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2010 CORPORATE LAW PRIMARY EXAM

DISCUSSION

Please note: this is not a model answer – it merely provides an indication of the primary material to be addressed in answering the questions

Question 1

Bemex Pty Ltd has 500,000 ordinary shares on issue. Each of the company’s five members holds 100,000 fully paid shares. One of the members (Colin) wants to quit the company. He has offered his shares to the other members but they have indicated that they do not presently have the funds to acquire them. The company has been trading profitably and has no major creditors.

Please advise Colin as to the circumstances, if any, in which:

(a) the company could act as a guarantor in relation to any loan agreements that the other members may enter into to facilitate their acquisition of his shares (6 marks)

[In agreeing to guarantee performance of the loan obligations of its members, Bemex would be providing financial assistance to them to acquire Colin’s shares in it. Thus the company could only provide that assistance in the circumstances referred to in s 260A(1).

It is a question of fact whether, by acting as guarantor in respect of each relevant loan, Bemex would materially prejudice either its own interests or the interests of its members. Bemex as a separate entity would appear to have nothing to gain from acting as guarantor. But that alone is probably not sufficient reason for saying that its interests would be materially prejudiced. Much would depend on the credit worthiness of the relevant members and the terms of the guarantee.

Although a company is taken to give financial assistance when it agrees to act as a guarantor, it might not be known for many years whether the guarantee will be enforced. The company’s ability to pay its creditors if the guarantee is enforced might be problematic.

Given the company’s profitability, the guarantees might not materially prejudice the company’s ability to pay its creditors. However, it would be important to compare the full extent of the company’s exposure under the guarantees with the company’s current and projected profitability. It would also be important to know the relative health of the company’s last balance sheet.

If the provision of one or more of the guarantees might not satisfy the terms of s 260A(1)(a), the financial assistance could still be provided if it was approved by shareholders under s 260B: see s 260A(1)(b). Among other things, this would require the passage of a special resolution at a general meeting. However, the members who would receive the financial assistance could not vote in favour of the resolution; nor could their associates. The alternative approval process, a unanimous resolution, would be appropriate here: see s 260B(1)(b).

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Note that where there is no material prejudice to members or creditors, there is NO requirement for the giving of the financial assistance to be approved by a general meeting. The word ‘or’ separates s 260A(1)(a) and s 260A(1)(b).]

(b) the company could itself buy back his shares. (6 marks)

[A company cannot usually acquire its own shares: see s 259A. However, one of the exceptions allows a company to buy-back its shares under s 257A: s 259A(a).

Bemex could buy-back Colin’s shares if the buy-back does not materially prejudice the company’s ability to pay its creditors and Bemex follows the prescribed procedures: s 257A.

In contrast to the position under s 260A(1)(a), it is somewhat easier to apply the material prejudice test to a buy-back. This is because it is the company’s current financial position which is important. Since the company is profitable with no major creditors, it should be a relatively straight forward exercise to determine whether the payment of the buy-back price will materially prejudice the company’s ability to pay its creditors.

The buy-back of Colin’s shares would be a selective buy-back since it does not fit the definitions of the other kinds of permitted buy-back: see the relevant s 9 definitions. Thus the buy-back would have to be approved by special resolution in the manner prescribed by s 257D. Colin and his associates should not vote in favour of that resolution.

It is irrelevant that the buy-back would exceed the 10/12 limit referred to in ss 257B(4)-(5). This is because the buy-back has to be approved by special resolution under s 257D. It would make no sense for it to also have to be approved by ordinary resolution under s 257C. The 10/12 limit is only relevant to employee share scheme buy-backs, on-market buy backs and equal access scheme buy-backs: see the table in s 257B(1).]

TOTAL: 12 marks

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Question 2

ABW Ltd has 100 million fully paid ordinary shares on issue. It also has 10 million cumulative preference shares on issue. Both classes of shares are quoted for trading on the Australian Securities Exchange (‘ASX’). The rights attached to the preference shares are stated in the company’s constitution.

The constitution permits the class rights to be varied or abrogated only if the preference shareholders approve of the change by special resolution at a separate class meeting. For the purposes of the class rights variation procedure, any reduction in the company’s issued preference share capital is deemed to involve a variation in the class rights of the preference shareholders.

The preference shares:

can be voted in a general meeting only in the circumstances required by the ASX Listing Rules, and as referred to in the Corporations Act s 9 definition of ‘voting share’; and

carry the right to be repaid share capital in a winding up in priority to ordinary shareholders.

The directors of ABW Ltd have resolved that the company should reduce its share capital by returning $1 per share to the company’s ordinary shareholders. No shares will be cancelled as a result of the reduction.

(a) Some preference shareholders, who in aggregate hold about 20% of all of the preference shares, do not support the capital reduction. Please advise them as to:

(i) the procedures that the company will have to comply with to effect the reduction (4 marks)

[On the facts, this appears to be an equal reduction. Section 256B(2) should have applied to the facts. Thus the buy-back may occur subject to the company satisfying the requirements of s 256B(1).

One of the requirements is that the reduction must be approved by shareholders under s 256C: s 256B(1)(c). In this case, an ordinary resolution of the shareholders in general meeting will suffice: s 256C(1). The preference shareholders would be entitled to vote on that resolution because of their class rights: cf clause (b) of the s 9 definition of ‘voting share’ and ASX LR 6.3.2. ]

(ii) what, if any, action they may take to prevent the reduction occurring and the likely outcome of that action. (8 marks)

[Section 256B(1)(a) requires a capital reduction to be fair and reasonable to the company’s shareholders as a whole. The proposed reduction is not consistent with the right of the preference shareholders in a winding up to have their capital returned before the ordinary shareholders get anything. In these circumstances, to return the capital to preference shareholders would normally be considered to be fair and reasonable, even if those shareholders opposed the return: see , for example, Scottish Insurance Corp Ltd v Wilsons & Clyde Coal Co Ltd [1949] AC 462, HL; Re Daniel Clifford Investments Ltd [1948] SASR 278. However, prima facie, to completely exclude the preference shareholders from the return of capital would not be fair or reasonable: Re Fowlers Vacola Manufacturing Co Ltd [1966] VR 97, Little J.

There is nothing in the facts to suggest that the proposed reduction involves any breach of the formal class rights of the preference shareholders. However, if, for the reason given above, the reduction would

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not be fair and reasonable to the company’s shareholders as a whole, the reduction, if made, would contravene s 256D(1).

Under s 1324(1), a person whose interests have been, or would be, affected by a contravention of a provision of the Act may seek injunctive relief. The preference shareholders would be deemed to be such persons: see s 1324(1A)(c). Further, in s 1324 proceedings, the burden would be on the company to prove that the reduction was fair and reasonable to the company’s shareholders as a whole: see s 1324(1B)(a).

Proceedings under s 1324 could be instituted at any time before the company actually returned capital to the ordinary shareholders. Once the capital has been returned there is nothing that a court can do to unwind the reduction. This is one consequence of s 256D(2)(a); a contravention of s 256D(1) does not affect the validity of the reduction: see Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 40 ACSR 221, CA(NSW).]

(b) Please advise the company’s directors whether, and if so how, the company may delete the variation of rights clause from its constitution and replace it with another.(6 marks)

[The company’s constitution contains a variation of rights clause. Therefore s 246B(1) applies. The existing variation of rights procedure may only be ‘changed’ if the change is approved using the existing procedure. To replace an existing procedure surely ‘changes’ the existing procedure.

Thus, to effect the change:

(a) The company in general meeting would have to pass a special resolution changing the company’s constitution: s 136(2). The preference shares could be voted for or against the resolution: see clause (d) of the s 9 definition of ‘voting share’. Presumably, the adoption of a different variation procedure involves a variation of the current right to have all variations approved in accordance with the current procedure.

(b) As required by the company’s current constitution and s 246B(1), the preference shareholders, at a separate class meeting, would also have to approve the change to the variation procedure by special resolution.]

TOTAL: 18 marks

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Question 3

Austral Ltd is a highly profitable unlisted company. It has 276 members and over 100 employees. The company’s directors want to raise $50 million of additional loan capital to expand the company’s operations. Please advise them in relation to the following matters.

(a) Under what circumstances, if any, may the company grant a valid fixed charge over its book debts (ie accounts receivable) to its bank? (5 marks)

[The House of Lords dealt with this question in Re Spectrum Plus plc [2005] UKHL 41: see extract on MyUni. The following propositions emerge from that case:

It is in law possible for a company to create a security consisting of a fixed charge over all its present and future book debts: Lord Scott at [80].

A debenture expressed to grant a fixed charge over present and future book debts would be capable of creating a fixed charge over all such debts as and when they accrued due to the chargor company: Lord Scott at [103].

A debenture could fortify the apparently fixed character of the charge by including a provision entitling the chargee to call for a formal written assignment by the chargor of the debts as they accrued. Such an assignment unaccompanied by written notice to the debtor would constitute the chargee equitable proprietor, and not simply equitable chargee, of the debt: Lord Scott at [104].

The question as to how a particular charge should be categorised depends upon the nature of the rights over the charged asset that have been granted to the chargee or reserved to the chargor. The label that the parties have attributed to the charge may be some indication of the rights the parties were intended to have but is not conclusive: Lord Scott at [80].

It is inconsistent with the nature of a fixed charge that the assets which constitute the security should remain at the disposal of the chargor.

Thus, to be a valid fixed charge, a charge over book debts must not allow the chargor to dispose of the debts, or the proceeds of them, without the express consent of the chargee.

In Spectrum, the charge required the chargor to pay the proceeds of discharged book debts into an account at a bank operated by the chargee. However, the charge was held to be a floating charge because it did not prevent the chargor from accessing the funds in that account without first getting the chargee’s consent. The House of Lords held that it would have been a valid fixed charge if the bank account had been ‘locked’ in the sense that it could only be drawn upon by the chargor with chargee’s consent: see, in particular, Lord Scott at [116]-[117].

Another matter that might have been dealt was the need to register the charge: see ss 262(1)(f) and s 262(4).]

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(b) If the company were to try to raise some of the loan funds from its existing members and employees, in what circumstances, if any, could the securities be referred to as ‘debentures’ in the offer documentation? (5 marks)

[Under s 283AA(1)(a), before a body (such as a company) makes an offer of debentures (as defined by s 9) that needs disclosure to investors under Chapter 6D, it must enter into a trust deed that complies with s 283AB and appoint a trustee that complies with s 283AC.

On the facts, the offer of debentures for issue is likely to require disclosure under Chapter 6D because the exemptions from s 706 (as set out in s 708) are unlikely to apply to all of the offers.

A borrowing company that is required to enter into a trust deed under s 283AA must discharge the duties imposed by Part 2L.2: s 283BA. Section 283BH(1) imposes a duty on the borrower to describe or refer to the debentures 9in the s 9 sense) in the offer documentation only in accordance with the table. Item 2 of the s 283BH(1) table states that the debt securities can only be referred to as ‘debentures’ if the circumstances set out in s 283BH(2) or (3) are satisfied.

Section 283BH(2) would not be available on the facts because the security provided would not consist of a first mortgage over land. However s 283BH(3) permits the borrowing company to refer to the debt securities as ‘debentures’ if:

(i) the repayment of all money that has been, or may be, deposited or lent under the debentures has been secured by a charge in favour of the trustee over the whole or any part of the tangible property of the company or of any of its guarantors; and

(ii) the tangible property that constitutes the security is sufficient, and is reasonably likely to be sufficient, to meet the liability for the repayment of all such money, and all other liabilities that have been, or may be, incurred and that rank in priority to, or equally with, that liability.]

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Question 4

(a) Under the Corporations Act 2001 (Cth):

(i) Who can obtain, and what is the process for obtaining, a Declaration of Contravention?

There needs to be a breach of a Civil Penalty provision. In relation to Directors’ Duties (which is what this part of the exam is directed towards, and

where it was taught in the course), this is likely to be a breach of ss 180-183. Sought by ASIC (s 1317E and J).

(ii) What are the consequences if a Declaration of Contravention is successfully obtained?

Leading to: civil penalty order (s 1317G); disqualification (s 206C); injunction (s 1324). Aside from this, ASIC can apply for compensation to company: s 1317H. The company can also apply separately for compensation: s 1317J(2).

(iii) What is the impact of s 185? What other section has similar effect?

Short paragraph answer (worth 5 marks total)

Section 185 tell us that ss 180-184 act in addition to and not in derogation of ‘any rule of law relating to the duty or liability of a person’ – so, it does not exclude duties existing under common law (such as contractual and tortious duties) and equity (such as fiduciary obligations).

Further, it tells us that the business judgment rule, as defined in s 180(2) also provides a defence to the duties arising at common law and equity which are equivalent to s 180(1).

Section 193 does the same in relation to ss 191-192, but uses that phrase “general law” when discussing rules about conflicts of interest – explain that this means the same as common law and equity.

(b) Problem question:

Serenity Pty Ltd (“Serenity”) is a transport and cargo delivery company, focusing on large retailers and high-end electronic items. Although the company is in sound financial health according to its books and accounts, it has been receiving pressure recently from one of its major customers, Alliance Industrial Pty Ltd (”Alliance”), who are unhappy with a recent spate of mechanical failures in the Serenity transport fleet, which have held up some deliveries.

From January 2010 onwards, Mal, the managing director of Serenity, and Zoe, the Chair of its Board, meet on a weekly basis with Ben, the finance manager of Alliance. He requires them to prepare financial reports and keep an up-to-date schedule of maintenance for the Serenity transport fleet. He says this is required in order to prevent Alliance from having to seek an alternative delivery company. He also looks over the Serenity delivery schedules to help them optimise the delivery routes between the Alliance warehouses and stores, and also routes to other customers’ sites.

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In May 2010, in order to reassure Alliance, the Board of Serenity decides to seek tenders for a new maintenance company to repair their fleet. Zoe passes the public tender information to her husband, Hoban, who runs a maintenance business, and assists him in tailoring his tender application to address the particular concerns expressed by the Board in their meetings. His bid is ultimately successful, not because it is the cheapest, but because, according to Mal, it offers the most comprehensive options which fit best with the needs of Serenity’s fleet. Zoe abstains from the vote at the Board meeting in relation to the tenders, but is present at the meeting, and takes part in the discussion. Unfortunately, Mal is ultimately proved to be incorrect, as Hoban’s four chief mechanics quit within the following three months, leaving Hoban’s business unable to comply with the terms of the maintenance contract. In September 2010 the Board of Serenity accepts the re-tender of another maintenance company, and the fleet is soon back at 100% operational status. Alliance is satisfied, and Ben no longer wishes to meet with Mal and Zoe.

(1) Advise the members of Serenity whether Mal or the Board are in breach of any of the duties which they owe to Serenity, and whether anyone else owes duties to the company in this situation.

[20 marks]

To start with, set out the persons mentioned in the question, and determine their relevance/capacity.o Serenity Pty Ltd – proprietary limited company, with no information provided about the

constitution, so assume RR applyo Who is the Board? Mal (MD) and Zoe (Chair – presiding director on the Board). Are there

others? As a Pty Ltd company, maybe not.o Capacity? Mal as the MD is guaranteed to be an executive director. We don’t know about Zoe

(good students might mention that it is good business practice to have Chair as non-executive)o Members of Serenity – Pty Ltd company, so they will be shareholders

Whilst setting out the people involved in the problem, students may choose to discuss the second part of the answer first – whether ‘anyone else’ owes duties to the company The question did not ask if they had breached any duties, only if they were owed, but short comment could be made. The other people mentioned on the facts are:o Alliance Pty Ltd – a major customer of Serenity, and so probably a creditor. But they are not in

a corporate group with Serenity, or anything like that, as far as we can seeo Ben – finance manager of Alliance (NOT Serenity). There is no information about whether he is

also a director of Alliance. He is probably just a high level employee, but possibly an officer of Alliance. Due to his behaviour in the meetings with Mal and Zoe, he may also be a ‘shadow director’ of Serenity. (The facts for “Ben” were pulled from the Buzzle and Apple litigation, before Justice White in the NSW Supreme Court earlier this year. Apple and its finance director instructed Buzzle’s directors to arrange for the preparation of financial reports, prepare plans for collection of accounts, employ resources for debt collection, and only to sell Apply products.) Discussion of ASIC v Citigroup will be necessary to answer the question of whether or not Ben will owe “director’s duties” to Serenity, and it will ultimately come down to

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answering the question: was Serenity (or the Board) accustomed to act on the instructions of or in accordance with Ben’s wishes? Although it is arguable both ways here, there is probably not quite at the threshold required on these facts. Has he breached any duties? Probably not, but for example, he would not be able to misuse the information he uncovered about potential competitors.

o Hoban – a former employee or contractor (there is not enough information to decide which). As an employee he would owe fiduciary duties, but probably not as a contractor. Either way, the company would look to pursue him under the contract between the parties, so any duties he owes to the company would be considered in light of that contract.

When discussing the potential breaches of duties which have occurred on the facts, it is very important to make it clear that these are owed to company, not to the other directors on the Board or to the shareholders.

Isolating the behaviour that is considered to be questionable (i.e. potentially in breach of a duty) is important. Here, it will be:

o Mal: support of Hoban’s tendero Zoe: passing information to Hobano Zoe: tailoring Hoban’s applicationo Zoe: discussing the tenders with the Boardo The Board: reliance on Mal’s adviceo Zoe should receive the bulk of the discussion, as her behaviour is the most egregious.

The following are not issues from these facts, and did not need substantive discussion:o There is no suggestion of trading whilst insolvent (the company is in sound financial

health according to its books and accounts, the only issues have been delays in delivery).o There are no Ch 2E issues here (not a public company).o Section 195 does not apply (not a public company).o The meetings with Ben do not expose Mal and Zoe to any kind of breach of directors’

duty, as they were required in order to ensure retention of a major client. As such, not only is any shareholder likely to complain about such behaviour, but also it is unlikely to be found to breach any duty.

o Relying on the information provided by Hoban and the other tenders to the company is not an issue – it would form the basis of the contract completed between the parties (and so is outside the scope of this course).

Mal:o The only real argument to be made with respect to Mal is under s 180, due to him expressing

his opinion regarding which was the best tender. There are insufficient details available to decide if this decision was made with sufficient care – but business judgment rule will protect him, even if it does amount to a breach. In any event, was the kind of failure of Hoban’s business that happened on these facts something that could have been anticipated?

o As an executive, there will be an implied duty of care from contract to consider also. If Mal has any special skills as a professional, then they may raise his duty, depending on the terms of his appointment.

Zoe:

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o There are a number of potential arguments to be made against Zoe.o Under s 181, the best interests of the company may not be her motivation (her husband is?)

and she may also not be acting in good faith in relation to any of the three circumstances which could be considered “breaching” (as listed above).

o Her use of position (s 182) and information (s 183) may also be improper. Here is it necessary to distinguish between passing on public tender information (according to the facts) and tailoring the application on the basis of private Board discussions; the former may not be a breach as it could be information that Hoban already had (publicly available – but Zoe still accessed it due to her position on the Board, so it is technically still breaching), but the latter most certainly would be and should be the focus of discussion.

o Her abstaining from voting is not actually required (not a public company, so s 195 is not a problem – s 194), but the issue that this raises is disclosure. Can her abstaining be taken as notice that she had a material personal interest? Possibly, but it is not strictly compliant with the disclosure requirements. There is no indication on the facts that she complied with disclosure (s 191) or provided standing notice (s 192) to the Board. However, this is a proprietary company, and so it is possible that this information is something already known to the Board, due to the smaller nature of such companies, and the closer relationships.

o The equitable (NOT common law) fiduciary obligations are clearly breached: both the “no conflict” and “no profit” rules. There is no indication of fully informed consent, either by the Board or by the shareholders (who are arguably still the only people able to provide such consent).

The rest of the Board – if they exist:o Reliance under s 189 on advice by Mal that the Hoban contract was best, discuss threshold.

Was the kind of failure something that could have been anticipated? Much of this discussion mirrors the discussion of Mal’s potential breach of s 180, and did not really need to be repeated.

Each of the duties raised above needed to be discussed – elements of the duty, behaviour which may breach the duty, possible defences, ability for shareholders/Board to waive or acquiesce etc.

Finally, there is no evidence that any damage was actually done to company, other than having to re-tender and the associated costs, and potentially the costs of having someone provide maintenance in the short time between Hoban’s company ceasing and the new tender being accepted. Hoban would be pursued for breaching the maintenance contract (the facts say he was unable to comply with the terms).

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(2) Regardless of your answer to (1), assume that there has been a breach of s 181 of the Corporations Act 2001 (Cth) by the entire Board of Serenity, but, at the request of a member, the Board refuses to authorise proceedings by the company, or a meeting to discuss such proceedings. What proceedings and remedies are available to the member?

[10 marks]

Members’ remedies in relation to a breach of s 181: Statutory derivative action is the best course of action on these facts.

o A member would satisfy the requirement of s 236(1)(a)(i) standing for ‘member’o They would need to apply under s 237(1) to court for leave, and the criteria to be applied by

the court are found in s 237(2) criteria to be applied by court. They appear to be satisfied here. It is worth noting that the presumption under s 237(3) re: best interests is clearly rebutted when those involved in the breach are involved in the decision not to take action.

o A highly attractive component of the SDA is that under s 242 costs orders are possible – but in reality, these appear to be rarely ordered.

o An injunction by ASIC or a person whose interests are or would be affected by the conduct is available under s 1324 – but what could be injuncted here? It is a little late for this remedy.

o Also, the members do have options of their own when it comes to calling a meeting if the Board refuses: s 249D, E and F. The court could call a meeting under s 249G.

Winding up and oppression are not particularly suitable remedies here. Winding up is too extreme in these circumstances, and oppression would be hard to argue on the facts – but discussion would have resulted in some points.

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Question 5

The company now seeks your advice. The company wishes to know:

(1) Whether, and if so in what circumstances, the Bank can appoint a receiver even if an administrator is appointed under Part 5.3A Corporations Act. [5 Marks]

If an administrator is appointed, a moratorium comes into effect from the time of commencement of administration (on the appointment of the administrator).

This moratorium prohibits (without leave of court or consent of the administrator) enforcement of security with certain exceptions.

Persons who commenced enforcement prior to commencement of VA, and security over perishable property, are exempt

The only circumstance other than perishable property in which a receiver can be appointed after VA commenced, is if appointed by a holder of a charge or charges over all or substantially all of the company’s property

In this case, there is a 13-business day ‘decision period’ in which the chargeholder can decide to appoint a receiver

The administrator gives notice to any such chargeholder, so that they can consider whether or not to exercise the right to appoint a receiver

If the chargeholder does not do so, then they cannot appoint a receiver after this decision period, without permission of court or consent of the administrator

If they do appoint a receiver, the receiver can recover the charged property in the normal way, subject to the administrator’s power to go to court to restrain the receiver.

It is a precondition of appointment of a receiver under s441A that the charge has become and still is enforceable- in other words, that an event of default has arisen which entitles the chargeholder to appoint a receiver- the mere fact that an administrator has been appointed (unless that itself is a specified event of default) would not enable appointment of a receiver- the power to do so derives from the charge agreement.

For all five marks, the answer should include:

(a) The fact that the bank can only appoint a receiver if it has a charge over all or sub stantially all of the company’s property- see s441A

(b) The fact that there is a 13 business-day decision period in which to do so

(c) The fact that the charge must have become and still be enforceable

(d) Reference to the facts of this situation, namely that the bank has a fixed and floating charge over the business (so that is ‘all or substantially all’), which is duly registered with ASIC, and which includes the event of default of entrance into VA, and making of demand which has been done.

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(2) What resolutions may be voted upon by creditors at the second meeting in a Voluntary Administration, and what factors might influence the decision at the creditors meeting in this particular case, given the information available to you.

[20 Marks]

section 439C states quite clear that the only resolutions that may be voted upon at this meeting are:-

(a) That the company execute a Deed of Company Arrangment (DOCA)(b) That the company be wound up(c) That the voluntary administration should terminate.

all these three should be mentioned.

What factors might influence the decision at the creditors meeting in this particular case, given the information available?

General points: This question asks students to consider the factual information given to them in the question, and how it might influence the decision- therefore if students just write a general essay about the rights of secured and/or unsecured creditors, the benefits of liquidation etc., this should not get a high mark out of the 20 available.

This question invites students to consider the three possible resolutions, and what factors might influence these. Therefore they have to go through the legal issues raised., insofar as they may impact on the decisions.

‘Decision at the creditors meeting’ is a little ambiguous- it could mean an individual creditor’s decision as to how to vote, or it could mean the outcome in terms of the likely resolution.

It is also fair to point out that one factor that might be said to influence the decision will be the votes cast in favour or against the resolution- I would not say that this is something which influences the decision, as opposed to something that determines the outcome.

Nevertheless, if a student states the majority voting requirements for a creditors’ meeting in a VA, this would not be wholly irrelevant, even if it is not what the question was getting at.

With 20 marks on offer, there is scope here for students to raise and give a view on every single relevant issue, and obviously if they do so well then they should get close on 20 marks. If they raise only some of those issues, or only deal with them in part, or have inaccuracies in their answer, then clearly their marks will reduce accordingly.

In the time available to students in an exam, and in view of the question asked, it is sufficient if the students identify the factors, and briefly discuss the basic elements . For example, identify the insolvent trading possibility, identify possible defences which might be raised. It is not necessary for the students,

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any more than it is for an administrator in relation to these factors, to deal definitively with each of these issues in order to answer the question as to what factors may influence the decision.

Here are the main issues and the suggested points that should be raised:

(a) The position of the Bank. The Bank is entitled to appoint a receiver in the ‘decision period’. S441A. In this case, the Bank had a charge over all or substantially all of the assets (as far as we can tell), and the charge is enforceable, given the event of default specified, and that the bank has called in the overdraft.

If the Bank has already appointed a receiver here, then there will be little left by way of company property for the administrator to deal with, though there may be the possibility of claims against directors or voidable transactions which can only be pursued by a liquidator- so if this is a case where a receiver is in office, then that factor would influence the decision in favour of liquidation.

If Bank has not appointed receiver, bank will be able to enforce its security if it does not vote for any DOCA proposal-444D.

Therefore, the view of the Bank about any rescue/DOCA proposal will be a crucial factor – the administrator would report on that, because if the DOCA involves any ongoing funding or trading, the secured property may be required (although the administrator/DOCA administrator could go to court to ask for that property to be available , subject to adequate protection).

(b) Insolvent trading – elements of s588G

An administrator or deed administrator has no power to pursue insolvent trading claims, (see s588M(2))

When could the company be said to have become insolvent- students should go through the indicators, exceeding credit periods, requests for credit renegotiation. S588G says that a company has to be insolvent or become insolvent as a result of incurring of debts at that time

Debts were incurred- ongoing trading is sufficient

Reasonable grounds for suspecting insolvency or that it would result

Plus also the director must be shown to have been aware that there were grounds for suspecting, or that a reasonable person in a like position in a company in the company’ s circumstances would have been aware- s588G(2)

There is little to go on here, but for the purposes of influencing the vote in a second meeting of a VA, a watertight case does not have to be made out, merely information for the creditors upon which they can form a view .

Possible defences under s588H here?

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Each director will have to be considered separately

Brian- is a lawyer, not an accountant. No special standard, just the usual level of financial awareness that all directors in his shoes should have (managing director)

Did he have reasonable grounds to expect solvency – ‘expect’ is higher than ‘suspect’- hope that the olive project would turn out well, and that water allocation rights would materialize in 2011, is not sufficient to meet this threshold. Tourprint v Bott.

Gina- lack of English, not an excuse. Lack of business knowledge not an excuse. Southern Cross case.

Could she rely on Brian- as Brian did not have any special skill as an accountant, it would not be reasonable for her to rely on him in relation to solvency advice.(the ‘Stake Man’ case was mentioned where it was suggested that you have to show that you reasonably relied upon the person for advice about solvency, not advice generally). Look at the wording of 588H(3). In this case, his texting to say that ‘liquidity ok’ is not sufficient, and query whether she should even rely on him for advice as to solvency even if she did (which she would have to prove) to solvency, though he is the MD and she is not. This is just something that should be raised, there is no clear answer.

Southern Cross v Clark was covered in lectures/seminar- no particular exemption for partners or dormant directors. She still needs the same minimum level of financial awareness, and even if he was the managing director on whom she could rely for information, she has to assess that information and form an independent judgment for herself.

Her frequent overseas absences do not qualify as an ‘other good reason’ like illness in s588H(4) , for failure to attend board meetings or otherwise be involved in the management. Just because she needed to do extra work is not a good reason for neglecting her duties as director of Bigmouth.

In relation to both directors, they may claim that the VA commencement should be a defence, and this should be taken into account under 588H(5) and (6). The factors mentioned in subsection (6) suggest the court will look at whether or not the VA was triggered early enough- it won’t be a defence if it is a cynical last-minute response, perhaps to a creditor statutory demand for example.

The practical point could be made by some students that it would depend whether or not the directors were worth pursuing by the liquidator (in terms of the directors’ solvency)

The general defence in s1317S is available here too- acted honestly and ought fairly to be excused (Stake Man case confirms). Could the directors here, or possibly just Brian, argue that they honestly believed that the company was in a temporary crisis due to the effects of the GFC on its exports, and that it would pull through given the olive project, and the expectation about water allocation. However the problem with this is that Brian and Gina did not take any

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professional advice, so although they may have been honest, it doesn’t necessarily mean they ought to be excused if they fell below the standard for directors.

(c) Was the olive transaction and ‘uncommercial transaction’ – 588FB- at the time it was made, might the company have been insolvent, or insolvent as a result of it. Here, two months prior to concluding insolvent, but after the other signs of insolvency referred to above had occurred, so probably insolvent in July.

If so was it the type of transaction that no reasonable company in the circumstances , would have entered into having regard to the benefits and detriments, and any other relevant matter.

It was a risky transaction in that Brian was digging up vines and spending money on olives, and paying out for a share in expensive equipment. The benefits to the company were speculative or long-term, given the reality of insolvency at the time.

Some students might raise the issue as to whether it was such a significant transaction that Brian should have got Gina’s consent as the other director.

Also it could be a breach of s181, and this is something a liquidator can pursue too. The point is that the directors breach of the statutory and fiduciary duties are also relevant on insolvency, but obviously they are not expected to write about these in any detail in this question.

Time period for uncommercial transaction – was the transaction within the time period? Two years- s588FE(3)- these provisions are confusing, some students may think it is six months under FE(2), but for uncommercial transactions (which are also ‘insolvent transactions’ within 588FC) it is two years. Although the legislation is confusing, the time periods for each type of transaction have been covered in lectures.

A liquidator, but not an administrator, can pursue voidable transactions.

(d) Unfair preference

Return of goods to an unsecured creditor, if it falls within the six months period, is a preference as it gives them an advantage that they would not have on an immediate liquidation 588FA (viz that they have the goods in satisfaction of their debt). Unlikely that creditor will have a defence under 588FG because put pressure on Bigmouth, so may have known of financial difficulty- although, it could be usual type of pressure in the sense of asking for payment of an outstanding debt- onus is on them to prove lack of suspicion test under 588FG is met.

(e) Likely effect of DOCA

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Whilst the proposal for the directors to put money in and waive their claims is the sort of thing that might happen in a DOCA (as there are no limits to what may be in the DOCA), students should point out that:

(a) Employee priorities must be respected (ie s556 and 561) in a DOCA –s444DA- therefore the Chilean workers will have their priority respected either way

(b) The generous offer to waive the dividend debt is not so generous, as this would have deferred status under s563A on a liquidation anyway. The director’s salary (as excluded employees) would be capped under s561, but is still a priority claim up to $2000.

(c) There are certain things that must be in a DOCA s444A(4)(d) The only proposal here seems to be to waive some director claims, and keep trading on until

2011 when water allocation rights might save the company. (e) The administrator has to report to creditors under s439A and this will certainly influence the

decision. The administrator must recommend one of the options, and give reasons in light of his/her investigations of the company’s affairs.

(f) Entrance into a VA and/or a DOCA and THEN going into liquidation will not protect against voidable transactions challenges by a subsequent liquidator- s588FE(2A) and (2B).

(g) Entry into a DOCA which then terminates without liquidation may protect the directors from scrutiny by a liquidator, but ASIC can still pursue insolvent trading claims against the directors.

TOTAL FOR QUESTION FIVE: 25 Marks