Reading Guide

Lecture 9

COMMONWEALTH OF AUSTRALIA
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Note: Please come prepared to discuss the

Lecture Hypothetical on Oppressive/Unfair
conduct in class

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Revision Question Answers: (e), (b), (d), (b)

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Shareholders’ Meetings
Reading: Chapter 14
CA: Sections 249A-U (except 249K, LA and P); 249X and Y; 250A–C, 250E, J,
L, N, P, R, S; 300A; 317; 1322(1), (2) and (4)
Cases: Re Totex-Adon Pty Ltd and the Companies Act; Chew Investment
Australia Pty Ltd v General Corp of Australia

• The general meeting is one of the 2 organs of the company

• The will of shareholders is expressed at meetings of the company.

• The calling and conduct of meetings is part of the internal

regulation of companies and is governed by the replaceable rules
and the company’s constitution (if any).

• The provisions of the Corporations Act dealing with meetings are

designed to ensure that the will of shareholders is reflected in the
running of the company, and that they have an opportunity to gain
information about the company.

Types of Meetings
Shareholders meetings can be described as four types:

• Annual General Meeting

• Extraordinary general meeting

• Class meeting

• Adjourned meeting

Annual General Meeting

Who is required to hold an AGM?

A public company with more than 1 shareholder (section 250N(4)),

unless a proprietary company or a single shareholder public company
states in its constitution that an AGM will be held.

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When must the AGM be held?

• The 1st AGM: Within 18 months after its registration (s250N(1)).

• Future AGMs: AGM must be held at least once in every calendar

year and within 5 months after the end of the company’s financial
year (s250N(2)).

The AGM must be held even if other meetings are held during the year
(s250N(3)).

Can the company extend the time for holding the AGM?

Yes. A company can apply to the ASIC for an extension of time to hold
the AGM (s250P(1)). The application has to be made before the
expiration of time during which the AGM was required to be held
(s250P(2)).

What is the purpose of the AGM?

The AGM gives shareholders the opportunity to obtain information about

the company’s past performance and future plans. Furthermore,
shareholders can question directors regarding the affairs of the company.

What is the business of the AGM?

Section 250R provides that the business of an AGM may include any of
the following, even if not referred to in the notice of meeting:

• the consideration of the annual financial report, directors’ report

and auditor’s report;

• the election of directors;

• the appointment of the auditor;

• the fixing of the auditor’s remuneration.

What must be disclosed at the AGM?

• Section 317(1): The directors of a public company that is required

to hold an AGM must provide before the AGM the financial,
directors’ and auditors report for the last financial year that ended
before the AGM.

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 • For listed companies, the directors’ report must contain a
remuneration report that sets out the remuneration paid to
directors and the top 5 executives (s300A(1)).

Can members participate at the AGM?

Yes. The chair of an AGM must allow a reasonable opportunity for the
members as a whole at the meeting to ask questions about or make
comments on the management of the company (s250S), including the
remuneration report if a listed public company (s250SA).

Extraordinary General Meeting

This is the general name given to general meetings which are not AGMs.

The extraordinary general meeting may address resolutions such as the

appointment and removal of directors, amendments to the constitution
and share capital reductions.

Class Meetings
The Constitution and the CA may provide for class meetings. Remember
under section 246B (which we discussed in an earlier lecture):

• The rights attaching to a class of shares may only be cancelled or

varied in accordance with the company’s procedure (s246B(1));
and

• If there is no procedure, by special resolution of the company and

75% of the votes in the class whose rights are to be cancelled or
varied (this can be by written consent or special resolution)
(s246B(2)). For the underlined rule, a separate meeting must be
called of the class members.

Adjourned Meeting
The Constitution will typically give the Chairperson power to adjourn
meetings (refer clause 5.6 of Qantas Constitution). To adjourn a meeting
is to stop the meeting and restart it at a later time or date. The
Chairperson may adjourn the meeting:

• So that persons who have a material personal interest in a matter

being considered can leave the meeting;

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 • There is no quorum;

• To evict persons from the meeting who are not entitled to be there
(e.g. non-members);

• Where time has run out to address all of the agenda items at the
meeting.

When a meeting is adjourned, formal notice of the resumed meeting must

be given if the meeting is adjourned for 1 month or more (s249M - RR).

Calling Meetings
A meeting can be called by:

• A Director

• Directors at the request of shareholders

• Shareholders

• Court

By a Director of Company
Any director may call a meeting of the company’s shareholders, unless
the constitution states otherwise (s249C – RR). The decision to call a
general meeting is typically made by the Board of directors, as opposed
to a single director, when it is necessary for the administration of the
company’s affairs.

An individual director of a listed company has the right to call a

shareholders’ meeting despite anything in the constitution (s249CA).

By the directors at the request of shareholders

What is the rule?

Section 249D(1): The directors of a company must call and arrange to

hold a general meeting on the request of shareholders holding at least 5
percent of the voting shares or at least 100 shareholders who are entitled
to vote at the general meeting.

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What must be contained in the request?

The request must be in writing, state the resolution(s) to be proposed at

the meeting, signed by the shareholders making the request and given to
the company (s249D(2)).

When must the directors call the meeting?

The directors must call the meeting within 21 days after the request is
given to the company. The meeting is to be held not later than 2 months
after the request is given to the company (s249D(5)).

What if the directors fail to call the meeting?

Members with more than 50% of the votes of all of the members who
make a request under s249D may call and arrange to hold a general
meeting if the directors do not do so within 21 days after the request is
given to the company (s249E(1)).

The meeting must be held not later than 3 months after the request is
given to the company (s249E(2)).

When can the directors validly refuse a request to call the meeting?

A meeting of a company’s members must be held for a proper purpose

(s249Q). Directors may validly refuse to call a general meeting requested
by shareholders if:

• The purpose of calling the meeting is to harass the company and

its directors (Humes Ltd v Unity APA Ltd);

• The purpose of calling the meeting is to pass a resolution that is

invalid (e.g. it interferes with the directors’ exclusive power to
manage the co’s business).

Case Example: NRMA v Parker

Facts: A member requested the calling of a general meeting. The proposed

resolution purported to direct the board over a matter that the constitution gave
the Board sole power over.

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Held: As this resolution could not be effectively passed by the members and it
was the sole object of the proposed meeting, it was held that the directors were
entitled to refuse to act on the request.

By shareholders
Section 249F: Shareholders with at least 5% of the voting shares may
call, and arrange to hold, a general meeting without requesting the
directors to call the meeting. The members calling the meeting must pay
the expenses of calling and holding the meeting (s249F).

By Court
Section 249G: On application by a director or member entitled to vote at
the meeting, the Court may order a meeting of the company’s members
to be called if it is impracticable to call the meeting in any other way.

A situation which would be impracticable is where a minority shareholder

in a small company does not have the voting power to request or call a
meeting because the majority shareholder refuses to co-operate in calling
a meeting (see Re Totex-Adon Pty Ltd and the Companies Act)

Notice of Meetings
What notice is required to call a meeting?
Notice enables shareholders to know what business will be considered at
the meeting so that they can decide how to vote.

General Rule (other than listed public company)

At least 21 days notice must be given of a meeting of a company’s

shareholders. However, if a company has a constitution, it may specify a
longer minimum period of notice (s249H(1)).

Shorter notice

Section 249H(2): A company may call on shorter notice:

• An AGM - if all the members entitled to attend and vote at the

AGM agree beforehand;

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 • Any other general meeting - if members with at least 95% of the
votes that may be cast at the meeting agree beforehand
(s249H(2)).

When is shorter notice not allowed?

• In public companies where the meeting is to consider a resolution

to remove a director or appoint a replacement (s249H(3)).

• Where the meeting is to consider a resolution to remove an auditor

(s249H(4)).

General Rule (Listed Public Company)

Despite s249H or anything in the company’s constitution, a listed

company must give at least 28 days notice of shareholders’ meetings
(s249HA).

Who receives notice of the meeting?

Section 249J(1): Written notice of a meeting of a company’s members
must be given individually to each member entitled to vote at the meeting
and to each director. There are a number of methods for giving notice,
including personally, post, fax and electronic means (s249J(2)).

What are the contents of the notice of meeting?

Section 249L:

• Time, date and place of meeting;

• General nature of meeting’s business

• If a special resolution is proposed – an intention to propose

resolution and state resolution

• If a member is entitled to appoint proxy – this must be stated as

well as whether the proxy must be a shareholder. A shareholder
must also be informed of the right to appoint two proxies and to
specify the proportion of votes each proxy is appointed to exercise
(s249L(1)).

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If the information in the notice is misleading, the Court may order an
injunction to restrain the holding of a meeting: Chequepoint Securities
Ltd v Claremont Petroleum NL.

Apart from section 250R CA, the general rule is that only those matters
set out in the notice of meeting can be considered, unless all the
members attend the meeting and agree to vary the agenda. Minor
variations to the text of resolutions are permitted, but the substance of
the resolution should remain unchanged.

Note: Click on this link to view National Australia

Bank’s Notice of Meeting and Proxy Forms for its
2009 AGM:

http://www.nabgroup.com/vgnmedia/downld/20091116_NAB
2009NoticeOfMeetingAndProxy.pdf

Proceedings at Meetings
Does the meeting have to take place at one venue?
No. A company may hold a meeting of its members at 2 or more venues
using any technology that gives the members as a whole a reasonable
opportunity to participate (s249S). This contemplates the use of video-
conferencing and electronic communication.

What is the Quorum for a general meeting?

The quorum for a meeting of a company’s members is 2 members and
the quorum must be present at all times during the meeting (s249T(1) – a
RR). If the quorum is not present within 30 mins after the meeting time,
the meeting is adjourned to the time, date and place the directors specify
(s249T(3)).

Who chairs the general meeting and how is the chair

elected?
Section 249U (a RR): The directors may elect an individual to chair
meetings of the company’s members. This person is usually a director
and chairs the directors’ meetings as well.

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The directors at a meeting of the company’s members must elect an
individual present to chair the meeting (or part of it) if an individual has
not already been elected by the directors to chair it or, having been
elected, is not available to chair it, or declines to act, for the meeting (or
part of the meeting) (s249U(2)). If the directors do not elect the chair,
then the members can (s249U(3)).

Voting – Numbers
Company with share capital

Section 250E(1) (RR): Subject to any rights or restrictions attached to

any classes of shares (e.g. in the Constitution), at a general meeting,
each member has 1 vote on a show of hands and 1 vote for each share
they hold on a poll.

Company without share capital

Section 250E(2) (RR): Each member of a company has 1 vote, both on

show of hands and a poll.

Voting – Process
Section 250J: A resolution put to the vote at a member’s meeting must be
decided on a show of hands unless a poll is demanded (s250J(1)). On a
show of hands, a declaration by the chair is conclusive evidence of the
result, provided that the declaration reflects the show of hands and the
votes of the proxies received. Neither the chair nor the minutes need to
state the number or proportion of the votes recorded in favour or against
(s250J(2)).

What is a poll?

According to Holland J in Ryan v South Sydney Junior Rugby League

Club:

``The ascertainment of voting strength by the more formal and

more accurate methods of receiving, recording and counting votes
is commonly called a poll but the word `poll' does not itself specify
any particular method or procedure and if one is not prescribed by
the articles or left by the articles to the meeting or the chairman of
the meeting to direct it would be for the meeting to decide the
procedure.

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When is a poll demanded?

Section 250L: A poll may be demanded at any time during the meeting of
company members by the chair, members with at least 5% of the votes
that may be cast on the resolution on a poll or at least 5 members entitled
to vote on the resolution. The Constitution can reduce the numbers and
%.

Proxies
Who can appoint a proxy?

Section 249X: A member of a company who is entitled to attend and cast

a vote at a meeting of the company’s members may appoint a person as
the member’s proxy to attend and vote for the member at the meeting

Note: Section 249X is a RR for Pty Ltd, but a mandatory rule for
a public company

What are the proxies’ rights?

Section 249Y(1): A proxy has the right of the appointing shareholder to

speak at the meeting, to vote according to the appointment and to join in
a demand for a poll.

What if the member attends the same meeting as the proxy?

Section 249Y(3): A company’s constitution (if any) may provide for the
effect that a member’s presence at a meeting has on the authority of a
proxy appointed to attend and vote for the member. However, if the
constitution does not deal with this, a proxy’s authority to speak and vote
for a member at a meeting is suspended while the member is present at
the meeting.

Resolutions
What are the types of resolutions?

• Ordinary Resolution: Resolution passed by simple majority

(>50%).

• Special Resolution (s9): 75% of the votes cast by members

entitled to vote on the resolution. For example, the CA requires a

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 company to pass a special resolution in circumstances of altering
the constitution (s136(2)) and selective reduction of capital
(s256C(2)).

• Resolution without general meeting (circulating resolution): A

proprietary company with more than 1 shareholder may pass a
resolution without a general meeting being held if all the members
entitled to vote on the resolution sign a document containing a
statement that they are in favour of the resolution set out in the
document (s249A(2)).

• Resolution without general meeting (1 member companies): A

company that has only one shareholder may pass a resolution by
the shareholder recording the resolution and signing the record
(s249B).

Can shareholders move resolutions?

Yes. Shareholders with at least 5% of the votes that may be cast or at

least 100 shareholders entitled to vote may give a company notice of a
resolution that they propose to move at a general meeting (s249N(1)). If
the company receives notice of a resolution from member(s) under
s249N, the resolution must be put at the next general meeting of the
company that occurs more than 2 months after the notice is received by
the company (s249O(1)).

The members may use this procedure, for example, to have a matter
included for consideration at an AGM. However, the request must be
provided to the company at least 2 months before the date of the AGM.

Procedural Irregularity
What is a procedural irregularity?

Section 1322(1) states that procedural irregularity includes:

• The absence of a quorum at a meeting of members or directors

• A defect, irregularity or deficiency of notice or time

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A procedural irregularity may include giving 20 days notice of a meeting,
rather than 21 days or not providing notice of a meeting to all of the
directors.

What is the legal effect of a procedural irregularity?

A “proceeding” under the CA (e.g. directors or members meeting or the

passing of a resolution) is not invalidated because of any procedural
irregularity unless the court is of the opinion that the irregularity has
caused or may cause substantial injustice which may not otherwise be
remedied by order of the court and by order declares the proceeding to
be invalid (s1322(2)).

Thus, the proceeding is deemed to be valid, despite the procedural

irregularity. This means that if a person wants the proceeding declared
invalid, the onus falls on the person to demonstrate that substantial
injustice has resulted or will result from the irregularity.

The Court can make an order that any act or thing arising out of the
procedural irregularity is valid (s 1322(4)(a)).

What is substantial injustice?

Substantial injustice is a question of fact. The injustice must flow from the
irregularity, not the outcome of the irregularity. For example, a resolution
passed at a meeting (“the outcome”) without a valid quorum (“the
irregularity”) is not a substantial injustice if the resolution would have
been passed even if a quorum was present.

Members’ Remedies
Oppressive or Unfair Conduct
Reading: [17.05] – [17.110]
CA: sections 232 – 234; section 53

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Additional Cases: Re Bright Pine Mills Pty Ltd; Shamsallah Holdings Pty Ltd v
CBD Refrigeration & Air conditioning Services Pty Ltd; Fexuto v Bosnjak
Holdings Pty Ltd

The remedy for oppressive or unfair conduct is typically used by a

shareholder in a small proprietary company effectively “locked in” to
company because no ready market for their shares exists.

The remedy is not common with public companies, which are more likely
than proprietary companies to have a market for the company’s shares
and aggrieved members will sell their shares rather than incur costs in
taking legal action. Furthermore, publicly listed companies must comply
with ASX Listing Rules which require these companies to gain
shareholder approval when they propose structural changes.

What is the Rule?

Under section 232, the Applicant must prove that:

• the conduct of a company’s affairs; OR

• an actual or proposed act or omission by or on behalf of a

company; OR

• a resolution, or a proposed resolution, of members or a class of

members of a company

IS

• contrary to the interests of the members as a whole; OR

• oppressive to, unfairly prejudicial to, or unfairly discriminatory

against, a member or members whether in that capacity or in any
other capacity.

How do you answer an oppressive or unfair

conduct question?
There is a 4 step process that you can use:

1. Can the person apply?

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 2. What is the relevant conduct?

3. Is the relevant conduct contrary to member interests, oppressive

or unfair?

4. What are the remedies?

Can the person apply?

Section 234 CA lists the persons who can apply. The persons include:

Section 234(a): A member of the company, even if the application relates

to something done to the person other than as a member

Section 234(c): A person who has ceased to be a member of the

company if it relates to circumstances in which they ceased to be a
member

Section 234(d): A person who has a share as the result of transmission

under a will

Section 234(e): A person whom ASIC has permitted to bring the

application as a result of an investigation

What is the relevant conduct?

Section 232(a): Company’s Affairs

Section 53 CA provides a wide definition of the “affairs of a body

corporate”. This is another way of saying “the company’s affairs”. The
definition includes:

• the promotion, formation, membership, control, business, trading,

transactions and dealings, property, liabilities, profits and other
income, receipts, losses, outgoings and expenditure of the body;

• the internal management and proceedings of the body;

• the power of persons to control the rights to vote attached to

shares in the body or to dispose of such shares.

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Given the wide definition, any matter that comes before a general
meeting or director’s meeting would be within the scope of the company’s
affairs.

Section 232(b): Actual / proposed act or omission by or on behalf of a

company

Act: For example, a single resolution of the board of directors (Wayde v

NSW Rugby League Ltd)

Omission: For example, the company persistently refuses to pay

dividends when sufficient profits exist (Sanford v Sanford Courier Service
Pty Ltd)

Section 232(c): Actual or proposed resolution at a general or class

meeting

Note that the actual or proposed resolution is not by directors, but by

members at a general meeting or class meeting.

Is the relevant conduct contrary to member interests,

oppressive or unfair?
The relevant conduct must be:

• Section 232(d): contrary to the interests of the members as a

whole; OR

• Section 232(e): oppressive to, unfairly prejudicial to, or unfairly

discriminatory against, a member or members whether in that
capacity or in any other capacity.

A case example of section 232(d) is Re Overton Holdings Pty Ltd. Faye,

Overton’s managing director and majority shareholder, arranged for the
company to lend money to 2 other companies controlled by Faye that
were in financial difficulty. The loans were unsecured and made without
the knowledge of Overton’s other director and minority shareholder.

In relation to section 232(e), the three underlined elements are now

considered as a “composite whole”. This means that the key issue is
whether the conduct is commercially unfair on a member or members.

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There is no definition for “oppressive” or “unfairly” in the CA, so the best
way to determine whether the conduct falls under section 232(e) is by
looking at the case law. What we do know from the case law is that:

• The result, not the motive must be unfair. This means that conduct
may amount to oppression even though directors and majority
shareholders are acting in what they think are the best interests of
the company. The issue is this: is the effect of the conduct
commercially unfair?

• Typical case scenarios where section 232(e) is raised include:

o Disagreements between minority and majority shareholders

o Diversion of corporate opportunity and/or profits

o Exclusion from management

o Improper share issue

o Failure by a person to dispose of their shares

Note: There is also an excellent list of examples

at pp 216-217 of the 2009 Corporations
Legislation textbook.

• Unfair is determined objectively. For example, a director’s conduct

is oppressive or unfair if no reasonable director would have acted
in that way (Wayde v NSWRL Ltd)

Case Example: Wayde v NSWRL Ltd

Facts:

The NSWRL was responsible for the running of the Sydney rugby league
football competition (now known as the NRL). Under the NSWRL’s
Memorandum of Association the company’s objects and powers included the
following: “To foster and control the game of rugby league throughout the State
of NSW and the ACT and generally to take such action as may be considered
conducive to its best interests”.

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The NSWRL sought to reject an application for admission to the NSWRL
competition by the Wests Football club. This would reduce the number of teams
to 12. Wests brought an application for a remedy under the equivalent of s232.

The NSWRL argued that there were too many games in the competition and the
competition was too long. Players complained that they were playing too much
football, and did not give sufficient time for the players to recover from games
and injuries. A reduction to 12 teams would mean 4 fewer playing days,
particularly during hot weather (which could affect the health of players).

Held:

The NSWRL had power under its Memorandum to determine the number of
teams in the competition.

The decision to reject ‘Wests’ was made in good faith and in the interests of the
competition as a whole

Although the decision may have been prejudicial to or discriminatory against the
club, this in itself did not satisfy the requirements of s232.

The prejudice or discrimination must be unfair discrimination in the commercial

context. The relevant question was whether the resolution to reduce the number
of teams “so unfair that reasonable directors would not have passed the
resolution?” From an objective point of view the resolution was not so unfair.
While the decision was harsh on Wests, it was one that a reasonable board
could have made.

Shareholder disagreements

In determining whether or not conduct is oppressive or unfair the court

must balance the conflicting interests of majority and minority
shareholders. The court will examine the background of the company and
the reasonable expectations of its shareholders. For example, the fact
that minority shareholders are unhappy with a decision is not itself a
ground for oppressive or unfair conduct given that on purchasing shares
as minority holders, they should realise that control of the company lies
with persons with substantial interests in the company.

For example:

• In McWilliam v LJR McWilliam Estates Pty Ltd, the Court held that
it was not necessarily oppressive or unfair just because the Board
was pursuing company policies with which the minority

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 shareholders disagreed. The company amended its dividend
policy because of tax laws and not to act unfairly towards the
minority (albeit that the amendment had the affect of
disadvantaging the minority).

• In Re H W Thomas Ltd, a minority shareholder could not show that

conduct was oppressive, unfairly prejudicial, or unfairly
discriminatory. At a general meeting of the company, the minority
shareholder moved that the assets held by the company be sold
and the proceeds reinvested in higher income earning investments
(i.e. a riskier proposition). The resolution was not passed. The
company was a family company in which it was common ground
that the financial management of the company had been
conservative. It was also understood that the company was
intended to be a source of employment, rather than a means of
obtaining dividend income. In these circumstances the minority
shareholder was not unfairly prejudiced by complying with the
decision of the majority of shareholders.

Diversion of Profits and Corporate Opportunities

Case Example: Sanford v Sanford Courier Service Pty Ltd

Facts: Company A diverted its business away to Company B, of which the

majority shareholders and directors of Company A were the sole directors and
shareholders of Company B. Furthermore, company A paid high salaries and
provided other benefits to its directors while refusing to pay dividends, thus
denying the minority shareholder in Company A a share of the profits. In fact,
the operating profit of Company A for the year was $9,714; the salaries paid to
the 2 directors were $51,432 each (a lot of money in 1984!!).

Held: The majority shareholders acted oppressively towards the minority

shareholder as they excluded him from the profits of the company by failing to
pay dividends.

Exclusion from management

Many family companies are run as “quasi-partnerships”, with family

members having a “legitimate expectation” to participate in the
management of the company. An act of blocking this participation may be
considered unfair.

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Recent Case Example: Mopeke Pty Ltd v Airport Fine Foods Pty Ltd

Airport Fine Foods Pty Ltd (AFF) was a proprietary company. The Bradfield
family and associated interests (Bradfield interests) held 40% and the Lagerlow
family and associated interests (Lagerlow interests) held 60% of the shares in
AFF.

There were three executive directors, Mr Steven Petrovski (representing

Bradfield interests), Mr John Lagerlow and Mr Gordon Lagerlow. In January
2005, the board of directors required Mr Petrovski to resign as director.

The Bradfield interests contended that the dismissal of Mr Petrovski as an

executive director and his consequent exclusion from day-to-day management
of the company constituted oppression.

Held: The Court ordered under section 233 for Lagerlow interests to purchase
the Bradfield interests.

It is typically considered unjust for a majority to use their voting power to

exclude a member from participation in the management without giving them the
opportunity to remove their capital upon reasonable terms. The aggrieved
member has a "legitimate expectation" that they would be able to participate in
the management or withdraw from the company: Fexuto Pty Ltd v Bosnjak
Holdings Pty Ltd.

The circumstances as a whole made it unfair for the Lagerlow interests to use
their majority voting powers to remove Mr Petrovski, in the absence of proof of
Mr Petrovski's incompetence, from participation in the daily management of the
business, without giving the Bradfield interests the opportunity to sell their
interest at a fair price.

Improper share issue

In Re Dalkeith Investments Pty Ltd, the Court held that excluding a

director from the opportunity to participate in the decisions of the board to
issue shares (which had the purpose and effect of diluting the directors’
shareholding) amounted to oppressive conduct.

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Failure to dispose of shares

The mere fact that a member of a company cannot dispose of his/her

shares is not enough to establish oppression. For example, the
other shareholders may be unwilling to purchase the shares:
McWilliam v L J R McWilliam Estates Pty Ltd.

Inadequate dividends payment

Low dividend payment for an extended period of time can constitute

unfair and prejudicial conduct, especially where the ratio between the net
profits that the company has made and the dividend declared is high: Re
Same Weller and Sons Ltd [1990] Ch 682, where a dividend of 14p had
been paid for the past 37 years and the most recent accounts showed
that net profits had covered the dividend declared by 14 times.

What are the remedies?

Section 233 CA: The Court has a wide discretion with respect to
remedies – it can “make any order … it considers appropriate in relation
to the company”. Section 233 provides a list of orders that the Court can
make, including:

• Winding up

• Repeal or modification of the company’s constitution

• Regulation of the future affairs of the company

• Purchase of any shares by any member or the company itself

• Company or a member acting on behalf of the company to

institute, prosecute, defend or discontinue specified proceedings

• Injunction (both “positive” and “negative” injunction)

• Appointment of a receiver or receiver and manager over company

property

Lecture Hypothetical

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Facts

A – 5% shareholder

B – 65% shareholder, general manager of company’s business and

director

A sought orders under the equivalent of section 233 removing B as a

director and excluding him from all management of the business on the
basis that:

As director, B had breached fiduciary duties, failed to call general

meetings despite A’s repeated requests and failed to supply A with
financial records

B and the rest of the shareholders argued that the conduct was not unfair
and that if it was, the appropriate remedy would be for the sale of A’s
shares to B.

A was partly motivated by the desire to “get” B.

The Court found that:

1. There had been a number of breaches of fiduciary duty by B, but

the amounts involved were very small

2. There had been “serious inadequacies” in the company’s

accounting records

Questions

Was A able to apply?

What was the relevant conduct?

Was the relevant conduct unfair?

What remedy do you think the Court ordered here?

Statutory Derivative Action

Reading: [17.115] and [17.120]
CA: Sections 236, 237 and 242; Section 9 (definition of “officer”);
Additional Cases: N/A

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A statutory derivative action enables persons, with prior leave of the
Court, to take action on behalf of the company. This differs from
oppressive or unfair conduct, where the applicant (e.g. a member) takes
action personally. However, in particular circumstances, both remedies
may apply to the same factual scenario.

There are two issues in a statutory derivative action:

1. Can the person apply?

2. Will the Court grant leave?

Can the person apply?

Section 236 provides that a former or current member or officer of the
company can apply to the Court for leave to bring a statutory derivative
action.

Will the Court grant leave?

Section 237(2): The court must grant an application for leave if all the
following matters are established:

a) it is probable that the company will not itself bring the proceedings,
or properly take responsibility for them, or for the steps in them;
and

The issue is this: what is the probability, based on the circumstances

at the time of the court hearing, that the company won’t take action?
Where the proposed defendant to the contemplated action is an
officer of the company, inaction is easy to identify.

b) the applicant is acting in good faith; and

Two questions here: Does the applicant honestly believe there is a

good cause of action with a reasonable prospect of success? Is the
applicant bringing the action for a collateral (i.e. alternative) purpose
not connected to the proceedings? For example, an application which
puts pressure on the company directors to resign, have the company
buy out the applicant’s shares or to pay dividends to a particular class
of shareholders. The Court will scrutinise the reasons why a former
member or officer is applying for leave

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c) it is in the best interests of the company that the applicant be
granted leave; and

As with section 181, the best interests of the “company” depends on

its solvency. For example in the case of Charlton v Baber, the Court
was satisfied that the legal proceedings against the director for breach
of fiduciary duty would enhance returns to and thereby promote
creditor interests, which were the company’s interests during the
company’s liquidation.

If the applicant (on behalf of the company) intends on taking or

defending proceedings against a third party (i.e. not a related party of
the company), there are particular grounds set out in section 237(3)
which create a rebuttable presumption that granting leave is not in
the company’s best interests. The grounds are pretty much the same
as the business judgment defence to a due diligence action under
section 180(2).

d) there is a serious question to be tried; and

This criterion is designed to prevent frivolous claims, but it is not

necessary that the applicant be required to prove the legal issue when
applying for leave. A person only needs to show that there is a
probability of success

e) either:

a. at least 14 days before making the application, the

applicant gave written notice to the company of the
intention to apply for leave and of the reasons for applying;
or

b. it is appropriate to grant leave despite the above.

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Who pays for the statutory derivative action?
The applicant who is the party involved in the action on behalf of the
company. However, section 242 states that a court can make
any order it considers appropriate concerning the applicant’s
legal costs, which includes indemnification by the company. L&H
notes that courts are reluctant to award costs even if the
applicant is successful. I assume this would limit the number of
statutory derivative claims.

Statutory Injunctions
Reading: [17.130] – [17.140]
CA: s 1324
Additional Cases: N/A

• Rule: Under s1324(1), the court has a discretion to grant an

injunction restraining a person from engaging in conduct that has
contravened or would contravene the Corporations Act.

• Positive/Negative Injunction: the court may make any order

restraining the person's conduct or requiring the person to act.

• Who may apply? Only ASIC or a person whose interests have

been affected by conduct which relates to a contravention of the
Corporations Act can apply to the court for an s1324 injunction
(s1324(2)).

• “Interests have been affected”: Persons who apply need not show
that they suffered any special injury arising from the contravention
of the Corporations Act. However, applicants must establish that
their interests go beyond the mere interests of members of the
public (Broken Hill Pty Co Ltd v Bell Resources). A line of court
authority suggests that shareholders have standing to apply for an
s1324 injunction because they have greater interests than a mere
member of the public and their interests could be affected by
contraventions of the Act (e.g. breach of director’s duties).

Winding Up by the Court

Reading: [17.145 – 17.180]
CA: ss 461; 462; 9 (definition of “contributory”);

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Additional Cases: Re William Brooks & Co Ltd; Kokotovich Constructions Pty
Ltd v Wallington

Section 461 provides various grounds for a Court to wind up a solvent

company. Despite these grounds, the Court will exercise its discretion
very carefully as it considers that winding up a solvent company is an
extreme step. There are three main issues associated with winding up:

1. Can the person apply?

2. Is there a ground for winding up the company?

3. Will the court exercise its discretion? In particular, is there an

alternative remedy to winding up?

A winding up involves an insolvency practitioner (typically an accountant

known as a “liquidator”) selling off the company’s assets and distributing
the proceeds to the company’s creditors, with the balance (if any)
distributed to the members. The general consequence of this is that the
company is deregistered. Winding up is also known as “liquidation”.

Can the person apply?

Section 462(2) provides that the following persons may apply for an order
to wind up the company:-

• the company;

• a creditor (including a contingent or prospective creditor) of the

company;

• a contributory (see section 9 definition – includes a fully paid

holder of shares in a company with a share capital);

• the liquidator of the company;

• ASIC;

• APRA.

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What are the grounds for winding up a company?
The Court may order the winding up of a company under a number of
grounds in section 461(1) CA (e.g. the company has no members, the
ASIC or APRA determines that it is in the public, member or creditor
interests or the company passes a special resolution to have the Court
wind up the company).

In this course, we will focus specifically on sections 461(1)(e), (f), (g) and
(k) which provide:

(e) directors have acted in affairs of the company in their own

interests rather than in the interests of the members as a whole, or in
any other manner whatsoever that appears to be unfair or unjust to other
members; or

(f) affairs of the company are being conducted in a manner that is

oppressive or unfairly prejudicial to, or unfairly discriminatory
against, a member or members or in a manner that is contrary to the
interests of the members as a whole; or

(g) an act or omission, or a proposed act or omission, by or on

behalf of the company, or a resolution, or a proposed resolution, of a
class of members of the company, was or would be oppressive or
unfairly prejudicial to, or unfairly discriminatory against, a member
or members or was or would be contrary to the interests of the
members as a whole; or

(k) the Court is of opinion that it is just and equitable that the company
be wound up.

Your thoughts: what does sections 461(1)(e), (f) and

(g) remind you of? What are the differences between
oppressive or unfair conduct and winding up in terms of
who can apply and the available remedies? (Hint: also
consider section 467(4))
What is just
and equitable?

The “just and equitable” ground is known as a “catch all” provision in

statute law. If an act or omission does not fall under any of the grounds in
section 461(1)(a) – (j), the Court can still find that it was “just and
equitable” that the company be wound up. This is a question of fact.

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Typical examples of situations where it is just and equitable to wind up
the company include:

• Management deadlock (re Yenidje Tobacco Company Limited)

• Failure of the Substratum (Re Tivoli Freeholds)

• Breakdown of confidence in the conduct and management of the

company. This could be due to fraud or other misconduct by the
directors (refer Loch v John Blackwood Limited in which the
directors did not provide financial reports to minority shareholders
nor had audits been conducted)

• Breaches of the Corporations Act, including breaches of directors’

duties, inadequacy of accounts and record keeping or consistent
breaches of tax laws.

• Public Interest (ASIC v Storm Financial)

Case Example: Clarke v Bridges [2004]

Facts: In 2001 Mr C and Mr B decided to open a wine bar in Melbourne. Each

man held two of the four issued shares in a shelf company set up by Mr C’s
accountant. Together they were the only directors. The company leased
premises owned by Mr B and his wife. Within 2 years of the bar opening, the
relationship between C and B deteriorated. The business shut down and was
sold. After the proceeds of sale were used to discharge the company’s liabilities,
there remained a surplus of $12,000 which was held in the company solicitor’s
trust account. C sought to have the company wound up approximately 6 months
after the business was sold.

Held: The Court held that it was just and equitable to wind up the shelf company
on two grounds:

* Failure of the substratum: the company ceased to carry on the business for
which it was formed (Re Tivoli Freeholds Ltd);

* A deadlock at both Board and shareholder level (re Yenidje Tobacco Company
Limited).

The Court said: It is inappropriate that this company be left in limbo. If it is the
parties will engage in further litigation; I am certain that they will reach no

29
agreement on the fate of the money in the solicitor’s trust account and will
simply take that matter to court … The only way that I can put an end to this
state of affairs is to order a winding up.

Case Example: ASIC v Storm Financial Ltd [2009] FCA 269

Judgment:

http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2009/269.html?query=^Storm
%20Financial

Facts: Storm Financial Limited carried on a financial planning business. Mr and

Mrs Cassimatis were the founders and two of three directors of Storm Financial.
Due to a variety of factors administrators were appointed. The Commonwealth
Bank (CBA), a secured creditor, appointed receivers and managers in January
2009 who effectively took control of the day to day management of the
company. The creditors’ meeting was due to be held on 23 March 2009.

Prior to the meeting, the Cassimatis released an extraordinary proposal for a

DOCA through documents entitled “A Simple English explanation of the DOCA”
and “Storm Financial Limited – The Simple Solution”. When these documents
came to the notice of ASIC, they filed an application to have the company
wound up, either on the basis of insolvency (which we will discuss next week) or
that it was just and equitable to do so (s 461(1)(k)). The administrators had
recommended to creditors that the DOCA be rejected and that the company be
placed in liquidation.

Held: It was just and equitable that Storm be wound up under s461(1)(k)
because:

* Storm Financial was not trading and there was no likelihood that its former
business would resume

* The interests of creditors would not be served by the DOCA proposed by Mr

and Mrs Cassimatis (see contents of DOCA below)

• The public interest would be served. Placing the company in the hands of
liquidators would be for the wider good of the financial system because the
liquidator could investigate issues including: Could the CBA have saved Storm
Financial from insolvency by providing financial assistance? Were the
investments recommended by Storm to its clients appropriate? Were the actions
of Storm and its directors following the substantial drop in the stock market
appropriate?

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The DOCA provided, amongst other things:

* $2 million dividend payment made to interests associated with the Cassimatis’

and currently subject to an injunction, be paid to Storm Financial. However it
was likely that the liquidator would recover the $2 million as an unfair director-
related transaction – in fact the $2 million was subsequently paid back to Storm
Financial

* Cassimatis’ and all other Storm officers and employees be released from any
future liability, which would deny a liquidator the ability to sue the directors for
breach of their statutory duties, most notably s 588G

* Cassimatis’ take control of any legal proceedings against CBA. This was not
only inconsistent with an external administration, whereby the receiver,
administrator or liquidator (as the case may be) takes control, but it was likely
the Cassimatis’ would be joined as parties to any litigation brought by
disgruntled investors, thereby creating a conflict of interest

* The DOCA was proposed to serve the Cassimatis’ interests, not Storm
Financial, which justified ASIC’s decision to bring an application for winding up
during the administration.

Will the Court exercise its discretion?

Note that under section 461, the Court may order winding up, even if one
of the grounds is established.

The Court will not make a winding up order under section 461(1)(e), (f),
(g) or (k) if it is of the opinion that the applicant has some other available
remedy AND that the applicant is acting unreasonably in seeking winding
up instead of pursuing another available remedy: s467(4). Winding up is
regarded as a remedy of last resort and one which should not be granted
if a less drastic remedy is available.

Case Example: Re Dalkeith Investments Pty Ltd

Facts: A divorce between 2 major shareholders resulted in a breakdown in the

mutual trust and confidence between members. As this was irreconcilable, this
was a ground to have the company wound up under what is now s461(1)(k).
However, the court held that a remedy under the equivalent of s232
(oppression) was less drastic and more appropriate under the circumstances.
The company was profitable and had considerable assets and should not have

31
been wound up. The court ordered the purchase of the oppressed members’
shares by the remaining members.

Revision Questions

Question 1

Which of the following is an example of “oppressive conduct” within the meaning

of Corporations Act 2001 (Cth) s 232?

(a) Where the directors divert a business opportunity to themselves.

(b) Where a minority member is improperly excluded from participating in
the management of the company.
(c) Where board meetings of a company are conducted in an unfair manner.
(d) Where the directors fail to act in the interests of the company.
(e) All of the above.

Question 2

Which of the following is not one of the remedies which can be granted by the
court under Corporations Act 2001 (Cth) s 233 where the court finds that there
has been oppression?

(a) An order that the shares of a member be purchased by other members

or by the company.
(b) An order that a director be disqualified from managing companies for a
specified period.
(c) An order that the company be wound up.
(d) An order that the company’s constitution be modified or repealed.

Question 3

Which of the following is not entitled to bring a statutory derivative action

against a director on behalf of the company?

(a) A former member.

(b) A member of a subsidiary of the company.
(c) A former director.
(d) A creditor.

Question 4

Which of the following is not a requirement which must be satisfied before a

court will permit a person to bring a statutory derivative action against a
director?

(a) The applicant is acting in good faith.

(b) The applicant is a related party of the company.

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 (c) It is probable that the company will not itself bring the proceedings.
(d) It is in the best interests of the company that the applicant be granted
leave.

Questions 1 – 4 are taken and/or adapted from Commercial Applications of Company Law 8th
edition Multiple Choice Questions & Answers CCH Publishers

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