DECISION Section 588G of the Corporations Act 2001 (Cth) imposes
a positive obligation on all directors to stop the company's insolvent
trading, including non-executive directors. The court was of the view
that Elliott had turned a blind eye to Water Wheel's financial difficulties
and this was no defence to the claim against him. The court found that
the directors took no steps to prevent Water Wheel from continuing to
trade. Both directors were fined and banned from management.
[9] ASIC v RICH
(2003) 44 ACSR 341 ; [2003] NSWSC 85
Supreme Court of New South Wales
Chairman - Duty of care and diligence
FACTS ASIC sued three executive directors (Rich, Keeling and
Silberman) and one of the four non-executive directors (Greaves) of
One Tel Ltd, the fai led telecommunications company which collapsed
into liquidation in 2001, for breach of statutory duties. This case arose
from an application by the chairman (Greaves), who was an non-
executive director, for an order striking out before trial ASIC's claim
against him for an alleged breach of the duty of care and diligence under
180(1) of the Corporations Act 2001 (Cth).
ASIC alleged that Greaves, a qualified chartered accountant with
substantial commercial experience in listed public companies, was
better qualified and had more experience that all of the other One Tel
directors as regards board supervision of the financial management of the
company. ASIC alleged that Greaves had special responsibilities beyond
those of the other non-executive directors, by reason of his position as
chairman of the board and the Finance and Audit Committee, and also
by reason of his high qualifications and experience. Those responsibilities
led to a higher standard of care and diligence, accord ing to ASIC, which
Greaves fai led to meet.
Greaves argued that his roles as chairman and committee member
were essentially the same as the three other non-executive directors of
One Tel (Packer, Murdoch and Adler) who were not sued by ASIC in
this proceeding.
12
Corporations Law
ISSUE Did the chairman of the board, in the particular circumstances
of this case, have special responsibiliti.tiSa;above and beyond that of the
other non-executive directors?
DECISION The court accepted ASIC's claims and held that the
conduct of Greaves, in fai ling to remain informed about the company's
financial position and to be more vigilant, was capable of giving rise to a
breach of duty and diligence claim. The court rejected the contention by
Greaves that, except with respect to 'ceremonial or procedural matters'
(such as chairing of meetings), a company chairman has no greater
responsibilities or duties than other directors. Austin]' e~ lained:
... the Court's role, in determining the liability of a defendant fo r his
conduct as company chairman, is to articulate and apply a standard of
care that reflects contemporary community expectations. It is now
commonplace to observe that the standard of care expected of company
directors, both by the common law (including equity) ... and under [the
Corporations Act], has been raised over the last century or so ... if the duty
to keep informed exists for all company directors, it must be a duty imposed
on the company chairman, whose 'responsibilities' may be enhanced.
The court concluded that ASIC's claim disclosed a reasonable cause
of action agaolnst Greaves under s 180(1) and dismissed the strike out
application by Greaves.
Note: Greaves (together wit:h Keeling, the joint CEO of One Tel Ltd)
later settled the proceedings with ASIC and accepted liability for breach
ofs 180(1).
[10] ASIC v RICH
(2009) 75ACSR.1; [2009] NSWSC 1229
New South Wales Supreme Court
Directors duties: duty of care and diligence - Business judgment
rule
FACTS In civil penalty proceedings, ASIC claimed that the executive
directors One Tel Ltd, the fa iled telecommunications company which
collapsed into liquidation in 2001, breached their the duty of care and
diligence under s 180(1) of the Corporations Act 2001 (Cth) ('the Act').
ASIC alleged that Rich (joint CEO) and Silberman (Finance Director)
of One Tel Ltd had fai led to disclose the true and poor financial position
of the company to the board, and that they knew or should have known
the true position.
ISSUE If the directors did breach their duty of care and diligence,
could they rely upon the business judgment rule defence ins 180(2) of
the Act?
13
 LexisNexis Case Summaries
DECISION In a judgment in excess of 3,000 pages, the court held that
ASIC had failed to prove its case. The court was critical of the broad way
in which ASIC presented its case, in which ASIC presented extensive,
but insufficient, evidence to support its allegations.
The court held that the directors could rely upon the defence. The
judgment by Austin J offered a detailed analysis on the duty of care
and diligence, concluding that the statutory duty of care and diligence
is essentially the same as the duty of care and diligence of a director or
officer at general law.
Austin J also analysed and offered guidance on the operation of the
business judgment rule ins 180(2) of the Act - his Honour considered
the statutory language in that section to be 'profoundly ambiguous.'
On the important question relating to the onus of proof, his Honour
concluded that the Australian statute (unlike the US approach) casts
the onus of proving the four criteria ins 180(2) on the directors.
His Honour defined a 'business judgment', with reference to s 180(3 ),
as involving a decision to take or not to take action in respect of
matters relevant to the business operations of the corporation, including
matters of planning, budgeting and forecasting. Failure by a director to
undertake proper oversight of the company's affairs was held not to be
business judgment.
His Honour held that the following factors are relevant when
considering whether a director's belief that they are properly informed
is reasonable:
• the importance of the business judgment to be made;
• the time available for obtaining information;
• the costs related to obtaining information;
• the state of the company's business at that time and the nature of
competing demands on the board's attention; and
• whether or not material information is reasonably available to the
director.
Austin J held: 'the qualifying words, "to the extent they reasonable
believe to be appropriate" convey the idea that protection may be
available even if the director was not aware of available information
material to the decision, if he reasonably believed that he had taken
appropriate steps on the decision-making decision to inform himself
about the subject matter.'
14
Corporations Law
[11] ASIC v SOMERVILLE
(2009) 77 NSWLR 110; 259Al-R 574; 74 ACSR 89;
[2009] NSWSC 934
New South Wales Supreme Court
Directors' duties - Accessorial liability
FACTS ASIC alleged that the directors of companies engaged
in illegal 'phoenix' activity (by stripping assets from an insolvent
company and transferring them to a new company) and that their legal
adviser, Mr Somerville, also contravened the Corporatl'tlns Act 2001
(Cth) ('the Act') by being involved in the directors' breaches of duties
(ss 181, 182 and 183). Liabilities from the old company were not
transferred to the new company. The evidence showed that the legal
adviser, by his advice and conduct, was instrumental in facilitating the
conduct of the phoenix activity. Thus, ASIC also alleged that legal
adviser was involved in contraventions within the meaning of s 79
of the Act. As such, ASIC alleged he had also breached ss 181, 182
and 183.
ISSUE Did ~he directors breach their statutory duties? Did their legal
adviser also breach the Corporations Act by being involved, pursuant to
s 79, in the directors' breaches?
DECISION The directors ~reached s 182 by using their position to
obtain an advantage for themselves and the new company, in preserving
the assets, whilst inflicting harm on the old company by leaving the
liabilities behind. The directors breached s 181 by failing to consider
the interests of the old company when they transferred the assets. The
directors also breached s 183 by using company information and acting
in detriment to the creditors.
The court was satisfied on the evidence that that there was a direct
causal connection between the legal adviser's involvement and the
breach of directors duties. The court found that the legal adviser aided
and abetted the directors in their breaches and was therefore also liable
for such misconduct under s 79 of the Act.
In the civil penalty proceedings, the solicitor was disqualified
from managing companies for a period of six years and the each
director was disqualified for a period of two years: Australian Secu-
rities and Investment Commission (ASIC) v Somerville (No 2)[2009]
NSWSC 998.
15
 LexisNexis Case Summaries
[12] ASIC v VIZARD
(2005) 145 FCR 57; [2005] FCA 1037
Federal Court of Australia
Directors' duties - No conflict rule
FACTS Vizard was a non-executive director of Telstra Ltd. Vizard had
access to confidential Telstra information acquired from board meetings
about proposed financial dealings between Telstra and other companies.
Using his personal funds and armed with confidential information,
Vizard traded in the shares of three listed public companies. The share
purchases were made for his and his family's benefit by his accountant, on
behalf of Vizard's family trust. Most of these share purchases ultimately
resulted in losses.
Vizard admitted liability for breach of directors' duties in a case
brought against him by ASIC under s 183 of the Corporations Act 2001
(Cth) [prohibits improper use of information].
ISSUE How significant is white collar crime and the role of general
deterrence when determining penalties for breach of directors' duties?
DECISION The court held that general deterrence is of primary
importance in cases of this kind. The court took the view that a message
must be sent to the business community that for white collar offences
'the game is not worth the candle'. Vizard was ordered to pay a pecuniary
penalty of $130,000 for each contravention (totalling $390,000) and
was disqualified from management for a period of ten years - the court
rejected ASIC's recommendation of five years as lenient. The director's
conduct was held to be both dishonest and a gross breach of trust.
[13] AUSSIE VIC PLANT HIRE PTY LTD v ESANDA
FINANCE CORP LTD
[2008] HCA 9
High Court of Australia
Statutory demand - Insolvency
FACTS A creditor, Esanda, served a statutory demand on a debtor,
Aussie Vic Plant Hire (Aussie) alleging that Aussie owed it more
than $400,000 under several hiring and chattel mortgage contracts. A
statutory demand is a demand served on a company under s 459E of the
Corporations Act 2001 (Cth) ('the Act') to pay a debt or debts within
21days. Section 459F(2) provides that if the company applies pursuant
to s 459G for an order to set aside the demand, a court may extend the
16
Corporations Law
period for compliance, and if no extension is ordered the period ends
seven days after the application under ~59G is finally determined.
Pursuant to s 4590 Aussie applied to the Supreme Court of Victoria
for an order setting aside the demand. A master of the Supreme Court
dismissed Aussie's application but extended the time for compliance
with the demand.
After the time for compliance had passed, but before the appeal was
heard, Aussie appl ied for a further extension of time to comply with the
demand. A Supreme Court judge refused to give an exte~ion of time.
The Victorian Court of Appeal, constituting five judges, upheld that
decision: Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Ltd
(2007) 63 ACSR 300; [2007] VSCA 121.
Aussie appealed to the High Court.
ISSUE Does the Act permit the making of an order extending the time
for compliance with a statutory demand where the period for compliance
contemplated bys 459F(2)(a)(i) has expired?
DECISION ]he majority of the High Court (Gleeson CJ, Hayne,
Crennan and Kiefel]]) confirmed that courts do not have the power to
extend time for compliance with a statutory demand after the period for
compliance with the demana has expired. The majority held that the
evident purpose of Pt 5.4 included speedy resolutions of applications to
wind up insolvent companies.
[14] AUTOMATIC SELF-CLEANSING FILTER
SYNDICATE CO -LTD v CUNNINGHAME
[1906] 2 Ch 34
England and Wales Court of Appeal
(Civil Division)
Directors - Management powers
FACTS At a general meeting of shareholders, a resolution was passed
by the majority of shareholders for the company to sell its assets pursuant
to a sale agreement reached with the purchaser. The directors refused to
comply with the resolution. The directors were of the opinion that the
proposed course of action was not in the best interests of the company.
The directors supported their decision by relying upon the articles
[constitution] which delegated to them all powers of management. A
shareholder sought a court order that the directors were bound by the
resolution.
17
 LexisNexis Case Summaries
ISSUE Can shareholders override management powers given to the
board of directors?
DECISION The directors were entitled to ignore the resolution. The
court held that the articles were contractually bind ing and that it was
agreed that the directors alone were to manage the company. The court
observed that if the shareholders wished to change the mandate given
to directors, they could do so by altering the articles under the process
spelt out in its constitution.
Note the following passage from John Shaw & Sons (Salford) Ltd v
Shaw [1935] 2 KB 113 which reinforces the principle that if powers of
management are vested in directors, they and they alone can exercise
the powers:
The only way in which the general body of the shareholders can control
the exercise of the powers vested by the articles in the directors is by
altering their articles, or, if opportunity arises under the articles, by
refusing to re-elect the directors of whose actions they disapprove. They
cannot themselves usurp the powers which by the articles are vested in
the directors any more than the directors can usurp the powers vested by
the articles in the general body of shareholders.
[15] BAILEV v NSW MEDICAL DEFENCE UNION LTD
(1995) 184 CLR 399
High Court of Australia
Alteration of the corporate constitution
FACTS Dr Bailey was a member of the NSW Medica l Defence Union
(MDU), a company which had an objects clause stating that the
purpose of the MDU was to indemnify its members against professional
negligence claims. The constitution of the MDU, however, was later
amended to give the MDU discretion to refuse to provide assistance to
its members at any time. The estate of Dr Bailey was defend ing a large
malpractice claim, and it requested indemnity from the MDU . The
malpractice claim arose before alteration of the MDU constitution.
The MDU argued that the altered rules were automatically binding
on its members and refused the member's request for assistance. The
estate of Dr Bailey argued that the original rules were still binding on
the MDU.
ISSUE Can a separate 'special contract' be implied under the
company's rules?
DECISION The High Court found that the MDU and Dr Bailey were
parties to a contract of insurance (a special contract) that required
18
Corporations Law
the MDU to indemnify against the professional negligence claim. It
was held that the articles of association o~the MDU created special
contracts between the MDU and each of the members that could not
be amended unilaterally. As a matter of construction, it was held that
the parties could not have intended that the MDU's duty to indemnify
could be unilaterally withdrawn years after the injury has arisen.
[16] BANK OF NEW ZEALAND v FIBERI PTY LTD
(1993) 14 ACSR 736 ·•..,
New South Wales Court of Appeal
Contractual liability - Statutory assumptions
FACTS Fiberi Pty Ltd (F) had two directors, both of whom were equal
shareholders. The only significant asset held by the company was a
residential property. D, a director, h ad many other business interests and
controlled other companies in which the other director of F held no
financial or managerial interest.
D and his son used the common seal of F to guarantee loans made
by the Bank of .iqew Zealand (BNZ) for the benefit of their group of
companies. The common seal was witnessed by D and his son in his
capacity as company secretary of~ a position he did not hold. The other
director ofF only became aware of these financial obligations undertaken
by F when the companies controlled by D collapsed.
The innocent director challenged the authenticity of the loan
documents. BNZ sought to rely on the equivalent statutory assumptions
under ss 128-129 of the Corporations Act 2001 (Cth) to enforce its
security. Note: This case was decide~under the predecessor provisions in
s 68A of the Companies Code.
ISSUE Was the company bound to an unauthorised loan transaction,
not for its benefit, in which a director had a self-interest?
DECISION The company (F) was not bound to these financial
obligations. BNZ was denied the benefit of the statutory assumptions
based on the limitation found in the equivalent of s 128(4). It was held
that BNZ should have known through its relationship with F that the
D and his son lacked authority to execute the guarantees on behalf
of F. BNZ, in these circumstances, should have made independent
inquiries and not merely relied on oral assurances given by D. It was
held that a reasonably competent and prudent bank official, in similar
circumstances, would have taken steps to verify the information before
acting on it.
19
 LexisNexis Case Summaries
[17] BRUNNINGHAUSEN v GLAVANICS
(1999) 46 NSWLR 538; [1999] NSWCA 199
New South Wales Court of Appeal
Directors - Duty to act in good faith in best interests of company
FACTS A family company had issued 6,000 shares, of which 5,000 was
held by Band 1,000 by G . Both Band G were the only shareholders and
directors, with B playing a major role in management following a dispute
between the parties. Effectively, B was the governing director with G
entirely dependent on B for information.
During negotiations to resolve their dispute, G agreed to sell his
shares to B. G was unaware that B was negotiating to sell the company
to a third party for a higher price per share than B was offering G . B sold
the company and profited from the higher price. G sued B for breach of
fiduciary duty.
ISSUE Does a director owe fiduciary duties to individual shareholders
in a closely-held company?
DECISION Directors can owe a fiduciary duty to individual shareholders
in cases where a director occupies a position of special advantage over
a shareholder, as in this case. The relationship between B (as director)
and G (as shareholder) was fiduciary in nature because G had been
effectively locked out of the company and had no way of verifying the
true value of his shares. These elements of vulnerability and control
in a private company gave rise to a fiduciary duty on B to provide full
disclosure to G regarding the sale of the company.
[18] BUZZLE OPERATIONS PTY LTD (in liq) v APPLE
COMPUTER AUSTRALIA PTY LTD
(2011) 277 ALR 189; [2011] NSWCA 109
New South Wales Court of Appeal
Directors - Shadow director
FACTS Six retailers of Apple products merged to create a new entity
called Buzzle which granted a charge [security interest] over its assets
to Apple. Some months later Buzzle was in financial difficulties but
continued to trade. Upon the collapse of Buzzle, the liquidator sought to
hold Apple liable for insolvent trading on the basis that it was a shadow
director of Buzzle.
Evidence showed that Apple had various representatives who
participated in key management meetings of Buzzle. Apple had also
20
Corporations Law
imposed various conditions on Buzzle for its continued support of the
business prior to its collapse. Apple's-4\nance director kept an office
insider Buzzle's headquarters and regularly attended meetings with
directors and senior managers of Buzzle.
ISSUE Was Apple and/or its finance director liable for insolvent
trading as shadow directors of Buzzle?
DECISION Neither Apple nor its finance director were shadow
directors. The Court of Appeal upheld the decision at first instance that,
notwithstanding Apple's influence over Buzzle's businesa, iuzzle was not
accustomed to act in accordance with the directions or wishes of Apple.
The court held that Apple was acting to protect its own independent
commercial interests. The Appellate Court emphasised that the evidence
must show something more than just being in a position of control. The
power to control must be put into practice. This vital factor was missing.
[19] CADENCE ASSET MANAGEMENT PTY LTD
v CONCEPT SPORTS LTD
(2005) 56 ACSR 309; [2005] FCAFC 265
' Full Federal Court
Corporate fundraising - r.rospectus liability
FACTS Concepts Sports Ltd (CSL) issued a prospectus offering
24 million shares at an issue price of $0.50 each. The prospectus
addressed the strength of the company's business and its future prospects.
It included forecasts on sales revenue and on earnings before interest
and tax.
In June 2004, the plaintiff C adence Asset Management (CAM)
subscribed for 100,000 shares in CSL based on the contents of the
prospectus. In September 2005, the plaintiffs sold their shares to a third
party at a considerable loss - at an average price of 11.5 cents per share.
The sale of the shares was prompted by the revised financial outlook
issued by CSL, after the float, which predicted a loss.
CAM brought proceedings against CSL for damages, under ss 728-
729 of the Corporations Act 2001 (Cth), ('the Act') based on the
misleading and deceptive statements in the prospectus.
The trial judge rejected the claim by CAM on the basis of the rule in
Houldsworth v City of Glasgow Bank ( 1880) 5 App Cas 317 (Houldsworth)
which requires a purchaser (CAM) to renounce their share purchase
before claiming damages. CAM, however, had already sold their shares
and were unable to fulfil the rule.
21
 LexisNexis Case Summaries
CAM appealed to the Full Federal Court, arguing that the old rule
in Houklsworth had no application for a damages claim under s 729 of
the Act.
ISSUE Must an investor first rescind their share purchase before relying
on the protection given to investors under the fundraising provisions in
Ch 6D of the Act?
DECISION The Full Federal Court overturned the original decision
and held that the rule in Houklsworth does not apply to the Act. The
court held that Ch 6D of the Act, dealing with corporate fundraising,
is a complete code designed for investor protection. Thus, CAM
was entitled to proceed with its recovery action against CSL, under
ss 728-729, for losses suffered without the need to rescind its contract
to acqu ire the shares.
Note: In a subsequent class action joined in by other aggrieved investors
who also suffered loss through reliance on the prospectus, CAM entered
into a confidential out-of-court settlement with such investors. Note
also that statutory reform (s 24 7E) has reinforced the decision by the
Full Federal Court.
[20] CAMPBELL v BACKOFFICE INVESTMENTS PTY LTD
(2009) 73 ACSR 1; [2009] HCA 25
High Court of Australia
Members - Oppression
FACTS Campbell established a business which he later incorporated
and undertook a cap ital restructure. Mr Weeks' company, Backoffice
Investments (Backoffice), entered into a share sale agreement under
which Backoffice purchased one of the two issued shares in the company
from Campbell fo r $850,000. The relationship between Campbell and
Weeks quickly broke down. A provisional liquidator was appointed
who later sold the company's assets to another company controlled
by Campbell for nearly $200,000. That money was used to pay the
company's liabilities and the provisional liquidator's fee and expenses.
The company was left an empty shell and its shares were worthless.
Backoffice and Weeks brought proceedings against Campbell and the
company alleging, among many other legal causes of action, oppression
by Campbell pursuant to s 232 of the Corporations Act 2001 (Cth)
('the Act').
The trial judge allowed the oppression claim and ordered Campbell,
under s 233 of the Act, to buy back the company share for $853,000.
22
Corporations Law
By majority, the NSW Court of Appeal allowed Campbell's appeal
against the compulsory buy back order-4 rejected the oppression claim
but ordered, instead, that Campbell pay damages of $850,000 to Weeks
and Backoffice on the basis of misleading and deceptive conduct:
Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359.
Campbell and the company appealed to the High Court. Weeks and
Backoffice sought special leave to cross-appeal to reinstate the remedy
granted by the trial judge.
ISSUE Did Campbell engage in oppressive conduct? . • •
DECISION The High Court held that wrongful exclusion from
management may be a form of oppression. The court affirmed that there
is no need to examine the motives of a person alleged to have engaged
in oppressive conduct as there can be oppressive conduct even when
a person thinks they are acting rightly. The court affirmed that s 232
should not be read narrowly through judicial constraint.
The High Court, however, refused leave for the cross-appeal on
the basis that a compu lsory order to repurchase the shares of an in-
nocent party, i.n the circumstances of this case, was not an appropriate
remedy. -'
Given that the company ~as in provincial liquidation, and that it had
no business or assets, it was held that the s 232 conduct was brought to
an end on the appointment of the provisional liquidator. Consequently,
it was held that the only order that should have been made under s 233
was a winding up order.
The High Court remitted the case to the Court of Appeal to consider
the other legal issues arising.
[21] CHAHWAN v EUPHORIC PTY LTD
t/as CLAY & MICHEL
(2008) 65 ACSR 661; [2008] NSWCA 52
New South Wales Court of Appeal
Statutory derivative action - Liquidation
FACTS Chahwan, the appellant, was a director of Bycoon Pty Ltd.
Chahwan applied to court for leave under s 237 of the Corporations
Act 2001 (Cth) ('the Act') to commence proceedings in the name of,
and on behalf of, Bycoon Pty Ltd (in liquidation) against Europhic Pty
Ltd. Chahwan alleged that Europhic Pty Ltd held properties in which
Bycoon had a beneficial entitlement and sought a court declaration to
23
 LexisNexis Case Summaries
that effect. The liquidator ofBycoon Pty Ltd declined to be involved in
any proceedings against Europhic Pty Ltd.
ISSUE Is the statutory derivation action available to a company
that is in liquidation (whether voluntary liquidation or court ordered
liquidation)? A series of first instance decisions of the Supreme Court
of New South Wales held that Pt 2F. lA of the Act (dealing with the
statutory derivative action) was available to companies in liquidation.
DECISION The Court of Appeal (Tobias, Beazley and Bell JA)
unanimously held that the statutory derivative action is not available
once a liquidator is appointed to a company. The court exp lained:
... the context as well as the extrinsic materials identifying the mischief
wh ich Pt 2ElA was intended to remedy, namely, the restrictions relating
to the exceptions to the rule in Foss v Harbottle, are indicative of an
intention that the statutory derivative action was intended to apply only
to a company as a going concern and not one under the control of a
liquidator. This is because the rule in Foss v Harbottle and its exceptions
did not app ly and were irrelevant to a company in liquidation.
Note: Courts in other Australian jurisdictions are divided on the issue
whether Pt 2.F.lA is applicable to company in liquidation.
Inherent jurisdiction of the court: Under the court's inherent jurisdiction,
it appears that only creditors or members of a company in liquidation
may, with the court's leave, be allowed to institute proceedings in the
name of the company: Carpenter v Pioneer Park Pty Limited (2008)
71 NSWLR 577; [2008] NSWSC 551. Creditors do not have standing
to apply under Pt 2.F.lA.
[22] COMMISSIONER OF TAXATION
v BHP BILLITON FINANCE LTD
[2010] FCAFC 25
Full Federal Court
Corporate groups - Agency relationship
FACTS BHP Billiton Ltd, one of the largest resources in the world,
established a wholly owned subsidiary company, BHP Billiton Finance
Ltd (Finance Ltd) in 1995 for a legitimate business purpose - to meet
the financing needs of all the members of this large corporate group.
Finance Ltd borrowed a sign ificant amount of funds at commercial
interest rates, totalling billions of dollars, from a wide range of external
creditors from all around the world. Over a lengthy period, Finance Ltd
earned billions in interest from its lending activities to other companies
in the group, as an in-house finance company, and paid tax accordingly.
24
Corporations Law
Finance Ltd had no individual employees, with its workers drawn
from other companies within the BHP .gf()Up. Finance Ltd paid for these
services with its own funds. Its directors were appointed by the parent
company, which also provided final-sign off on strategic matters -
such as overall borrowing and lending arrangements within the group.
The board of the parent company made decisions as to the appropriate
capital structure maintained by companies in the group.
A legal dispute arose when Finance Ltd wrote off large portions of its
debt owned by BHP Billiton as bad and claimed tax deductions. The
debt write-off occurred as a result of two failed comth~rcial projects
undertaken by BHP Billiton. The Commissioner of Tax disallowed the
tax deductions on the basis that Finance Ltd was not really operating
a business of lending money but rather as a conduit for the parent
company's investment activities.
The trial judge rejected the claims of the Commissioner of Tax: BHP
Billiton Finance Ltd v Commissioner of Taxation [2009] FCA 276.
The Commissioner of Tax appealed to the Full Court of the Federal
Court.
ISSUE Wa{ the subsidiary company (Finance Ltd) conducting its
activities independently or as a mere conduit for its parent company
(BHP Billiton)? •
DECISION The Full Court unanimously held that the subsidiary had
an independent separate legal existence and allowed the tax deduction.
The court held that the facts did not support the Tax Commissioner's
claim that the subsidiary was merely an appendage to, or agent of, the
business of the corporate grouE. The undisputed facts led the court
to conclude there was a legitimate and independent in-house finance
business being conducted by the subs idiary. In light of these facts, the Full
Court was critical of the Tax Commissioner's claims which were held to
be 'perverse'.The High Court refused leave to appeal on the issue of the
legal treatment of corporate groups, but allowed the Tax Commissioner
leave to appeal on other grounds involving interpretation of tax law.
[23] COOK v DEEKS
[1916] 1 AC 554
Privy Council (UK)
Directors' duties - No conflict rule
FACTS Three directors of the Toronto Construction Co (TCC), who
held three quarters of the shares, had a disagreement with the fourth
director (Cook). The directors then negotiated a major construction
25
 LexisNexis Case Summaries
contract on behalf of TCC, but later diverted the contract to a new
company they formed and excluded TCC and Cook from the benefit of
the contract - Cook was neither shareholder nor director in the new
company.
The directors of TCC held a general meeting. As majority
shareholders, the three directors forced a resolution declaring that TCC
had no interest in the contract. The resolution also authorised them to
defend any legal action brought by Cook.
ISSUE Did the directors breach their fiduciary duty? Was the resolution
passed by the majority shareholders valid?
DECISION The directors breached their fiduciary duty through
diversion of corporate opportunity away from TCC and into their own
business. The directors had to account for profits to TCC due to the ir
conflict of interest by putting their own interests ahead of TCC. The
court found that the new company held the contract as constructive
trustee for TCC. The court also held that the directors' purported
ratification of their breach of fiduciary duty to TCC was invalid. The
resolution amounted to an oppression on the minority shareholder
(Cook) because it was an expropriation of company property.
[24] DANIELS v ANDERSON
(1995) 37 NSWLR 438
New South Wales Court of Appeal
Directors' duty of care, skill and diligence -Auditors' duty of care
FACTS K, an employee of AWA Ltd, engaged in foreign exchange
(FX) currency trading without any effective supervision by the company.
Initial success from this FX trading activity later turned to large losses
which K concealed from the company. The aud it conducted by Daniels
(on behalf of the auditing firm Deloittes) revealed major deficiencies
in internal records and control in AWA Ltd and, in particular, over K's
trading activities. This vital information was conveyed by the auditor
to Hooke, the managing director of AWA Ltd. Both Hooke and the
auditor, however, fa iled to convey this key information to the board
of AWA Ltd who were unaware of the deficiencies in internal control.
Meanwhile, AWA Ltd continued to lose substantial sums of money
through the unsupervised FX transactions conducted by K.
AWA Ltd sued the aud itors in contract for negligence, alleging that
the losses could have been minimised if the auditors had communicated
their findings to the board who could have then taken remedial action.
The auditors counter-sued the directors of AWA Ltd (both executive
26
Corporations Law
and the three non-executive directors) for contributory negligence,
alleging that their neglect of oversight""< duty contributed to the loss
suffered by AWA Ltd.
The trial judge (Rogers CJ) in AWA v Daniels (1992) 7 ACSR 463
found the auditors and the managing director of AWA Ltd liable in
negligence. Both parties appealed. The non-executive directors of AWA
Ltd were held not to have acted in breach of their duty of care, skill and
diligence.
ISSUE (1) Directors duties - Did all of the director Qf.,/\WA Ltd act
in breach of their duty of care, skill and diligence? (2) Auditors duties -
Was the auditor liable in negligence to their client, AWA Ltd?
DECISION The majority of the Court of Appeal (Clarke and Sheller
JJA) upheld the primary judge's finding of negligence.
( 1) Directors duties:
The managing director was held to have breached his duty of care,
skill and diligence by failing to communicate the serious deficiencies in
internal controls to the board. It was held that it was not unreasonable
for the non-eiecutive directors to accept and rely upon the assurances
given to them by the managing director and the auditor.
The majority judgment, drctw ing upon legal principles from Australian
insolvent trading case law and US case law, established the following
principles governing the performance expectation of the modem
director:
• directors should acquire at least a basic understanding of the company's
business and should become fa miliar with the fundamentals of the
business;
• directors are under a continuing duty to keep informed about the
company's activities, including its financial activities;
• directorial management does not require a detailed inspection of day-
to-day activities, but rather a general monitoring of corporate affairs
and policies;
• directors may not shut their eyes to corporate misconduct and then
claim that because they did not see the misconduct, they did not
have a duty to look;
• a director cannot rely blindly on the judgment of others.
• a director is not an ornament, but an essential component of corporate
governance. Thus, a director cannot seek protection behind a paper
shield bearing the motto 'dummy director';
• the concept of a sleeping or passive director is over and is inconsistent
with modern law;
27
 LexisNexis Case Summaries
• a director's duty of care is not merely subjective, limited by the
director's knowledge and experience or ignorance or inaction;a
director, whatever their background, has a duty greater than that
of simply representing a particular field of expertise; andthe law of
negligence can accommodate different degrees of duty owned by
people with different skills but that does not mean a director can
safely proceed on the basis that ignorance and a failure to inquire are
a protection against liability for negligence.
The Court of Appeal held that the performance expectation is
the same for all directors, and unlike the trial judge, did not draw a
distinction and entertain a lesser standard for non-executive directors.
(2) Auditors duties:
The auditors were negligent in failing in its duty to report to the board
on the internal deficiencies that left AWA Ltd at risk of substantial
losses. The Court of Appeal found that:
... in accordance with their own audit manual, the standard practices
and procedures of the auditing profession and common prudence, [the
auditors] were under a duty to report the acknowledged absence of proper
records and the weakness in internal controls to the management and
then, in the absence of appropr iate and timely action by management,
to the board.
The auditor's liability in negligence was, however, reduced by the
contributory negligence of the executive director of AWA Ltd. The
Appellate Court apportioned damages, with one third borne by AWA
Ltd and two thirds by the auditors.
[25] Re DARBY; Ex parte BROUGHAM
[1911] 1 KB 95
King's Bench Division (UK)
Lifting the corporate veil - Fraud
FACTS Darby and Gyde, both undischarged bankrupts, formed a
company called City of London Investment Corporation (CUC) in
which they were shareholders and the only directors. They were entitled
to all profits. After they purchased a licence to work a quarry, they caused
CUC to promote another company, Welsh Slate Quarries Ltd (WSQ),
to which the public subscribed to debentures via a prospectus. CUC
then sold the licence to WSQ at a grossly inflated price. Although the
purchase price was paid to CUC, Darby and Gyde ultimately received
the monies and shared the large profits from the sale. None of this
material information was disclosed to the public in the prospectus.
28
Corporations Law
Upon the collapse of WSQ, Darby and Gyde were convicted of making
false statements in the prospectus. The~uidator sought to recover the
secret profits from the true promoters. Darby objected on the basis that
CUC made the profit, not him.
ISSUE Can a person, purporting to act in the name of a company,
retain any of the profit made due to concealment?
DECISION The corporate veil was ignored on the basis the company
was used to conceal a fraudulent operation. The court looked into the
company and found that CUC was a 'dummy' company, ~ed by Darby
and Gyde to conceal their identities and to perpetuate fraud. They were
the true promoters and had failed to make proper disclosure of their
identity and profits. The court allowed the liquidator to prove in Darby's
bankrupt estate and to recover the secret profit he made by hiding
behind the company.
[26] DAVID GRANT & CO PTY LTD v WESTPAC
BANKING CORP
> {1995) 184 CLR 265; [1995] HCA 43
High Court of Australia
Statutory demand - lnsoltency
FACTS Westpac served a statutory demand on David Grant & Co
(DGG) that DGG applied to the court to have set aside. The court
application was outside the 21 days statutory period imposed under
s 459G of the Corporations Act 2001 (Cth) {'the Act'), giving rise to
the presumption of insolvency. DGG sought to extend the time limit
for opposing the statutory demand under the remedial provision in
s 1322(4).
ISSUE Can a statutory demand be set aside if challenged outside the
21 day statutory period?
DECISION The High Court held that the 21 day time limit is strictly
enforceable and cannot be exceeded once it expired. Gummow J
explained:
The provisions of the new Pt 5.4 constitute a legislative scheme for quick
resolution of the issue of solvency and the determination of whether
the company should be wound up without the imposition of disputes
about debts, unless they are raised promptly ... the new Pt 5 may appear
to operate harshly. But that is a consequence of the legislative scheme
which has been adopted to deal with perceived defects in the pre-
existing procedure in relation to notices of demand.
29
 LexisNexis Case Summaries
Note: An extension of time can only be sought, under s 459R of the Act,
but only if such an application was made within 21 days of the service
of the statutory demand.
[27] DEPUTY COMMISSIONER OF TAXATION v CLARK
(2003) 57 NSWLR 113
New South Wales Court of Appeal
Directors liability for insolvent trading - Defence
FACTS A husband and wife were the two directors of a small family
company, with Clark being the 'paper' director (in name only).
She accepted directorship in mistaken belief to satisfy the statutory
requirement of minimum of two directors (but the law at the relevant
time allowed one person companies). Clark had no business experience.
The company incurred debts whilst insolvent. The creditor sued Clark
for breaching her statutory duty under s 588G of the Corporations
Act 2001 (Cth) . C lark relied on statutory defence under s 588H(4),
arguing she had 'some other good reason' to be excused from absence
from management- namely, she relied on her husband to manage the
business due to her love and faith in him as a director.
ISSUE Can delegation by a director of the entire management of the
company constitute 'some other good reason' for purposes of s 588H( 4)
defence against insolvent trading liability?
DECISION A total failure to participate, for whatever reason, should
not be regarded as a 'good reason' under the statutory defence. The
director's excuse was held to be in conflict with the basic expectation
of all directors to ordinarily participate in management. The court
concluded that the statutory defence operates on the assumption that
every director will be involved in the management of the company. The
director was held personally liable to creditors for insolvent trading.
[28] Re DUOMATIC LTD
[1969] 2 Ch 365
England and Wales High Court
(Chancery Division)
Shareholders - Meetings
FACTS Shareholders, with voting shares in a company, had informally
approved the payment of salary to a director. There was no evidence
of agreement to do so by the holders of non-voting shares (preference
shareholders). The liquidator of the company argued that the decision
30
Corporations Law
was invalid due to the absence of a formal general meeting and the
fa ilure to show that all shareholders cot:l.l\ented.
ISSUE Can a decision be reached without a formal general meeting of
the company?
DECISION Based on the spec ific circumstances of this case, the
court held there was no need for a formal resolution of a meeting of
shareholders. The decision was valid as it was based on the unanimous
consent of all the voting shareholders. The court was satisfied that all of
the voting shareholders applied their minds to the dec4ii'ifi made. This
was seen as being tantamount to a resolution of a general meeting of the
company. Given that the preference shareholders had no right to vote,
the lack of approval by them was considered to be irrelevant.
[29] EBRAHIMI v WESTBOURNE GALLERIES LTD
[1973] AC 360; [1972] 2 WLR 1289
House of Lords (now Supreme Court UK)
Winding up - Just and equitable ground
FACTS E anti N were business partners with equal rights of management.
Later, they incorporated their business and were the only shareholders
and directors of the compan'l' They were equal shareholders. Thereafter,
G, the son of N was appointed director. E and N transferred an equal
amount of shares to G. The company's profits were distributed as
directors' remuneration in lieu of dividends.
After a dispute between E and N, N and G combined and used their
majority voting power to pass a resolution to remove E as a director.
Consequently, Eno longer sharectin the profits as director. The company's
constitution conferred the power to remove a director. E petitioned the
court to wind up the company on the just and equitable ground.
ISSUE Was it just and equitable to wind up the company on the
basis of a breakdown in mutual trust and confidence in a closely held
company, in spite of the absence of illegal conduct ?
DECISION It was held that the company be wound up. The court
granted relief on the basis that equ ity allows the court to impose equitable
considerations onto the management of the company particularly where
the management involves a close personal relationship of mutual
confidence. In this case, where a pre-existing partnership had been
converted into a limited company, the exclusion of E from management
breached equitable principles of good faith and allowed for the
dissolution of the company. Based on the facts of this case, it was held to
be inequitable to insist on enforcement of strict and legal rights.
31
 LexisNexis Case Summaries
[30] ELEY v POSITIVE GOVERNMENT SECURITY
LIFE ASSURANCE CO LTD
(1875) 1 Ex D 20
England and Wales High Court
(Chancery Division)
Statutory contract - Company and outsiders
FACTS Eley was appointed as solicitor to the company for life under
the company's articles of association. He later became a member of the
company when he was awarded shares. Later, he was removed as the
company's solicitor by the company. Eley viewed the contents of the
articles as contractually binding on him in his capacity as a solicitor.
Thus, Eley sued the company for breach of contract.
ISSUE Can a member enforce the company's rule in a different
capacity (in this case, in a non-member capacity as solicitor)?
DECISION The court held that the articles conferred no rights upon
Eley in any capacity other than that of a member and that these were
unaffected, therefore his action failed. The court viewed Eley as suing in
his capacity as an 'outsider', unrelated to his status as a member.
[31] ERLANGER v NEW SOMBRERO PHOSPHATE CO
(1878) 3 App Cas 1218
House of Lords UK (now Supreme Court UK)
Promoter - Duty of disclosure
FACTS A syndicate, headed by Erlanger, acquired a lease for an island
thought to be rich in minerals (phosphate deposits) for £55,000. The
syndicated then formed a company (New Sombrero Phosphate Co) and
appointed its directors which included puppets of Erlanger. The syndicate
then sold the lease, via a nominee, for an inflated price of £110,000 to
the company. The company directors approved the purchase without
enquiry into the facts or the true value of the lease. Erlanger personally
profited in this way to the detriment of the interests of the company
and its shareholders. Members of the public who bought shares in the
company were unaware of the material facts surrounding the purchase
of the lease. Later, a new board of directors took legal action to have the
sale rescinded.
ISSUE Was the promoter's disclosure, as a fiduciary, adequate?
DECISION As a promoter, Erlanger owed fiduciary duties to the
company - which includes the duty of care to make full disclosure to
an independent board of directors to enable them to make an impartial
32
Corporations Law
decision as to whether the purchase ought or ought not to be made.
Erlanger was held to have abused hi~ower for the advancement of
his own interests and to have acted in breach of fiduciary duty. The
court rescinded the contract. The parties were restored to their pre-
contractual position.
[32] FORREST v ASIC
[2012) HCA 39
High Court of Australia
•••
Company misleading or deceptive conduct (s 1041 H)
Continuous disclosure obligations (s 674) - Directors' duties of
care and diligence
FACTS Fortescue Metals Group Ltd (Fortescue) issued a series of
market announcements via the ASX about agreements it made with
Chinese state-owned entities to build, finance and transfer the railway,
port and mine components ofFortescue's proposed infrastructure project
in Western Australia. Each of the agreements was headed 'Framework
Agreement'. It stated that it was to become binding upon approval by
the parties' rlspective boards and that the parties were to jointly agree
to develop further conditions of contract at a later date. The respective
boards approved the agreements. Fortescue, and its CEO Andrew
Forrest, made public statements that the company had entered into a
'binding contract' for these infrastructure projects.
ASIC brought proceedings in the Federal Court against Fortescue
alleging that the agreements were not binding and therefore the public
announcements were misleading or deceptive under s 1041H of the
Corporations Act 2001 (Cth) . ('the Act'). ASIC also alleged that
Fortescue and Forrest had breach continuous disclosure requirements
under s 674 by failing to correct the misleading information, and that
Forrest breached his duty of care and diligence under s 180(1) in such
circumstances.
The trial judge dismissed ASIC's claims. The court held that the
announcements were not misleading on the basis that they were
statements of opinion that were reasonably and honestly held by the
directors: ASIC v Fortescue Metal Group Ltd (No 5) (2009) 76 ACSR 506.
The Full Court of the Federal Court unanimously allowed ASIC's
appeal. It held that ordinary and reasonable readers of the unequivocal
announcements made by the company would not regard it as merely
conveying an opinion on issues of law and, instead, would regard the
agreements as legally enforceable in Australia. Furthermore, it was
held that the company's fail ure to correct the misstatements resulted in
33
 LexisNexis Case Summaries
breach of s 674 and in the director's breach of s 180(1 ): ASIC v Fortescue
Metal Group Lui (2011) 81ACSR563.
Fortescue and Forrest appealed to the High Court.
ISSUE (1) Did the company engage in misleading or deceptive
conduct? (2) If so, did the director breach their statutory duty of care
and diligence?
DECISION The statements were neither misleading or deceptive, thus
the company and the director had not failed to meet their obligations
under the Act.
The High Court rejected ASIC's claim that the term 'binding
contract' implied that the agreement would be governed by the laws of
Australia, noting that the contracts involved Chinese parties and were
executed in China.
The High Court (French CJ, Gummow, Hayne, Heydon and Kiefel J])
rejected the approach adopted by the Full Federal Court which sought
to classify the market announcements as either statements of fact or
opinion. Instead, for the plurality, the determinative issue was: 'what
did the impugned statements convey to their intended audience when
they sa id that the parties had made a "binding contract"?'. The plurality
explained:
The intended audience can be sufficiently identified as investors (both
present and possible future investors) and, perhaps, a wider section of
the commercial or business community. It is not necessary to identify
the audience more precisely ... what would that audience make of the
[announcement] ... would they, as the Full Court assumed, ask a lawyer's
question and look ... to what would happen in a court if the parties to
the agreement fell out at some future time? Or would they take what was
said as a statement of what the parties ... understood that they had done
and intended would happen in the future? The latter understanding is to
be preferred.
In a separate judgment, Haydon J also allowed the appeal. The High
Court reinstated the primary judge's decision.
[33] FREEMAN AND LOCKYER (A FIRM) v BUCKHURST
PARK PROPERTIES (MANGAL) LTD
[1964] 2 QB 480
Court of Appeal (UK)
Contractual liability - Ostensible/apparent authority
FACTS K and H were equal shareholders in a property development
company. They, together with two others, were the directors. The
34
Corporations Law
company's constitution allowed for the appointment of a managing
director, but no one was appointed t~hat position. K acted as the
managing director and, in the absence of express authority, contracted
with a firm of architects to perform serv ices for the company. The firm
sued the company for non-payment of fees. At trial, the company was
held to be bound by the contract. The company appealed on the basis
that K lacked authority to contract on the company's behalf.
ISSUE Was the company bound to the contract on the basis of
ostensible/apparent authority?
DECISION The company was bound to the contract on the basis of
.. ~
K's appearance as managing director. K was held out by the board to
have authority and the outsider relied on that representation to contract
with the company. The board was aware of, and had acqu iesced in,
K acting as managing director in relation to the transaction. By such
conduct, the board represented to an outsider that K had authority
to enter into contracts of a kind which a managing director would in
the normal course be authorised to do so on the company's behalf.
Diplock LJ explained:
An 'apparel)!' or 'ostensible' authority ... is a legal relationship between
the principal and the contractor created by a representation, made by
the principal to the contractor, intended to be and in fact acted on by
the contractor, that the agerlt has authority to enter ... into a contract
of a kind within the scope of the 'apparent' authority, so as to render
the principal liable . .. that representation . .. operates as an estoppel,
preventing the principal from asserting that he [or she] is not bound by
the contract. It is irrelevant whether the agent had actual authority to
enter into the contract.
•
[34] FURS LTD v TOM KIES
(1936) 54 CLR 583
High Court of Australia
Directors' duties - No conflict rule
FACTS Tomkies, the managing director of a company, Furs, was
authorised to negotiate a sale of part of the company's business. He
obtained a secret commission for himself when he divulged confidential
business information to a purchaser of the company's business. Upon
discovery, Furs sought remedies for breach of fiduciary duties.
ISSUE Did the director breach his fiduciary duty even though no loss
may have been caused to the company?
DECISION An undisclosed profit which a director gets as a result of
their fiduciary duties belongs in equity to the company. The court held
35
 LexisNexis Case Summaries
that it does not matter that the profit was of a kind which the company
could not have ever itself have obtained, or that no loss is caused to
the company by the gain of the director. Tomkies had to account to
the company for the profit he made. The court noted that Tomkies
could have kept the profit upon disclosure of all material facts to the
shareholders and upon their approval.
[35) GAMBOTTO vWCP LTD
(1995) 182 CLR 432; 16 ACSR 1
High Court of Australia
Members' alteration of constitution - Minority rights
FACTS The case arose from the majority's attempt to acquire 100 per
cent ownership in WCP Ltd. The majority of shareholders in Industrial
Equity Ltd (IEL) held nearly 99.7 per cent of the shares in WCP Ltd.
Gambotto, a minority shareholder, held nearly 0.1 per cent of the shares
in WCP Ltd. The majority of shareholders in IEL sought to alter the
company's constitution to enable any member who held more than
90 per cent of the shares to compulsorily acquire all the issues shares in
WCP at a price of $1.80 per share. An independent expert had valued
the shares at $1.36 per share.
The evidence showed that IEL wished to obtain 100 per cent ownership
of WCP in order to achieve significant tax savings (over $4 million
annually) and administrative savings (nearly $3,000 annually) .
Gambotto refused to sell his shares and challenged the alteration of
the constitution which sought to expropriate his shares.
The trial judge held that the purpose and effect of the alternation
amounted to unjust oppression to minority shareholders who objected
to the alteration: Gambotto v WCP Ltd (1992) 8 ACSR 141.
On appeal, the NSW Court of Appeal overturned the decision on the
basis that considerable benefits from the expropriation would accrue to
the company, that the price payable for Gambotto's shares was fair and
found no was reason for the court to intervene: WCP v Gambotto ( 1993)
30 NSWLR 385.
Gambotto appealed to the High Court.
ISSUE Was the alternation of the company's constitution made for a
proper purpose?
36
Corporations Law
DECISION The High Court held that the alterat ion was invalid as
it was made for an improper purpose~ even though the alteration
was motivated by substantial financial savings and costs which would
advance the commercial interests of the company.
The majority of the High Court (Mason CJ, Brennan, Deane and
Dawson JJ) rejected the 'bona fide for the benefit of the court as a
whole' test for alteration decided in Allen v Gold Reefs of West Africa
Ltd [1900] 1 Ch 656. The latter test was considered by the High Court
to be inappropriate when dealing with competing rights and interests
of members. The High Court majority, instead, favou~e~ a two-stage
test approach when determining whether alternations involving
expropriation of share are valid - namely:
( 1) Was the power to airer exercised for a proper purpose and not
oppressive to minority shareholders (proper purpose test)?
(2) Was the expropriation fair and not oppressive (fairness test)? The
fairness test has two aspects to it - that of procedural fairness (proper
disclosure of all relevant information) and substantive fairness (in
relation to the.price to be paid for the shares)
,#
Applying this legal test to the facts, the High Court majority held
that the company had satisfier the fairness test but had fai led the proper
purpose test. An expropriation of shares made to advance the interests
of the company or to secure some commercial advantage was considered
by the majority to be insufficient justification. The High Court majority
defined proper purposes narrowly and explained:
[expropriation is justified] where it is reasonably apprehended that
the continued shareholding of cl;i.e minority is detrimental to the com-
pany, its undertaking or the conduct of its affairs ... and expropriation is
a reasonable means of eliminating or mitigating that detriment.
The approach adopted by the High Court majority can, perhaps,
be explained by its conception of shares as property. In discussing
the nature of shares, the High Court viewed shares as more than a
'capitalised dividend stream' with 'proprietary rights' conferred on the
investor.
Note: The stringent test in Gambotto decision has proved to be
controversial. Since the Gambotto decision, and in partial response to
that decision, parliament has amended Corporations Act 2001 (Cth)
[Part 6A.2] to facilitate the compulsory acquisition of the shares.
37
 LexisNexis Case Summaries
[36] GERARD CASSEGRAIN & CO
PTY LTD (in liq) v CASSEGRAIN
(2013) 97 ACSR 283; [2013] NSWCA 455
New South Wales Court of Appeal
Directors duties - Judicial forgiveness
FACTS Two directors of the appellant company arranged for a third
party (F), who was also their wife/daughter, to loan a sum of money to
the company in which receivers were appointed. As repayment for the
loan, the two directors caused the appellant company to transfer shares
it held in two other companies to F.
The appellant company claimed that the transfer of shares were
effected at undervalue. It alleged that both directors had breached their
fiduciary and statutory duties to the company (ss 180, 181 and 182 of the
Corporations Act 2001 (Cth)).
The New South Wales Supreme Court held that both directors had
breached their duties by:
• transferring the shares at undervalue without an independent
valuation and the consent of minority shareholders (breach of s 180);
transferring the shares for an improper purpose of removing assets out
of the reach of unsecured creditors (breach of s 181 ); and preferring
their own interests to those of the company (breach of s 182 - due
to the conflict of interest).
Relying upon s 1318 for judicial relief, the directors pointed out the
need for quick decision making in a pressured environment involving
insolvency. This excuse was dismissed by the trial judge as irrelevant. lt
was held that directors acting under pressure, by reason of financial or
other circumstances, must still adhere to their fiduciary duties.
The directors appealed.
ISSUE Did the breaches of directors' duties in relation to a transaction
that involved conflict of interests, improper purpose and transfer of
assets at significant undervalue warrant judicial forgiveness under the
Corporations Act?
DECISION The Court of Appeal unanimously dismissed the appeal,
on the basis that the directors failed to challenge the findings of breach
of duties made by the trial judge. Although the court disagreed with the
trail judge's assessment of the extent of the undervalue of the shares,
it was held that no case was made out by the directors for the grant of
relief.
38
Corporations Law
[37] GILFORD MOTOR CO LTD v HORNE
[1933] Ch-Q\35
England and Wales Court of Appeal
(Civil Division)
Lifting the corporate veil - Evasion of existing legal obligation
FACTS Home was the managing director of Gilford Motor Co
(GMC). Home had signed a non-compete clause in his employment
contract with GMC which prohibited him from soliciting its customers
after leaving its employment. Shortly after his resignatit>~, he arranged
for his wife to incorporate a company with his wife and friend as its
sole shareholders and directors. The newly formed company, managed
by Home, carried on business in competition with GMC. An injunction
was sought by GMC to restrain Home from breaching his contractual
agreement.
ISSUE Could the court treat the newly formed company, a separate
legal entity, and its controller (Home) as a single person?
DECISION The court lifted the corporate veil. An injunction was
granted agail}St both Home and the newly formed company on the
basis the new company was being used to evade a legal obligation. The
court was satisfied that the new company was formed as a device, or as
a strategy, in order to mask \ he effective carrying on of a business by
Home.
A cautionary note: The Supreme Court in the UK in Prest v Petrodel
Resources Ltd [2013] UKSC 34, in an influential judgment, queried
the existence of the concept of veil piercing and found that it was
unnecessary to rely on veil piec~ng to reach the decision in the Gilford
Motor case, or in any of the other decided cases on veil piercing to date.
[38] GLUCKSTEIN v BARNES
[1900] AC 240
House of Lords UK (now Supreme Court UK)
Promoter - Duty of disclosure
FACTS Gluckstein, together with three others, bought a property for
£140,000 and then resold the property for £180,000 to a company that
they promoted for this purpose. The four persons in this syndicate were
the only directors. The prospectus disclosed the profit of £40,000 to the
public, but made no mention of a further £20,000 profit made by the
syndicate from the accompanying purchase of a discounted mortgage
39
 LexisNexis Case Summaries
on the property. The newly formed company went into liquidation. The
liquidator sought to recover the undisclosed profit from Gluckstein.
ISSUE What constitutes proper disclosure?
DECISION A partial or incomplete disclosure by a promoter as fiduciary
was held to be inadequate. The company lacked an independent board of
directors, thereby comprising whatever disclosure may have been made
to the board. The promoters put into their own pocket the difference
between the real and pretended price without full disclosure. The
promoters were held to have practised an elaborate system of deception on
the shareholders. Gluckstein, as promoter, was held to have breached his
fiduciary duty and liable to account to the company for the secret profit.
[39] GREEN v BESTOBELL INDUSTRIES PTY LTD
(1982) 1 ACLC 1
West Australian Supreme Court
Directors' duties - No conflict rule - Corporate veil
FACTS Green, managing director of Bestobell, set up his own
private company (Clara Pty Ltd) and caused it to submit a tender for a
commercial construction project in direct competition with Bestobell.
C lara was the successful tenderer and performed the construction
contract. Upon discovery, Bestobell sued both Green and C lara for an
account of profits on the basis of Green's breach of fiduciary duty.
ISSUE Was the director who benefited from a confl ict of interest
protected by the corporate ve il ?
DECISION Green had breached his fiduciary duty to Bestobell by
placing himself in a position where his duty to it conflicted with his own
interests. The corporate ve il was lifted and Greed and C lara were treated
as the same person on the basis that C lara knowingly assisted in Green's
breach of fiduciary duties. Clara was ordered to account to Bestobell
for the profits it derived, notwithstanding that Bestobell's tender ranked
third in priority.
[40] GRIMALDI v CHAMELEON MINING NL (No 2)
(2012] FCAFC 6
Full Court of Federal Court
Directors - Definition
FACTS Grimaldi was not appointed as a director of Chameleon
Mining but was involved with the company as 'consu ltant' in several
40
Corporations Law
important transactions from which he received extensive private
benefits. The board of Chameleon Mi~g allowed him to negotiate for,
and to acquire, mining tenements for the company but did not confer
authority on him to formally bind the company. G rimaldi attended board
meetings by invitation. The evidence showed the board authorised him
on occasion to perform functions expected of a director, such as fund
raising and share placements under a prospectus. When transacting for
Chameleon Mining for some major acquisitions, he appeared to stand
on equal footi ng with directors in directing the affairs of the company.
The evidence showed that often Grimaldi benefited m9~eJ.rom the some
of the transactions he was involved in than Chameleon Mining.
Grimaldi, together with some of the directors of Chameleon
Mining, was sued by the company fo r breach of fiduciary duties and the
equ ivalent duties (ss 181-1132) under the Corporations Act 2001 (Cth)
('the Act'). Grimaldi argued that he was not appointed as a director and
that his real status was that of consultant. In determining the company's
claim against Grimaldi, the court had to first work out the legal status of
Grimaldi in relation to the company.
ISSUE Was the 'consultant' or adv iser (Grimaldi) a de facto director of
Chameleon ~ining within the meaning of s 9 of the Act?
. DECISION Grimaldi was a de facto director of Chameleon Mining.
Whether or not a person wih be a director will tum on the nature and
extent of the functions to be performed. The evidence showed that
he was doing the work of a director. The Full Court (Finn, Stone and
Perram]]) explained:
.. . Even though not authorised to be a director, Mr Grimaldi was either
given, or had arrogated to himself with the acquiescence of at least
the two executive directors ...• funct ions in the affairs of Chameleon
which wou ld properly be expected to be performed by a director of that
corporation ... given the extent and significance of those functions, he
so acted in the position of a director as to warrant the imposition on him
of the liabilities, statutory and fiduciary, of a director.
In an extensive discussion on the legal principles governing the
definition of directors, the Full Court's observations included the
fo llow ing salient points:
• there is no reason why the relationship of a person with a company
may not evolve over time into that of de facto director; it also may
be the case that the person only performs the role and functions
that constitute him or her a director for a limited period of time;
whether a person has acted in the position of a director is a question
of substance and not simply how that person has been denominated
in, or by, the company;
41
 LexisNexis Case Summaries
• a rigid distinction between a de facto and a shadow director cannot
be maintained; a shadow director whose wishes or instructions need
not relate to all facets of management of the company's business,
similarly, the functions assumed by a de facto director likewise may
be limited in scope; the fact that a company has an active director
or directors apart from the alleged de facto director, or has a properly
constituted and apparently 'functioning' board does not preclude a
finding that the person in question was a director.
[41] HALL v POOLMAN
(2007) 65 ACSR 123
New South Wales Supreme Court
Directors liability for insolvent trading - Discretionary judicial relief
FACTS Both directors of the Reynolds group of wine companies
were sued for insolvent trading after the companies continued to trade
while they were severely insolvent. The company managed its creditors
through delayed and non-payment of creditors, and had a large tax debt
of over $17 million. The companies attempted to resolve the tax debt
with the Australian Taxation Office (ATO) over a period of ten months.
The companies were ultimately placed into liquidation. The liquidator
sued one of the directors (the other became bankrupt), who sought relief
under the judicial forgiveness provision in s 1317S of the Corporations
Act 2001 (Cth) .
ISSUE Should a director be given relief from personal liability?
DECISION Partial relief from liability was granted to the director. In
seeking to save the company from liquidation by negotiating with the
ATO in a genuine and reasonable manner, the director was found to
have acted reasonably. However, once it became clear that the ATO was
unlikely to resolve the dispute within a reasonable time (three months),
it was held that the director should have stopped the company from
trading and incurring further debts. The director was found liable for
insolvent trading past that critical point.
[42] HAMILTON v WHITEHEAD
(1988) 166 CLR 121
High Court of Australia
Corporate liability - Accessorial liability
FACTS Whitehead was the managing director of a proprietary
company charged with a criminal offence dealing with 'prescribed
42
Corporations Law
interests' under the predecessor to the Corporations Act 2001 (Cth).
Only a public company was allowe~to issue such securities. He
was charged as an accessory, with being knowingly concerned in the
company's commission of the offences. It was argued that Whitehead
had committed the criminal acts on behalf of the company, therefore he
could not also be an accessory to his own acts.
ISSUE Can a director be an accessory to a crime committed by a
company?
DECISION The High Court accepted that it was a logic;,a!;.consequence
of the separate legal entity rule in Salomon v Salomon & Co Ltd [1 897]
AC 22 [63] that it is poss ible for a company to be the principal offender
(direct liability) and for the director to be liable as an accessory to a
corporate crime. The court affirmed that an individual controller of a
company can in their personal capacity aid and abet what the company
has done.
[43] HAR LOWE'S NOMINEE PTY LTD v WOODSIDE
(LAKE ENTRANCE) OIL CO
> (1968) 121 CLR 483
High Court of Australia
Directors duties - Power fo issue shares
FACTS Woodside (Lake Entrance) Oil Co (Woodside), a company
involved in oil and gas exploration, entered into a joint venture with
another company (Burmah) and sought to further consolidate that
business relationship by issuing shares to Burmah. Harlowe's Nominee
Pty Ltd (a substantial share~lder in Woodside) sought a court
declaration that the share issue was not done for a proper purpose on the
basis that Woodside did not have an immediate need for further capital.
ISSUE Were the shares issued for an improper purpose?
DECISION The shares were issued for a proper purpose. It allowed
Woodside greater flexibility to pursue its beneficial commercial
relationship with Burmah. Barwick CJ, McTieman and Kitto ]]
explained:
... although primarily the power is given to enable capital to be raised
when required for the purposes of the company, there may be occasions
when the directors may fa irly and properly issue shares for other reasons,
so long as those reasons relate to a purpose of benefitting the company
as a whole, as distinguished from a purpose, for example, of maintaining
control of the company in the hands of the directors themselves or their
friends.
43
 LexisNexis Case Summaries
[44] HICKMAN v KENT OR ROMNEY MARSH SHEEP
BREEDERS' ASSOCIATON
(1915] 1 Ch 881
Chancery Division UK
Statutory contract - Company and members
FACTS The articles of association of the company stated that any
dispute between a member and the company must first be solved by
arbitration, as opposed to litigation. A dispute arose from the expulsion
of a member (Hickman) from the company. The member sought to
take the dispute to court. The company sought to enforce its dispute
resolution provision by applying for the litigation to be stayed.
ISSUE Are company members bound by the rules of the company's
constitution?
DECISION Stay granted because the memorandum and articles
constituted a contract between the company and each member - a
contract which is enforceable by both the company and the members.
The company rules required arbitration.
Note: This legal principle is codified ins 140( 1) of the Corporations Act
2001 (Cth).
[45] HIH INSURANCE LTD AND HIH CASUALTY AND
GENERAL INSURANCE LTD, Re; ASIC v ADLER
(2002) 41 ASCR 72; (2002] NSWSC 171
New South Wales Supreme Court
Directors' duties - Business judgment rule
FACTS Alder was non-executive director and shareholder of HIH
Ltd prior to the company's spectacular collapse into liquidation in
2001. Williams was the CEO and founder of HIH. On behalf of a
private company (PPE) controlled by Adler, and with the knowledge of
Williams and Fodera (Finance Director), Adler obtained a $10 million
unsecured, interest-free loan that was inadequately documented ('the
loan transaction') from a subs idiary of HIH. Shareholder disclosure was
not made. Nor was the loan disclosed to other members of the board of
HIH.
Alder used $4 million of these funds to buy more shares in HIH
with the purpose of stabilising the fa lling share price and giving the
impression of confidence in the company. The shares were subsequently
sold at a substantial loss. He also used $4 million of the loan to acquire
44
Corporations Law
high risk unlisted technology stocks. The rest of the funds were used by
Adler to make unsecured loans to enti~ related to himself.
In civil penalty proceedings, ASIC sought declarations against Alder,
Williams and Fodera for contraventions of directors' duties under the
Corporations Act 2001 (Cth) ('the Act') - namely: s 180(1) duty of
care and diligence; s 181 duty to act in the company's best interests;
s 182 duty not to make improper use of position; and related party
transaction provisions under Ch 2E of the financial assistance provisions
under s 260A. In addition, ASIC also alleged that Alder had breached
s 183 (duty not to make improper use of information). · • .,
ISSUE Did Alder, Williams and Fodera engage in multiple breaches
of the Act identified above? If so, did the business judgment rule in
s 180(2) protect the directors from breach of duty of care and diligence
liability arising from the loan transaction?
DECISION In procuring the loan transaction in the circumstances
described above, each of the directors (Alder, Williams and Fodera)
had breached their duties under s180 (1) (duty of care and diligence).
A reasonable director acting in their position would not allow the
company ma~ such a highly speculative and risky loan without at least
making sure that proper safeguards were put in place - such as receiving
an independent appra isal of the loan through proper due diligence and
by getting board approval. An the directors failed to ensure that HIH
followed authorised investment practices. Their failure to safeguard HIH
interests fell short of the standard of a reasonably competent person in
their position.
Business judgment rule defence - Adler and Williams both had a
'material personal interest' in -11.e loan transaction which precluded
successful reliance on s 180(2). Williams also fa iled under this defence
due to his neglect to deal with proper safeguards surround ing the loan
transaction. The court held that there was no reason to infer that
Williams properly informed himself about the subject matter of any
judgment he made (as required under s 180(2)(c) ), for example by
obtaining proper independent advice on behalf of HIH.
In addition, with reference to the loan transaction, the court held
that Alder had also breached s 181 (to act in the company's best
interests - he put his personal interest before the company's interest),
s 183 (improper use of information) and, together with Williams, s 182
(improper use of position - both directors sought to benefit from the
use of the loans in the belief that the HIH share price would increase).
Note that on appeal, the decision was largely confirmed except for the
liability under s 183: Adler v ASIC (2003) 46 ACSR 504.
45
 LexisNexis Case Summaries
Each of the directors (Adler, Williams and Fodera) were also held
to be in breach of s 209(2) (related party transactions) and s 260D(2)
(financial assistance) respectively.
Related party transaction breach - the court found that the
$10 million loan was a financial benefit provided to Adler and his
related entities in breach of s 208, because no member approval was
obtained prior to the payment. The loan transaction could not be said
to be an 'arms length transaction' because it was extraord inary generous
(unsecured, inadequately documented and interest free).
Financial assistance breach- the court held that the result of the loan
transaction was to diminish the financial resources ofHIH- it acqu ired
no enforceable rights to secure payment of the loan. HIH suffered
material prejudice as result of the financial assistance, thereby resulting
in a contravention of s 260A. The three directors were involved in the
company's contravention of s 260A and were therefore liable under the
civil penalty provision in s 260D(2).
In the civil penalty decision in ASIC v Adler (2002) 42 ACSR 80, the
court examined the .role played by each of the three directors in their
contraventions of the Corporations Act 2001 (Cth) and imposed the
following sanctions:
• Alder - disqualified from management for a period of 20 years;
liable to pay a pecuniary penalty of $450,000 and ordered to pay
compensation {jointly with Williams) of nearly $8 million.
• Williams - disqualified from management for a period of ten years;
liable to pay a pecuniary penalty of $250,000 and ordered to pay
compensation {jointly with Adler) of nearly $8 million.
• Fodera - liable to pay a pecuniary penalty of $5,000.
The appeal to the NSW Court of Appeal was largely dismissed, except
for upholding that Adler did not breach s 183 of the Act (improper
use of information): Adler v ASIC (2003) 46 ACSR 504. The Court of
Appeal upheld the civil penalties, subject to recalculation of interest.
[46) HOLYOAKE INDUSTRIES (VIC) PTY LTD
v V-FLOW PTY LTD
[2011] FCA 1154
Federal Court of Australia
Directors duties - Conflict of interest
FACTS A number of executives of Holyoake received information,
during the course of their employment, about the company's major
46
Corporations Law
competitor Variflow Melbourne Pty Ltd (Vari flow) looking to sell its
business. Holyoake had the opport~ty to purchase Variflow but
declined to do so. The executives relied on internal information on
Variflow's business held by Holyoake and decided to purchase the
business in their own name without disclosure to Holyoake.
The executives obtained bank finance for this purpose by explaining
that their acquisition would benefit from their experience and
customer links - the latter being confidential information belonging
to Holyoake - and by encouraging Holyoake's customers to shift their
business to the newly acqu ired VariFlow. Upon rec~ipt of finance,
the executives resigned from Holyoake without offering a reason.
They incorporated V-Flow Pty Ltd, used it to purchase the business
from VariFlow, and began to compete with Holyoake. In an action by
Holyoake for breach of fiduciary duties, the executives claimed that they
only worked on the purchase transaction after work hours and therefore
were not in breach of fiduciary duties.
ISSUE Did the executives pursue a business opportunity independently
of their employment?
DECISION J'he executives conduct was a breach of fiduciary duties.
The court held that fiduciary duties do not stop at the end of the work
day for opportunities obta ined while acting as a fiduciary. Attempts by
the executives, and some at the employees who resigned and joined
V-Flow, to place themselves outside the scope of their contractual,
fiduciary and statutory obligations (s 182 of the Corporations Act 2001
(Cth)) to Holyoake were rejected by the court. The managing director
of Holyoake breached s 181 due to deliberate steps taken to advance
his own interests at the company's expense. The executives' reliance
on Holyoake's confidential infottnation to assist them in acquiring the
competing bus iness was held to breach s 183.
[47) HODGSON v AMCOR LTD; AMCOR v BARNES
(2012) vsc 94
Victorian Supreme Court
Company officers - Definition
FACTS Hodgson was a senior manager at Amcor Ltd and responsible
for the largest division of Amcor A ustralasia. The latter had an annual
turnover of nearly $970 million with an annual profit of about $70 to
$80 million, employing over 2,600 people. Furthermore, Hodgson was
the Group General Manager of Amcor businesses. Hodgson did not
participate in the making of board decisions, but was subject to them.
47
 LexisNexis Case Summaries
The facts showed that the Amcor board had practical control of the
company's finances and strategic direction. Hodgson managed only part
of the company and was required to follow the direction of the board.
Hodgson sued Amcor for amounts owing to him on termination of
his employment contract. Amcor counterclaimed against Hodgson for
breach of fiduciary duties for acting in his own personal interest when
selling two of Amcor's businesses. Hodgson denied he was a company
officer and therefore argued that the officers' statutory duties (ss 180-183
of the Corporations Act 2001 (Cth) ('the Act') did not apply to him.
ISSUE Was Hodgson a company officer as defined under s 9 of the Act?
DECISION Hodgson satisfied the statutory description of officer in
s 9(b)( i) of the Act because it was recognised that a company's business
is not governed entirely by the decision of the board. Hodgson was found
to be part of the highest level of senior management within Amcor and
to have participated in decisions that affected the business of Amcor at
a high level. The court explained:
Senior management may fulfil a critical role in determining the business
processes, commercial direction and ultimately the profit achieved
by the div isions of an enterprise. So much is reflected in [s 9]. Unless
senior management at this level within a corporate organisation are also
regarded as relevant 'officers' for the purposes of the Act, there wou ld be
little point in extending the definition beyond company directors and
secreraries.
Despite the absence of exercising ultimate control, the court held
that Hodgson's participation in the management of Amcor was real
and direct. Furthermore, it was also found that he h ad the capacity to
affect significantly Amcor's financial standing which is addressed in
s 9(1)(b)(ii) of the statutory definition of officer.
[48] HOWARD SMITH LTD v AMPOL PETROLEUM LTD
[1974) AC 821
Privy Council (UK)
Directors duties - Power to issue shares
FACTS Howard Smith and Ampol were involved in a takeover battle
for R W Miller Holdings Ltd (Miller). Ampol (and its associate) owned
nearly 55 per cent of the shares in Miller. The majority of the directors
in Miller favoured the takeover bid by Howard Smith but this had little
prospect of success due to Ampol's refusal to accept the offer. To faci litate
the favoured outcome, the directors of Miller issued shares to Howard
48
Corporations Law
Smith. The effect of the share issue was to dilute the share capital of
Milter and to tum the majority shareh~ng of Ampol into a minority
interest. Ampol sought a court declaration that the share issue was done
for an improper purpose and a court order for the share issue to be set
aside. The directors of Miller stated that the purpose of the share issue
was to raise capital.
ISSUE Did the directors of Miller use their power to issue shares for a
proper purpose?
DECISION The shares were issued for an improper pui;p~e - it was
done mainly to dilute the majority shareholding of Ampol. In reaching
this conclusion, the court focused on the substantial purpose for which
the power to issue shares was exercised. In adopting this approach, and
based on the evidence, the court was not convinced that the primary
purpose was to raise capital. Lord Wilberforce observed: 'so far as (legal)
authority goes, an issue of shares purely for the purpose of creating voting
power has repeatedly been condemned.'
[49] INDUSTRIAL EQUITY LTD v BLACKBURN
> (1977) 137 CLR 567
High Court of Australia
Corporate group - Separate legal entity
FACTS A holding company sought to treat the profits earned by
one of its subsid iaries as its own prior to the profits being passed to
the holding company by way of dividend. Given that the holding
company was required to prepare group accounts for itself and its
subsidiary, the holding compan.y took the view that the corporate
group should be treated as a single entity and therefore their course
action was permissible. A shareholder challenged the va lidity of the
d istribution.
ISSUE Can a holding company treat the profits of its subsidiary as its
own profits before the subsidiary formally distributes those profits to the
holding company?
DECISION The holding company cannot treat the profits of its
subsid iary as its own profits before a formal distribution of those profits by
way of dividend from its subsid iary. Relying upon Salomon v Salomon &
Co Ltd [1 897] AC 22 [63] and Walkerv Wimbome (1976) 137CLR1 [76] ,
it was held that each company within the corporate group is a separate
legal entity - notwithstanding that the Corporations Act 2001 (Cth)
permits the preparation of group accounts.
49
 LexisNexis Case Summaries
[50) KINSELA v RUSSELL KINSELA PTY LTD (in liq)
(1986) 4 NSWLR 722
New South Wales Court of Appeal
Directors duties - Creditors; insolvency
FACTS The case involved an insolvent company that had leased two
premises to two of its directors for rent far below market value when the
company was in a doubtful position of solvency. The liquidator argued
that despite the knowledge and unanimous approval of the shareholders,
the directors had acted in breach of their duties to the company.
ISSUE Did the directors breach their duties to the company, in spite of
shareholder ratification?
DECISION Once the company becomes insolvent, the director no
longer owes duties solely to the shareholder but also to the creditors of the
company. Street CJ for the Court of Appeal held that while shareholder
interests ordinarily hold primacy, different considerations apply in the
context of corporate insolvency. The court held that creditors become
entitled to deal with the company's assets as it is 'in a practical sense
their assets' and the director's duty extends in an insolvency context to
not prejudicing the interests of creditors.
[51) LEE v LEE'S AIR FARMING LTD
[1961] AC 12
Privy Council
Company can contract with its controlling member - Separate
legal entity
FACTS Lee was a controlling shareholder and governing director
of a company he formed for the purpose of conducting a crop dusting
business. Lee was employed by the company as its chief pilot and paid
wages for his work. Lee died during employment, in an air crash, and
his widow sought workers' compensation. The insurance company
denied the claim on the basis that Lee was a director and not a worker
(as defined) under the relevant workers' compensation legislation.
ISSUE Can a person who owns, operates and is employed by their own
company (in effect, a one person company) have a dual status as director
and employee?
DECISION As a separate legal entity, a company can make a
valid and effective contract with one of its members. It is a logical
50
Corporations Law
consequence of the decision in Salomon v Salomon & Co Ltd (1897]
AC 22 [63] that one person may fun~on in dual capacities. It is
possible to have a contractual relationship between the two parties (a
director and a company), providing that the company is not a sham.
Thus, Lee was a worker and his widow succeeded in the workers'
compensation claim.
[52) LENNARD'S CARRYING CO LTD v ASIATIC
PETROLEUM CO LTD ·•.,
(1915] AC 705
House of Lords UK (now Supreme Court UK)
Corporate liability - Directing mind
FACTS An explosion in an unseaworthy ship caused the loss of
the ship and the cargo. The owner of the cargo (Asiatic) sued the
owner of the ship for damages. The shipowner relied on a statutory
defence, under shipping law, which allowed the avoidance of liability
for damages arising without their 'fault'. Alternatively, the shipowner
argued that ev~ if the loss of cargo occurred with the knowledge or as
a result of the 'fault' of Mr Lennard, the managing director of another
company which managed the ship on behalf of the owner, this was not
the fault of the shipowner. T~e evidence showed that the ship had a
history of problems with its boiler engines which led to the shipping
disaster in this case.
ISSUE Could the fault of Mr Lennard be imputed to the shipowner so
as to deny reliance on the shipowner's statutory defence?
DECISION Mr Lennard was helcT to be the directing mind and will of
the shipowner company, therefore his knowledge of the unseaworthy
condition of the ship was imputed to the shipowner. Thus, the statutory
defence did not apply and Asiatic was entitled to damages. Viscount
Haldane LC explained the court's reasoning as follows:
... a corporation is an abstraction. It has no mind of its own any
more than it has a body of its own; its active and directing mind must
consequently be sought in the person of somebody who for some
purposes may be called an agent, but who is really the directing mind
and will of the corporation, the very ego and centre of the personality
of the corporation ... if Mr Lennard was the directing and mind of the
company, then his action must ... have been an action of the company
itself.
51
 LexisNexis Case Summaries
[53] MACAURA v NORTHERN ASSURANCE CO LTD
(1925] AC 619
House of Lords UK (now Supreme Court UK)
Company's property is not property of its members - Separate
legal entity
FACTS Macaura, owner of a timber business, sold the business to a
company he formed and in which he was the controlling member. Prior
to the sale, the business was insured against loss by fire and the insurance
policy was in his name. After the sale, when the timber was destroyed
by fire, the insurance company refused the company's claim on the basis
that the company as owner of the timer was uninsured.
ISSUE Does a person who owns, controls and operates a company (in
effect, a one person company) retain any legal or equitable interest in
the asset transferred to the company?
DECISION .The insurance company's refusal to pay was upheld by the
court on the basis that property owned by a company is not owned by
its members. Upon the transfer of assets into the company's name, the
former owner (Macaura) did not retain any legal or equitable interest in
those assets. As a separate legal entity, the company was the owner of
the asset. It did not have an insurance policy.
[54] Re McLELLAN; STAKE MAN PTY LTD v CARROLL
(2009) 76 ACSR 67
Federal Court of Australia
Directors liability for insolvent trading - Discretionary judicial relief
FACTS The company operated a timber business profitably for many
years until it embarked on an expansion plan which proved to be
costly, troublesome and ultimately affected the company's cash flow.
The director acted on professional advice (a specialist accountant, an
insolvency practitioner and business restructure specialist) but ultimately
the company was placed into external administration. The liquidator
pursued the director for insolvent trading for company debts totalling
nearly $357,000. The director relied on statutory defences and, in the
alternative, sought relief from the court under the judicial forgiveness
provision ins 1317S of the Corporations Act 2001 (Cth)
ISSUE Should a director be given relief from personal liability?
DECISION The company traded whilst insolvent and the director's
statutory defences failed. Yet, the court granted the director complete
52
Corporations Law
judicial relief from personal liability for the company's debts based on
considerations involving honestly, dili§l(nce and fairness. The court
found that the director did not profit personally, nor did he disregard
professional advice during the period of insolvent trading. The director
had taken quick and positive steps to try and solve the company's
financial problems and had acted reasonably in the circumstances of the
case.
[55] MERIDIAN GLOBAL FUNDS MANAGEMENT ASIA LTD
v SECURITIES COMMISSION . • .,
(1995] 2 AC 500
Privy Council (UK)
Corporate liability - Special rules of attribution
FACTS An investment management company (Meridian) was
prosecuted by the NZ Securities Commission for failure to comply
with statutory disclosure provisions under securities law (New Zealand
Securities Amendment Act 1988 ). An investment officer of Meridian,
with authority. to purchase shares, bought a substantial quantity of
shares in a co1'1.pany (ENC) in the name of Meridian but which was in
fact done for his own purpose without the knowledge of management
at Meridian. As a substantial shareholder in ENC, Meridian had a
statutory obligation under securities law to notify ENC of this fact.
Due to the concealed nature of this transaction, this disclosure did not
happen.
Upon prosecution, Meridian argued that the investment officer,
who exercised this authority improperly, worked under the supervision
of the managing director and cotild not be said to represent the mind
of Meridian. If successful, it would mean that the knowledge of the
investment officer could not be attributed to Meridian and thus the
prosecution for breach of securities law would fail.
ISSUE Can the actions and knowledge of a person who is not the
company's directing mind still be attributed to the company? If so, on
what basis can the attribution be made?
DECISION Meridian was liable for breach of statutory disclosure
requirements under securities law but not on the basis of the directing
mind approach to corporate liability. Instead, the court examined the
statutory context of the offence. In considering the purpose and policy
of the statute, the court held that parliament intended to attribute the
state of knowledge by the investment officer to Meridian. It was held
that if this was not the case, then the objectives of the statute could be
53
 LexisNexis Case Summaries
easily sidestepped by delegating tasks involving knowledge of substantial
shareholdings to others. The court recognised the need for the courts to
develop special rules of attribution in criminal cases where failure to do
so would frustrate the policy of the statute under consideration. Lord
Hoffman explained:
In exceptional cases, however, [the company's primary rules of attribution
based on the identification approach) will not provide an answer ...
the court must fashion a special rule of attribution for the particular
substantive ru le. This is always a matter of interpretation ...
... [in intended to apply to a company, how was it intended to apply ?
Whose act (or knowledge, or state of mind) was for this purpose intended
to count as the act of the company? One finds the answer ... by ... taking
into account the language of the rule (if it is a statute) and its content
and policy.
[56] NORTHSIDE DEVELOPMENTS PTY LTD
v REGISTRAR-GENERAL
(1990) 170 CLR 146
High Court of Australia
Validity of company acts - Limits to indoor management rule
FACTS Northside, which owned land, was a passive investment
company with three directors. Northside purported to grant a bank
a mortgage over its land to secure a loan for the benefit of unrelated
companies controlled by one of its directors (S). The common seal
of Northside was affixed to the loan document by S and witnessed by
his son who purported to be the company secretary, but who was not
appointed to that position. The articles required the board's authority
for the loan transaction which did not occur. Northside claimed that the
mortgage was invalid due to non-compliance with its articles.
ISSUE Did the indoor management rule apply to benefit the lender?
DECISION The unauthorised loan was not binding on the company.
The bank cou ld not benefit from the indoor management rule. The
circumstances surrounding the loan transaction, and the nature of the
transaction, should have put the bank on inquiry. The loan was of no
commercial benefit to Northside, nor was it related to the company's
business (a non-trading company). Such factors shou ld have made the
bank suspic ious and make inquiries which it fa iled to do.
54
Corporations Law
[57] PANORAMA DEVELOPMENTS (GUILDFORD)
v FIDELIS FURNISH!~ FABRICS LTD
[1971] 3 All ER 16
Court of Appeal UK
Company secretary - Authority
FACTS A company secretary hired cars, purportedly on behalf of
the company in their capacity as secretary. The cars were purportedly
required fo r the purpose of transporting important company customers.
The cars, however, were used for the secretary's priva~ ~ urpose. The
company resisted payment for the hire charges on the basis that the
secretary lacked authority to enter into such contracts.
ISSUE What is the authority of a company secretary?
DECISION The company was bound to the contracts. A modern
company secretary has ostensib le authority to enter into contracts
connected with the administrative side of the company's affairs (such
as employing staff and ordering cars) . The modern company secretary
is no longer a mere clerk, but an officer of the company with extens ive
duties and re§t'lonsibilities. They are the chief administrative officer of
the company and can enter into transactions of an administrative kind
required for the day-to-day running of the company's affairs.
• •
[58] PARKE v DAILY NEWS LTD
[1962] Ch 927
England and Wales High Court
(Chancery Division)
•
Directors - Duty to act in good faith in best interests of company
FACTS The directors of a newspaper publisher so ld off some of its
assets and used part of the sale proceeds to make ex-grat ia payments
to those employees made redundant as a result of the sale. These
bonus payments were over and a bove all of the lawfu l entitlements
due to the redundant employees. Parkes, a shareho lder, sought an
injunction to restrain the company from making the bonus payment
to employees.
ISSUE Can directors' put the interests of their employees ahead of the
interests of the company's shareholders when there is no prospect of
commercial advantage to the company?
55
 LexisNexis Case Summaries
DECISION The shareholder's objection to the payment was upheld.
The generous payments did not deliver a benefit to the company and
therefore were not considered to be in the best interests of the company.
Relying upon the precedent in Hutton v West Cork Railway Co (1883)
23 Ch D 654, it was held that 'the law does not say there is to be no
cakes and ale, but there are to be no cakes and ale except such as are
required for the benefit of the company.'
[59] PESO SILVER MINES LTD (N.P.L) v CROPPER
{1966) 58 DLR (2d) 1
Supreme Court of Canada
Directors duties - Conflicts of interest
FACTS Cropper was the managing director of the Peso Silver Mines Ltd
(Peso). He passed on corporate opportunities to exploit mining claims to
Peso. The availability of the mining claims was public knowledge. Peso
had fully considered and rejected the mining claims largely on the basis
of a lack of funding. Later, when Cropper was reapproached with the
opportunity to exploit the mining claims, he personally took up those
opportunities. Upon change in control of Peso, the company alleged
that Cropper acted in breach of his fiduciary duty. Peso sought a court
order declaring that Cropper held his successful commercial interests on
trust for Peso and was therefore accountable to the company.
ISSUE Did the corporate opportunity exploited by the director come
to him as a fiduciary or in his private capaciry?
DECISION Cropper did not breach his fiduciary duty to Peso. The
facts showed that he exploited corporate opportunities, based on public
information, in a private capacity. The court held that Cropper had
discharged his fiduciary when he previously presented the opportun ity
to Peso and the board specifically rejected it in good faith for sound
business reasons. When Cropper was reapproached with the commercial
opportunity, it was held that he was approached in his capacity as an
individual member of the public. Cartwright J explained: \ assume an inhuman altruism ...
On the facts of the case at bar I find it impossible to say that [Cropper]
obtaining the interests he holds .. . by reason of the fact that he was a
director of [Peso] and in the course of the execution of that office.
There is no suggestion in the evidence that the offer to [Peso] was
accompanied by any confidential information unavailable to any
prospective purchaser or that [Cropper] as director had access to any
such information by reason of th is office.
56
Corporations Law
[60] PETERS' AMERICAN DELICACY CO LTD v HEATH
(1939) 61 CL~57
High Court of Australia
Members' alteration of company's constitution - Minority rights
FACTS Special resolutions were passed at a members' meeting of
Peters' to alter the articles (constitution) which dealt with the methods
of making a bonus issue of shares. The majority of members favoured
a method of dividend distribution which saw an increase in dividends
to those who held fully paid shares and passed a resolutiolll to achieve
this result. The holders of partly paid shares opposed the resolution and
challenged the validity of the alteration.
The plaintiffs argued that the majority favo ured the interests of fully
paid shareholders and, in reliance upon the legal test in Allen v Gold
Reefs of West Africa Ltd [1900] 1 Ch 656, argued that the majority had
'failed to act bona fide for the benefit of the company as a whole' to the
detriment of the partly paid shareholders.
ISSUE Did the majority of members fail to act bona fide for the benefit
of the company,:as a whole when altering the constitution?
DECISION No. The High Court held that in voting for the resolution
the majority of shareholders ~ere not bound to disregard their own
interests. The court was satisfied that the resolution did not involve
oppression, nor was its purpose outside the scope and purpose of the
power to alter the constitution. The High Court was critical of the legal
test which said that an alteration must be 'bona fide for the benefit of
the company as a whole' adopted in Allen v Gold Reefs of West Africa Ltd.
Dixon J explained: •
To say that the shareholders forming the majority must consider the
advantages of the company as a whole ... seems inappropriate, if not
meaningless, and not all events start at such an impossible enquiry.
The 'company as a who le' is a corporate entity consisting of all the
shareholders ... No-one supposes that in voting each shareholder is to
Note that these critical remarks on the 'bona fide for the benefit of the
company as a whole' approach to determine the validity of alternations to
the corporate constitution was endorsed by the High Court in Gambotto
v WCP Ltd (1995) 182 CLR 432; 16 ACSR 1 [35] which rejected this
test and substituted it for the 'proper purpose' test.
57
 LexisNexis Case Summaries
[61] REGAL (HASTINGS) LTD v GULLIVER
[1967] 2 AC 134
House of Lords UK (now Supreme Court UK)
Directors' duties - No conflict rule
FACTS Regal owned a cinema. A subsidiary, Hastings, was set up to
buy the leases of two other cinemas with the ultimate aim of selling all
three cinemas as a going concern. A precondition of the lease sale was
for Hastings to either have its capital fully paid up to a value of £5,000 or
for the directors to give personal guarantees for its rent. Regal, however,
could only contribute £2,000 to its subsidiary and its directors were
unwilling to offer personal guarantees. Four of the directors of Regal,
persons nominated by chairman and the company's solicitor subscribed
to shares in Hastings to the value of £3,000 and voluntarily provided
this extra capital in their personal capacity. Their actions allowed
for the lease deal to go through and, later, for all the shares in both
companies to be sold. The subscribers to the shares made substantial
profits. Regal, under new controllers, claimed that the subscribers were
liable to account for their personal gains.
ISSUE Did the directors, who acted with honesty and whose actions
benefitted the company, act in breach of the no-conflict rule?
DECISION The four directors were in a fiduciary position to Regal
and made personal profits. They breached their fiduciary duties. It was
irrelevant that they acted in good faith and that the company could
not take advantage of the opportunity itself. Directors were liable to
account to Regal for the profits made upon the sale of their shares. It
was held the profiteer as fiduciary, however honest and well-intentioned,
cannot escape the risk of being called upon to account under equity. The
directors could have protected themselves by obtaining the consent of
the Regal shareholders at a general meeting.
[62] ROYAL BRITISH BANK v TURQUAND
(1856) 119 ER 886
Court of Appeal (UK)
Validity of company acts - Indoor management rule
FACTS A bank loaned money to Turquand (a mining company)
following the signing of the loan agreement and attachment of the
common seal by two of the company directors. Contrary to the
requirement in the company's deed of settlement (similar to articles
of association), the loan was not approved and passed by resolution of
the shareholders at a general meeting. Upon default, the bank sought
58
Corporations Law
to enforce payment. The company resisted payment on the basis that
the bank should have been aware of the~ternal irregularity within the
company.
ISSUE Can an outsider acting in good faith assume that all internal
procedures within a company have been complied with?
DECISION The loan was binding on the company. An outsider
dealing with a company in good faith, and without any knowledge of
irregularity, is entitled to assume that internal acts of management have
been complied with and is not bound to enquire whetheriilJl\,:h acts have
been irregular or not. This is now known as the indoor management
rule - designed to give sufficient protection to innocent outsiders
dealing with companies. The indoor management rule is codified in
s 129 of the Corporations Act 2001 (Cth).
[63] SALOMON v SALOMON & CO LTD
[1897] AC 22
House of Lords UK (now Supreme Court UK)
Separate legctl personality - Separate legal liability
FACTS Salomon, a sole trac;ler, operated a leather business for over
30 years. He sold the solvent business to a limited company he formed
(Salomon & Co Ltd) for nearly £39,000. The company issued shares to
seven subscribers, satisfying the statutory requirements of the Companies
Act 1862 (UK). Salomon held 20,001 shares, his wife and five children
each subscribed to one share. Part of the purchase price was paid by the
issue of fully paid shares but the company still owed Solomon £10,000 -
the balance of the purchase price. 1'he company agreed to pay this amount
over time and, to secure this obligation, granted security to Salomon via a
floating charge (non-circulating security interest) over its assets. Salomon
became a large secured creditor of the company, as well as a controlling
major shareholder and managing director.
Due to a downturn in the leather industry, the business failed and
the company's assets were insufficient to pay all the creditors in full.
Salomon, in his capacity as secured creditor, sought priority payment of
the company's debt owed to him.
On behalf of the unsecured creditors who stood to get little or no
payment, the company's liquidator objected to Salomon's priority claim.
The liquidator argued that the company and Salomon were one and the
same, with Salomon under a duty to personally indemnify (reimburse)
the company for its debts.
59
 LexisNexis Case Summaries
ISSUE Is a person who owns, controls and operates a company (in
effect, a one person company) liable for the debts of the company?
DECISION So long as a company is not a sham, the company has
an existence separate from that of its members and officers. The
incorporation of a company as a separate legal entity means that the
debts of the company are the company's debts, and not the debts of its
members or officers. A legally incorporated company is treated as an
independent person, with its own rights and liabilities.
Thus, Salomon & C o Ltd was neither agent nor trustee for Salomon
and thus he was entitled to be paid as a secured creditor, ahead of the
other unsecured creditors. The court was satisfied that Salomon & Co
Ltd was ~1ot a sham intended to defraud creditors.
[64] SHAFRON v ASIC
[2012] HCA 18
High Court of Australia
Officer - Duties of care and diligence
FACTS Shafron was general counsel (in-house lawyer) and company
secretary of James Hardies Industries Ltd (JHIL). He played an active
role in shaping and developing the restructure of the company which
occurred in 2001. ASIC alleged that he was involved in multiple breaches
of his duty of care and diligence under s 180(1) of the Corporations Act
2001 (Cth) ('the Act') by, inter alia, fa iling to advise the board that a
draft ASX announcement was misleading and by omitting to advise the
board to consider whether information about a key document (deed of
covenant and indemnity entered into by JHIL and its two subsidiaries)
needed to be disclosed to the ASX.
Shafron argued that his duties of care under s 180(1) were limited
to his role as company secretary, as officer, and did not extend to the
situations above when he performed in his role as general counsel.
Consequently, when performing the latter role, he argued that he was
not an officer. In this way, Shafron sought to distinguish the capacities in
which he worked and limit his exposure to s 180(1) liability.
ISSUE Can the tasks undertaken by a person with a joint title of
general counsel and company secretary be compartmentalised when
determining liability for breach of officer's duties?
DECISION Shafron was held to have breached his duties of care and
diligence under s 180( 1) on the basis that it is not possible to sever duties
and responsibilities into watertight compartments. The High Court
60
Corporations Law
held that the following is the proper approach to determine whether a
company secretary, as officer, has breach~s JSO(l):
[T]he relevant statutory enquiry [is] what were the responsibilities he
[Shafran] had within JHIL [as company secretary], [it is] not an inquiry
which [seeks] to divide the capacities in which those responsibilities
were undertaken: whether between a role of company secretary and
some other role, or otherwise. ·
The court held that the responsibilities of an officer, such as Shafron,
are not confined to statutory responsibilities; they include 'whatever
responsibilities the officer had within the corporation, reg"a~ less of how
or why those responsibilities came to be imposed on that officer.'
In obiter statements, the court held that the key role played by Shafron
in the restructure of JHIL and his participation in decision making that
affected the whole or a substantial part of the business meant that his
conduct satisfied the statutory definition of officer under s 9 of the Act.
The court accepted that this conclusion could be reached without the
person making the actual decision.
The High Court remitted the case to the Court of Appeal for
consideration .#in claims to be excused from liability, penalty and
disqualification.
In the civil penalty decision*in Gillfillan v ASIC (2012] NSWCA 370,
Shafron was disqualified from management for a period of seven years
and a pecuniary penalty of $75,000 was imposed. This result affirmed
the penalty order imposed by the primary judge in ASIC v Macdonald
[No 12] (2009) 259 ALR 116.
•
[65] SMITH STONE & KNIGHT LTD
v LORD MAYOR, ALDERMEN AND CITIZENS
OF THE CITY OF BIRMINGHAM
[1939] 4 ALL ER 116
King's Bench Division (UK)
Lifting the veil in corporate group - Agency
FACTS Smith, Stone & Knight Ltd (SSK), a paper manufacturer, was
the parent company of a wholly owned subsidiary company, Birmingham
Waste Co Ltd (BWC) which conducted a paper waste removal business.
BWC carried on business using the assets and many other resources of
its parent company. The local council compulsorily acqu ired the land
occupied by BWC. Due to technical reasons under statute law, BWC
cou ld not sue the local council for compensation for disturbance caused
61
 LexisNexis Case Summaries
to their business. Instead, SSK sought compensation from the local
council for the cost of moving the business of its subsidiary company to
new premises. The local council objected on the basis of the separate
legal nature of companies.
ISSUE Can the two separate companies in the corporate group be
treated as a single entity and have the corporate veil lifted on the basis
of agency?
DECISION The corporate veil was lifted on the basis of an agency
relationship between the parent company and the subsidiary, entitling
SSK to compensation. The court identified an agency relationship
between the parent company and the subsidiary by formulating a six-
point test (below) and answered them in the affirmative with reference
to the facts of the case:
• Were the profits treated as the profits of the parent?
• Were the persons conducting the business appointed by the parent?
• Was the parent the head and brain of the trading venture?
• Did the parent govern the venture, decide what should be done and
what capital should be used in the venture?
• Did the parent make the profits by its skill and direction?
• Was the parent in effectual and constant control?
[66] SPIES v R
(2000) 201 CLR 603; [2000] HCA 43
High Court of Australia
Directors duties - Creditors - Insolvency
FACTS The case arose in the context of a sale of shares by a company
(Holdings Pty Ltd), in which Spies was a major shareholder and director,
to another company (Sterling Nicholas) where Spies served in a similar
capacity and was one of two directors. The latter company operated at a
loss. Spies owed substantial sums of money to Sterling Nicholas. He had
also guaranteed the bank overdraft of Sterling Nicholas and had given a
mortgage over his home as security.
Spies caused both companies to enter into a series of transactions
with each other (sale and purchase transaction of shares) with the result
Spies ended up selling shares in an apparently worthless company for
$500,000 and changed his position from a substantial debtor of Sterling
Nicholas to become a substantial secured creditor of that company.
At trial, Spies was charged and convicted with defrauding creditors
of a company contrary to s l 76A of the Crimes Act 1900 (NSW).
Consequently, no verdict was taken in the alternative charge brought
62
Corporations Law
against Spies under s 229( 4) of the Companies (NSW) Code (equivalent
to s 182 of the Corporations Act 20'*< (Cth) which prohibits the
improper use of position by directors).On appeal, the NSW Court of
Criminal Appeal set aside the conviction under s l 76A but exercised
its statutory power to convict Spies in respect of the s 229( 4) offence.
Spies appealed to the High Court.
ISSUE The key legal issues in this case centred on the interpretation
and operation of various criminal law statutes (that are not relevant
for purposes of the discussion below). However, in • 11taking that
determination, the High Court did consider the nature of directors'
duties to creditors in powerful obiter dicta statements that are generally
regarded as being authoritative.
DECISION The High Court upheld the appeal and ordered a new trial.
In considering the nature of directors' duties to creditors, the majority
judgment (Gaudron, McHugh, Gummow and Hayne JJ) of the High
Court:
(1) analysed .the dicta of Mason J in Walker v Wimbome ((1976)
137 CLR 1 [76f'on directors duties to creditors and endorse the view of
commentators that it is 'extremely doubtful' whether Mason J intended
to suggest that directors owe a.n independent duty directly to creditors;
and
(2) affirmed that directors owe a duty of imperfect obligation to
creditors - a duty that is incapable of being enforced directly by
creditors. The majority judgment in Spies relied on the judgment of
Gummow J in Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler
(1994) 51FCR425 and explaine~
Where a company is insolvent or nearing insolvency, the creditors are
seen as having a direct interest in the company and that interest cannot
be overridden by the shareholders. This restriction does not, in the
absence of any conferral of such a right by statute, confer upon creditors
any general law right against former directors of the company to recover
losses suffered by those creditors ... the result is that there is a duty of
imperfect obligation owed to creditors, one which creditors cannot
enforce save to the extent that the company acts on its own motion or
through a liquidator.
The majority judgment in Spies concluded:
In so far as remarks in Grove v Flavel suggest that the directors owe an
independent duty to, and enforceab le by, the creditors by reason of their
position as directors, they are contrary to principles and later author ity
and do not correctly state the law.
63
 LexisNexis Case Summaries
[67] STREETER v WESTERN AREAS EXPLORATION
PTY LTD (No 2)
(2011) 82 ACSR 1; [2011] WASCA 17
Western Australian Court of Appeal
Directors duties - Conflicts of interest
FACTS Western Areas Exploration Pty Ltd (WAE) was a dormant
company with no capital, employees or income. WAE approached
Streeter (S), a regular investor in junior exploration companies, to
invest capital in WAE. S became a large shareholder and was appointed
to the board as one of three directors of WAE, of which Brailey (B) was
the chairman.
B, in his capacity as a stockbroker, referred a business proposal
to develop a start-up nickel prospecting company to S. S met the
proponents of the business proposal and suggested the use ofWAE as the
listing vehicle. The proponents rejected this idea for various commercial
reasons.
An agreement was reached:
• for S to provide cap ital for the nickel project;
• for WAE to receive shares in the new company, Western Areas NL
(WANL), in exchange for its shareholder base and its 70 per cent
holdings of a gold mining tenement; and
• for S to be appointed to the Board of WANL.
S purchased the other 30 per cent of that tenement (from an unrelated
party) and sold it to WANL without informing WAE.
Several years later, WANL discovered large nickel deposits and
its share price and fortunes increased dramatically. None of the
shareholders of WAE subscribed for shares in WANL despite receiving
the prospectus. S was removed from the board of WAE via a resolution
at the shareholders meeting. The new management at WAE caused the
company to take legal action against S for breach of his fiduciary duty
based on conduct which occurred almost six years previously.
The trial judge held that S had breached his fiduciary duty to WAE
by wrongfully taking up and exploiting the nickel project business
opportunity for his private benefit. It was held that S, and his company,
held shares in WANL on trust for the benefit of WAE. S appealed.
ISSUE Did the director, operating in multiple capacities, wrongfully
divert a business opportunity to himself in breach of fiduciary duty?
64
Corporations Law
DECISION The West Australian Court of Appeal overturned the
decision of the trail judge by a 2:1 maj~y.
The majority held that S did not breach his fiduciary duty. The
rejection of the initial offer to use WAE as the listing vehicle meant that
the subsequent offer was made to S in his private capacity as a venture
capital investor. S was approached because the business proponents were
seeking seed capital for the nickel project, not because he was a director
ofWAE.
Although the minority judge found a breach of fiduciiery duty, the
Appellate Court unanimously held that WAE was not ent itled to
remed ies due to the unsatisfactory explanation for the six year delay in
taking legal act ion. Evidence showed that the WAE shareholders were
aware of the circumstances surrounding the nickel project proposal
at the time but had failed to act. WAE was seen to be exploiting
the subsequent changes in economic circumstances fo llowing the
extraordinary delay.
[68] SWANNSON v RA PRATT PROPERTIES PTY LTD
(i002) 42 ACSR 313; [2002] NSWSC 583
New South Wales Supreme Court
Members - Statutory deri~ation action
FACTS Swannson (S) was a shareholder and director of RA Pratt
Properties (RAPP). S sought court leave under s 237 of the statutory
derivative action provisions of the Corporations Act 2001 (Cth) {'the
Act') to bring proceedings in the name of RAPP against a former
d irector (his divorced wife, Higl;iland) for alleged breach of directors
duties. S sought to have Highland compensate RAPP for payments
made by Highland out of RAPP's funds to S for his own benefit.
ISSUE Did the applicant satisfy the statutory requirements for leave
under s 23 7 of the Act?
DECISION The court refused to grant leave on the basis that S fai led
to show that he was acting in good faith or that the legal action was in
the best interests of the company.
Palmer J explained the approach to establishing the 'good fa ith'
requirement under s 237(2)(b) by noting there are two interrelated
factors involved:
The first is whether the applicant honestly believes that a good cause
of action ex ists and has a reasonable prospect of success ... [this) wou ld
65
 LexisNexis Case Summaries
not simply be a matter of bald assertion ... The second factor is whether
the applicant is seeking to bring a derivative suit for such a collateral
purpose as would amount to an abuse of process.
Palmer J explained the approach to establishing the 'best interests of
the company' requirement under s 237(2)(c):
... it is important to note [this section] requires the Court to be satisfied,
not that the proposed derivative action may be, appears to be, or is likely
to be, in the best interests of the company but, rather, that it is in its best
interests ... [this] is a far higher threshold for an applicant to cross.
The court made a number of valuable observations on the purpose and
operation of the statutory derivation action:
• it is intended to keep a careful balance between facilitating the
bringing of derivative actions and protecting the company from too
ready and unwarranted interference in its internal management;
• it is clearly the intent of Pt 2F.1A that leave to bring a derivative
action must not be given lightly;
• an application under s 237(2) is not interlocutory in character; the
relief sought is fina l and the applicant bears the onus of establishing
the requirements under s 23 7.
[69] STATEWIDE TOBACCO SERVICES v MORLEY
(1990) 2 ACSR 405
Victorian Supreme Court
Directors liability for insolvent trading - Defence
FACTS Morley was a 'paper' director (in name only) of a small family
company who did not partake in management for several decades. When
her husband (a director) died, the son took over the management of
the business. He caused the company to incur debts to a creditor when
the company was insolvent. The cred itor sued Morley for breaching
her statutory duty under s 588G of the Corporations Act 2001 (Cth).
Morley relied on the statutory defence under s 588H(2), arguing she had
reasonable grounds to expect solvency. Evidence showed she did not
monitor financial performance of the company.
ISSUE Does ignorance of the company's affairs satisfy the s 588H(2)
defence against insolvent trading liability?
DECISION Directors are personally liable to creditors for insolvent
trading. Each company director is expected to take a diligent and
intelligent interest in the company's affairs. Ignorance of the company's
affairs of the director's own making is no excuse. Morley's ignore arose
largely by her own fai lure to make necessary inquiries on the company's
66
Corporations Law
affairs, including its financial affairs. Appellate Court decision affirms
that the days of the sleeping or passive cHi"-fCtor are over.
[70] TESCO SUPERMARKETS LTD v NATTRASS
[1972] AC 153
House of Lords UK (now Supreme Court UK)
Corporate liability - Directing mind
FACTS Tesco Supermarkets was prosecuted for a statutory offence
under consumer law for failing to sell goods (washing 'P'oider) at the
widely advertised discounted price. Upon depletion of the discounted
stock, the shop assistant at a Tesco branch had restocked shelves with
washing power at a higher price. The store manager, who had received
instruction, training and supervision from the board of directors of
Tesco, was unaware of the actions of the shop assistant. Tesco relied
on the statutory due diligence defence by argu ing that they took all
reasonable care and that the commission of the offence was due to the
actions of another person - namely, the branch manager who had
fai led to supervise the actions of the store assistant.
ISSUE Coulcf'the branch manager, based on these facts, be said to be
represent the mind and will of Tesco? If so, the due diligence defence
will fail. •
DECISION Tesco succeeded under the due diligence defence because
the branch manager was held not be part of directing mind of the
company. Based on the chain of command set up in this case, the branch
manager could not be identified with the company because the board did
not delegate any of its functions to the store managers. Tesco's board of
directors were found to have retairt\:!d control and that the store managers
had to follow their orders. Thus, the actions of the store managers could
not be imputed to the company. Lord Reid explained the identification
approach in attributing primary corporate liab ility as follows:
[the person representing the company's mind] is an embodiment of the
company ... and his [or her] mind is the mind of the company. If it is a
guilty mind then that guilt is the guilt of the company.
[71] TIVOLI FREEHOLDS LTD, HERALD & WEEKLY TIMES
LTD, In the matter of TIVOLI v FREEHOLDS LTD
[1972] VR 445
Supreme Court of Victoria
Winding up - Just and equitable ground
FACTS The company operated theatres. The main purpose of the
company, as stated in its objects clause, was to carry on an entertainment
67
 LexisNexis Case Summaries
business. Following the damage to one of its theatres by Ii.re, the company
sold its theatres and used its funds to acquire shares in other public
companies. It engaged in the practice of corporate-raiding. A minority
shareholder objected to the use of the company's fund in this way and
petitioned the court to wind up the company on the just and equitable
ground.
ISSUE Was it just and equitable to wind up the company on the basis
that its funds were used for purposes inconsistent with the company's
objects?
DECISION It was held that the company be wound up. The company's
funds were being committed to other purposes (corporate raiding)
which was entirely different from its objects (entertainment business),
and outside the general intention and common understanding of its
members. In this way, the company's substratum had failed.
[72] TRACY v MANDALAY PTY LTD
(1953) 88 CLR 215
High Court of Australia
Promoters - Definition
FACTS A company, RSC Trading Co Pty Ltd (RSC), purchased land
which was to be developed for residential purposes. The company,
as promoter, sold the land for a substantial profit to a newly formed
development company (Mandalay) for the purpose of building the
ten-storey block of home units. The purchase of the land was funded
by Mandalay through selling units off the plan. The investors who
were persuaded to take shares in Mandalay were ignorant of the profit
involved in the purchase. A change in the law prevented the proposed
construction from proceeding.
An action was brought against the promoters (RSC) by the
new management in Mandalay to recover the moneys paid by its
shareholders. Some of the sh areholders in RSC took no active part in
this project but stood to benefit financially by allowing others in to act
on their behalf.
ISSUE Could the inactive participants in the company who stood
behind the active promoters be deemed to be promoters?
DECISION High Court held that the inactive participants in RSC
were promoters on the basis that they left it to others to form the
68
Corporations Law
company (Mandalay) on the understanding that they were to profit
from the construction project. Dix~ CJ, Williams and Taylor ]]
exp lained:
The word 'promoter' has been said on many occasions to be a word
which has no very definite meaning.
. .. [it would be] an entire mistake to suppose that after a company
is registered its directors are the on ly persons who are in such a
position towards it as to be under fiduciary relations to it. A person
not a director may be a promoter of a company which is already
incorporated, but the capita l of which has not yet been 'ta'-en up, and
which is not yet in a position to perform the obligations imposed upon
it by its creators ...
But it is not only the persqns who take an active part in the formation
of a company and the rais ing of the necessary sh are capital to enable it
to carry on business who are promoters ... persons who leave it to others
to get up the company upon the understanding that they also will profit
from the operation may become promoters.
[73] .TRANSVAAL LANDS CO v NEW BELGIUM
(TFfANSVAAL) LANDS & DEVELOPMENT CO
(1914] 2 Ch 488
England antl Wales Court of Appeal
(Civil Division)
Directors' duties - No conflict rule
FACTS Harvey was a director of Transvaal Land Co (TLC) and a
trustee for shares in the New Belgium company (NB), with his wife
holding the beneficial interest. "'TLC bought a block of shares in NB.
Harvey failed to disclose his legal interest in NB (the selling company)
and the benefit he obtained from the purchase transaction. Harvey had
taken part in the purchase decision by TLC.
ISSUE Was Harvey in a position of conflict between his duty as trustee
and his duty as director?
DECISION A director cannot, on behalf of the company, buy shares or
other property for themselves, or from a company in which they have a
financial interest. Harvey was held to have a conflict of interest between
his duty as trustee to act in the interests of the beneficiary and his duty
as director to act in the interests of TLC. Harvey should have disclosed
his interest in NB before TLC purchased the property. The contract was
voidable due to the conflicting interests.
69
 LexisNexis Case Summaries
[74] VASUDEVAN & ORS v BECON CONSTRUCTIONS
(AUSTRALIA) PTY LTD & ANOR
(2014) 97 ACSR 627; [2014] VSCA 14
Victorian Court of Appeal
Insolvency - Unreasonable director-related transaction
FACTS The sole director of W Pty Ltd (W) caused W to enter into
a deed under which it assumed joint liability for obl igations owed by
its director to a third party, B Pty Ltd (B). W also granted a mortgage
to B as security for W's obligations under the deed. In exchange, B
covenanted not to sue the director for guarantees he had given for the
debt. W was later wound up in insolvency. The liquidators found that
W had received no benefit from these transactions, but had suffered a
substantial detriment.
The liquidators applied to court to set aside these transactions on the
basis that it would not been entered into by a reasonable person.
At first instance, the Victorian Supreme Court found that the
transaction was not an unreasonable director-related transaction within
the meaning of s 588FDA(l)(b) of the Corporations Act 2001 (Cth).
The court held that the fact that a transaction may be in the financial
interest of a director is insufficient to bring it within the description of
one 'for the benefit of' the director within the meaning of the section.
The liquidators appealed the court's decision.
ISSUE Does the unreasonable director-related transaction provision
of the Corporations Act cover both direct and indirect benefits to
directors?
DECISION The Court of Appeal unanimously overturned the
decision and ordered that the deed and mortgage be declared void due
a breach of s 588FDA. The court held that the natural and ordinary
meaning of 'for the benefit of' accords to the objective of the section of
preventing directors stripping benefits out of companies to their own
advantage
The Appellate Court disagreed with the more restricted meaning of
'for the benefit of' given by Brereton J in Re Great Wall Resources Pty
Ltd (in liq) [2013] NSWSC 354 and accordingly declined to follow that
approach.
70
Corporations Law
[75] VINES v ASIC
(2007) 62 ACSR 1; [20~] NSWCA 75
New South Wales Court of Appeal
Officers (CFO) - Duty of care and diligence
FACTS Vines, a chartered accountant and former auditor, was the
chief financial officer (CFO) of GIO Australia Holdings Ltd (GIO) and
had responsibility for the financial affairs of the GIO group. He played
a key role in the due diligence process for the profit forecast prepared by
GIO in response to a hostile takeover bid launched by A~ for GIO in
1998-1999. GIO forecasted a business profit of $80 million.
ASIC alleged that Vines breached his duty of care and diligence,
under the precursor to s 180( 1.) of the Corporations Act 2001 (Cth) ('the
Act'), as he knew or should have known of relevant facts at that time
(the adverse impact of Hurricane Georges on the insurance industry)
that should have led him to make a downward revision of the profit
forecast. The hurricane struck North and Central America a month
after the takeover bid was announced. GIO subsequently announced
a loss.
The trial judge, Austin J, found seven breaches of the duty of care by
Vines: (2005) 55 ACSR 619. In that case, two other executives ofGIO
were also found to have breacl\ed their duty of care but did not appeal.
Vines appealed to the NSW Court of Appeal.
ISSUE Did Vines, as a company officer, breach his statutory duty of
care and diligence when in respect of profit forecasts made during a
takeover bid?
•
DECISION Three of the seven breaches of the duty of care by Vines
were upheld by a majority of the Court of Appeal. The majority
(Spigelman CJ and Ipp J) upheld the following contraventions of duty
of care by Vines:
• When he signed the management sign-off having failed to take
positive steps to advise the Due Diligence Committee of the basis
of the assumptions underlying the profit forecast which he knew or
ought to have known was improbable.
• When he supported the integrity of the GIO profit forecast to the
Due Diligence Committee when he knew or ought to have known it
was improbable.
• When, in the period after the Part B statement (as required then
under the old law on takeovers) was issued by GIO, he failed to
71
 LexisNexis Case Summaries
give attention to whether the GIO Re profit forecast would be
achieved.
Civil penalties: As a result of these findings, the majority judgment
of the Court of Appeal upheld the decision by Justice Austin to deny
Vines relief from liability (ss 1317S and 1318 of the Act). However,
the penalty of $100,000 imposed by the trial judge was reduced to
$50,000 by the Court of Appeal. The disqualification order imposed by
the trial judge, which banned Vines from managing a corporation for
three years, was set aside by the Court of Appeal: Vines v ASIC [2007]
NSWCA 126.
Justice Santow, in dissent, held that relief should be granted given the
nature of the contraventions as no more than errors of judgment, as not
being flagrant, as involving no dishonesty on the Appellant's part, and
where only three out of seven contraventions were upheld on appeal.
[76] WALKER v WIMBORNE
(1976) 137 CLR 1
High Court of Australia
Corporate group as separate legal entity - Directors duties:
creditors - Insolvency
FACTS Several companies in a group had common directors who
transferred funds within the group to satisfy some debts. The directors
did not specifically consider the abi lity of the borrower to repay the
debts. The case concerned the propriety of that corporate policy
under which the directors of Asiatic shifted funds among companies
in the group. The companies went into liquidation. The liquidator of
Asiatic took action against the former directors of Asiatic to recover
the amount of loss caused to the company as a result of the directors'
misfeasance.
ISSUE Must directors think about their own company individually in
a group or can they prefer group interests?
DECISION The High Court held that each company within a group
is a separate and independent legal entity and therefore a director has
a duty to consider its interests alone when deciding whether payments
should be made to other companies. Mason J explained:
[I]n the absence of contract creating some additional right, the creditors
of company A, a subsidiary company within a group, can look only to
that company fo r payment of their debts. They cannot look to company
B, the holding company, for payment.
72
Corporations Law
The court held that the directors misapplied the company's funds and
were in breach of their duties. ~ ,
Mason J noted, in obiter statements, that creditor interests were
entitled to consideration because the transaction offered no advantage
to Asiatic and exposed the company to substantial loss with potential
prejudice to its unsecured creditors. Mason J explained:
[In respect of the duty of directors to consider the best interests of the
company] it should be emphasized that the directors of a company in
discharging their duty to the company must take into accour:it t~e interest
of its shareholders and its creditors. Any failure by the directors to taken
into account the interests of creditors will have adverse consequences
for the company as well as for them.
See Spies v R (2000) 201 CLR 603; [2000] HCA 43 [66] for the
significance of these ob iter statements.
[77] WAYDE v NSW RUGBY LEAGUE LTD
(1985) 180 CLR 459; 10 ACLR 87
High Court of Australia
,
Shareholder remedies - Oppressive, unfairly prejudicial or
unfairly discriminatory cond~ct
FACTS The directors of the NSW Rugby League Ltd (NSWRL) passed
a resolution which eliminated a team called Wests from the rugby
competition. The articles of association (constitution) of NSWRL
allowed the board to determine the number of teams in the competition.
The board's decision was based on the need to reduce the number of the
teams from 13 to 12 in order to make the competition more attractive to
the teams (shorter playing season and potentially less injuries to players)
and the public. Wayde, on behalf of Wests, applied for a court order that
the actions ofNSWLR was a breach of the predecessor of s 232(e) of the
Corporations Act 2001 (Cth).
ISSUE Was the board's decision oppressive, unfairly prejudicial or
unfairly discriminatory to a member?
DECISION The board's decision did not breach the equivalent of s 232
of the Corporations Act. The decision to exclude Wests was made in
good faith and did not constitute oppression. Although the effect of
the decision was harsh on Wests, the board acted within their powers
and their decision was made for the overall benefit of the competition.
The board had reasonably balanced the interests of NSWRL against
the detriment caused to Wests. Applying an objective test, it was held
73
 LexisNexis Case Summaries
that the decision reached was not one that no reasonable director
would have made. Thus, Wests had failed to show that the prejudice or
discrimination suffered by the club was unfair, as required under s 232 .
Brennan J exp lained:
Where the directors of a company are empowered to discriminate among
its members and to prejudice the interests of one of them, the adoption
of a resolution which has that effect and which is made in good faith
and for a purpose within the power is not, without more, [in breach
of s 232). Prima facie, it is for the directors and not for the co urt to
decide whether the furthering of a corporate object which is inimical to
a member's interest should prevail over those interests or whether some
balance should be struck between them.
[78] WESTPAC BANKING CORPORATION
v THE BELL GROUP (in liq) (No 3)
(2012) 89 ACSR 1; [2012] WASCA 157
West Australian Court of Appeal
Directors duties: creditors - Insolvency - Duty to act in the best
interests of the company in corporate group context
Note: It is relevant to note that this complex and mammoth case in the
Bell litigation (litigated over 1 7-year period and generating over 2,600
pages of judgment) considered multiple breaches of law by the company
directors. The discussion below is confined to two significant aspects
of this case, namely: (1) the directors' duty to act in the best interests
of the company in the context of corporate groups; and (2) the scope
and ambit of the common law fiduciary duty of directors to consider
creditor interests during insolvency. It should also be noted that the
reasoning of the majority judgment in this case, on the latter issue, has
been criticised by academics and by senior members of the judiciary
writing extracurially.
The High Court of Australia granted leave to appeal. The case, however,
was settled out-of-court on the eve of the High Court hearing in 2013.
FACTS The litigation arose from a refinancing (workout) arrangement
undertaken by the directors of the Bell Group Ltd (BGL) to avoid
impeding liquidation. There were more than 100 companies, domestic
and international, in BGL that were connected through interlocking
loans. BGL had raised finance from a number of banks in Australia
and the UK. At the time of the refinancing, the loans were unsecured
and several subsidiaries in BGL had assets that were not exposed to the
parent company's debt obligations.
74
Corporations Law
Following the stock market crash of 1987, the banks were concerned
about the repayment of their unsecured~ns . In 1998, it became clear
that BGL had insufficient funds to make the loan repayments. The banks
refused to grant further funding and could call for full repayment 'on
demand'. This left BGL little choice but to pursue workout negotiations.
The directors of BGL, in the context of financial distress, took action
to convert the unsecured loans into secured obligations and to bring all
the companies in BGL into the security agreement so that their assets
could be used to pay down the secured debts. This was done to give BGL
some breathing space and to try and restructure its affair~ ~ ensure the
survival of the group of companies. This attempt at corporate rescue
ultimately fa iled 12 months later and the companies in BGL were placed
in liquidation. The banks realised their security and recovered A$283
million from asset sales.
The liquidator commenced proceedings against the banks to recover
the proceeds on the basis of various claims, including a breach of directors'
duties because the directors knew the companies were insolvent and
that the refinancing benefited the banks to the prejudice of other (non-
bank) creditors . Relying on the rule in Barnes v Addy ( 1874) LR 9 Ch
App 244 (dea1'ing with accessorial liability), the liquidator sought to
prove that the banks knowingly participated in breaches of directors'
duties and knowingly received assets resu lting from these breaches.
It was common ground in the litigation that the directors of BGL did
not act for any dishonest or fra udulent reason, or to gain any personal
advantage from the refinancing transaction.
The trial judge (Owen J) held that the conduct of the directors had
failed to demonstrate consideratioR of the interests of the creditors of the
group companies that were pledging their otherwise unsecured assets for
the benefit of the parent company (BGL). His Honour, however, noted
that the relevance of cred itors interests would wax and wane depending
upon the circumstances and the significant of the risk to creditors and
that this called for a balancing exerc ise when determining breach of
directors' duties to consider cred itor interests: Bell Group Ltd (in liq) v
Westpac Banking Corporation (No 9) (2008) 39 WAR l.
All the banks appealed to the Western Australian Court of Appeal
(originally on 144 grounds).
ISSUE ( 1) Did the directors of BGL breach their fiduciary companies
by fa ilure to consider the interests of each company in BGL separately;
(2) and by causing detriment to the creditors of the other companies in
the group?
75
 LexisNexis Case Summaries
DECISION The appeal judgment, by a 2:1 maionty (Lee and
Drummond AJJA; Carr AJA) confirmed the bank's liability but adopted
a different approach to the trial judge on the issue concerning directors'
duties to consider interests.
(1) Lee AJA held that the failure of the Australian directors to
consider at all whether participation in the refinancing transactions
was in the best interests of each company individually, meant that the
Australian directors could not be heard to say that they had a bona fide
belief that they had so acted. Consequently, both the trial judge and the
majority in Bell held that it was unnecessary to apply the Charterbridge
test in Charterbridge Corp Ltd v Lloyds Bank Ltd [1 970] Ch 62 (were the
directors' decisions to enter into the transactions such that no intelligent
and honest director could have made in the interests of each company
in that group?).
In dissent, Carr AJA was critical of the judicial approach adopted
by the trial judge and the majority in Bell on the basis that it was
'impossible or at the very least totally unrealistic commercially to isolate
the interests of one company in the group from another'. His Honour
held it was appropriate to apply the objective test in Charterbridge in
default of any actual consideration by the directors of the interests
of other creditors. Adopting this approach, his Honour held that the
directors did not breach their fiduciary duties and explained:
The [refinancing] transactions provided the opportunity to continue in
business and allowed some time in which to achieve a restructure of the
Bell group ... it cannot be said that the decisions to [do so] were such that
no intelligent and honest director could have made them in the interests
of each company in that group.
... it is helpful to stress that this was not a case of giving security simply
and merely to avoid liquidation of the Bell group; it was to avoid those
liqu idations and the consequent very substantial losses of asset values ...
The Bell directors' decision cannot ... be characterised as irrational in
the Charterbridge sense.
It simply cannot be the law that in those circumstances, contrary to
commercial reality, they [the Bell directors) were obliged solemn ly to
sit down and work their way through the balance sheets of some 70
subsid iaries nearly all of whom were basically shells.
(2) On the legal treatment of directors' duties to creditors, unlike the
balancing exercised advocated by the trial judge, Drummond AJA held:
Directors ... must, if the company is sufficiently financially distressed,
have regard and give proper effect to the interests of creditors ... courts will
now intervene in a appropriate case, irrespective of the directors' beliefs
and business judgments, to ensure that creditors are properly protected.
76
Corporations Law
This approach seems to elevate the duty to a direct one to creditors,
or at a minimum makes them the sole st~eholder group, rather than
including their interests as merely one of a number that must be
considered by directors. It appears to depart from orthodox authorities
(Walker v Wimbome (1976) 137 CLR 1 [76]; Spies v R (2000)
201 CLR 603 [66]).
The approach adopted by Drummond AJA in Bell is also questionable
in light of the long standing judicial practice of non-interference with
directors' business decisions and the general undesirability of judging
commercial decisions via a rear-view mirror. In dissen~ Carr AJA
warned against 'the legally impermissible procedure of looking over the
directors' shoulders as they made the business decision'.
[79] WHITEHOUSE v CARLTON HOTEL PTY LTD
(1987) 70 ALR 251
High Court of Australia
Directors duties - Power to issue shares
FACTS Mr Wiitehouse was the governing d irector of Carlton Hotel.
Control over the voting in the company was achieved by maintaining
three classes of shares: •
• C lass A shares - unrestricted voting rights; issued to Mr Whitehouse;
• C lass B shares - deferred voting rights arising upon death of
Mr Whitehouse; issued to Mrs Whitehouse;
• C lass C shares - no voting rights but with rights to share in profits
and surplus capital only; issued to the two sons and four daughters
•
Upon divorce, the sons aligned themselves with their father and the
daughters with their mother. Mr Whitehead issued C lass B shares to
his sons in order to prevent his daughters exercising control over the
company. Later, after Mr Whitehead fe ll out with his sons, he directed
the company to challenge the share issue as being invalid as it was done
for an improper purpose.
ISSUE Was the share allotment made by the director for a proper
purpose?
DECISION The share allotment was invalid. It was done for an
improper purpose - to manipulate control and take control away from
his wife after his death. Mason, Deane and Dawson JJ explained:
The reason why ... it is impermissible for the directors ... to exercise a
fiduciary power to allot shares for the purpose of destroying or creating
a majority voting power ... [lies in the fact that) it is simply no part
77
 LexisNexis Case Summaries
of the function of the directors as such to favou r one shareholder or
group of shareholders ... fo r the purpose of diluting the voting power
Index
attached to the issued shares held by some oth er shareholders or group
References are to case numbers
of shareholders.
A company officer, of .... 64
[80] Re YENIDJE TOBACCO CO LTD Agency
[1916] 2 Ch 426 existence of .... 1, 22, 65
England and Wales Court of Appeal lifting the corporate veil
(Civil Division) .... 65
Alteration of company constitution
Winding up - Just and equitable ground .... 15
FACTS A profitable company had two shareholders who were also members, by .... 60
the only directors. Both of them had equal rights of management and minority rights on .... 35, 60
proper purpose, for .... 35, 60 '
voting. Both were not on speaking terms following prior hostilities in
their relationship. There was no provision in the company's constitution Assets, company
for resolution of dead locks following their constant disagree ments. not property of members .... 53
A ll correspondence between them was passed through the company
Auditors
secretary. One sh areh older petitioned the court to wind up the company
duties of .... 24
on the just and equitable ground.
Australian Secyrities and
ISSUE Was it just and equitable to wind up the company on the basis Investments Commission
of complete deadlock in management? (ASIC)
DECISION It was held that the company be wound up. The refusal
model litigant, as .... 5 • separate legal entity .... 63 , 76
to meet on business matters, the continued quarrelling and the state Authority
of animos ity between the two directors made it impossible for each to apparent or ostensible .... 33
have confidence in each other. Their working relationship, predicated
on mutual co-operation, trust and confidence had broken down, giving B statutory derivative action,
rise to the ground for dissolution of the company. Bias
liquidators, of .... 3
•
Breach of duties
directors, where shareholders
rat ified .... 50
Business judgment rule .... 10
defence, as .... 10, 45
c Company secretary
Care and diligence
business judgmen t rule as defence
.... 10, 45
Chai rman's duty of .... 9
CFO duty of .... 75
78
"""'"(
directors' duties of .... 4, 5, 6, 10,
24,3 2, 45
Chairman
care and diligence, duty of .... 9
·~ (CFO)
Chief Financial Officer
care and diligence, duty of .. .. 75
Companies
assets of are not assets of members
.... 53
company acts, validity of .... 56,
62
continuous disclosure obligations
.... 6
directing mind of .... 52, 70
dual status as employee and
director .... 51
outsiders and .... 30
separate legal liab ility .... 63
statutory contracts .... 30
Company in liquidation
availability to .... 21
Company officer
care and diligence, duty of .... 64
CFO, duty of care and diligence
.... 75
company secretary, authority of
... . 57
definition .... 47
authority of .... 57
care and di ligence, duty of .... 64
Conflicts of interest .... 59
director acting in multiple
capacities .... 67
79
 LexisNexis Case Summaries
Conflicts of interest - cont'd
director's duties and .... 67
no conflict rule .... 12, 23, 34, 39,
46, 59, 61, 73
Continuous disclosure obligations
directors' duty of .... 6, 32
Contractual liability
apparent/ostensible authority
.... 33
loan guarantees where no
authority to execute .... 16
Corporate constitution
alteration .... 15, 35, 60
enforcement of .... 44
members bound by .... 44
Corporate groups
agency relationship, existence of
.... 1, 22, 65
duty to act in best interests of
company .... 76, 78
group interests over individual
corporations .... 76, 78
lifting the corporate veil and
.... 65
separate legal identity .... 49, 63,
76, 78
subsidiary, profits of .... 43
Creditors
directors duties to .... 66, 76, 78
Crime
director as accessory to corporate
.... 42
D act in good faith in best interests
Defences
business judgment rule .... 10
directors, to insolvent trading
.... 8, 27, 69
ignorance of company's affairs
.... 69
'some other good reason' defence
.... 27
References are to case numbers
80
Definitions
company officers .... 4 7
director .... 40
promoters .... 72
Directing mind of corporation
.... 52, 70
liability and .... 70
special rules of attribution of
.... 55
Directors
accessory to company crime, as
.... 42
acting in multiple capacities
.... 67
business judgment rule .... 10
care and diligence, duties of .... 4,
5, 6, 10, 24, 32, 45
care, skill and diligence, of .... 24
continuous disclosure obligations
.... 6, 32
creditors, duties to .... 66, 76, 78
discretionary judicial relief, where
.... 41, 54
employee, dual status as .... 51
group interests over individual
corporations, preferring .... 76,
78
management powers .... 14
no conflict rule .... 12, 23, 34, 39,
46,59,61, 73
oppressive, unfairly prejudicial or
discriminatory conduct .... 77
Directors' duties .... 11, 24, 43, 45,
48,69, 79
of company .... 17, 58
acting in mu ltiple capacities,
where .... 67
breach and shareholder
ratification .... 50
care and diligence .... 4, 5, 6, 10,
24,32,45
care, skill and diligence, of .... 24
Index
conflicts of interest .... 67
continuous disclosure obligations
.... 6, 32
creditors, to .... 66, 76, 78
definition .... 40
judicial forgiveness for breach
.... 36
legal adviser, accessorial liability
.... 11
no conflict rule .... 12, 23, 34, 39,
46,59,61, 73
'phoenix' activity of ... . 11
Disclosure
companies obligations .... 6
continuous disclosure obligations
.... 6, 32
directors' obligations .... 6
fundraising, requirements during
.... 2
promoters' duty of .... 31, 38
prospectus ljibility .... 2, 19
sophisticated investor exemption
and .... 7
Discretionary judicial relief
insolvent trading where .... 41, 54
E
Employee
director, dual status as .... 51
interests benefitted over
shareholders' .... 58
F
Fraud
lifting the corporate veil where
... . 25
Fundraising .... 2
disclosure requirements .... 2
prospectus, failure to lodge .... 2
prospectus liability .... 19
sophisticated investor exemption
.... 7
Refe rences are to case numbers
81
G
~dfaith
directors' duty to act in .... 17, 58
Indoor management rule .... 56, 62
limits to .... 56
Insolvency
liquidators, independence of .... 3
statutory deman<'ls ~extension of
time .... 13, 26
unreasonable director related
transaction .. .. 74
winding up on just and equitable
ground .... 29, 71, 80
Insolvent trading
defence to, by directors .... 8, 27
directors' liability for .... 8, 69
discretionary judicial relief
.... 41, 54
ignorance of company's affairs as
defence .... 69
shadow directors' liability for
.... 18
'some other good reason' defence
.... 27
J
Judicial forgiveness
breach of director's duties, for
.... 36
Just and equitable ground
breakdown of mutual trust .... 29
deadlock in management, where
80
funds used for purpose
inconsistent with objects .... 71
winding up and .... 29, 71, 80
L
Legal adviser
accessorial liabi Ii ty of .... 11
 LexisNexis Case Summaries Index

R Subsidiary Unreasonable director related

Liability
companies, separate legal .... 63
corporate, and directing mind of
the company .... 52, 70
special rules of attribution of
.... 55
Lifting the corporate veil .... 25
evasion of existing obligation
.... 37
fraud, where .... 25
no conflict rule and .... 39
Liquidators
apparent bias of .... 3
independence of .... 3
M Shareholders
Meetings .... 5, 28
resolution without formal .... 28
Minority rights
alteration of constitution, on
.... 35, 60
Minutes .... 5
Misleading and deceptive conduct
.... 20, 32
companies', by .... 32
N Solicitor
No conflict rule .... 59, 73
corporate veil .... 39
director's duty of .... 12, 23, 34, 61,
70, 73
0 denial of benefit of .... 16
Oppressive conduct .... 20, 77
p Statutory demands
Promoters
definition .... 72
duty of disclosure .... 31, 38
Prospectus .... 2
liability .... 19
requirements to lodge .... 2
profits of .... 43 ~ransaction
Remedies
judicial forgiveness .... 36 separate legal entity .... 49, 76 direct and indirect benefits .. .. 74
Resolutions
T w
without formal meeting .... 28
Time for compliance Winding up
statutory demands .... 13, 26
s breakdown of mutual trust .... 29
deadlock in management, where
Separate legal entity .. .. 63, 76 u 80
Shadow directors Unfairly prejudicial or funds used for p rPbse
insolvent trading, liability for discriminatory conduct inconsistent with objects .... 71
.... 18 shareholder's remedies where just and equitable ground .... 29,
Share issue .... 77 71, 80
power to .... 43, 48, 79
proper purpose, for .... 43, 48, 79
directors' breach, ratification of
.... 50
directors' fiduciary duty to .... 17
directors' management powers and
.... 14
employees interests over .... 58
meetings .... 28
minority rights .. .. 35, 60
remedies .... 77
resolution without forma l meeting
.. .. 28
accessorial liability of .... 11 •
Sophisticated investor exemption
fundraising disclosure and .... 7
Statutory assumptions
Statutory contract
articles as .... 44
extension of compliance time
.... 13, 26
Statutory derivative action .... 21, 68
Company in liquidation,
ava ilability to .... 21
leave to seek, requirements ... . 68

References are to case numbers References are to case numbers

82 83