Australian corporate law

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Australian corporations law has historically borrowed heavily from UK company law. Its legal structure now consists of a single, national statute, the Corporations Act 2001. The statute is administered by a single national regulatory authority, the Australian Securities and Investments Commission.

The two federal statutes are the Corporations Act 2001 and Australian Securities and Investments Commission Act 2001.[1] The corporations legislation is administered by the Australian Securities and Investments Commission ("ASIC"), which reports to the Treasurer. Since provisions in the Act can frequently be traced back to some pioneer legislation in the United Kingdom, reference is frequently made to judgments of courts there.

History[edit]

On the settlement of Australia by British colonists in 1788 the power in relation to corporations was controlled by the United Kingdom. As colonies gained more independence, and their own parliaments, the power to control corporations passed to these parliaments. Each of the colonies passed laws in relation to the regulation of corporations. On federation in 1901, the Commonwealth of Australia gained limited powers, through the constitution, in relation to corporations, most notably:

"51(i) trade and commerce with other countries, and among the States;"[2]

and

"51(xx) foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth;"[2]

These powers did not extend to the formation of corporations, so the formation of corporations continued to be regulated by the states and territories, while the running of the companies was regulated by the Commonwealth. Laws between states and territories were inconsistent. A later attempt at complex cross-vesting arrangements by the states, territories and commonwealth was ruled invalid by the High Court. It was after this, in 2001, that the current arrangement, where the states refer their power to the Commonwealth in respect of corporations was created.

Company formation[edit]

A "corporation" is defined as a separate legal entity created by charter, prescription or legislation.[3] Australian law, like English law, recognises a kind of corporation called the corporation sole. However, there are few cases of such corporations, the corporation sole is excluded from the Australian statutory definition of corporation.[4]

A proprietary company, under CA 2001 s 45A is one which has the suffix "Pty Ltd", and is not allowed to raise capital on the public equity markets. This form of business entity has similar characteristics to the Limited Liability Company, or LLC, that is a commonly used term in multiple jurisdictions around the world. Some of the characteristics of an Australian Pty Ltd Company include: i) Full foreign ownership is permitted, ii) requires minimum of 1 shareholder and 1 director, iii) requires one director to be resident in Australia and office address to be in Australia, iv) profits can be repatriated, v) an annual audit is required and vi) shareholders have limited liability.

Corporate governance[edit]

Corporate Governance standards are not just a matter of comply and explain, and have been taken into account by the Australian courts when determining the scope of directors’ duties. (They would probably be similarly relevant to the UK duty of care, under CA 2006 s 174.) In Australian Securities and Investments Commission v Rich,[5] Mr Greaves was a non executive director of One.Tel Ltd, and also the chairman, chair of the board and chair of the finance and audit committee. He was a qualified accountant. Austin J held that it was a board responsibility to have functioning financial and audit committees with independent directors, as well as internal review and accounting standards.

The ASX Corporate Governance Council’s Best Practice Recommendation 2.3 states the CEO and chair should be separated. The ASX CGCBPR 2.1 states there should be a majority of independent directors, and the chair should be independent. Under ASX CGCBPR 8.1, the companies should have a remuneration committee, which should be chaired by an independent director, have at least three members and a majority independent. Under ASX CGCBPR 4.2 an audit committee should have at least three members, with a majority independent, and be chaired by an independent director, not including the chairman.

Company constitution[edit]

Australia has strong rules, similar to those found across the Commonwealth,[6] in allowing for removal of directors by a simply majority vote in an ordinary resolution. For public companies, under CA 2001 section 203D[7] there must be a meeting with two months’ notice where the director has a right to be heard. For private companies (known as ‘proprietary companies’ the ones with the suffix “Pty Ltd”) which do not offer shares to the public, and have under 50 shareholders, this rule can be replaced with a different rule allowing for a simpler procedure. In Lee v Chou Wen Hsien [1984] 1 WLR 1202, the Privy Council advised that a private company was permitted to have a provision for directors to remove other directors. Removal from office does not affect a director’s claim for breach of contract.[8]

Under CA 2001 s 201H[9] the directors of a public company (like the UK) can make the appointments of other directors. However, unlike the UK, if that happens, those new directors must be confirmed at the next general meeting, CA 2001 s 201H(3). This rule can be replaced, so it would be possible for a company to require that shareholders make all appointments.

Shareholder rights[edit]

The Corporations Act 2001 contains a default rule in section 250E that shareholders have one vote per share (or have one vote per person if a poll happens with a show of hands at a meeting). Corporations listed on the Australian Stock Exchange cannot deviate from one share, one vote, ASX LR 6.8. Under CA 2001 section 249D directors must convene a meeting if members with over 5% of voting rights, or at least 100 members, request it by writing, stating the resolution they wish to be put. The CA 2001 section 136(2) gives the general meeting the power to alter or amend the company constitution by a 75% vote (a special resolution).

Directors’ remuneration is to be determined by ‘the company’ (CA 2001 s 202A). This rule is a default, or ‘replaceable’, and it usually is replaced. As usual, the standard is that directors pay themselves. Australia has had a non-binding say on pay since the Corporate Law Economic Reform Program Act 2004 for its shareholders. Then, under the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011, new sections were introduced (see CA 2001 ss 250R(2), 250U-V) so that if at two consecutive meetings over 25% of shareholders vote against the directors’ remuneration package, the directors have to stand for election again in 90 days. (It might be noted that it is unclear why shareholders cannot simply propose remuneration themselves, and fix it, and leave directors to go somewhere else if they do not like it.)

Australia has few rules on political donations. Only if it can be found to be a breach of a director’s duty (e.g. the director of the company is a Liberal party member), or would involve oppression of the minority (inherently unlikely) can anything be done as a company law matter. There is no requirement, as in the UK, for ex ante approval of donations with political objects. There is under the Commonwealth Electoral Act 1918 a requirement for disclosure of donations, since the Howard government raised it in 2006, over $10,000.

Australia has a system of "codetermination" or member nominated trustees in its pension, or ‘superannuation’ funds. Since the Occupational Superannuation Standards Act 1987, the Occupational Superannuation Standards Regulations (SR 1987 No 322) regulations 13 and 15 required that equal member nominated trustees was required, or at least one member nominee in schemes with under 200 people. The current legislation is the Superannuation Industry (Supervision) Act 1993, sections 86 to 89.

Directors' duties[edit]

Australian directors are subject to similar duties found in other jurisdictions, particularly the duty of loyalty and the duty of care. Directors have a duty to act in the best interests of the company. This is primarily identified as being for the benefit of shareholders, and surveys suggest that Australian directors, more than in other countries view their primary obligation as being to create shareholder value.

Directors have the duty to strictly avoid conflicts of interest. When directors have any interest in a transaction (i.e. they stand on both sides of a deal a company makes) they must give full disclosure under CA 2001 ss 191-193. A significant extension to the UK law, there is in addition, criminal penalties under Schedule 3 of the 2001 Act. In The Duke Group Ltd v Pilmer[10] a director of Duke Holdings Ltd, and a Duke Group employee, became a director of Kia Ora, a mining business, in a reverse takeover. He failed to tell the Kia Ora board the true financial position of Duke Group, which was worse than expected. Owen J held this failure to disclose meant a breach of duty. So directors involved in two companies with conflicting interests must not only declare they have an interest but also give full disclosure on the potential harm to the company. When a director wishes to take an opportunity in which the corporation may possibly have an interest, the director must gain the fully informed consent of the board, or the opportunity will belong to the company under CA 2001 sections 182-183.[11] There are further specific duties where members need to approve large transactions found in CA 2001 sections 207-230.

An objective standard of care was developed by the Australian courts, beginning in Daniels v Anderson[12] where a bank let a forex trader lose money. The bank sued the auditors (Deloitte Haskins and Sells) who failed to notice, and the auditors counterclaimed that the company was negligent. The NSW Court of Appeal held by a majority that both the auditors and the company directors, whether executives or not, were liable for failing to exercise proper oversight. However, the Liberal government introduced the Corporate Law Economic Reform Program Act 1999, with a new section 180(2) containing a US style ‘business judgment rule’. Directors cannot be liable if they have at least taken steps to ‘inform themselves about the subject matter of the judgment to the extent that they reasonably believe to be appropriate’. I am not sure whether there is a recent parallel case, but this would mean that a director could receive a report on separating the back and front offices and ignore it (as in Barings), receive a compensation report warning of grave mistakes and ignore it (as in the US Walt Disney case), or simply delegate duties down the chain of management, and ignore what happens below (as in Daniels).

At the point of insolvency CA 2001 s 588G creates the same kind of liability as is found in the UK for wrongful trading (Insolvency Act 1986 s 214). If a director is or should reasonably be aware that a company would become insolvent, and does nothing about it, the director is liable to pay compensation.

Shareholder litigation[edit]

The Australians were ahead of the UK in reforming the common law procedure for bringing a derivative claim. It also has an equivalent for unfair prejudice in CA 2001 s 232, which need not be discussed again. Following Canada’s lead, in the Corporate Law Economic Reform Program Act 1999, a new statutory derivative procedure was put into CA 2001 ss 236-242. A member or a former officer of the company (so unlike Canada, this is limited, and other stakeholders cannot claim) can bring an action for a breach of duty owed to the company, and if granting leave would be ‘in the best interests of the company’ the courts will give leave. This is essentially similar to the one found in the UK.

Takeovers[edit]

See also: Takeovers

Takeovers are regulated directly by detailed and very technical rules in Chapter 6 of the Corporations Act 2001. Corporate control transactions and restructings may also be subject to anti-monopoly, foreign investment, employment protection and special industry protection legislation.[13]

Corporate finance[edit]

Australian Commercial law Name Institution Course Date   Question 1 Introduction This is a case emanating from the corporations Act 2001 where the authorized financial advisor acted unprofessionally according to the Australian corporations Act. The breach of law led this financial advisor to jail. The judge issued his verdict basing on the provisions in the corporations Act 2001 to safeguard the plaintiffs from the negative impacts caused by the financial advisor Mr. weaver who gave false information to his clients. Motives of the financial advisor (Mr. Weaver) From the case, we are informed that Mr. Weaver (the defendant) pleaded guilty for 3 counts of failing to have a reasonable basis for the advice he gave and one count of making a false or misleading statement. He admitted that the advice he offered to his clients did not have a reasonable basis thus, it is as if he offered blind advice that affected the clients negatively. The clients followed his advice presuming that he is a trusted professional who has extensive knowledge in matters of financial investments. The defendant Mr. Weaver did not have any ulterior motive by giving this false advice but seems he acted this way due to assumptions. He did not take time to analyze the underlying facts so as to come up with credible advice that would benefits his clients; thus, he acted carelessly. Legal tools used by Judge Wall QC In making his ruling, judge Wall capitalized on section 1041E of the Australian corporations Act 2001, which protects the plaintiff against the false or misleading statements made by the people they relied upon. This section deals with different forms of misleading statements or omissions. Giving information which is materially false or misleading when making a contract or when giving advice to somebody whom they rely on the advice of is illegal.(s1041E) The section applies in the following circumstances; first, where the statement is likely to induce another person to buy or sell a financial product. Secondly, the section applies when the statement induces the client to dispose or acquire a financial product. Thirdly, the section applies where the statement is likely to have the effect of increasing, reducing or maintaining the price of the given financial product. For instance, Weaver, the defendant provided false statements or advice to the clients and this led to reducing client’s financial products. Moreover, for this law to be applied by the judge, the plaintiff must show the probable effect beyond reasonable doubt as decided in case of R v Boughey 1986.

It is a criminal offence to make a false or misleading statement under section 1041E of the Corporations Act. It carries a penalty of $495,000 or more or imprisonment for 10 years or both.

Another legal tool in relation to this case is section 961B of the Australian corporations Act 2001. This section provides that an authorized financial advisor should act to the best interest of the clients. This implies that any authorized financial advisor has the obligation to provide credible advice that would indeed increase the interests of the clients. In relation to this case, Mr. Weaver did not put the interests of his clients first by giving them misleading advice of recommending double gearing strategy which worked against the clients. Thus, Mr. Weaver was guilty of the offense of ignoring the interests of the clients by being careless in his action. Thus, this section formed a good legal basis on which the judge based his ruling. It is a criminal offence to fail to have a reasonable basis for advice under section 945A( now replaced by (s961B)) of the Corporations act 2001 and carries a maximum penalty of $22,00 or imprisonment for 5 years or both. Question 2 Introduction In this case, the defendant Mr. O’Sullivan has been accused of breaching the laws surrounding provisions of financial services. As a director in the Provident capital Ltd, he engaged himself in activities that violated the laws in financial services. Commissioner John Price had a wide legal ground on which he based his judgment in stopping Mr. O’Sullivan from being a director and ordering the withdrawal of the license of Provident Capital Ltd. Motives of the defender Mr. O’Sullivan From the case, we can deduce that Mr. O’Sullivan was accused of gross misconducts. It seems he violated the laws deliberately since he has been a director for over fifteen years and he decided to act ignorant. The case shows that the defendant provided false or misleading statements, failed to exercise due care and diligence and he also acted selfishly by looking after his own interests. Legal tools used by Commissioner John Price In this case, section 1041E of the Australian corporations law Act 2001 applies. The section provides that it is illegal to provide false or misleading information when giving advice (Tomasic, 2002). As a director of the Provident Capital Ltd, many stakeholders depended on the advice of Mr. O’Sullivan because they trusted him. However, he breached this law by causing Provident Capital Ltd to provide false statement to Australian executor trustees Ltd. Mr. O’Sullivan knew well that the statement or the false information he was giving to the Australian executor trustees ltd was going to mislead it, but he went ahead to do so. Section 1311(1) of the corporations Act 2001, requires that the breach of section 1041E amount to the imprisonment of five years and a heavy fine (Tomasic, 2002). The commissioner used the powers in section 1043o to withdraw the license of Provident Capital and prevention of the continued operation of the company as in the case NCSC v Monarchy Petroleum NL7Co 1984.

As a director Mr. O’Sulivan is bound by the Australian Corporations act 2001, of which he broke several other sections of. Including (s181) duty to act in good faith in the best interest of the company. Directors have both a fiduciary duty and stator duty S 181(1)(a)) to act in good faith in the best interest of the company. Another legal basis of the ruling by the commissioner was based on Section of corporations Act 2001. This section covers due care and diligence. It states that the director or officer of any corporation must exercise his powers and discharge the duties with high degree of diligence and due care that any reasonable individual can exercise (Tomasic, 2002). However, from the case, we find that Mr. O’Sullivan acted with low degree of diligence and care by causing Provident Capital ltd issuing debentures prospectus when it was not necessary. He also failed to exercise due care and diligence in managing and recording largest loan. Therefore, the defendant was guilty and the court acted appropriately by banning him to be a director. Question 3 a) Voluntary administration is one of the company insolvency procedures where the company directors or secured creditors appoint an external administrator to administer a financially troubled company. The aim of a voluntary administration is to maximize the chances of the company continuing to operate. If this is not possible the secondary aim it to achieve better returns to creditors or shareholders rather than imitate winding up (s.435A) The external administrator is called a voluntary administrator with the main purpose of investigating company affairs and ascertaining whether the company should be wound up, enter into a deed of arrangement or terminate the administration. The voluntary administrator must be a registers liquidator (s.448B) and must be independent. The administrator reports and recommends to the creditors or the directors the action to be taken basing on the underlying facts in his findings. Thus, voluntary administration provides a troubled company with breathing space as rectifications and adjustments are done and to rescue it. While the company is under voluntary administration, it is protected in that the unsecured creditors cannot enforce their claims and even the owners of the property used by the company are not allowed to recover them. Compulsory liquidation on the other hand, is where the company is compelled by the court to liquidate its assets after it is unable to pay its creditors. The creditors take legal action to pursue and recover their owed resources after investigating and confirmed that the company has insufficient resources to operate to be able to repay its loans. One similarity is that both voluntary administration and compulsory liquidation (Pt5.4, ss459A-459T) are insolvency procedures carried out by the creditors of the company aimed to recover their owed money by the company. The first difference between these two insolvency procedures is that voluntary administration is meant to gauge the status and ability of the company to repay its debts. Thus, it is an investigative procedure meaning that the company is not yet under receivership; the creditors are still contemplating whether the company would be in a position to repay its debts. However, compulsory liquidation is the last option for the creditors after being sure that the company would not be able to repay its debts thus, it has no future. The second difference is that in voluntary administration, there is no court order; the creditors just decide to appoint a volunteer administrator who would watch the company closely and advise them on whether to demand their debts or give the company more time. Whereas Compulsory Liquidation the court orders that the company be wound up by proving the company is insolvent. They do this by issuing a statutory demand for debt(s) of at least $2,000 to be paid within 21 days (s459E) b) A financial service guide (FSG) is a document that contains information about the company specialized in providing a financial advice to individuals or even other companies. The guide must be given to the perspective client before the financial service is given (s.941D) The FSG must include; The name and contact details of the provider, a statement describing any special instructions about how the client may provide instructions to the provider, information about the kinds of financial services that they are authorized to provide and the kinds of financial products related to those services, information about the remuneration including commissions or any other benefit, information about any relationships or associations that may reasonably be expected to be capable of influencing the provider when providing any services and information about the dispute resolution system. The main purpose of an FSG is to help the client make informed decision when choosing a specialized financial advisor. Examples of where these laws could be breached include not providing a FSG before the potential client is given advice (s.941D) The law could also breached by leaving out important information from the FSG, such as relationships or associations that may have an influence on services or information provided .

A statement of advice (SOA) is a document that shows the advice given, the reasons for that advice and any other information including remuneration. A SOA should be provided when a client is given personal advice (s 946A) The SOA can be the method that the advice is given or a record of the advice. If the SOA is a record it must be provided to the client as soon as practicable after the advice is provided and before any services that are connected with the advice are entered into (s.946C) The SOA must include; Information regarding the clients circumstances, descriptions of the products and strategies considered, A statement setting out the advice and reasons why the advice is appropriate (s 947B) and (RG175), The name and contact details of the providing entity, Information about fees, commissions or associations that might have affected the advice (s 947B- licensee, 947C- AR, 947D- additional info if advice recommends replacement)

Examples of possible breaches of the law regarding a SOA include; The SOA not being provided to the client before the providing entity provides services related to the advice given (s946C) or if the SOA is not provided at all. (s 946A) Failing to include important details such as fees, commissions or associations that may have affected the advice would also break the law. (s 947B- licensee, 947C- AR, 947D- additional info if advice recommends replacement)

  References Asic.gov.au. (2008). Voluntary administration: A guide for creditors. Retrieved from http://download.asic.gov.au/media/1348514/Voluntary_administration_guide_for_creditors.pdf Mokal, R. (2005).corporations Insolvency Law: Theory and application. London; Oxford University Press. Print. Profinvest.com.au. (2014). Financial Service Guide. Retrieved from http://www.profinvest.com.au/resources/files/pis_financial_services_guide.pdf Tomasic. R. (2002). Corporation law in Australia. 2nd Ed. Sydney; The federation Press Unisuper.com.au. (2015) Financial Service Guide. Retrieved from https://www.unisuper.com.au/~/media/Files/Forms%20and%20Downloads/Forms%20and%20Brochures/About%20UniSuper/UNIS000018_Financial_Services_Guide.pdf Weisgard, G. (2003). Company Voluntary Arrangements. 2nd Ed. London; Jordans Publishers.

See also[edit]

References[edit]

  1. ^ Together termed as "corporations legislation" under Corporations Act 2001 s 9; Australian Securities and Investments Commission Act 2001 s 5(1).
  2. ^ a b http://www.comlaw.gov.au/comlaw/comlaw.nsf/0/19541afd497bc2e4ca256f990081e2cf/$FILE/Constitution.pdf Australian Constitution
  3. ^ Butterworths Encyclopaedic Australian Legal Dictionary (definition of "corporation").
  4. ^ Corporations Act 2001 s 57A.
  5. ^ (2003)44 ACSR 241; [2009] NSWSC 1229 AustLII
  6. ^ See the UK Companies Act 2006 s 168
  7. ^ Corporations Act 2001 s 203D. AustLII
  8. ^ See Carrier Australasia Ltd v Hunt (1939) 61 CLR 534, which mirrored and preceded the leading UK case, Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701.
  9. ^ Corporations Act 2001 s 203D. AustLII
  10. ^ (1999) 17 ACLC 1329, http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCATrans/1999/351.html?stem=0&synonyms=0&query=title(Pilmer%20and%20Duke%20)
  11. ^ See Queensland Mines Ltd v Hudson (1978) 18 ALR 1 or Adler v ASIC (2003) 46 ACSR 504
  12. ^ (1995) 13 ACLC 614
  13. ^ See Renard I A and Santamaria J G, Takeovers and Reconstructions in Australia, Butterworths looseleaf, Ch 1

Bibliography[edit]

  • Renard, I. A; Santamaria, J. G. "Chapter 1". Takeovers and Reconstructions in Australia. Butterworths. 
  • Farrar, J. H (2008). Corporate governance : theories, principles and practice (SJ100 FAR). 
  • Farrar, J. H (2001). Corporate governance in Australia and New Zealand (KU956 F24). 
  • Ford, H. A. J (1999). Ford and Austin's principles of corporation law (KD956 F69) (9th ed.). 
  • Tomasic, R (2002). Corporations law in Australia (SJ100 TOM). 

External links[edit]