annual review: january 2015 - legal solutions · annual review: january 2015 xvi corporations...

ANNUAL REVIEW: JANUARY 2015

by

Professor Robert Baxt AOEmeritus Partner, Herbert Smith FreehillsProfessorial Fellow, University of MelbourneHonorary Professor of Law, Griffith University

1 Introduction

The change of government in Canberra in late September 2013 has led to a significant shift in theway in which corporate law (and related areas of the law such as securities market regulation) isbeing pursued, reassessed, and developed by a more conservative federal government. Indeed, theyear 2014 has proved to be a rather quiet year in terms of legislative initiatives, although there hasbeen quite a bit of action on one level – namely an attempt by the government to reduce regulationand red tape and to create a more efficient and effective regulatory framework.

Apart from the fact that very few legislative initiatives have been pursued (with a late flurrytowards the end of the year as is the usual case), one very disappointing development during 2014,which seems to be proceeding inevitably, and regrettably, to a sad end is the proposed dissolutionof the Corporations and Markets Advisory Committee (CAMAC). A bill has been presented toParliament making it inevitable that CAMAC will be dissolved early in the new year (seeAustralian Securities and Investments Commission Amendment (Corporations and MarketsAdvisory Committee Abolition) Bill 2014 (Cth)). This is a most disappointing result brought aboutby a rather blind acceptance of the proposition that the need to reduce the budget deficit,necessitated the automatic elimination of a number of smaller organisations that seemed to be easyto be dissolved and their disappearance raising few, if any, questions for the public. However, weare likely to find further issues arising in the context of the work that has been previouslyundertaken by CAMAC as a result of the Financial System Inquiry report (the Murray Report)published on 7 December 2014. In addition, the government has acted inadequately, in my view, inresponse to the far-reaching report of the Senate Economic References Committee (the SenateCommittee) on the Australian Securities and Investments Commission (ASIC) (see Performanceof the Australian Securities and Investments Commission (June 2014)).

The government’s intention in relation to the reform agenda and the replacement of CAMAC, byrelying on officers of Treasury, the Australian Law Reform Commission (ALRC) and theProductivity Commission (the PC) to carry on this work will prove to be an inadequate andinappropriate way to ensure we address law reform issues. This is especially so after so many yearsexperiencing healthy and robust interaction between the practising legal profession and otherprofessionals who have held important views to express on these matters, and governmentministers, regulators and officers on the other hand. Such interaction between these interestedparties have ensured that sensible reform was progressed in the past.

In the meantime, we have seen a steely determination on the part of the new government to ensurederegulation is at the heart of its reform agenda. Few bills have been presented for consideration bythe Parliament in the area of corporate law and related matters (although towards the end of the2014 there has been a significant increase in the number of bills being introduced into Parliamentincluding the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014(Cth)).

In this Review, I will canvas the relevant areas under a number of subheadings. In the next section(section 2), I will briefly discuss legislation which has either been enacted or progressed to asignificant stage to warrant some commentary. Section 3 will deal with possible future reforms. In

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section 4, I will address the work of ASIC, its various reports and initiatives, and the SenateCommittee Report into ASIC referred to earlier as well as other matters relating to corporate lawreform.

In section 5, I will include a review of major decisions of our courts under various headings. As inthe past, I provide only brief commentary on cases relating to directors’ duties and corporategovernance, shareholders’ remedies and rights, and miscellaneous questions of corporate lawcovering a number of areas of interest. I will provide relatively little attention to the more technicalareas of the law such as schemes of arrangement, liquidation, administration and related fields.

As has been the case in the past, I have been assisted in a significant way in the writing of thisoverview by a number of paralegal assistants working with me at Herbert Smith Freehills – namelyAmanda Cowan, Dinisi Sirimanne and Ada Vuu.

2 Legislation and proposed legislation2.1 Reducing red tape

The government announced two red tape legislation days which will highlight each Parliamentaryyear from 2014 onwards. This year, eleven thousand pieces of legislation were apparently repealedby two bills aimed to reduce red tape (Omnibus Repeal Day (Autumn 2014) Bill 2014 (Cth) nowenacted as Omnibus Repeal Day (Autumn 2014) Act 2014 (Cth); Omnibus Repeal Day (Spring2014) Bill 2014 (Cth)). It has been claimed that this would result in a net saving of $2.1 billion incompliance costs. Collectively, the bills were introduced to drive certain principal objectives at theheart of the federal government’s push for deregulation and reducing red tape. One such goal hasbeen to lessen instances of where measures required for compliance are either duplicative, toocostly or at times, completely unnecessary. Cutting red tape would also assist in luring furtherinvestment into Australia – a particularly important concern for the government as competition foroverseas investment is increasingly difficult when operating in a global market with capitalmobility and on a local scale, the compliance burdens faced by small businesses also hinder furtherproductivity. The push for deregulation to encourage investment within Australia has inevitablyalso led to the consolidation of many regulatory bodies (regrettably including CAMAC, as notedearlier in this Review). ASIC has also adopted a similar approach in reducing red tape.

2.2 Proposed FOFA reforms

Readers may have assumed that in reviewing the legislative initiatives taken by the new federalgovernment in 2014, I would be posing a conclusion to the story surrounding the reforms to thefuture of financial advice legislation (Corporations Amendment (Future of Financial Advice) Act2012 (Cth) (FOFA)). The opposition parties at the time the 2012 legislation was enacted are nowthe government, and whilst they had highlighted their opposition to some of the reforms included inFOFA, the drama that surrounded the push to implement the new government’s proposed reforms(mainly at reducing the inclusion of positive obligations on financial advisers and related parties inproviding various services to the investing public) has been quite extraordinary.

It is unnecessary in this overview to discuss the proposed changes to the legislation, themodifications sought to such proposed changes, and the political and other fallouts that occurred.The long and the short of the drama, following the disallowance by the Senate of the regulationsintroduced by the government to effect the changes to the legislation, has meant that the originalFOFA legislation remains much the same. There have been some amendments/consequences.

ASIC has agreed that it will not administer the 2012 laws as the effective laws, until 9 months havepassed since the date that the regulations were disallowed. Greater disclosure will need to beprovided by advisers in certain situations, and the legislation will impose an obligation on therelevant contractual relationship between investment advisers and their customers to be renewed ona regular basis.

One of the significant challenges facing the industry, and ASIC, flowing on from the SenateCommittee Report, and the fallout from the debate surrounding the implementation of FOFA, is

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that ASIC’s proposed program to introduce an education regime for financial planners will face anumber of obstacles. This is the position, notwithstanding the recognition by government thatAustralia needs a well-informed, trustworthy and a competent professional adviser industry. Therehas already been reported pushback by industry players in relation to the scope of the ASICinitiatives. It will be interesting to see what the final fallout of the regulation of this industry will beagainst the backdrop of the Murray Report (which endorsed ASIC’s approach), and ongoing claimsfor compensation by those who have allegedly lost significant sums of money in various investmentdisasters. Many of these claims for compensation are being pursued through class actions supportedby litigation funding as well as separate litigation. Increased media and other speculation as to whatneeds to be done to overcome the disappointments of the past few years in this context are likely tobe enhanced if the government’s reaction to the Murray Report into the Australian financial systemis a positive one.

2.3 The tragedy of CAMAC

Without doubt, in my view, the most significant corporate law initiative taken by the federalgovernment in 2014 (not because it will produce significant benefits to the community, but rather inmy view, one that is likely to endanger the future of responsible corporate law reform in Australia)is the inexplicable decision to abolish CAMAC. CAMAC was created in 2002, succeeding theCorporations and Securities Advisory Committee which was established in 1991 as part of anational corporations law system. This body was created to better ensure that Australia’s corporatelaw could be legislated on a co-operative Commonwealth/State/Territory basis as a result of theCommonwealth Constitution failing to provide adequate legislative powers to be exercised by thefederal government.

CAMAC over the years has delivered a significant number of reports and discussion papers on arange of matters. These have dealt, for example, with director liability, the regulation of managedinvestment schemes and crowd sourced funding (the latter two being the subject of the two mostrecent reports), as well as a number of significant although less comprehensive reports that have ledto improvements in corporate law regulation. It operated on a very modest budget of just over $1million per annum (and it is interesting to note that in the most recent financial year, being the lastfinancial year for CAMAC under current arrangements, saw it returning to the government adividend of over $78,000). It was strongly supported by the professional communities and business.

The decision to abolish CAMAC occurred as a result of what was almost a routine review ofgovernment agencies by the new federal government to implement a cut back on the budget deficitand government spending. CAMAC represented an easy target. Regrettably, despite strongsubmissions made by the Law Council of Australia, and many other regulatory and business bodies,the government has indicated that it will not change its mind to dissolve CAMAC. It will bereplaced by a set of proposals that can only deliver, at best, a second best regime.

One of the great advantages of CAMAC was that it won the respect and support of the legal andbusiness communities. Pro bono assistance was willingly provided to CAMAC by a range ofpersons, including the writer of this Annual Review, in relation to its research and other initiatives.Professional persons and business leaders attended conferences, workshops and discussionsorganised either by CAMAC or on behalf of CAMAC. Important reforms that had been initiatedwere analysed and improved upon. Indeed, at the time that CAMAC was abolished, it had reacheda critical stage in reviewing the laws and rules in relation to the conduct and holding of AnnualGeneral Meetings of companies. All of this work is likely to be “wasted” unless a satisfactoryregime is put in place to pick up the gap generated through its abolition.

Indeed, one of the ironic consequences of the government’s decision to abolish CAMAC was that itoccurred at the same time as a government organisation released a report entitled IndustryInnovation and Competitiveness Agenda: An action plan for a stronger Australia (14 October2014). That committee noted that CAMAC was “[a] government advisory body with strongfinancial market experience”. That report also advised that the Australian Assistant Treasurer wouldconsult widely on a regulatory framework to facilitate crowd sourced equity funding based on the


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report prepared by CAMAC. A better recommendation for the importance of CAMAC could nothave been provided. The Murray Report also included a glowing reference to the work of CAMAC.

As noted earlier (see section 1, Introduction), the government has signalled that it intends to usepersonnel from within Treasury’s ranks, and ministerial advisers, as well as relying on the ALRCand the PC, where relevant, to undertake appropriate tasks. Hopefully, this can provide a stop gapmeasure that will be relatively successful.

2.4 Corporations Legislation Amendment (Deregulatory and Other Measures) Bill2014 (Cth)

The Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 (Cth) (theBill) was tabled in Parliament after a period for public comment. This is an amended version oflegislation that was previously introduced by the Labor government.

The most significant amendment to the Act proposed by the Bill is to change the terms ofs 249D(1) of the Act. The Bill removes the current provision which permits just 100 members of acompany to call a general meeting (a provision that has been the subject of constant criticism). Thelegislative amendment instead requires members holding 5% of the voting shares to agree to call ageneral meeting.

Other important items introduced by the Bill include the removal of remuneration reportingrequirements for unlisted disclosing entities; clarification on the circumstances in which companydirectors may shorten the length of a relevant financial year; and the elimination of the requirementfor small companies limited by guarantee (and certain others) to appoint or retain an auditor. Thelegislative amendment also expands the operation of the Takeovers Panel in permitting its Presidentand members to participate in proceedings irrespective of whether they are in Australia or overseas.If passed in its current form, the Bill will also confer wider powers to the Remuneration Tribunal (abody responsible for setting remuneration for certain public offices).

This proposed legislation is unlikely to come into effect until sometime in 2015. At the time ofwriting this Review, the Bill has been referred to the Senate Economics Legislation Committee forfurther inquiry and a report has been signalled to be released by early February 2015.

It is interesting to note however, that the proposed changes to s 254T of the Act, originally posedunder the Corporations Legislation Amendment (Remuneration Disclosures and Other Measures)Bill 2012 (Cth), have not been pursued. It is understood that there are differences of opinion inseparate sections of the Treasury on the proper scope for such changes. In section 5, Leading Cases,we note an interesting Victorian Court of Appeal decision in which some of the rules relating to thescope of powers to pay dividends in companies is discussed (see section 5.16; ICM Investments PtyLtd v San Miguel Corporation [2014] VSCA 246).

2.5 Insolvency Reform

The ongoing debate as to what might be a more appropriate form of legislation to regulate inquestions arising out of insolvency (both corporate and personal) has been brought to the directattention of the Australian public by the release of the federal government’s Insolvency Law ReformBill 2014 (Cth). This legislation is in effect an update of the Insolvency Law Reform Bill 2013 (Cth)introduced by the previous Labor government, which was aimed at providing a better regulatoryoversight, not only of the insolvency profession, but to ensure that customers of insolvency serviceswould receive better value for their money in using the services of insolvency practitioners. It inturn had been built on a paper published by the government entitled A modernisation andharmonisation of the regulatory framework applying to insolvency practitioners in Australia(December 2011).

In the 2013 Annual Review of Corporations Legislation 2013 (Thomson Reuters 2013), wehighlighted the most critical provisions in the 2013 Bill (see p xx–xxi). Whilst the Insolvency LawReform Bill 2014 (Cth) also basically embraces these matters, it concentrates on matters withrespect to regulatory and process issues rather than substantive changes to the law. It is hoped thatthe new law will come into operation by 1 February 2016.


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The Bill focuses on the regulatory oversight of the insolvency profession and strengthens creditors’rights in the insolvency process. Proposed changes include the investment of greater rights andpowers in creditors to question the performance of insolvency practitioners and if necessary, toremove them, either by resolution, or by more direct action by the appointment of an independentspecialist to review their performance. The Bill seeks to streamline the corporate regulatory andadministration process with the processes in personal insolvency.

There is a great emphasis in the Bill on the question of education and related matters. In thatcontext, the Bill proposes to give ASIC greater powers to oversee and investigate misconduct ofinsolvency practitioners.

Whilst the commentary period on the current Insolvency Reform Bill has elapsed, the governmenthas indicated that it will review the recommendations in the Murray report in relation to this matteras well as submissions that have been made into the Bill. It will be fascinating to see how thegovernment decides to amend the law.

Australian insolvency reform has been described as overly focused on the rights of creditors, at theexpense of encouraging business entrepreneurship and survival of the business which is the focusof the US insolvency laws. There are many in the community who would like to see Australiaintroduce a US style Chapter XI. This regime provides greater flexibility in the way in whichinsolvency issues are dealt with, with much less reliance on laws such as the insolvent tradingregime contained in s 588G of the Act. There is more emphasis in allowing a quick return tonormal life on the part of corporations and individuals who might otherwise have faced insolvency.

It will be interesting to see how far the initiatives that the government has highlighted in the Billand commented on in particular submissions will be replicated in legislation in due course.

2.6 Legislative initiatives (going forward)

The Commonwealth Treasury is currently reportedly reviewing the operation of the litigationfunding industry pursuant to the Corporations Amendment Regulation 2012 (No 6) (Cth) (asamended by Corporations Amendment Regulation 2012 (No 6) Amendment Regulation 2012 (No 1)(Cth)). The focus of this regulation, which was on conflicts of interest and related matters, has beencontinually a subject of comment in the profession and by members of the judiciary. It is uncertainwhether any review of this regulation will occur, but the operation of litigation funding and the useof class actions linked to litigation funding remains a matter of very high interest for the legalprofession and for business. It is uncertain whether the recent PC Inquiry Report, Access to JusticeArrangements (September 2014), will result in further changes being made to this regulation andother possible rules of court.

3 Possible reforms3.1 A better statutory business judgment rule or an honest and reasonabledirector defence?

With the disappearance of CAMAC, it is unclear how suggestions for legislative or other reform inthe corporate area can be properly channelled. The legal and business community has certainlybeen anxious to see a revisiting of the statutory business judgment rule at s 180(2) of the Act, butthis particular topic seems to have lost interest and comments as far as the government is concernedover the last 2-3 years.

Recently, the Australian Institute of Company Directors (the Institute) has championed a differentapproach to questions surrounding what appropriate protection or safe harbours should be madeavailable to directors and senior officers with respect to potential prosecutions, either criminal orcivil, for alleged breaches of the law. What is being sought is an approach that encompasses a moreambitious attempt to deal with these matters than envisaged by the existing statutory businessjudgment rule (I am a member of the Institute’s working group introducing this initiative).

In a thought-provoking and controversial paper entitled The Reasonable and Honest DirectorDefence published by the Institute in August 2014, the approach taken has been to provide directors


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with a much broader “safe harbour” than currently is available under the Act. Indeed, it goes furtherthan the US common law business judgment rule. It would deal not only with protection fromprosecution or civil litigation involving alleged breaches of the duty of care, but also provideadequate protection for directors, who act honestly and reasonably, in the context of ambitiousprofit forecasts and questions surrounding broader issues raised under the continuous disclosureregime. That area of regulation has impacted significantly on the way directors behave or wish tobehave.

It is fair to say that neither the push for a broader statutory business judgment rule, nor theInstitute’s honest and reasonable director proposition, have attracted any significant governmentinterest; the government has, however, indicated that it will review both initiatives carefully. How itwill be possible to raise the intensity of interest in relation to either of these proposals, whichshould be considered together as well as separately, remains a matter of some difficulty for the legaland business communities. However, the continued failure of the federal, State and Territorygovernments, to deal adequately and completely with the use of strict liability and reversal of onusof proof legislation highlighted by the important CAMAC report of 2006, and the positive actionstaken by the Council of Australian Governments (COAG), make it essential that these initiativesare not ignored.

It remains to be seen how, if at all, moves in this area will be progressed in a meaningful andsatisfactory way in 2015 because the current federal government is very much concerned withreducing deficits and balancing the budget, rather than pursuing issues in this context.

3.2 Possible reform of the concept of to whom directors should owe their duties

The scope of directors’ duties, and the extent to which it is possible for directors to take intoaccount interests other than shareholder interests, has become increasingly important. This is due tothe growing importance of rules of corporate governance, and the controversy surrounding thedecision in the Bell Group case (Westpac Banking Corporation v The Bell Group Ltd (in liq) (No 3)(2012) 44 WAR 1). The Governance Institute of Australia (GI) in particular has highlighted themajority decision of the Western Australian Court of Appeal as significant in its paper Shareholderprimacy: Is there a need for change?. This discussion paper aims to foster public comment on whatis expected today, by the community, in the management of corporate activity by directors. Thisinterest has been heightened by the rules of corporate governance.

The majority decision in the Bell Group case has been criticised as being an incorrect statement ofthe current law. Currently, the law on directors’ duties, both at common law and under the Act,emphasises that directors owe their duty to the company – that is, its shareholders (s 181 of theAct). Other stakeholder interests are still considered by the directors in pursuing their obligations.The discussion paper asks whether the concept of “shareholder primacy” remains legitimate,especially as directors often are expected to “save” companies which face financial difficulty.

Justice Ken Hayne, a member of the High Court of Australia, delivered a lecture entitled “Directorsduties and a company’s creditors” on 19 August 2014 at the University of Melbourne. In thelecture, Hayne J confirmed his view, which the High Court did not have a chance to considerbecause the Bell Group case had been settled, that the duty owed by directors was to theshareholders and not creditors. Whilst not referring directly to the Western Australian Court ofAppeal majority judgment, it was clear that Justice Hayne did not agree with it.

The GI makes a number of different suggestions in its discussion paper. Of particular relevance inconsidering whether such an approach is worthy of further consideration is the impact of particularprovisions in legislation such as s 172 of the Companies Act 2006 (UK). Section 172 of thatlegislation not only permits directors, but some would suggest requires those directors to haveregard to the interests of stakeholders other than shareholders (including employees, creditors andpersons dealing with the companies) (see section 5.3 below).


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4 The role of ASIC, the Senate Economics References Committeereview, and related matters

4.1 Introduction

The role of ASIC, so much in the limelight as a result of the Senate Committee Report (see section1, Introduction), has been highlighted further by recommendations in the Murray Report of theAustralian Financial System. In Chapter 5 of the Murray Report, a number of interestingrecommendations have been made. The crucial questions of ASIC’s funding and its regulatorypowers are particularly important with the Murray Report embracing and endorsing much of thecommentary provided by ASIC through its chairman Greg Medcraft. I comment on some of theserecommendations both in this section and elsewhere.

4.2 Senate Economic References Committee inquiry into ASIC’s performance

As a result of the significant number of corporate failures that have occurred following the globalfinancial crisis, and many claims that ASIC was not administering the law in an effective way toprotect the investing public from the collapses that have occurred, the Senate Committee publishedits report following an extensive inquiry. The Report, over 500 pages in length, contained 61recommendations for consideration by the federal government. Over 400 submissions werereceived by the Senate Committee. In June 2014, it released the final report of its findings entitledPerformance of the Australian Securities and Investments Commission.

In these conclusions, the Committee referred to ASIC as a “timid, hesitant regulator” which failedto identify and act upon “clear and persistent early warning signs of corporate wrongdoing”. Manyof the recommendations in the report focused on the regulator’s failure to police the activities andperformance of a number of organisations that offered apparently attractive investments to thepublic, which regrettably were significantly affected by the global financial crisis. Therecommendations identified some protection and risk management techniques that in the SenateCommittee’s view, should have been put in place by organisations that held investments ofhundreds of millions of dollars by Australian investors.

The government’s response to the Senate Committee’s Report was unsatisfactory – it responded toonly a handful of the 61 recommendations. Many of the recommendations were too “far reaching”,and contained extreme suggestions (such as the establishment of Royal Commission into theCommonwealth Bank). What is important is that the government has endorsed many of ASIC’srecommendations for greater regulatory powers. It has supported the establishment of a register offinancial advisers (which ASIC is considering). The whistleblowing operations of ASIC have beenconsidered by ASIC (see section 4.3). Suggestions in that context have also been endorsed.However, the recommendations by the Senate Committee of the government review and somereform questions (through the ALRC preferably) concerning directors’ duties and penalties havebeen ignored. The Murray Report supports some of these suggestions.

ASIC has responded positively to the Senate Committee Report in a number of ways. One of itsmost significant initiatives was to publish its strategic outlook in October 2014. This new documentoutlines ASIC’s key foci for the 2014-2015 period. ASIC Chairman, Greg Medcraft explained themain purpose of this document was to emphasise that ASIC was “being transparent about our roleand priorities, the risks we see and how we will respond helps our stakeholders better understandwhat we achieve and why”.

In various comments, the Chairman Medcraft dismissed suggestions that ASIC was being tooselective. He concluded his commentary by suggesting that “[ASIC] will take enforcement actionagainst entities, regardless of their size or reputation”.

In addition to the strategic outlook document, ASIC has also produced a number of papers showingthat it will be working with the government in attempting to remove unnecessary regulatoryregimes and processes – the “removal of red tape” is fast becoming a catchphrase in the regulatoryenvironment. It indicated that it would publish a more detailed outlook in 2015 – no doubt its viewswill be significantly influenced by the follow up from the Murray Report.


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4.3 ASIC’s handling of whistleblowers

The important whistleblowing provisions in the Act contained in Pt 9.4AAA of the Act, introducedin 2004, was the subject of detailed consideration by the Senate Committee. It has been the subjectof commentary, particularly by government officers (see Treasury report, Improving Protections forWhistleblowers published in 2009). This paper contained a number of useful recommendations forreform to improve whistleblower protection. These recommendations have not been acted upon todate. ASIC, in its submission to the Senate Committee, also recommended reforms towhistleblower laws. It wanted to extend protection to individuals who did blow the whistle andpromoted the position of ASIC to regulate potential breaches of the legislation.

The proposal by ASIC to establish an “Office of the Whistleblower” was considered as significantby the Senate Committee. In its report, it recommended the taking of strong action to protect thesuppliers, including permitting anonymous disclosure, which would encourage persons to comeforward to provide ASIC with the necessary information it needed to pursue significant breaches.

The US regime that is currently in existence provides much wider protection and encouragementfor whistleblowing, including monetary rewards to those who act as whistleblowers. In that context,I would refer readers to interesting articles on this subject (such as that recently written by SuletteLombard and Vivienne Brand, “Corporate whistleblowing: Public lessons for private disclosure”,42 ABLR 351 (October 2014)).

The Senate Committee in its recommendations embraced the initiatives being taken by ASIC andencouraged the pursuit of these reforms.

4.4 ASIC’s views on penalties

In its Report, the Senate Committee was critical not only of the lack of appropriate funding forASIC, but also confirmed that it was not satisfied that ASIC was vested with the necessary powersto pursue serious breaches of the relevant legislation. A number of very recent events havehighlighted the significance of these comments and pronouncements. However, it does not assistASIC when its Commissioners (including its Chairman) make suggestions that Australian laws aretoo soft, thus encouraging persons to perhaps take risks where they know that it is unlikely that anyjail terms will be pursued by the regulator.

In Report 387: Penalties for corporate wrongdoing (published March 2014), ASIC outlined itsposition that the penalty regime in the Act falls below the standards that apply in other areas of lawsuch as competition and consumer law and other similar areas, domestically and overseas(particularly the USA). ASIC noted that the lack of a wider range of non-criminal monetarypenalties and disgorgement penalties for corporate wrongdoing, as available in other jurisdictions,impacts its ability to deter the market from engaging in misconduct.

The Murray Report endorsed this particular request for harsher penalties and Chairman DavidMurray has emphasised this part of the Report in recent speeches. This issue is discussed in section5.12.

4.5 ASIC widens its reach to combat illegal phoenix activity

As part of its program targeting illegal phoenix activity, ASIC has recently announced the wideningof surveillance on illegal phoenix operators in the building and construction sector and their use offalse statutory declarations. This is in response to feedback from various stakeholders (smallbusiness, industry bodies and government agencies) regarding the alleged employment of falsestatutory declarations to dishonestly claim payments for work in the construction sector. This illegalpractice has “serious flow-on effects”, according to ASIC Commissioner, Greg Tanzer. Contractors,often small business operators, face great liability (such as the inability to pay operating expensesand other debts) when they do not receive payment for work undertaken.

ASIC is also part of the Inter-Agency Phoenix Forum – a grouping of government agencies,including the Australian Tax Office and the Australian Crime Commission, to share strategiesagainst illegal phoenix activity. Other initiatives include the administration of the AssetlessAdministration Fund (established by the federal government to assist initial liquidator investigations


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concerning the failure of companies with few or zero assets) and the pursuit of appropriateenforcement action against relevant companies. ASIC has also sought the disqualification ofdirectors involved in two or more companies that have faced liquidation within seven years.

In July 2013, ASIC launched a surveillance program focusing on alleged phoenix activity by failedcompanies from the construction, labour hire, transport, security and cleaning industries. Therefore,ASIC’s recent campaign to investigate the use of false statutory declarations in the constructionsector is an expansion of this surveillance initiative. As a starting point, the activities of eightsubstantial commercial and residential developments currently under construction across Australiawill be examined (details of these developments have not been disclosed).

4.6 Implications of the Murray Report for ASIC

Some of the major recommendations of the Murray Report if accepted in some form or other by thefederal government, would enhance the ability both of ASIC and the Australian PrudentialRegulatory Authority (APRA) to regulate the industry and thus increase the protection available toconsumers. In this part of the Review, I discuss some of the more interesting and challengingrecommendations, as well as questioning the necessity of enhancing ASIC regulatory powers.

One of the more prominent recommendations is aimed at facilitating the introduction of targetedand principles-based product design and distribution obligations. This new “obligation” orenhancement of ASIC’s operations will vest it with a power generally described as a productintervention power. Based on a similar power vested in the UK financial regulator, this power willarguably enhance the regulatory toolkit available to ASIC where it may recognise a significantconsumer detriment arising from the use of sophisticated and complex financial instruments andproducts. As this power will involve minimal judicial intervention, it is hoped that the speed in theway in which this power can be exercised, will enhance the effective operation of ASIC in thiscontext. The Murray Report also supports the raising of industry standards to help ensure advisersremain competent and efficient, including the vesting of increased powers in ASIC to banindividuals from the management of financial organisations. In particular, the Murray Reportappears to favour ASIC being able to control the remuneration structures available both in the lifeinsurance and stockbroking industry. This initiative arguably will enhance ASIC’s already initiatedprogram of introducing a register of financial advisers and education program, one aimed atimproving the quality of advisers in the field.

Many of these recommendations are welcomed, though there are some recommendations in thereport which raise the question of whether ASIC should be given enhanced regulatory powers. TheMurray Committee has embraced the recommendations of the Senate Committee to enhanceASIC’s budget and regulatory powers, having been strongly influenced by the difficulties that ASIChas had in detecting market misconduct and thus minimising the consequential consumer loss.Recommendations that have been proposed to tackle this difficulty are aimed at enhancingdisclosure and literacy, as well as enabling ASIC to control the type of products to be madeavailable in the market. The Murray Report suggests that ASIC should devote more attention toindustry supervision, including becoming more proactive in identifying and weaning outmisconduct. This role will be particularly enhanced by the proposed new product interventionpowers as mentioned above. Included in this raft of suggestions is the vesting in ASIC of a strongerlicensing power to address misconduct. Side by side there is likely to be the introduction of highercriminal and civil penalties. These changes, it is argued, will increase the ability of ASIC toregulate the industry more effectively. Many of these changes call for close co-operation withAPRA.

Our regulators already enjoy a significant range of powers which do not require preliminary courtaction and enable the regulator to achieve a satisfactory outcome. These powers include the use ofinfringement notices, substantiation notices, and other devices (such as enforceable undertakings)which only require judicial involvement if challenged by the parties. Many corporations andindividuals find the cost of court proceedings a major obstacle and they tend to succumb to theregulators’ actions.


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It will be fascinating to see how the federal government responds to these recommendations whichare quite far reaching and which continue to erode one of the basic and fundamental tenets of ourAustralian (and common law) legal system – that a person (whether a corporation or an individual)is innocent until proven guilty.

5 Leading Cases

5.1 Introduction

It is not my intention to discuss important cases in all areas of corporate law decided during 2014.I will be concentrating on issues surrounding directors’ duties, corporate governance and relatedmatters, shareholders’ rights and remedies and unusual cases arising out of company administrationor reconstruction, as well as other decisions on continuous disclosure and dividend rights. As usual,a plethora of cases concerning company liquidation, schemes of arrangement and related mattershave been decided. I will not be dealing with the numerous cases concerned with overturning thewinding up of companies in certain scenarios.

5.2 Directors’ duties – an overview

Whilst, compared to the last few years, the year 2014 has not been one in which there have beenany spectacular decisions dealing directly with directors’ duties of care and diligence, or with theirfiduciary duties, there have been interesting cases raising peripheral questions. Of particularrelevance is an ongoing concern about the way the statute (the Act), and the general (common) lawinteract with the growing impact of the rules of corporate governance. The community (i.e.politicians, the media and the general public) have a high expectation that company directors (andofficers) will observe these behavioural rules. The failure of our successive governments to dealdirectly with the interaction of the rules of corporate social responsibility (or corporate governance)and the law, has increased tensions in the boardroom. This is especially so in relation to thequestion of “to whom are director’s duties owed?”. These matters are discussed in this section.

5.3 Directors duties and the culture of compliance

The principles of corporate governance have been highly influential in placing pressure uponcompanies and their directors to instil a culture of compliance into their environment. Theexpectation that directors not only comply with their statutory duties, but also with principles ofcorporate governance, continues to gain momentum.

Companies listed on the ASX must comply with the ASX Listing Rules, but are also now expectedto comply with ASX Corporate Governance Council’s Corporate Governance Principles andRecommendations (Principles and Recommendations). The ASX Corporate Governance Councilhas recently released its third edition and came into effect on 1 July 2014. Although the Principlesand Recommendations are not prescribed by legislation and only apply to companies listed on theASX, their influence is much more widespread, and we have seen growing pressures on directors(including those of non-listed companies) to take into account the interests of all kinds ofstakeholders in carrying out their obligations. No doubt the large-scale corporate collapses from theglobal financial crisis have added to the scrutiny of corporate governance issues to prevent suchcatastrophes happening again.

In addition, s 12.3 of the Criminal Code Act 1995 (Cth) (the Criminal Code) which came intoeffect in 2001, discussed by French J (as he was then) in ASIC v Chemeq [2006] FCA 936(Chemeq), also emphasises the need for directors to ensure that their companies have in place a setof risk management compliance procedures, which need to be refreshed from time to time.

In Spies v The Queen (2000) 201 CLR 603 (Spies), the High Court of Australia made it reasonablyclear that directors’ duties were owed to shareholders, and not creditors. However, as noted earlierin section 3.2 of the Review, the Western Australia Court of Appeal in the Bell Group decisionregrettably took the view that the directors, in considering only the interests of the major bankswhen restructuring the company’s financial arrangements to avoid insolvency, were required toconsider the interests of all creditors. Justice Carr, in the minority, held that the law, as governed by


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Spies, was that there was no requirement for directors to act in the best interests of creditors. Thedirectors of the Bell Group corporation were granted leave to appeal the Western Australian Courtof Appeal decision to the High Court. The case settled, depriving the High Court of the opportunityto clarify what directors’ duties are actually owed, and to whom.

However, Justice Ken Hayne, a current member of the High Court, expressed views on the BellGroup decision in his lecture on “Directors’ duties and a company’s creditors” (August 19, 2014).He made it clear that directors owed no duty to creditors. In his view the law was clear – directorsowe their duty to the shareholders. Justice Hayne also discussed the tension created by expectationsin the community that rules of corporate governance be adhered to, as if they were binding legalprinciples – which of course they are not.

It is interesting to compare the Australian law with that of the UK, where directors are arguablyrequired (or at least encouraged) by s 172 of the Companies Act 2006 (UK) to take into accountother stakeholders including creditors and employees, amongst others. In Moore Stephens (a firm) vStone Rolls Ltd (in liq) [2009] UKHL 39, the House of Lords, in a lengthy judgment, consideredthe different stakeholder interests that could be taken into account pursuant to s 172 of the UK Actand suggested that the better view was that the basic and fundamental duty of directors was stillowed to the shareholders.

Although there is no parallel provision in the Australian legislation, there have been suggestionsthat such a change be made (see Possible Reforms, section 3.2). As the principles of corporategovernance continue to permeate our corporate culture, there is growing confusion about whetherthese principles are part of the law and require compliance, or whether they are merelyrecommendations. A High Court decision, which could be unlikely for some time, or perhapslegislation, is necessary to confirm that these principles are not part of the law, and are merelyguidance principles for corporate behaviour.

5.4 The interaction of corruption rules and the duties of directors

This increasing expectation that companies will observe the rules of corporate governance andadopt a culture of compliance becomes more significant where breaches of the law do notnecessarily translate to breaches of directors’ duties, even if those non-corporate law breaches arenot in line with either the principles of corporate governance or broader community expectations.

Duncan v ICAC [2014] NSWSC 1018 (Duncan) provides a useful illustration of this tensionbetween duties of directors under corporate law and obligations that may arise outside corporatelaw. This case concerned a takeover negotiation between Cascade Coal Pty Ltd (Cascade Coal)and White Energy Company Ltd (White Energy) concerning a coal licence over a certain tenementheld by Eddie Obeid and his family which was obtained by Cascade Coal. Four directors ofCascade Coal were also directors of White Energy and they were aware of the Obeid family’sinterest in the transaction. During the negotiation, these directors failed to disclose the Obeids’interest to White Energy which had been the subject of a New South Wales ICAC inquiry.

As a result of this failure, the directors of Cascade Coal were alleged by ICAC to have engaged inmultiple breaches of the law. The directors were charged with allegations of corruption in relationto their conduct during the takeover negotiation for not disclosing the involvement of the Obeidfamily, who were considered to be potentially “criminally tainted persons”. In addition, it wassuggested that the directors, by failing to make this disclosure in the negotiation, were in breach ofs 184 of the Act as they were intentionally dishonest or, alternatively, reckless and failed todischarge their duties in good faith and in the best interests of the company or for a proper purpose.

Justice McDougall in the Supreme Court of New South Wales dismissed the allegation that thedirectors were in breach of their duties under s 184 of the Act. He ruled that the directors were notacting in their capacity as directors of the company in the negotiation; rather they were merelyengaged in business conduct. I regard this as an artificial distinction as it fails to recognise theincreasing expectation on directors to observe the rules of corporate governance and adopt a cultureof compliance, which would have imposed different obligations on the directors. Arguably, the


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directors of Cascade Coal, who were in a position of conflict, should have been required to disclosethe Obeid family’s involvement in the takeover transaction with White Energy.

As noted earlier, the Criminal Code imposes a statutory obligation on companies to set upappropriate risk management structures within their company or face potential criminal charges incertain circumstances. Arguably, in Duncan, an appropriate risk management compliance structurehad not been implemented to deal with transactions where there was a risk of conflict (see also thedecision of Justice French, in Chemeq discussed in section 5.3 above).

5.5 Ancillary liability of directors (and officers) – the impact of Barnes v Addycontinues to play a significant part

Under the “rule” in Barnes v Addy (1874) LR 9 Ch App 244 (Barnes v Addy), accessorial liabilityis said to arise when, either a third party has knowingly received misappropriated trust property(knowing receipt), or has assisted in a breach of fiduciary duty (knowing assistance). The latterform of liability was considered in some detail by the High Court of Australia in FarahConstructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 (Farah Constructions). This questionalso arose in the Full Federal Court in Grimaldi v Chameleon Mining NL (2012) 200 FCR 296(Grimaldi), a case that dealt mainly with breaches of directors’ duties. Whilst most of thediscussion in Grimaldi is dicta, it nevertheless provides useful background.

In the Bell Group case, a particular concern was whether the alleged failure of the directors to actin the best interests of other stakeholders in rescuing the Bell Group companies was “caught” byone of the rules in Barnes v Addy. In particular, the question the Western Australian Court ofAppeal had to assess was whether the interpretation of the “dishonest and fraudulent design” rules,by the High Court in Farah Constructions, should be adopted. The appeal from the WesternAustralian court did not proceed to the High Court as the case was settled.

In Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266 (Hasler), the New South Wales Court ofAppeal revisited the issue of the dishonest and fraudulent design rule. The court in Hasler notedthat the Bell Group decision had adopted a different approach to the High Court of Australia inFarah Constructions. Leeming JA, who delivered the principal judgment, took the view that theFarah Constructions case did not provide an expansion of the “class of breaches of fiduciary duty”which might attract the second limb of Barnes v Addy (at [105]). Rather, the test was to establish afinding of dishonest and fraudulent design. The New South Wales Court followed the High Courtdecision in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 which hadbeen in effect “embraced” in Farah Constructions.

5.6 Rare cases of judicial compassion for disqualified directors

Once a director has been disqualified pursuant to the various provisions of the Act, it has proven tobe a very difficult task for that director to have that period of disqualification shortened, unlessthere are exceptional circumstances. Under s 206G of the Act, a person who has been disqualifiedfrom managing a corporation may seek leave from a relevant court (the Supreme Court of variousstates and territories and the Federal Court of Australia).

One of the significant questions that directors continue to face in dealing with the apparentlyharsher attitude being taken by our courts to evaluating the duties of directors to act with care anddiligence in other duties, both statutory and common law, is the fact that our courts may become alittle more compassionate in providing directors who have been disqualified under orders of thecourt in an appropriate case from once again managing a corporation. For a while courts have takena very hard line against applications for reinstatement of directors but in two recent decisions, ReRyan [2014] QSC 18 (Ryan), and Re Gay (unreported, Tas Sup Ct, Porter J, 30 August 2013) (Gay),the courts have taken a softer approach.

Section 206 of the Act provides that a person who has been disqualified from managing acorporation may seek leave from the State Supreme Court or the Federal Court to be reinstatedonce they have been disqualified. In Ryan, the Queensland Supreme Court took into account therelevant director’s background, personal character and the potential risk that he might offend if hebecame engaged in the management of the corporation, in granting him permission. Justice Lyons,


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whilst recognising that great caution should be exercised before granting leave to a disqualifieddirector, was of the view that the applicant if granted leave would bring a significant benefit to thecompany (at [49]). In granting leave, Lyons J noted that the director’s conduct leading todisqualification had been out of character and he would be unlikely to commit an offence in thefuture. However, Lyons J imposed certain conditions to ensure there was a proper balance in thefuture direction of the company as well as protecting public shareholders, employees and creditors.

A similar result was reached by Porter J in Gay. However, this case involved a more serious breachof the law – the insider trading provisions of the legislation. In the view of Porter J, Gay’s conductwas a less serious category of insider trading, and the application for leave was granted. Hisconclusion that Gay had not been acting dishonestly and that the insider trading breach was on thelower end of the scale, worked in Gay’s favour. Justice Porter felt that the public would not be atrisk by his appointment as director of the two companies. In addition, Gay was able to successfullyestablish that his skill and expertise was vital to the continued success of the businesses, and couldnot be replaced by others in the companies.

ASIC was disappointed with both decisions but in particular with Gay because it involved the moreserious breach of insider trading for which the regulator is generally seeking harsher penalties.

5.7 Obligations to directors not to allow a conflict of duty and interest to impact onclaims for remuneration, retirement and related payments

An interesting group of cases, unrelated to each other, involving State Supreme Courts in two casesand the Federal Court in the third case, highlight the increasing attention placed on payments madeto directors. They emphasise the need to ensure proper steps are taken by directors that payment fortheir services (either during the course of their directorship or on retirement) and other relatedemoluments, are not to be affected by potential conflicts of interest. These issues have collectivelybecome a concern for shareholders as well as the regulator (although in the cases discussed, theregulator was not a party to the litigation). In this context, the significance of fiduciary duties owedby directors to their relevant companies is heightened.

In the Renshaw case (Queensland Mining Corporation Ltd v Renshaw [2014] FCA 365), theFederal Court of Australia was asked to consider whether a retiring director could retain certainpayments made to him in the context of ss 200A and 200B of the Act. The relevant payments wereagreed to via a resolution of the executive management of the company; shareholder approval forthe payments had not been sought. The company challenged the payments on the basis that theywere made in breach of s 200B of the Act (payments characterised as a “benefit” in connection withretirement must be approved by the relevant shareholders).

The director argued however, that these payments were not “benefits” as defined by ss 200A and200B of the Act, but were actually obligatory payments due under contract. Whilst Perry Jdismissed this assertion in recognising that a “benefit”, as defined under s 200AB of the Act is not“limited to payments aside from those which are the subject of pre-existing contractual obligations”(at [80]), it was up to the directors to establish that the payments were exempt from considerationunder this provision. For example, if they had been payments made pursuant to the operation of anapproved superannuation fund, the relevant section may not have applied. However, in Perry J’sview, none of the payments qualified as “exempt payments” as defined under the legislation; theywere in fact, “benefits” within the meaning of s 200B of the Act. Therefore, the company wasentitled to recover them, pursuant to s 200J of the Act, as the payments had not been approved bythe shareholders in a general meeting. The Full Federal Court (Rares, Griffiths and Gleeson JJ)have very recently dismissed an appeal by Renshaw (Renshaw v Queensland Mining CorporationLtd [2014] FCAFC 172), confirming Perry J’s interpretation.

In Cummings (Re Cummings Engineering Holdings Pty Ltd [2014] NSWSC 250), the relevantdirectors had voted in favour of a redundancy payment being made to one of their colleagues. Thedirectors, in seeking to defend the payment made to their colleague, relied on the exceptioncontained under s 200G of the Act, which excludes the need to obtain shareholder approval for apayment made in connection with a person’s retirement if it reflected reward for past servicesrendered, and did not exceed the amount specified in the relevant statutory provision.


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Whilst Brereton J held that the exception applied in this case, it was nevertheless necessary for thedirectors to show that their conduct complied with their general duty (both of common law andunder s 181 of the Act) to act in the best interests of the company. Furthermore, they had toestablish that they had not procured an advantage from their statutory position in breach of s 182 ofthe Act. Significantly, Brereton J noted that even if the directors had acted honestly in thecircumstances, to excuse the actions of the directors from the overriding principles of law referredto above would have impacted adversely upon the shareholders and deprived them of theirequitable rights. In his view, the directors had breached their duties at general law (as well as underthe statute) and the payments were held to be invalid.

The final case, Invion (Invion Ltd v SGB Jones Pty Ltd [2014] QSC 97), illustrates that directors’general law obligations will also impact on any payments made to directors following a takeover.In this case the directors of the relevant company, to ensure they were properly and financially“protected” in the event of a takeover or similar arrangement, persuaded the company board toamend their contracts to include a requirement that they receive 12 months’ notice before theirpositions as directors were terminated. These amendments also permitted them to resign from theirposition as directors of the company, and to receive 12 months’ executive remuneration in advanceof their departure.

The payments made in accordance with these arrangements were challenged by the company. ChiefJustice de Jersey had little difficulty in ruling that the directors had taken advantage of theirpositions to obtain a personal benefit to the detriment of the company. He further ruled that thecompany was entitled to obtain general compensation from the directors for breaches of theirstatutory duties and equitable compensation for breaches of fiduciary duties.

The directors sought relief from liability under s 1317S of the Act (the court reserves the discretionto provide relief where there is a contravention of a civil penalty provision) and also under s 1318of the Act (the court may provide relief for breaches of common law or equitable duties). Bothclaims were rejected because the court ruled that the directors had not acted with the appropriatehonesty or fairness to merit such relief.

As these cases demonstrate, the courts scrutinise the actions of directors very carefully to ensurethat decisions relating to their remuneration are made with integrity and in accordance with theirduties under the Act as well as in line with their fiduciary obligations.

5.8 Any relevant distinction between executive and non-executive directors?

The controversial decision of Rogers CJ in AWA Ltd v Daniels (t/as Deloitte Haskins & Sells)(1992) 7 ACSR 759, which arguably took a “soft” approach to the role of non-executive directors,giving them plenty of scope for reliance and delegation, has sparked a continued debate on thesignificant difference between the roles and duties of executive and non-executive companydirectors. In a reversal of this decision, the New South Wales Court of Appeal in Daniels vAnderson (1995) 37 NSWLR 438 held a much harsher view, partly influencing the introduction ofthe statutory business judgment rule. The recent interesting Victorian Supreme Court decision ofJaques v AIG Australia Ltd [2014] VSC 269 deals with the implications of this distinction betweenthe two classes of directors in an insurance law context. It once again provides some interestingconsideration of how these two classes of directors should be properly described and how theirduties should be assessed.

Under a policy of investment management insurance, Australian Property Custodian Holdings Ltd(Holdings) was indemnified against loss arising out of a claim for a wrongful managerial act up toa $5 million limit as well as a special excess limit of $1 million for loss attributed to the acts ofnon-executive directors. When Holdings sought the additional indemnity, the question of whetherthe relevant director (Jaques) was a non-executive director came to the forefront of the court’sconsiderations.

For this purpose, Dixon J had to identify the appropriate differences between an executive and anon-executive director and noted that non-executive directors were “usually independent ofcorporate management” (at [15]) and their duties were of an “intermittent nature” (at [16]). Inundertaking an elaborate assessment of Jaques’ past duties and responsibilities, the court came to


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the conclusion that he had acted in the capacity of a non-executive director and subsequently,Holdings was entitled to the special excess limit under the insurance policy.

Whilst this finding is dependent on the facts of this case, and the case is not one that dealsspecifically with the duties and responsibilities of executive directors and non-executive directors ina corporate law setting, the decision of Dixon J will be relevant in similar cases in the future.

5.9 Breaches of fiduciary duties may impact on an individual director’s taxationliability

In an unusual decision, Howard v Federal Commissioner of Taxation [2014] HCA 21, the HighCourt of Australia made some interesting and significant commentary on director’s duties,especially fiduciary duties where the relevant directors were also members of a joint venture. Theseactivities interacted with the rights of the relevant company. This interaction, whilst it led to theHigh Court confirming the approach the court takes to the fiduciary duties of directors, had anegative impact on the taxation rights of the directors in relation to the particular transaction.

The facts in this particular case were briefly these. Howard was a director of Distronics Limited(Distronics), as well as being a member of a joint venture arrangement established to buy, leaseand sell a golf course. Distronics was intended to be the main party involved in the transaction. Buttwo members of the joint venture arrangement (who were also directors of Distronics) took theopportunity to sell the relevant property to a different purchaser. In separate litigation, these twomembers were held to have breached their fiduciary duties (which sometimes are equivalent to theduties owed by directors). The appellant, Howard, received an award of equitable damages (orcompensation) as a result of that action but did not declare that relevant amount in his income taxassessment for the relevant tax year. The Commissioner of Taxation assessed him as being liablefor income tax for the amount received in settlement of that particular claim.

Howard challenged that assessment on the basis that this was an award of damages owed to him asdirector and therefore, was not assessable income. In considering this particular matter, tworelevant fiduciary and statutory duties of directors were considered by the High Court in somedetail. These were the duty not to improperly use director’s position for a personal advantage(which is replicated in s 182(1)(a) of the Act), or to use information improperly obtained as a resultof the position in order to procure a personal advantage (prohibited by the general law and bys 183(1)(a) of the Act).

The High Court ruled that the company’s lost business opportunity, as a result of the activities ofthe joint venturers, did not in fact create income that was due to the company or to the directors. Itwas due to the joint venturers. As a result, the High Court noted that the awarded compensationwas appropriately characterised as assessable income “in the hands” of the appellant for taxationpurposes.

5.10 Major civil penalties imposed for breaches of directors’ duties in a recent case

As noted elsewhere in the pages of this Annual Review, the chairman of ASIC, Greg Medcraft, hascontinued to campaign for increased penalties being introduced with respect to breaches of thelegislation (not only in the context of directors’ duties, but more generally in relation to breaches ofsignificant provisions of the legislation regulating market practices of one sort or another). Themost recent illustration of this “concern”, has been the media reaction to the decision of ASIC vAustralian Property Custodian Holdings Ltd [2014] FCA 1308 (Lewski). Justice Murphydisqualified Lewski for 15 years and imposed a monetary penalty of $230,000. Other directors weredisqualified for shorter periods. These penalties were imposed following his decision that they hadbreached their duties (see ASIC v Australian Property Custodian Holdings Ltd (in liq) (No 3)[2013] FCA 1342).

It is unnecessary for the purposes of this Review to discuss the facts of the case. However,Commissioner Tanzer of ASIC, when interviewed following the announced penalties, was asked


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why criminal proceedings had not been brought against the relevant directors in view of thesignificance of the civil penalties imposed. His answer was basically that there was insufficientevidence for criminal proceedings to be brought.

The inability of ASIC to seek criminal sanctions, for whatever reason, against directors in suchcases will nearly always blunt the plea by the regulators that heavier penalties should be allowedunder the legislation. Further, the reluctance of regulators to seek sanctions in important cases, suchas Lewski, is in stark contrast to the enthusiasm displayed in seeking increases in penalties. TheChairman of the Financial System Inquiry, David Murray, emphasised in speeches on the veryrecently published Murray Report (see sections 4.6-4.7) his support for Mr Medcraft’s call forharsher penalties being legislated for, together with greater resources being voted for ASIC.Whether this call will be responded to positively by the federal government is not entirely clear.

One final comment is warranted in relation to the Lewski case. I have been critical of the failure ofASIC to seek harsher penalties in major prosecutions of directors, and this is most starkly revealedin the decision of ASIC v Ingleby which is discussed in the 2014 Annual Review at page xix. Thedifference in the approach between the Victorian Court of Appeal and the Federal Court ofAustralia (in particular Middleton J) raises further questions for consideration in the context ofwhether harsher penalties are needed.

5.11 An interesting case on directors’ indemnity

An important “protective right” that directors and officers of companies enjoy is the ability toobtain insurance or indemnity in defending allegations of breaching relevant provisions of the Act.The decisions of the High Court in Rich v CGU Insurance Ltd (2005) 79 ALJR 856 and Wilkie vGordian Runoff Ltd (2005) 221 CLR 522 outline the reach of protection afforded to directors in thiscontext by s 199A of the Act. Now, in Leckenby v Note Printing Australia Ltd [2014] VSC 538(Leckenby), Sifris J has again highlighted the importance of this provision. Leckenby, the plaintiff,was the Chief Executive Officer of Note Printing Australia Limited (NPAL). Together with otherofficers of NPAL, Leckenby was charged with conspiring to bribe foreign officials, allegedly byattempting to secure contracts for NPAL. Leckenby sought from NPAL the ability to rely on theindemnity that had been provided to him by a Deed of Indemnity with NPAL. The question aroseas to whether the protection in the relevant deed was available to Leckenby.

NPAL argued that s 199A(3)(b) of the Act meant that the indemnity would only come into effect ifa not guilty verdict was delivered. Justice Sifris rejected this interpretation and held that theordinary meaning of the relevant clauses in the Deed of Indemnity indicated that the right ofindemnity arises immediately during proceedings and the Act did not prohibit this occurring.However, Sifris J noted that “[r]equiring repayment of amounts paid [in the event of a guiltyverdict] is inconsistent with the notion of an indemnity” (at [59]) and the arrangement would bebetter characterised as “an advance which requires repayment on a guilty verdict” (at [63]).Although not the traditional indemnity, the arrangements substantially still fell within theapplication of s 199A of the Act, notwithstanding s 199A(3)(b) of the Act.

The decision is a vital one which will be welcomed by directors and officers of corporations;nevertheless, as we note elsewhere in this Annual Review, additional protection is being sought bydirectors (and officers) by a widening of the statutory business judgment rule in s 180(2) of the Actor by an alternative honest and reasonable director defence sponsored by the Australian Institute ofCompany Directors discussed in section 3.1 above.

5.12 The Newcrest case – positive action by ASIC on continuous disclosure

ASIC’s decision to pursue Newcrest Mining Limited (Newcrest), in relation to alleged breaches ofthe continuous disclosure regime by some officers of the company, is an interesting illustration ofits response to criticisms of its continued reliance on infringement notices to deal with allegedbreaches of the continuous disclosure regime. It is unnecessary for our purposes to repeat mycomment in previous issues of this Review on the introduction of the infringement notice regime(see Annual Review: January 2014, section 3.6, p xx; Annual Review: January 2013, section 3.2, pxxii).


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The Newcrest case (ASIC v Newcrest Mining Ltd [2014] FCA 698) arose out of the continuedconcerns of ASIC about different aspects of the continuous disclosure regime. In particular, ASIChad been critical of the way in which companies had engaged in confidential briefings bycompanies to financial analysts without then disclosing the information to the market. In responseto this concern, ASIC published Report 393: Handling of confidential information: Briefings andunannounced corporate transactions (2014), and criticised these arrangements and also outlined itssuggestion for handling confidential information in the context of briefings.

ASIC decided to initiate proceedings against Newcrest in the Federal Court of Australia followingits discovery that certain senior officers of the company had allegedly contravened s 674(2) of theAct by disclosing market sensitive information to analysts interested in the performance of thecompany. Rather than pursuing the infringement notice regime as it had done recently, ASIC optedfor court proceedings.

After the proceedings had been issued, and following the exchange of various documents by theparties, discussions took place between them and a settlement was agreed for the payment of apenalty. That settlement agreement was referred to Middleton J in the Federal Court. The partiesagreed that the relevant penalties to be imposed were $800,000 for the alleged first contravention,and $400,000 for the second contravention.

In his judgment, Middleton J discussed the importance of the culture of compliance enunciated inthe Criminal Code Act 1995 (Cth) and referred with some approval to the consideration of thisissue by French J in Chemeq. His Honour was tempted to increase the second penalty to $500,000but eventually chose to approve the $400,000 agreed to by the parties. Some critics have suggestedthat this is a reflection of a “rubber stamp” approach to the arrangements made between ASIC andthe company.

I discussed in last year’s Annual Review the difference in approach taken by the Victorian Court ofAppeal in Ingleby (ASIC v Ingleby [2013] 275 FLR 171) and the view taken by Justice Middletonand other Judges in cases relating the Competition and Consumer Act 2010 (Cth) (see AnnualReview 2014, section 3.5, p xix). In Newcrest, Middleton J adopted the more traditional approachtaken in competition law cases. He has recently embraced this approach in Australian Competitionand Consumer Commission v Energy Australia Pty Ltd [2014] FCA 336. It will be interesting to seewhether ASIC continues to adopt a more aggressive approach in pursuing alleged breaches of thecontinuous disclosure regime rather than relying on the infringement notice procedure.

5.13 Shareholder rights, remedies and related matters

In recent issues of the Annual Review, we have commented on the increasing use of both thestatutory derivative action (pursuant to ss 236 and 237 of the Act), and the oppression remedycontained in ss 232 and 233 of the Act. It is apparent that our courts have adopted what is arguablya more expansive and shareholder-friendly approach interpreting these provisions. This isparticularly well-illustrated, in my view, by decisions delivered in 2013 and 2014.

5.14 Oppression

For many years it was felt that the oppression remedy was basically one that could be utilised byshareholders of companies that were either private companies, closely held companies orcompanies with a limited number of members. The use of the oppression remedy in companies thatwere regarded as public companies or companies with a broader business basis was seen as rare.Two cases in particular during 2013/2014 highlight the willingness of the courts to adopt a moreexpansive interpretation of the relevant provisions than perhaps had been the case in the past.

The first decision which merits brief commentary is the Supreme Court of Victoria decision inUbertini v Saeco International Group SpA (No 4) [2014] VSC 47 (Ubertini), raising a number ofoppression claims. Justice Elliott turned to one of the very early decisions on the oppressionremedy, in the United Kingdom Companies Act 2006 (UK), namely Scottish Co-operativeWholesale Society Ltd v Meyer [1959] AC 324 (Scottish Co-operative), to guide his judgment. InUbertini, a holding company, which purchased shares in a joint venture arrangement, conducted theaffairs of the new subsidiary company in a way which was clearly intended, in the view of Elliot J,


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to exclude the interests of the minority private shareholders. They believed that they wereeffectively involved in a partnership arrangement with the Italian public company that was themajor shareholder. Rather than ordering the winding up of the company where oppression wasfound to exist, Elliot J adopted the approach taken by the House of Lords in Scottish Co-operativein ordering the compulsory purchase of the minority shareholder interests by the majorityshareholder, finding that winding up would be unreasonable in the circumstances.

The other major case of interest, because it involves activities by a public company, was the NewSouth Wales Court of Appeal’s confirmation of the decision of Hammerschlag J in SumisekiMaterials Co Ltd v Wambo Coal Pty Ltd (No 2) [2013] NSWSC 488 (Wambo). That earlier decisionwas discussed in the 2014 Annual Review (at section 4.4). The Court of Appeal in Wambo Coal PtyLtd v Sumiseki Materials Co Ltd [2014] NSWCA 326 agreed with the trial judge’s conclusions that,on the proper construction of the relevant articles of association (the company’s contract), thepayment of class B dividends to Sumiseki Materials was mandatory, and could not be changed bythe board when it suited them for tax or other reasons. The relevant clause in the articles providedclearly, in the view of the Court of Appeal, that the Sumiseki Materials shareholding carried with ita right to dividends in relation to set periods. The decision of the board of the company to changethe arrangements so that it was treated as though it were a loan to Wambo by Sumiseki was held tobe oppressive and the oppression remedy was confirmed.

Other decisions in which courts have reached positive conclusions for shareholders are the WesternAustralian decision of Trafalgar West Investments Pty Ltd v Superior Lawns Australia Pty Ltd (No6) [2014] WASC 278 (Trafalgar) and the Victorian decisions in Dimopoulos v Unafood AustraliaPty Ltd [2014] VSC 327 (Dimopoulos) and Solanki v Cufari [2014] VSC 345 (Cufari).

In Trafalgar, the alleged oppressive conduct arguably occurred before Trafalgar West InvestmentsPty Ltd became a shareholder of the company whilst also occurring after it was a shareholder. Indeciding whether oppression could be said to have occurred in these circumstances, Martin J heldthe law “establish[ed] that s 232 and 233 of the Act are not to be fettered by reference to any rigid,temporal constraints” (at [68]), and a claim of shareholder oppression could be successful even ifthe alleged oppressive conduct was no longer taking place.

He also confirmed that the test for oppression in a family company (or a closely held company),should be made by reference to any hypothetical shareholder of the company, and was critical ofthe suggestion that a member of a family in a closely held company was unlikely to experienceoppressive conduct.

The judge decided that conduct which “has been the subject of other proceedings under otherstatutory provisions would not, therefore, necessarily dictate that it must be quarantined asincapable of being oppressive or as playing a relevant role in contributing to that overallconclusion. Moreover, the relevant conduct might be oppressive, even if it is otherwise completelylawful” (at [107]).

The decision in Dimopoulos considered whether the removal of a minority shareholder as adirector, without informing him of the relevant meeting where the vote occurred, could amount tooppression. His removal as a director was one of the many mechanisms used to exclude him fromparticipating actively in the company. Being a preliminary proceeding, Macaulay J was required todecide whether there was a serious question to be considered under s 232 of the Act, and ruled thatthere was sufficient evidence of oppression for a serious question to arise. Justice Macaulay alsoaccepted the plaintiff’s request to appoint an independent person to manage the company while theoppression proceedings remained on foot.

Finally, Elliott J in Cufari adopted a broad interpretation of s 232 of the Act in ruling thatoppressive conduct had occurred. He differentiated between conduct “contrary to the interests ofthe members as a whole” (s 232(d) of the Act) and that which is “oppressive, unfairly prejudicial orunfairly discriminatory conduct against a member of a company in s 232(e) of the Act on the basisthat a degree of ‘commercial unfairness’ must be present in the alleged conduct to necessitate acourt order under s 232(e) of the Act” (at [57]).


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To date, the courts have opted for a broad interpretation of s 232 of the Act, casting a wide net tocatch oppressive conduct under a variety of circumstances. The statute also gives the courts a widediscretion when affording relief for oppressive conduct, leaving the door open to further interestingcases on this issue.

5.15 The statutory derivative action

As I have noted in the Annual Review over the last few years (see Annual Review: January 2013,p xxxii–xxxiii; Annual Review: January 2014, p xxv–xxvi), shareholders (members) have achievedgreater success in seeking remedies, either against the directors of the company, or against thecompany (where directors have refused to take action to sue the company themselves). After initialreluctance to provide an expansive interpretation of various statutory – and indeed common law –remedies available to shareholders, the courts now continue to recognise more readily the claims ofshareholders in appropriate litigation. To a large extent, this increase in litigation on behalf ofshareholders has been assisted by the availability of litigation funding and, in appropriate cases, thepossibility of bringing class actions.

Several interesting cases in relation to statutory derivative action (contained in ss 236 and 237 ofthe Act) were decided during 2014. Before briefly discussing the cases, it is useful to remindreaders that the statutory derivative action was introduced in 2000 in clear recognition that the rulein Foss v Harbottle (1843) 67 ER 189 was a stumbling block for shareholders bringing appropriatelitigation against directors or third parties in relevant circumstances. Under the Act, to bring astatutory derivative action, shareholders must satisfy the requisites contained in s 237(2) of the Act.They must establish that:(a) it is probable that the company will not bring the proceedings itself, or take proper

responsibility for them, or for the steps in them;(b) the applicant is acting in good faith;(c) it is in the best interests of the company that the applicant be granted leave;(d) there is a serious question to be tried in the proceeding; and(e) the timeframe for processing the relevant application has been complied with by the relevant

parties.

An interesting case in 2014 is Australian Mortgage and Finance Company Pty Ltd v Rome EuroWindows Pty Ltd [2014] NSWSC 996 (Rome Euro). The applicant’s claim turned on whether thecause of action was in the best interests of the company (s 237(2)(c) of the Act). Justice Black, inthe NSW Supreme Court, ruled that the ambiguity in the statement of claim relating to the conductin question jeopardised the claim’s likely prospects of success. In his view, to grant leave to theapplicant to initiate proceedings would not be in the company’s best interests.

In this case, Black J also confirmed the views, expressed in Maher v Honeysett & Maher ElectricalContractors [2005] NSWSC 859, that leave can be granted not only to commence proceedings butalso to defend them, relying in the relevant case on the same requirements under s 237(2) of theAct. This was relevant when the two defendant directors of the relevant company in the Rome Eurocase brought a cross-claim against the other two directors who had initiated the statutory derivativeaction. Justice Black ruled that it would not be in the best interests of the company to be exposedto the risk of default judgment in the absence of a defence being lodged.

In Re Dynamic Industries Pty Ltd [2014] VSC 101 (Dynamic Industries), Robson J in the VictorianSupreme Court, had to review the question of whether the applicant was acting in good faith. Inreaching his decision he had regard to two interrelated factors – the applicant’s honest belief as towhether a proper cause of action exists with a reasonable prospect of success, and whether theapplicant harboured a collateral purpose rendering the action as an abuse of process. If theapplicant sought to obtain a benefit to which he/she was not entitled under the derivative action,good faith could not be established. Justice Robson, however, held that the applicants were actingin good faith. In his view, they had incurred extensive expenses in obtaining access to books andappropriate records of the company, and were willing to provide indemnity to cover the cost ofproceedings.

Leave, however, was refused by Black J in Re Fishinthenet Investments Pty Ltd [2014] NSWSC260. In His Honour’s view, there was insufficient evidence to establish the terms of ground (d)


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referred to above – that is, there was a serious question to be tried. His Honour was not convincedthat the particular litigation was in the best interests of the company. In His Honour’s opinion, itwas not appropriate to compare the relevant offers made for the purchase of the shares the subjectof the application. In the circumstances, His Honour did not believe the applicant’s claim would belikely to succeed.

Two very recent South Australian Supreme Court decisions, where leave was sought to bringstatutory derivative actions under s 237 of the Act, saw mixed results. In Michalakas v Powell[2014] SASCFC 132, the Full Court of the South Australian Supreme Court dismissed the appeal togrant leave, thus preventing Mrs Michalakas (the director of Garden Estate Hackham Pty Ltd(Garden E)) pursuing proceedings on behalf of a company Garden E against another company,Angas Securities, for an alleged breach of a loan agreement or alternatively, for misleading anddeceptive conduct in respect of its dealings with Garden E. This was based on the finding that therewas no serious question to be tried; granting leave was held not to be in the best interests of thecompany. In Argus Group Pty Ltd v Litigation Lending Services Ltd [2014] SASC 181 (LitigationLending), the plaintiffs, who held a minority interest in Litigation Lending Services Ltd, wanted topursue proceedings on behalf of the company against the directors and shareholders of LitigationLending in respect of alleged oppressive conduct and breaches of directors’ duties. The conduct hadarisen out of the directors’ and shareholders’ involvement in attempts by JustKapital Litigation PtyLtd to take control of Litigation Lending. Justice Gray in the Supreme Court of South Australiagranted leave for statutory derivative action to be brought after ruling that all requirements unders 237(2) Act had been established.

These decisions illustrate the variety of issues that are the subject of consideration by the courts inevaluating statutory derivative actions. By and large, shareholders have been successful in morecases than not. This line of interpretation, together with the successes obtained by shareholders inactions brought under the oppression remedy (discussed next in this Review), have enhanced therights and remedies of shareholders.

5.16 An interesting case on dividend entitlements

As noted earlier in this Review (see Legislation, section 2.4), the federal government has beenuncertain how to amend s 254T of the Act (availability of funds to declare and pay dividends). Twodecisions in 2014 highlight the importance of the rules. The Wambo case, discussed in the note onoppression earlier (see Leading Cases, section 5.14), raised some interesting questions on theinterpretation of directors’ general obligations. A different discussion of the rules occurred in theVictorian Court of Appeal decision in ICM Investments Pty Ltd v San Miguel Corporation [2014]VSCA 246 (ICM).

This case concerned the proposed acquisition by the San Miguel Corporation (San Miguel) ofcertain shares from ICM Investments Pty Ltd (ICM) (held by it together with others) in Berri Ltd(Berri). The agreements entered into between the parties were very detailed. ICM alleged that aspart of the agreement for the sale, Berri would declare and pay a dividend to ICM and that SanMiguel would procure the declaration and payment of this dividend amounting to $3,472,198.04.Certain franking credits were also to be procured. The relevant amounts had not been paid. ICMclaimed damages from San Miguel and Berri for the full amount.

Justice Vickery in the Victorian Supreme Court ruled that although there had been a breach ofcertain contractual obligations, no damage had been suffered by ICM. Only nominal damages wereawarded to ICM and it appealed this decision. The Victorian Court of Appeal (Nettle, Santamaria,and Beach JJA) reversed the decision. The court held that there were unconditional obligationsimposed on Berri and San Miguel to ensure the dividends were paid, including “any necessaryanterior step such as declaring the relevant dividend” (at [32]). This meant that San Miguel wasobliged to procure any future dividend that might have become due and payable.

It was argued by the defendants that San Miguel had been released from this obligation because ofthe potential illegality of the relevant dividend. The Victorian Court of Appeal agreed with theproposition put forward by ICM, that San Miguel and Berri had the burden of establishing the


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illegality of the arrangements. For this purpose, it could have been argued that the arrangementsbreached s 254T of the Act, either because the company had no profits from which a dividend couldbe paid, or that alternatively the company would be in breach of s 588G of the Act by engaging ininsolvent trading.

The Court of Appeal, in upholding the appeal, adopted the test enunciated in Marra DevelopmentsLtd v BW Rofe Pty Ltd [1977] 2 NSWLR 616. In that case, the New South Wales Court of Appealheld it was necessary to show that the relevant directors, in declaring and paying dividends, hadhonestly held the view, based on reasonable facts and information, that there were adequate profitsfor the declaration and payment of a dividend. Applying this test in ICM, the court consideredwhether in these circumstances, the directors of Berri could have held an honest and reasonableview that the payment of an interim dividend was not possible. The court ruled that it wasincumbent on San Miguel to show that “it would have been impossible for the [relevant] directorsacting honestly and reasonably…to have concluded that there were sufficient profits out of which topay the [relevant] dividend” (at [79]).

The Victorian Court of Appeal determined that the important question to be decided was whetherthe dividends could in fact have been paid. The court ruled that the directors could have decided torely on the reserves established by the company, as well as its trading profits, in order to meet thedividend obligations. Having assessed the availability of the trading profits and the reserves ofBerri in the appropriate year under consideration, the Court of Appeal concluded that there weresufficient profits from which a dividend could have been paid. Furthermore, the court held that thegeneral reserve was also available for distribution (at [168]). However, the Court of Appeal ruledthat Berri was not obliged to pursue the actual payment of the dividend as its participation in thesearrangements was not a contractual one.

This case illustrates that there are still a number of interesting and difficult questions to be decidedin evaluating if a dividend should be paid and whether it can be paid in the relevant set ofcircumstances. The proposed amendments to s 254T of the Act should therefore be pursued withurgency by the government in order to answer these and other related questions.

5.17 Distribution of capital in managed investment schemes – the High Courtdelivers a vital decision

In last year’s Review (see Annual Review: 2014, section 4.8, p xxix), I discussed the Full FederalCourt of Australia decision in ASIC v Wellington Capital Ltd [2013] FCAFC 52. An appeal fromthat decision has now been heard by the High Court of Australia (see Wellington Capital Ltd vASIC [2014] HCA 43) (Wellington). In dealing with the question of capital distributions in amanaged investment scheme, the High Court confirmed the decision of the Full Federal Court,albeit adopting a slightly different reasoning for its conclusion.

I noted in 2014 that a major factor distinguishing a traditional company, operating under thegeneral provisions of the Act, from one which may be operating via a managed investment schemearrangement, governed by Chapter 5C of the Act, lies in the relationship between the shareholder(member) and the company. In the former case, the relations between a shareholder and thecorporate entity operate under rules of company law, whilst in the latter case, they operate underthe “prism of trust law”. In essence, in a managed investment scheme, the entity responsible foradministering the investments held in the corporate structure is treated as a trustee of property thatis held for beneficiaries.

Wellington Capital Limited (Wellington), was the responsible entity of a managed investmentscheme, selling $90.75m of distressed assets held by the fund to an unlisted public company inexchange for shares in that company. The company subsequently made an in specie distribution ofthese shares, rather than cash, to the unit holders of the fund (the members). This decision waschallenged by ASIC, which argued that by distributing the shares (in the absence of informedconsent from the unit holders), Wellington had violated the fund’s constitution and s 601FB(1) ofthe Act.


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The Full Federal Court had highlighted the difference between a responsible entity and a“regulated” company under the Act, and in particular, the distinct trust flavour of managedinvestment schemes. Importantly, the Federal Court noted that s 601FC(1) of the Act unequivocallystipulated that a responsible entity of a registered managed investment scheme holds schemeproperty for scheme members (unit holders) on trust (at [48]). Accordingly, the court ruled that anydecision as to the proper construction of the relevant fund’s constitution, and the question ofwhether Wellington had the power to distribute scheme property in specie to scheme members,should be dealt within the “prism” of trust law (at [51]).

On appeal, the High Court of Australia confirmed this “trust” approach. It ruled that the extent towhich general trust law principles applied to a responsible entity’s functions, the provisions of theAct and the terms of the scheme constitution were relevant. It ruled that the proper construction ofthe relevant constitution did not permit a general power of capital distribution to members (at [26]).Furthermore, the scheme’s constitution, on its proper construction, only contemplated a capitaldistribution in the event of the winding up of the scheme (at [27]–[28]). An in specie distribution ofassets would therefore, only be acceptable in the termination of the scheme. In this context,Wellington had acted outside its conferred powers under its constitution (irrespective of trust lawprinciples). This resulted in a breach of s 601FB(1) of the Act (which requires a responsible entityof a managed investment scheme to act within its powers under the relevant constitution andlegislation).

However, the High Court felt that in interpreting the relevant trustee’s powers to deal with theproperty, the Full Federal Court had adopted too broad an approach to the law. The High Courtreferred to Re Centro Properties Limited [2011] NSWSC 1465 and Mercedes Holdings Pty Ltd vWaters (No 2) (2010) 186 FCR 450 which had differentiated between the constraints thatcompanies under the general provisions of the Act faced, in comparison to those experienced by atrust or a managed investment scheme. Whilst a general corporation must maintain its capital inorder to meet liabilities to creditors, in the High Court’s view, the removal of capital from a trustdid not affect the position of creditors – here the trustee remains liable to them in any event. It was,however, not necessary for the High Court to explore this matter further. All it had to consider waswhether the operation of the scheme was governed by principles relating to corporations law orconversely, trust law.

The regulation of managed investment schemes remains a critical matter for our government toreview – the work of CAMAC in this context has been left unfinished.

5.18 The Federal Court provides a sound commercial rationale in approvingschemes of arrangements

Where a takeover of a company is being considered, the relevant company (offeror) may opt toproceed via a scheme of arrangement, to be approved by the shareholders and by the court, ratherthan relying on the formal takeover regime under the Act. Two high profile schemes of arrangementinvolving CSR Limited and the James Hardie group of companies resulted in some interestingcommentary from the Federal Court on what matters the court should take into account inapproving a relevant scheme of arrangement. Recently, in the case of Re David Jones Ltd (No 3)[2014] FCA 753, Farrell J was asked to consider the approval of a scheme in circumstances whereshareholders holding a significant but small parcel of shares in David Jones Limited (David Jones)received an offer for their shares more generous than the offer made to the other shareholders inDavid Jones relating to the proposed takeover of David Jones by Woolworth Holdings Limited(Woolworths). This takeover was being pursued not through a formal takeover, but as is commonin recent times, by use of a scheme of arrangement.

It is usual for ASIC to ask to be heard in the proceedings before the court which needs to approvethe relevant scheme of arrangement. In the David Jones scheme, ASIC expressed certain concernsover the relevant scheme because of the possibility that a significant minority shareholder in DavidJones, Solomon Lew, appeared to be negotiating with Woolworths for special arrangements to bereached in relation to his minority holdings in another company in which they had an interest. Lewhad recently acquired a 9.8% stake in David Jones and also held a 11.8% interest in the othercompany.


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In considering the relevant matters, Farrell J noted that the court’s role did not extend to “imposingits own commercial judgment on the Scheme or to consider whether a better scheme might havebeen proposed” (at [3]). Her Honour instead favoured the view that where there is appropriatedisclosure, the decision of informed shareholders to approve a takeover should be upheld.

Justice Farrell held that the information supplied was adequate and had been made available to allthe shareholders to consider. There had been no serious opposition to the arrangements; in her viewthe scheme was both fair and reasonable within the meaning of s 411(4)(b) of the Act.

In interpreting s 411 of the Act, Farrell J also noted that the provision enabled “effective differencesin the treatment of shareholders” (differences that may create varying classes of shareholders), andis an approach by which a collateral benefit can be offered or given (at [13]).

This decision is one that has been welcomed not only by the companies involved, but also by thecommercial community. It is of course important for ASIC to test relevant provisions of the law inorder to see how the courts will interpret them. However, at all times, we should applaud courtdecisions in which a commercial assessment is made in the context of all the relevant facts, such aswas the case here, where there was very clear evidence of full and appropriate disclosure andplenty of opportunity for the relevant shareholders (whose interests were directly affected) toevaluate the situation.

5.19 The ability of courts to set aside the benefits of preferential or unfairtransactions on the liquidation of companies

Creditors (acting through the liquidator of the company) have opportunities, where directors of acompany (that have gone into liquidation or are being wound up) have engaged in fraudulentactions, have transferred assets of the company to themselves (or to others close to them), or haveengaged in insolvent trading, to pursue the directors for amounts that have allegedly been “lost” tothe company. Courts are not shy in providing relief under ss 588G and 588H of the Act. In therecent Victorian Court of Appeal decision of Vasudevan v Becon Constructions (Australia) Pty Ltd[2014] VSCA 14 (Vasudevan), the court adopted an expansive interpretation of certain statutoryanti-avoidance provisions (ss 588FDA and 588FE of the Act) in setting aside what appeared to besound commercial arrangements entered into between the parties so as to identify that there werepreferential or unfair transactions in favour of the directors. The facts of the case illustrate thenature of the arrangements that were under review.

Warren Thompson (Thompson) was the sole director and shareholder of Wulguru Pty Ltd(Wulguru) and two other companies. The two other companies owed debts to Becon Constructions(Australia) Pty Ltd (Becon), and Thompson guaranteed the relevant debts. In due course, however,the companies defaulted.

Becon instituted proceedings against Thompson as guarantor. The companies then entered into adeed pursuant to Thompson’s instructions to restructure the debts. This was to make Wulguru liablefor one of the company’s debts; it was also required to execute a mortgage in Becon’s favour assecurity under the deed. Upon execution of the mortgage, Becon would discontinue proceedingsagainst Thompson and release him from liability.

When Wulguru became insolvent, the liquidator, after examining the relevant facts, felt that thetransactions described above were “caught” by ss 588FDA and 588FE of the Act. However, at firstinstance the judge ruled against the liquidator in holding the view that for these sections to beeffective, it was necessary to show that Thompson had received a direct benefit from the transactionrather than a derivative benefit.

On appeal, the Victorian Court of Appeal (Nettle, Beach JJA and McMillan AJA) overturned thedecision ruling that Parliament did not intend the provisions to relate only to direct benefits. AsNettle JA noted, the relevant provisions were anti-avoidance provisions that should be read broadly.It was clear, in his view, expressing the judgment of the Court of Appeal, that:s 588FDA is self-evidently an anti-avoidance provision aimed at preventing errant directorsfrom stripping benefits out of companies to their own advantage. It is to be presumed, therefore,that Parliament deployed the language of the section with the intention of achieving that


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objective. According to ordinary acceptation, “benefit” includes both direct and indirect benefitsand, prima facie, that accords with the apparent objective of the section (at [19]).

It was the Court of Appeal’s view that the aim of the arrangements were to provide relief toThompson in a way that was clearly caught by the language of the relevant section. There was noevidence that it would be unfair or unjust to Becon for the transaction to be set aside. As a result,the court accepted the liquidator’s argument and declared the transactions void, thus imposingliability on Thompson.

Whilst the very recent decision of the Western Australian Court of Appeal in Weaver v Harburn[2014] WASCA 227 (Weaver) did not consider the same provisions in the Act as the Vasudevancase, the relevant provisions deal with similar broad issues. In Weaver, the sole director of aninsolvent company, Harburn Group Australia Pty Ltd (Harburn Group), had channelled corporatefunds through a wholly-owned subsidiary company of the Harburn Group. The liquidatorsappointed to administer the Harburn Group sought to recover these payments made to the director’swife. Master Sanderson dismissed the liquidators’ claim, at first instance, because in his view, thesurrounding circumstances did not indicate that the relevant payment was “unreasonable”. HarburnGroup was winding down its business, and in his view, it was “comfortably solvent” at the time ofthe relevant payment. The primary issue on appeal turned on the relevance, or alternatively, theweight to be given to the financial health of the company at the time of transactions. PresidentMcLure, who delivered the judgment in the Court of Appeal (with Buss and Murphy JJA agreeing),had to interpret the expression “any other relevant matters”, in the relevant statutory provision,s 588FDA(1)(c)(iv) of the Act. In the court’s view, a reasonable person would not have made therelevant payments and “[t]hat conclusion does not depend on, but is fortified by…[the] uncertainfinancial and commercial circumstances in which questions as to [the company’s] continuingsolvency” were raised (at [103]). Ultimately, the transaction was ruled as voidable and the directorwas ordered to repay the sum to the company.

5.20 Concluding comments

In this section, I have covered only a handful of cases which are clearly of interest in the broaderareas of directors’ duties, corporate governance, administration of companies in schemes andtakeovers, and related matters. The remedies of shareholders which are becoming much moreimportant and significant have also been discussed in some detail together with some interest in thecases on codes of conduct, the dividend rules, and other matters. As noted earlier, there are manyother cases that have been decided during the year (literally hundreds) on all areas of the legislationand the relevant common law. It is not possible in a Review of this length to cover more than thehandful of cases that have been discussed in this section.

6 ConclusionsWhilst the year 2014 has not provided as wide a variety of interesting cases dealing with the topicsranging from the questions that continue to arise concerning directors’ duties and responsibilitiesand other issues of corporate governance (often the focus of attention), the case law considered inthis Review again illustrates that the corporate law area is a very rich one. Questions of corporatelaw intersect with, and impact significantly, on other areas of the law.

A major challenge facing the federal government moving forward is to strike a balance between thegrowing insistence by regulators and others for reliance on behavioural rules (such as the rules ofcorporate governance), or powers that enable the regulators to move against companies andindividuals without necessarily proving a breach of the law (in the hope that the relevant behaviourwill be corrected), and the threat that this poses to the common law system of justice that we enjoyin this country.

Indeed, this issue is critical as we are invited to review and comment on the ALRC Issues Paper,Traditional Rights and Freedoms – Encroachments by Commonwealth Laws. The paper covers arange of matters impacting on questions that arise in the corporate law area as well as in other areasof everyday life. We are seeing far too much reliance, in my view, on the ability of regulators andothers in similar positions when vested with the power, to intervene and direct the behaviour of


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corporations and individuals, without the need to seek an appropriate court assessment of therelevant issues under question. Whilst corporations, or individuals, are able to challenge the stepstaken by regulators in the appropriate cases, it is placing an unreasonable burden on the relevantdefendants to prove their innocence. After all, the onus should be on the regulator, the Crown, orthe civil plaintiff, to prove the other party’s guilt in the appropriate situation.

Hopefully, we will see a proper balance being struck in 2015 in a number of different ways and anopportunity for some of the erosion that has occurred in the freedoms of our corporate andindividual citizens to be repaired.

In the meantime, it will be fascinating to see what additional powers are likely to be vested inASIC, and our other regulators as a result of the Murray Report, to face their ongoing, indeedincreasing, challenges. In particular, the possible further empowerment of ASIC (as suggested bythe Murray Report) will arguably ensure that persons wishing to invest in corporate and relatedsecurities can do so in the knowledge that they will be properly protected by sensible laws.Furthermore, it should enable an administration with sufficient resources and skills to capablyevaluate the relevant behaviour. However, we must ensure that the regulator brings appropriateactions in our courts, where necessary, to ensure that the challenged behaviour can be eithercorrected, or where appropriate, punished.


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