Lifting the corporate veil- revisiting Salome
Wednesday, July 04, 2018
In March I presented for Legawise at its annual family law conference in Brisbane. My topic was the vexed one of lifting the corporate veil- and therefore seeing behind the corporate structure. Here is my paper:
Legalwise Family Law Conference
8th Annual Family Law Forum Session: Family Law Update
Revisiting Salome
By Stephen Page[1]
1. Who was Salome?
According to Matthew, reinterpreted by Oscar Wilde, King Herod imprisoned John the Baptist. To entertain guests on Herod’s birthday, Salome danced the Dance of the Seven Veils. After one was teasingly removed, and then another and another – until with no doubt the excitement of all concerned, she was asked what her prize was for this extraordinary dance. The price was John the Baptist’s head on a platter – which was then cut and provided.
Thankfully, our legal system does not operate in such a brutal manner, but often when we seek to find the truth about companies, we engage in the Dance of the Seven Veils, often involving smoke and mirrors and often the truth still eludes us.
2. Is your client a director of the company?
I am going to assume for the sake of this presentation that you act for the wife and that the entity is controlled by the husband. Most of the time there are clear advantages in your client remaining a director of the company. As a director, she has certain obligations both under the common law and under the corporation law as to the management of the company, and has certain rights, for example the right of access to the books of the company.
Difficulties come when the other party, typically the husband dances the Dance of the Seven Veils and does not reveal the true state of the company’s affairs. Your client may have to seek certain remedies but also may, in an appropriate case, decide to resign as a director. If the company is in a parlous state, the last thing that your client wants to do is to be a director of a company that trades whilst insolvent, as there is both civil and criminal liability.
Very often a party may assert that the company is in such a state, when of course it is not, or the party has either hidden or diverted funds to other accounts or entities under his control.
If your client is a director and decides to remain as a director, at least for now, then some critical steps that need to be considered are:
(i) How the assets of the company are held? For example, how is the money held in any bank account of the company overly preserved?
(ii) Is there any questionable trading being undertaken by the company? Sometimes when parties break up, their entities not surprisingly hit a rough patch – because the focus of the parties on business is less than it ever was before. Of course this might be a mere statistical blimp which doesn’t impact much in the long term on either cash flow or the value of the business or in fact it may not be related to the breakup but some longer term trend with the company – such as its overall management, its failure to innovate, the effect of competition, etc. In your client’s search for the truth, a problem is that the other party may well assert that your client has been too vigorous in seeking to control the company and in fact your client is killing the goose that laid the golden eggs by causing ructions within the company and not enabling the company to trade in an ordinary manner.
(iii) Who are the other directors of the company? It’s an obvious point – but ordinarily the directors manage the company on behalf of the shareholders. If there are two shareholders, for example husband and wife and each has one $1 share of the same class, but there are three directors namely husband, wife and the adult son, then the balance of power ordinarily will be whoever has the adult son on side.
(iv) Who owns the shares at which numbers and what classes? Clients of mine have been surprised at times that although it would appear they own most of the shares, the constitution of the company means that the company is in effect controlled by their former partner.
(v) Therefore, get a copy of the constitution and read it thoroughly. Sometimes this can be an extraordinarily difficult task in itself in having to pry it out of the hands of the other party or the company’s accountant who is on side with the other party. If the company’s accountant plays a mutual role between the parties, that makes life considerably easier in trying to have some transparency.
(vi) Is there a shareholders agreement? If so, get a copy and read it. It might determine who controls the company.
(vii) Are there any directors or shareholders’ loan accounts? While these are less common, due to the effect of Division 7A of the Income Tax Assessment Act, nevertheless they need to be factored in as to what possible impact there may be upon your client.
(viii) Is the company a going concern, or is it more a shell (which might carry forward tax losses) or trustee of a family trust? Each of these might have a different strategy and outcomes. If it has carried forward tax losses, there might be real benefit holding on to control of the entity. If it is a trustee of a family trust, then the obvious applies – get a copy of the trust deed and read it carefully. Similarly, if the company is the trustee for a self-managed super fund, then extreme care must be taken as to what is the property of the fund, whether there has been compliance with SIS Act and what urgent action might need to be taken if there hasn’t been compliance. A copy of the trust deed needs to be obtained as well of course a copy of the accounts.
Generally, unless a company is insolvent, it is better to remain as a director so that your client has some control over the company and access to the books of the company.
The Full Court in Ferraro and Ferraro (1993) FLC 92-335 at p.79, 567 noted the wife’s personal liability as a director of various family companies:
“As it has been held that directors cannot absolve themselves from liability for insolvent trading by an assertion that they were merely a nominal director and took no part in the company’s affairs, this development in the law is particularly relevant to a wife who is only nominally a director of a company which conducts a family business.”
As the editors of CCH Family Law correctly state:
“If the decision is to participate in the company’s affairs, then the previous non-participating director should”
· establish the solvency of the company immediately. The director should have regard to the most recent financial accounts;
· ascertain the extent of security provided by the company and personal guarantees given by directors. The director will need to make a judgment as to whether they ought refuse extension of existing credit facilities against the need to preserve the underlying business;
· insist on dual signatories on company accounts;
· call for and attend regular meetings of the board of directors and ensure regular financial reports and information are provided at the meeting.”
If there were any doubt about the role of the wife as a director, that was done away with by Debelle J in Group 4 Industries Pty Ltd v. Brosnan & Anor (1992) 10 ACLC 1, 437:
“While some may say it was not unreasonable for a wife who is a part-time employee of the company and who has employment elsewhere to rely on her husband who is engaged full-time in the business of the company, such a view cannot obtain if the wife is a director of the company. Once the wife takes on the office of the directors, she undertakes duties and obligations which require an act of interest to be displayed in the affairs of the company.”
3. Your client is not a director but a shareholder of the company
As a shareholder, your client is in a much weaker position than if she were a director. The most powerful position that a shareholder can be in, is to cause a spill of the board through an extraordinary general meeting. This should only be considered if there is a real chance of success and your client has first obtained a copy of the constitution, any shareholders’ agreement, etc. and then had discussions with anyone who might be a director or shareholder of the company and therefore can influence the outcome. Check the classes of shares and benefits. Check the numbers. If the chairman of the meeting is ordinarily the chair of the directors, that might be your client’s ex, resulting in a very short unsuccessful meeting. If the shareholding consists of one $1 each between husband and wife but your client is not a director, then your client has in effect no control at an extraordinary general meeting whatsoever. Often the chair of the meeting has the casting vote. It will depend in large part on the constitution of the company and again any shareholders agreement.
4. If your client is neither a director nor shareholder
In essence, your client has to look to relief in Court.
5. De facto or shadow directors
Sometimes you may come across where someone else in reality controls the company other than its directors. This might be someone who holds themselves out as a director i.e. a de facto director or someone who doesn’t – a shadow director.
Madgwick J in Deputy Commissioner of Taxation v. Austin [1998] FCA 1034 said:
“Thus it seems to be a necessary condition of acting as a director, whether properly appointed or not, that one exercises what might be called the actual (and statutorily extended) top level of management functions. However, that is not necessarily a sufficient condition for such a conclusion, nor is it the same as saying that one must do things which only a director can do.
Directors are, of course, subject to the [Corporations] Law and the company’s articles, entitled to delegate their powers and functions to other officers or employees of a company; in the case of a large company, this would appear inevitable. But that is not to say that those others necessarily act in the capacity of a director (nor that a director who has delegated a substantial part of his or her authority ceases to act in that capacity). Whether a delegate or intermeddler is acting as a director will depend upon the nature of the functions or powers which are exercised and the extent of their exercise…
If, in the case of a small company, a person has, with full discretion, “acted as the company” in relation to matters of great importance to the company, and other than as an arms’ length expert engaged for a limited purpose, the conclusion that that person has acted in the capacity of a director may well be justified. The extent to which and the circumstances in which the person has so acted will nevertheless be of importance.
The variety of commercial and corporate life is such that it seems to me unprofitable to attempt a general statement as to what is meant by “acting as a director”. Whether a person does so act will often be a question of degree, and requires a consideration of the duties performed by that person in the context of the operations and circumstances of the particular company concerned. I have, for example, referred to the circumstances of the size of the company. In a large and diversified company, great discretion to deal with very important matter must be reposed in employees. In the case of a supermarket chain, as in Tesco, it would hardly occur to anyone to suggest that a managerial employee held to have “acted as the company” in breaking a consumer protection law at a particular store was acting as a director of the vast company concerned. As suggested above, in the case of a single person making decisions for a company, the business of which was confined to the operation of a corner store, a different view might be taken… Another relevant factor may be how the person who has claimed to have acted as the director was reasonably perceived by outsiders who deal with the company. This may aid a conclusion that the supposed director has held himself or herself out as such… An express claim to be a director may, in some cases, be carefully not made. That would not prevent a conclusion, nevertheless, that a person’s dealing with third parties point to his or her having acted as a director.”
6. Fiduciary obligations
Just a reminder. A director has a fiduciary duty to the company: Hospital Products Ltd v. United States Surgical Corporation [1984] HCA 684; (1984) 156 CLR 41. A director does not owe a fiduciary obligation to a shareholder: Percival v. Wright [1902] 2 Ch 421. There may be special circumstances in which a director may owe an obligation to a shareholder to account for an advantage obtained, for example Canehire Pty Ltd v. Themis Holdings Pty Ltd [2014] QCA 296; Murdoch v. Lake [2014] QCA 216.
In Glavanics v. Brunninghausen (1996) 14 ACLC 345, Bryson J noted that a director owes the following fiduciary obligations to the company:
· To act in good faith and prefer the interests of the company;
· To avoid advancing a conflict of duty and interest;
· A duty not to misuse a company’s property, information and opportunities and account for any benefits obtained;
· A duty of care and diligence.
Breach of the duty may found an action for negligence of the suit of the company: Daniels v Anderson (1995) 13 ACLC 614.
There are also statutory obligations:
· To act in good faith and for a proper purpose: section 181 of the Corporations Act 2001;
· To exercise the degree of care and diligence that a reasonable person in a like position in the corporation would exercise in the corporation’s circumstances: section 180(1). This is subject to the business judgment rule in section 180(2).
· Not to improperly use their position to gain an advantage for themselves or someone else or cause detriment to the corporation: section 182.
· Not to improperly use information to gain an advantage for themselves or someone else or cause detriment to the corporation: section 183.
· To disclose material personal interests: section 191.
7. Obligations under constitution of course
In addition to any other obligations under law you should always check what obligations a director has under the company’s constitution.
8. Transfer of shares
It is not uncommon to find provisions in the constitution of a company giving directors the discretion to decline to register any transfer without reason. An example of such a case was Ascot Investments Pty Ltd v. Harper (1981) FLC 91-000. Gibbs J at p.76, 058 stated:
“…the directors are bound to exercise their discretion bona fide in what they considered to be in the interests of the company, and not for any collateral purpose, but subject to that qualification their discretion is absolute and uncontrolled…”
And furthermore that the onus of proving that the directors did not act in good faith in refusing registration lies on those who challenge the decision.
9. Rights of pre-emption
Sometimes constitutions have a right of pre-emption about the ownership of any shares. It is absolutely essential if there is an issue about a particular company to check the company’s constitution. The constitution and any share agreement may impact the value of the shares.
10. Documents
I have always found in dealing with complex property settlements involving a number of entities that it is useful to draw a diagram or genogram of the structure of the various entities, whether they be companies, trusts or partnerships. You may need to undertake a company search and then pore through all the documents that are provided including:
· the ASIC search;
· the constitution;
· any financial statements including income tax returns;
· any substantial documents as to security such as loan agreements and leases, personal guarantees;
· do a name search in each of the parties;
· doing name searches with the Titles Office in the name of each of the parties and/or the entity;
· undertaking a search of the web. It is amazing how much information is put on the web that guides you. This would include ordinarily a search of the company’s website (if it has one), that of LinkedIn of each of the directors and/or the company and that of Facebook if available of each of the directors.
11. PPSA
Out of an abundance of caution, searches should be taken of a personal property securities register. Search and make sure you check the records carefully. Remember that not all interests that might be secured are registered. I don’t intend today to go through the requirements of the PPSA but be aware of its existence and search if needed.
12. Large and small private companies
A large private company is defined in section 45A(3) of the Corporations Act 2001as a proprietary company that satisfies at least two of the following:
(a) Consolidated gross operating revenue for the financial year is $25,000,000;
(b) Consolidated gross assets at the end of the financial year of the company (and its controlled entities) is $12,500,000 or more;
(c) The company and the entities it controls have at least 50 employees at the end of the financial year.
Large companies are required to:
· have audited financial statements prepared;
· prepare financial statements in accordance with all Australian accounting standards;
· lodge a full set of compliant financial statements with ASIC;
· present those annual accounts at the AGM of shareholders.
By far, most private companies are small private companies. They need not:
· prepare annual financial statements;
· have accounts audited unless required to do so by members holding 5% of the issued shares;
· disclose financial information in the annual returns;
· convene an AGM.
The books of a company are defined in section 9 of the Corporations Act to include:
(a) a register;
(b) any other record and information;
(c) financial reports or financial records, however compiled, recorded or stored; or
(d) a document.
Part 9.3 of the Corporations Act makes the following provisions regarding the books of the company:
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Provision
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Effect
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Section 1300
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Inspection of books
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Section 1301
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Local of books on computer
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Section 1303
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Court (a judicial registrar) may compel compliance with inspection or supply of any book.
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Section 1305
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Admissibility of books in evidence.
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Section 1306
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Form an evidentiary value of books.
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Section 1307
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Falsification of books being an offence.
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13. The ability of shareholders to inspect
Generally shareholders can’t inspect the books of a company. They may apply to the Court for an order pursuant to section 247A of the Corporations Act to allow them or someone else to inspect on their behalf. The applicant will need to satisfy the Court that the applicant is acting in good faith and for a proper purpose. Section 247A is subject to client legal privilege.
Access to company books could be authorised by the directors of the company or resolution of shareholders.
If the dominant purpose for inspection is to assist in other litigation to which the company is not a party, then the inspection is impermissible: Bride v. Commissioner for Corporate Affairs (1989) 7 ACLC 1, 202; Cleary v. Cleary and BJC Investments Pty Ltd (1999) FLC 92-868; Cescastle Pty Ltd v. Renak Holdings Ltd(1991) 9 ACLC 1333.
Using it as a fishing expedition for discovery is also impermissible: Re Claremont Petroleum NL (No. 2) (1990) 8 ACLC 548.
14. Inspection of the Constitution
Shareholders can apply to the company with the accompanying fee (if any) to inspect the Constitution. The request must be complied with by the company within 7 days: section 139 Corporations Act.
Inspection of minutes and resolutions
Shareholders are entitled to have access to:
· The minute books of the company for meetings of shareholders;
· Resolutions passed by shareholders: section 251B Corporations Act.
There is no right of access for minute books to meetings of directors. Someone who is a shareholder but not a director will need to rely on a subpoena or order for production.
15. Register of Members
Shareholders are entitled to inspect the register of members and to obtain a copy of it.
Access to documents of the company in liquidation. All rights relating to the inspection of books of the company by members are subject to leave first being obtained: section 486 Corporations Act.
Access by directors. Under section 290(1) of the Corporations Act a director is entitled to have rights of access to financial record of the company at all reasonable times. The onus rests with the person seeking to deny the director inspection of the documents: Edman v. Ross (1992) 22 SR (NSW) 351.
A director has the right to inspect the books of the company (as distinct from the financial records) at all reasonable times for the purposes of a legal proceeding which the director is a party. This applies to proceedings which the director brings in good faith or which the director has reason to believe will be brought against him or her: section 198F of the Corporations Act.
The fiduciary obligations which apply to directors means there is no right to possession or control in an personal capacity but only a right of access to documents strictly for the purposes of the corporation: Schweitzer and Schweitzer [2012] FamCA 445 per O’Reilly J.
In that case the wife sought disclosure by the husband of financial documents of two trusts and minutes of resolutions to the corporate trustees of those two trusts relating to trust distribution. The husband was the director of the two corporate trustees but not the sole director. He was not a shareholder of either corporate trustee. The husband was a discretionary beneficiary of both trusts.
The case has a good form of order as to the obligations on the husband that were agreed: annexure A – upon the undertaking of the husband to refrain from gambling more than a total amount of $500 per week (including but not limited to, online gambling such as Sportsbet, Centrebet and Betfair, gambling in casinos, gambling on pokie machines and purchasing lottery tickets from Golden Casket or any other organisation or charity).
It is ordered by consent by way of interim order:
1. That subject to paragraphs 2(b) and 2(c) the husband produced to the wife bank statements for the Schweitzer superannuation fund for the past 12 months.
2. That the husband will:
a. Keep the wife fully informed in relation to his financial circumstances including but not limited to his trading activities by providing her with the following documents every 3 months beginning on 1 June 2012:
i. Copies of bank statements for any account, including savings, loan and credit cards held in the husband’s name or jointly with another person and for the following entities in trust:
1. Mr Schweitzer Holdings Pty Ltd;
2. T Pty Ltd ACN;
3. B Pty Ltd ACN;
4. S Trading Trust;
5. Mr Schweitzer Family Trust; and
ii. Share and investment statements held in the husband’s name or jointly with another person or the names of the husband’s entities and trusts; and
b. Make available to the wife for her inspection, upon request, the original of all documentation disclosed to date and all documents disclosed in the future;
c. Provide to the wife with bank statements as opposed to internet transactions or transaction reports; and
d. Provide any other reasonable information disclosed or requested by the wife regarding his financial circumstances.
3. Within 48 hours of the husband selling, transferring or disposing of any matrimonial assets having a value greater than $5,000, including those controlled by the husband’s entities and trusts, the husband provide to the wife’s solicitor details of the same and any documents relating to such sale, transfer or disposition.
4. That, until further order, each of the parties be restrained from drawing down the mortgage secured over the property at ***.
5. The wife shall continue to reside on the property at ***, and the husband and the wife will each contribute to the rates, taxes and maintenance costs of the property in equal proportions (provided that any expenditure for maintenance is approved in writing by both parties prior to it being expended).
6. That within 7 days of the date of these orders, the parties jointly instruct Mr Y of J Valuers as a single expert witness to value the former matrimonial home.
7. That the parties share equally the costs of Mr Y’s fees.
8. That within 7 days of these orders, the parties jointly instruct D Valuers as a single expert witness to value the parties’ wine collection.
9. That the parties share equally the cost of such valuation.
10. That the parties participate in a private mediation before ***.
11. That the parties shall share equally the cost of the mediator’s fees.
The wife sought the following for disclosure by the husband:
(a) Copies of financial statements and tax returns for the Schweitzer Investment Trust and the Schweitzer Family Trust for the last three financial years, including balance sheets, profit and loss accounts and depreciation schedules;
(b) Bank statements for the Schweitzer Investment Trust and the Schweitzer Family Trust for the last two financial years; and
(c) Copies of minutes or resolutions of the corporate trustees of the Schweitzer Investment Trust and the Schweitzer Family Trust relating to trust distributions for the last three financial years.
That application was dismissed.
It was agreed:
· Each trust was a discretionary trust which the husband was a beneficiary.
· The appointor of each trust was the husband’s father.
· The husband was a director of the corporate trustee of each trust.
· The husband was not a shareholder in either corporate trustee.
The wife’s counsel submitted that the trust documents request by the wife were disclosable by the husband because:
(a) as a director of the corporate trustees, he is entitled, pursuant to section 290 of the Corporations Act to the financial records of the companies;
(b) as a beneficiary of the trusts, he is entitled to access to the financial documents in order to ascertain whether the trusts are being properly administered. O’Reilly J was satisfied for the purpose of rule 13.07(a) of the Family Law Rules that the documents sought by the wife are not and cannot be “in the possession of” of nor “under the control” of the husband, in his personal capacity and are not, on the facts of the case “in the possession of” nor “under the control” of the husband in his capacity as a director of the corporate entities who are the trustees of the two trusts nor in his capacity as a beneficiary.
The cases set out very useful case law about possession, custody or power and/or control and the difference between a director and the company itself. Her Honour very much used bold to emphasise certain words in the judgment, particularly when quoting other cases.
The husband said in his affidavit that the wife complained that he had refused to provide her with disclosure in relation to either trust and that “my father is the appointer/principal of both entities. I have spoken to my father about the disclosure that [the wife] seeks from the trusts and he has advised me in words to the effect:
“These are assets of your mother and me. I object to becoming involved in your matrimonial proceedings and providing the documents that have been requested.””
Her Honour noted at [50]:
“The trusts are discretionary trusts. As is understood, thus, a beneficiary has no interest in the corpus, but only the right to require due administration of the trusts and…is entitled to access to the financial documents of the trustees only for the purpose of ascertaining that there is due administration.”
Her Honour noted that the husband was one of two directors of one of the entities and one of three directors of the other. He was a shareholder in neither. Objectively, there was no evidence to suggest that either entity is the husband’s alter ego.
Her Honour then said at [57] to [59]:
“57. I would conclude thus that the disclosure that the wife seeks is inappropriately sought against the husband, in his capacity as the husband, and inappropriately sought against him in his capacity as a director of the corporate trustees, or as a beneficiary of the discretionary trusts.
58. Any documents of the corporate trustees to which the husband has access, he has access as a fiduciary such that, relevantly, such documents are not in his possession or under his control. The disclosure sought, thus, could be sought only against the two corporate trustees, either by way of their joinder, for clarity or other relief, if the wife be so advised, or short of that, for non-party disclosure relief.
59. The Rules of Court, Chapter 6, provide clear guidance as to who should be parties to actions. In particular, if ultimately the wife is to seek relief involving the trusts, it seems to me to be at least prudent, if not necessary, that the corporate trustees be joined.”
16. Which Court?
Starting in the Family Court
Jurisdiction is given to the Court under 1337C(1) Corporations Act.
Transfer to the Family Court
The matter can be transferred to or from the Family Court under sections 1337J and 1337L. The bases are:
· A proceeding is pending in the Family Court or Family Court of WA;
o The relevant proceeding arises out of, or is related to, another proceeding pending in the Federal Court or another State and Territory Court and that other Court is the most appropriate Court to determine the relevant proceedings; or
o Aside from that part of the Corporations Act, the relevant proceeding or a substantial part of it would have been incapable of being instituted in that Court and the extent to which in that Court’s opinion the matters for determination in the proceeding are matters not within that Court’s jurisdiction apart from that division of the Corporations Act and the interests of justice, then the Federal Court or another State or Territory Court is the most appropriate Court to determine the relevant proceeding; or
o The interests of justice.
In deciding whether to transfer under section 1337J, a Court must have regard to:
(a) The principal place of business of the corporation concerning the proceeding;
(b) The place or places where the events that are subject to the proceeding took place; and
(c) The other Courts that have jurisdiction to deal with the application.
Transfer cases
These include Roff v. Aqua Distributors Pty Ltd (1996) 14 ACLC 1769:
· Although the issues in each proceeding are not identical there will be a substantial overlap;
· It will be more efficient, less time consuming, less costly for the issues arising to be resolved in the one Court;
· The risk of inconsistent findings will be removed if the findings are heard and determined in the one Court;
· The matter can be resolved with greater expedition in the Family Court if the final hearing of the matter in the Family Court was imminent;
· The Family Court with its wide powers under Part 8 of the Family Law Act is well equipped to resolve the ultimate dispute between the parties, that being the future conduct, ownership, and control of the company;
· The Family Court, as opposed to the Federal Court, will be able to consider, and if thought appropriate, deal with the applicant’s obligation for a provisional liquidator having regard to the rights and obligations of the parties under the Corporations Act and the Family Law Act;
· Fox Enterprises Pty Ltd v. Fox (1995) 13 ACLC 573 was transferred to the Family Court. The family home was owned by the parties. The parties were sole shareholders and directors of the family company before separation. After separation the husband, his de facto and an employee of the company became directors and shareholders of the company. The company commenced proceedings seeking a declaration that the husband and wife held the home on a constructive trust for the company because of the breach of fiduciary duties. Not surprisingly, given that there were property settlement proceedings on foot, the Court transferred the matter to the Family Court saying that the proceedings could have been a ruse by the husband to deny the wife her property rights;
· Whether the proceedings are reliant in their entirety on the cross vested jurisdiction: Staples v. McColl (1989) FLC92-039;
· Where the practical problems are posed by the exercise of the jurisdiction: Re Boyce and Crowe (1982) FLC92-202;
· The transfer will result in significant further costs or delay: Kenda v. Johnson (1993) FLC92-331;
· Whether the separate proceedings involve the same material facts: Hallawi v. AGC (1989) FLC92-045;
· Whether the outcome determines or is central to the determination of the other issues: Lambert v. Dean (1989) FLC92-037;
· The location of the parties, witnesses and evidence (including documents): Yunghanns v. Yunghanns (1999) FLC92-836.
17. Family Law Rules
Chapter 25 of the Family Law Rules applies to the Corporations Act applications. Rule 25.02, as modified by Rule 25.03 or an order, applies to an application under the Corporations Act as if those rules were provisions of these rules. Rule 25.03 sets out the delegated power to registrars and judicial registrars under the Corporations Rules.
An originating application, called originating process, is required under Form 2 in the Federal Court. The application should contain the full name of the corporation, its ACN and its registered office. The Form 2 must also state each section of the Corporations Act and/or ASIC Act which applies as well as the relief sought. It has to be pleaded: Rule 2.2 and 15A.3 of the Federal Court (Corporations) Rules 2000.
An interim or interlocutory application is made under Form 3 interlocutory process.
It would be best not to invoke Rule 25.04 of the Family Law Rules:
“An application under the Corporations Act 2001…must not be dismissed only because it has been made in the wrong form.”
To transfer from the Family Court to another Court, or procedural orders under section 1337P(1) of the Corporations Act, the application is by way of an application in the case and an affidavit: Rule 25.05 Family Law Rules, which would ordinarily be listed as near as practical to 28 days after the date of filing: Rule 25.06 Family Law Rules.
18. Service
Rule 7.03 sets out what documents need to be served in what manner, for example ordinary service or special service. An initiating application or application in a case is required to be by special service. Under Rule 7.11, special service must be served on a corporation in accordance with section 109X of the Corporations Act, i.e:
· Leaving it at, or posting it to, the company’s registered office; or
· Delivering a copy of the document personally to a director of the company who resides in Australia or in an external territory; or
· If a liquidator of the company has been appointed – leaving it at, or posting it to, the address of the liquidator’s office in the most recent notice of that address lodged with ASIC; or
· If an administrator of the company has been appointed – leaving it at, or posting it to, the address of the administrator the most recent notice of that address lodged with ASIC.
Service on a director or company secretary can be by leaving it at, or posting it to, the alternative address notified to ASIC under sections 5H(2), 117(2), 205B(1) or (4) or 601BC(2). However, this only applies to service on the director or company secretary:
(a) In their capacity as a director or company secretary; or
(b) For the purposes of a proceeding in respect of conduct they engaged in as a director or company secretary.
19. Obtaining relief
Section 233 of the Corporations Act sets out the relief that the Court can make:
“(1) The Court can make any order under this section that it considers appropriate in relation to the company, including an order:
(a) that the company be wound up;
(b) that the company’s existing constitution be modified or appealed;
(c) regulating the conduct of the company’s affairs in the future;
(d) for the purchase of any shares by any member or person to whom a share in the company has been transmitted by a Will or by operation of law;
(e) for the purchase of shares with an appropriate reduction of the company’s share capital;
(f) for the company to institute, prosecute, defend or discontinue specified proceedings;
(g) authorising a member, or a member to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;
(h) appointing a receiver or a receiver and manager of any or all of the company’s property;
(i) restraining a person from engaging in specified conduct or from doing a specified act;
(j) requiring a person to do a specified act.”
The first comment that needs to be made about this section is that all those lettered items are merely examples, and that therefore it would appear that the Court has a largely unfettered jurisdiction as to what orders it can make regarding the company’s affairs. It is obviously easier to persuade a Court that the orders you are seeking fall within one of the categories rather than something novel.
20. Winding up
Deane J in Mallet v. Mallet [1984] HCA 21; (1984) 156 CLR 605; (1984) FLC 91-507 said at [9]:
“Special considerations may be relevant to determining the correct method to be followed in valuing shares in a family company for the purposes of section 79 of the Act. Where a family company has been treated by the parties to a marriage as no more than a convenient vehicle for their own commercial activities and investments, it may be quite unjust and inappropriate to treat the corporate structure as having any significance beyond the costs and expenses which would be involved in its removal. This is likely to be so in the case of a true family company holding a diverse collection of assets acquired over the life of the marriage. It is even more likely to be so where the combined shareholdings of husband and wife carry control of the family company and where, in order to sever relationships, it is proposed that either husband or wife require the shareholdings of the other. In such a case, the spouse who ends up with the combined shareholdings will ordinarily be able to procure the realization by the company of any of the assets with a realizable value exceeding their value as retained assets will often have a practical option of receiving the appropriate share of the net proceeds of any such realization, less any costs and expenses involved in the liquidation and/or distribution, by one or other of a number of legitimate means. In that regard, it is also relevant to note that the spouse who disposes of his or shares will commonly have foregone a real likelihood of having been able to procure the liquidation of the company on the grounds that, the marriage having collapsed, it is just and equitable that the company which was a creature of the marriage should be wound up.”
Malos v. Malos [2003] NSWSC 118; (2003) 44 ACSR 511 was a Supreme Court case in which there were two competing applications for relief by shareholders of a family company. The respective applicants were the only shareholders, being an uncle and his nephew. It is always a concern to read a judgment that starts: “This is an unusual case.”
The nephew alleged conduct in the affairs of the company that is contrary to the interests of the members as a whole, oppressive to him, unfairly prejudicial to him or unfairly discriminatory against him as a member. On that basis, he sought certain orders directed towards the convening of a meeting of members of the company and compulsion upon the uncle to attend in person or by proxy with a view to changing the composition of the board of directors. The uncle opposed the nephew’s application.
The uncle in turn then applied for winding up of the company on the just and equitable ground under section 46(1)(1)(k) of the Corporations Act. The nephew opposed the making of the winding up order.
The nephew held 5,002 shares in the company. The uncle held 3,002. The directors, if there were any validly in office, were the uncle and aunt.
The nephew was orphaned at 15 and lived with his grandmother until she died two years later. The uncle was originally his guardian and then attended to the nephew’s financial and other needs. At the time of hearing the nephew was aged 29.
The nephew said that he never knew much about the affairs of the company. He believed he inherited his 5,002 shares from his mother. For as long as he could remember, the uncle managed the affairs of the company.
In 2002 the nephew discovered in his tax return, prepared by the family accountant, a reference to his having received consulting fees from the company which he said he never received. His solicitors’ enquiries brought to light minutes and other documents which heightened the nephew’s concern.
Documents purporting to be minutes of general meetings of the company held in 1992, 1993, 1995, 1996, 1997, 1999 and 2000 show the nephew to have been present as a shareholder. The nephew said that he received no notice of these meetings, that he was not present and that he did not vote at any of the meetings. Other documents purported to be minutes of general meetings show as present the uncle and aunt. She was not at any time a member.
Business purportedly conducted at these meetings included the election of the uncle and aunt as directors, the declaration of dividends, the payment of directors’ fees and a buyback of shares. Probation of the purported meeting held in 2000, there was recorded a resolution to pay dividends of about $20,000 to the uncle and $35,000 to the nephew. The nephew said he received no such dividend.
It also appeared that there was a share buyback in the order of $80,000 from which it must be inferred, given that the nephew said he had no knowledge of it, that only the uncle participated.
After the nephew’s solicitor commenced making enquiries, the uncle offered to meet with the nephew, sit down with him and explain to him the affairs of the company. The offer was not accepted. The uncle said that the response was:
“An abrupt, ‘don’t speak to me, speak to my solicitor’.”
The nephew then sought to requisition the convening of a general meeting of the company. The uncle did not turn up and the apparent directors (uncle and aunt) took no steps in response to the requisition. Of course it was noted that even though a general meeting was supposed to have occurred, no quorum was present.
In his application seeking in effect that he be in charge of the company, the nephew put forward a letter from uncle to nephew in which this was said:
“In any event what this whole ugly business shows is that you and I cannot continue to operate the company together anymore. The sense of outrage I feel about you, and I suspect your de facto’s actions, has made me sick to my stomach. I want the company to end and in so doing end my association with you and your family. Your mother destroyed both my parents through her excesses and it looks like you and your actions are doing the same to my late father’s family company.
My suggestion to you is that we agree to dissolve the company, distribute the assets (a course I am sure your de facto will welcome) and go our separate ways. In the event that you reject this proposal the cost of continuing litigation will be substantial and the only persons who will stand to benefit will be the lawyers.”
Barrett J stated at [22] – [24]:
“There are cogent grounds for thinking that the uncle and his wife (who may well not be validly in office as directors, since their successive elections derive from general meetings which may never have occurred or were not quorate) have been party to actions entailing payment by the company to them of directors’ fees bearing no rational relationship to the services provided by them as directors; that dividends ostensibly paid to both shareholders did not reach one of them; and that the uncle alone obtained funds from the company through a share buy-back (the regulatory of which, according to its own terms, is suspect) without the other shareholder having had any knowledge that a buy-back offer was available or having had an opportunity to participate in relevant corporate decision making. The uncle has not attempted to put on any evidence about these matters or to show to be erroneous the indications I have just stated. The evidence also shows that there has been attempt (one would call a botched attempt) by the nephew to rest control of the board of directors from the uncle by means of legal procedures and without any attempt or willingness on the nephew’s part to discuss matters with the uncle. Furthermore, there exists between the two individuals a state of animosity which has caused the nephew to refuse to communicate with the uncle except through solicitors and the uncle to write to the nephew a letter…
The nephew, clearly enough does not trust the uncle. The events involving directors’ fees, dividends and share buy-back have caused him to lose confidence in the uncle. The uncle, for his part, has developed a sense of deep resentment towards the nephew who he regards as ungrateful, irresponsible and untrustworthy.
24. This company is within category (i) referred to in the judgment of Lord Wilberforce and Ebrahimi v. Westbourne Galleries Ltd [1973] AC360, that is, a company based on “an association formed or continued on the basis of a personal relationship, involving mutual confidence”. This is therefore a case in which equitable considerations of the kind to which his Lordship referred come into play, “considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way”.”
Barrett J went on to say at [25] to [28]:
“25 “The grandson of the founder has now taken the place of his deceased mother. He and his uncle are no longer able to “act as reasonable men with reasonable courtesy and reasonable conduct in every way towards one another”, to quote a formulation found in Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426. While the impasse at which they find themselves might, in an immediate and naked sense, be broken by assisting the nephew to exercise the undoubted majority of voting power he possesses, that will exacerbate the situation rupture and distrust rather than heal or improve it. It is clear from the events of October and afterwards that the nephew intends to exclude the uncle altogether.
26. It is the uncle who applies for winding-up. Normally, the Court would be unwilling to grant relief where the situation of breakdown has been created by the applicant’s misconduct. But I do not think that there is any inflexible rule to that effect. I refer, in that connection, to the following observation of Santow J in Ruut v. Head (1996) 20 ACSR 160 (a partnership case to which the principles now relevant applied):
“As a matter of logic, a lack of clean hands could not be an absolute bar, else otherwise for example, where both partners are equally at fault, neither could obtain a winding up order. Nonetheless it must be an important factor in the exercise of the Court’s discretion along with other factors, such as whether the partnership is truly deadlocked.”
27. In any event, I do not consider that the apparent misconduct on the uncle’s part has been the cause of the breakdown in this case. It is more deep-seated than that. The nephew feels that he has been wrongly excluded. But he is unwilling to communicate with his co-shareholder. The events of October 2002 represented his attempt, in turn, to exclude the uncle from decisions at director level. In a company such as this, that is no kind of foundation upon which to build a viable future.
28. It is sufficient clear that, quite apart from the particular conduct of the uncle, grounds for the making of a winding-up awed on the justice and equitable ground have been shown, this being a family company which is no more than an investment vehicle for two family members who have become entirely distrustful and estranged.”
Accordingly, a winding up order was made which would:
“Have the added advantage the liquidator can undertake a full investigation of the events surrounding their apparent payments by way of directors’ fees, dividends and share buy-back, armed with the particular weapons that the law places in the hands of liquidators for that purpose.”
As the uncle had not proffered to consent of any registered liquidator to act, the Court preferred to appoint a liquidator nominated or, at least, approved by the nephew assuming, of course, that there is no objective reason why that person is not an appropriate appointee.
Section 461 of the Corporations Act enables a company to be wound up on application of a shareholder, creditor (such as a spouse who may have a loan account) or the company. The bases for winding up include:
(a) The company is insolvent;
(b) The directors act in their own interests;
(c) Conduct is oppressive, unfairly prejudicial or discriminatory;
(d) Unjust on equitable grounds including:
(i) A breakdown of the mutual trust and confidence of the shareholders;
(ii) Deadlock or disagreement in the management of the company;
(iii) Fraud, misconduct or oppression in the conduct or management of the company’s affairs;
(iv) Failure of the substratum.
Beware that if an application for winding up is obtained, a party may be a related entity of the company under section 588FE(4) of the Corporations Act. Any transaction between the company and a party in the last 4 years of a relation back period is voidable.
There are no protective provisions in the Corporations Act specifically designed to quarantine these transactions pursuant to the terms of a binding financial agreement. A party must rely on the defence provision of section 588H of the Corporations Act and satisfy the Court:
(1) The transaction is not an unfair loan to the company;
(2) The party (and a reasonable person) had no reasonable grounds at the time for suspecting the company was insolvent; and
(3) The party provided valuable consideration or has acted to their detriment.
An example of a case involving those proceedings (which was also a good case as to non-disclosure is that of Weir and Weir (1993) FLC92-338.
As to which Court to go in for the winding up application, an example is Zhu v. TechUniversal (HK Macou) Development Pty Ltd[2005] FCA 256.
21. Oppressive or unfair conduct
An order under section 233 can be made:
(a) the conduct of a company’s affairs; or
(b) an actual proposed act or omission by or on behalf of the company; or
(c) a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d) contrary to the interests of the members as a whole; or
(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity: section 232 Corporations Act.
An example of such an oppression case is Turnbull and Turnbull (1991) FLC92-258 (allotment of shares to delete the value of shares held by minority shareholders).
22. Derivative suit
Pursuant to the common law and sections 236 to 242 of the Corporations Act, a shareholder may bring, or intervene in proceedings on behalf of a company.
Under section 236(1) of the Corporations Act a person may bring proceedings on behalf of a company if the person is:
· a member, former member or person entitled to be registered as a member of the company or of a related body corporate; or
· an officer or former officer of the company; and
· the person is acting with leave granted under section 237.
Under section 237(2) the Court must grant the application if it is satisfied that:
(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings –– there is a serious question to be tried; and
(e) either at least 14 days before making the application the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying or it is nevertheless appropriate to grant leave even though notice has not been given.
There is a rebuttable presumption against granting leave under section 237(3) concerning proceedings with third parties.
These proceedings are called a derivative action because the applicant relies on a cause of action belonging to the company rather than a personal cause of action.
The Court may make any order it considers appropriate regarding the costs of the application and the derivative action (section 242).
In Swansson v. Pratt [2002] NSWSC583, Mrs Swansson was a director and shareholder of the company. She was the former wife of Mr Highland who was the second defendant. Ms Swansson and Mr Highland were divorced in 1987. Mr Highland was a director of the company between 1992 and 1997.
Ms Swansson claimed that she didn’t know of the existence of the company until March or April 1999 and that she was the director and shareholder. She said that during the marriage she was in the habit of signing whatever documents Mr Highland asked her to sign without reading or understanding them. She caused her solicitor to carry out enquiries which showed that the company had a one-third interest in a property which was sold for $800,000 by a memorandum of transfer which she had signed. At least over $400,000 was paid on settlement to two companies in which Ms Swansson and Mr Highland were then directors and shareholders. She says that a signature to the transfer as a director of the company and on a direction to the purchaser of the company’s interests to pay part of the settlement monies to one of the other companies must have been procured by Mr Highland without telling her anything about what she was signing. She says that prior to early 1999 she did not know either company had received any monies from the company.
She claims that the payment was procured by Mr Highland while a director of the company for his own benefit or for the benefit of the other two companies in breach of his statutory duties as a director of the company and in breach of his fiduciary obligations under the general law. She claims that the husband is liable to compensate the company for breach of those duties.
Ms Swansson held a 25% interest in the company, her mother 50% and her brother 25%. Ms Swansson and her brother were the shareholders. Ms Swansson’s mother and brother made it clear that they do not wish the company to commence any proceedings against Mr Highland. Accordingly she sought an order under section 237(1) granting her leave to bring the proceedings against Mr Highland in the company’s name.
Ms Swansson’s brother says that the payment between the various companies was part of and pursuant to a complicated family arrangement which had been made in about 1991 or 1992 between Mr Highland and Ms Swansson while they were still married and Ms Swansson’s parents. This family arrangement was made known to Ms Swansson at the time that it was entered into.
Her brother said that in his capacity as a chartered accountant he was engaged by Ms Swansson to advise her in relation to a property settlement with Mr Highland. A section 87 deed was entered into between Mr Highland and Ms Swansson which was subsequently approved by the Family Court in 1996. Her brother said that he conducted a due diligence investigation into the financial affairs of Mr Highland and his companies in order to advise Ms Swansson as to the proposed property settlement. At the conclusion of that due diligence investigation, he explained in detail to Ms Swansson and her solicitor the transactions which had taken place pursuant to the family arrangement as well as the transactions whereby the funds from the sale of the company’s interest in the property were paid to the other two companies. He says that these payments were taken into account in working out the provisions of the section 87 deed.
A settlement sheet from 1996 shows that one of the companies sold its interest in that property to a third party for $250,000 and that on settlement a bank cheque for $140,000 was paid to Ms Swansson’s solicitor. Beside that item in the settlement sheet is a handwritten note “R[uth] H[ighland] settlement”. There was no evidence as to when and by whom that note was written.
Ms Swansson and her solicitor simply denied without elaboration that any explanation of the transactions were given to them by her brother. No party sought leave to cross-examine any of the deponents to the affidavit.
Palmer J said that in looking at the question of good faith there were two issues that needed to be satisfied:
“1. Whether the applicant honestly believes that a good cause of action exists and has a reasonable prospect of success. Clearly whether the applicant honestly holds such belief would not simply be a matter of bald assertion: the applicant may be disbelieved if no reasonable person in the circumstances could hold that belief.
2. Whether the applicant is seeking to bring the derivative suit for such a collateral purpose as would amount to an abuse of process.
The applicant may believe that the company has a good cause of action with a reasonable prospect of success but nevertheless may be intent on bringing the derivative action, not to prosecute it to a conclusion, but to use it as a means for obtaining some advantage for which the action is not designed or for some collateral advantage beyond what the law offers.
Where the application is made by a current shareholder of a company who has more than a token shareholding and the derivative action seeks recovery of property so that the value of the applicant’s shares would be increased, good faith will be relatively easy for the applicant to demonstrate to the Court’s satisfaction. So also where the applicant is a current director or officer: it will generally be easy to show that such an applicant has a legitimate interest in the welfare and the good management of the company itself, warranting action to recover property or to ensure that the majority of the shareholders or of the board do not act unlawfully to the detriment of the company as a whole.
However, where the applicant is a former shareholder or officer with nothing obvious to gain directly by the success of the derivative action, the Court will scrutinise with particular care the purpose for which the derivative action is said to be brought.
For example, a creditor may happen to be a former shareholder of the company and may seek, by the derivative action, to place the company in a financial position to repay the debt. There would be no abuse of process in commencing and maintaining the derivative action itself in that the action is commenced and maintained in order to achieve the purpose for which it is designed, namely, to recover property for the company. However, it may well be said that, in making an application for leave…the applicant is not acting in good faith because he or she is, in reality, seeking to vindicate his or her interest as a creditor and not whatever interest he or she may have as a former shareholder.
To take another example: a derivative action sought to be instituted by a current shareholder for the purpose of restoring value to his or her shares in the company would not be an abuse of process even if the applicant is spurred on by intense personal animosity, even malice, against the defendant: it is not the law that only a plaintiff who feels goodwill towards the defendant is entitled to sue…On the other hand, an action sought to be instituted by a former shareholder with a history of grievances against the current majority of shareholders or the current board may be easier to characterise as brought for the purpose of satisfying nothing more than the applicant’s private vendetta. An applicant with such a purpose would not be acting in good faith.
If a wrong appears to have been done to a company and those in control refuse to take proceedings to address it, the Court should permit a derivative action to be instituted only by those within the categories allowed by section 236(1) who would suffer and real and substantive injury if the action were not permitted. The injury must be necessarily dependent upon or connected with the applicant’s status as a current or former shareholder or director and the remedy afforded by the derivative action must be reasonably capable of redressing the injury.
Further, if an applicant for leave under section 237 seeks by the derivative action to receive a benefit which, in good conscience, he or she should not receive, then the application will not be made in good faith even though the company itself stands to benefit if the derivative action is successful. Such a benefit would include, for example, a double recovery by the applicant for a wrong suffered or recompense for a wrongful act inflicted upon the company in which the applicant was a direct and knowing participant with the proposed defendant in the derivative action. In such a case the law would not permit the applicant to derive a benefit from his or her own wrongdoing.”
Palmer J said:
“It is highly unsatisfactory for the Court to have to determine the issue of good faith on the basis of equivocal, incomplete documentary evidence and there be assertions and counter-assertions of witnesses whose credit has not been tested by cross-examination. No judge feels comfortable deciding a contest which depends ultimately on the credit of witnesses without seeing and hearing those witnesses in the witness box. However, that is how the parties in this case have chosen to leave the matter.
In the circumstances, I must decide the question on the basis that it is Ms Swansson who bears the onus of proving to the Court’s satisfaction, on the balance of probabilities, that she is acting in good faith. In order to arrive at the conclusion I must have regard primarily to the inherent probabilities which emerge from the rather scant available evidence.
Bearing in mind that Ms Swansson was independently advised by her solicitor as to a property settlement with Mr Highland in 1996, I find it inherently improbable that she would have appointed her brother as her own financial adviser to investigate Mr Highland’s financial affairs if she and her solicitors had any misgivings about her brother’s independence, integrity and capacity to conduct the investigation properly. It is clear that her brother knew all about the payments from the company to the companies and the antecedent family arrangements which had resulted in Mr Highland and Ms Swansson becoming the sole directors of the company. No reason has been advanced, supported by any evidence, as to why her brother would be motivated to conceal the payments made by the company to the other companies from Ms Swansson and her solicitor when advising them of the results of his investigations.
Further, it is clear that her solicitor was involved in some unexplained way and to some unexplained degree in the settlement of the sale of the other company’s interest in the property.”
The Court could not make a possible finding that Ms Swansson in fact received the benefit of the payments in her divorce settlement so that she was seeking a double recover in the proceedings against good conscience nor make a positive finding that she did not receive any such benefit and was not seeking a double recovery. The onus was upon her to demonstrate to the Court’s satisfaction that she was acting in good faith, had not discharged that onus and therefore dismissed the application.
Palmer J went on to say that:
“The character of the company ought to be taken into account. The requirement of section 237(2)(c) that the applicant satisfy the Court that the proposed action is in the best interests of the company is a far higher threshold for an applicant to cross. It requires the applicant to establish, on the balance of probabilities, a fact which can only be determined by taking into account all of the relevant circumstances. Accordingly, the inquiry will normally require the applicant to adduce evidence at least as to the following matters:
First, there should be evidence as to the charter of the company: differing considerations may well apply depending on whether the company is a small, private company whose few shareholders are the members of a family or whether it is a large public listed company. If the company is a closely held family company, it may be relevant to take into account the effects of the proposed litigation on the purpose for which the company was established and on the family members who are the shareholders. If the company is a public listed company, such considerations will be irrelevant. Again, the company may be a joint venture company in which the venture is at deadlock so that the proposed derivative action is seen as being for the purpose of vindicating one side’s position rather than the other’s in a way which will not achieve a useful result…
Second, there should be evidence of the business, if any, of the company so that the effects of the proposed litigation on its proper conduct may be appreciated.
Third, there should be evidence enabling the Court to form a conclusion whether the substance of the redress which the applicant seeks to achieve is available by a means which does not require the company to be brought into litigation against its will. So, for example, if the applicant can achieve the desired result in proceedings in his or her own name it is not in the best interests of the company to be involved in litigation at all…
Fourth, there should be evidence as to the ability of the defendant to meet at least a substantial part of any judgment in favour of the company in the proposed derivative action so that the Court may ascertain whether the action would be of any practical benefit to the company.
The company was not a trading company. It derived a very modest income from a share investment portfolio. If any substantial sum may be recovered from Mr Highland by the proposed derivative action, 75% of the benefit will go to shareholders who do not want it. It was noted by Mr Highland’s counsel that on the facts alleged by her Ms Swansson would be entitled to apply for the Family Court for an order under section 87 of the Family Law Act revoking the Court’s approval of the deed on the ground that approval had been obtained by fraud. If the deed were revoked, she could simultaneously seek an order under section 87(9)(b) of the Family Law Act as the Court considers just and equitable for the purpose of adjusting the rights between herself and Mr Highland.”
The Court noted that why it was that Ms Swansson had chosen not to pursue a remedy in the Family Court was not explained by the evidence.
23. Release from liability
Under section 1318 of the Corporations Act, officers of a corporation may be relieved from liability if in any civil proceedings against them for negligence, default, breach of trust or breach of duty or it appears to the Court that they acted honestly and ought fairly to be excused.
24. Statutory notices of demand/loan accounts
A party who is a creditor company, such as the beneficiary of a loan account, may issue a statutory notice pursuant to section 459E of the Corporations Act. The requirements of the demand are:
· It must specify the debt and its amount;
· It requires the company to pay the debt within 21 days of service;
· It must be in writing;
· It must be in the prescribed form;
· It must be signed by or on behalf of the credit.
The statutory notice of demand is a first step before the winding up of the company.
The company can apply to set aside the statutory notice or seek injunctive relief restraining the creditor from taking further steps to recover the loan because it will cause potential loss.
An example where the Family Court declined exercised jurisdiction to restrain the pursuit of the statutory demands was Yunghanns & Ors v. Yunghanns & Ors; Yunghanns (1999) FLC92-836.
25. Indoor Management Rule
The indoor management rule provides in effect that persons with a company and act in good faith may assume that acts within its constitution and powers have been properly and duly performed and don’t have to enquire whether acts of internal management have been regular.
Section 129 of the Corporations Act provides that a person having dealings with a company is entitled to make assumptions, namely that:
(a) At all relevant times, the company’s constitution has been complied with;
(b) A person who has held out the company, to be a director, secretary, officer or agent of the company has been duly appointed and has authority to exercise the powers and perform the duties;
(c) An officer or agent of the company who has authority to issue a document has authority to warrant that the document is genuine;
(d) A document has been duly sealed.
Under section 128(4) a person is not entitled to make an assumption if they have actual knowledge of, or the connection or relationship of the company is such that they ought to know, the true circumstances.
If a party who controls the company has misappropriated proceeds or applied the proceeds for the purposes unrelated to the corporation, the Court may scrutinise the transactions.
Of course a party who doesn’t control the company may need to use subpoenas or authority from the company or the other party to obtain loan applications, file notes and such like which may be used to show one of the exceptions under section 128(4).
26. Insolvent Trading
Of course there is both civil and criminal liability if a company has traded on an insolvent basis: section 588G Corporations Act.
27. Breaches of fiduciary duty
A director of course has a fiduciary duty to the company. As seen in Swansson and Pratt, the fiduciary duty may arise in equity or under the Corporations Act: see section 1318.
28. Injunctions
It may be necessary to obtain an injunction to preserve the property to the company: section 1324 Corporations Act.
29. Appointment of receivers
Sections 416 to 434C of the Corporations Act provide that a Court may appoint a provisional liquidator after the filing of a winding up application if the applicant can satisfy the Court that control of the company needs to be taken out of the hands of the directors and placed into the hands of a liquidator. A receiver and manager may be appointed to circumvent the failure of directors to account for income if there are ongoing Court proceedings.
In Ferrall and McTaggart v. Blyton (2000) FLC93-054, Orion J ordered the appointment of receivers as a consequential order. His Honour found that the Court had jurisdiction under sections 78, 80 or 106B of the Family Law Act.
In D Pty Ltd v. Sadler (2016) FLC9-736, receivers were appointed to three family trusts, on the application of the wife under section 79 of the Family Law Act. The three third parties appealed successfully. The receivers had proposed to trigger the redemption provisions within the various trust deeds in order for the wife as a unitholder to realise her interests within the unit trusts and convert these interests into their cash value.
30. Transfer of shares
As stated above, in Ascot Investments and Harper, it may be very difficult to ensure the transfer of shares by a company. Relief could be obtained under section 1071F of the Corporations Act or alternatively the order could be used to target the other party as director (if he is the sole director) so that in his or her capacity as director, the transfer is effected and all documents are executed under section 106A, failing which the registrar will sign on behalf of the director.
31. Finally
If you have a matter that is particularly messy concerning corporations, I would strongly urge you to have an expert on your client’s side who is familiar with Corporations law and can help guide your client through the maze to seek effective relief. That expert might be:
· A solicitor who practises in this area;
· A forensic accountant;
· Commercial counsel;
· Or a combination of all of the above.
Hopefully it is only a rare case where you have to invoke these rights, but when you are in that type of case you have to use every tool available to your client or you may find that by inertia and trickery your client will be unsuccessful – in which case who is he or she going to blame?
Stephen Page
[1] Stephen Page is a partner of Harrington Family Lawyers, Brisbane. Admitted in 1987, he has been an Accredited Family Law Specialist since 1996. Stephen is a Fellow of the International Academy of Family Lawyers and of the American Academy of Adoption and Assisted Reproduction Attorneys. He is an international representative on the American Bar Association ART Committee.
