Hickman v kent or romney marsh sheep breeders association

LAW00004 Company Law

SCHOOL OF LAW & JUSTICE

Session 2, 2018

TOPIC 4.2 Members’ rights & remedies

© John ORR. This material is subject to copyright. Not to be reproduced without written permission from the author

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Topic 4 Members’ rights and remedies AIM: At the end of this topic you

should be able to:

•  Identify a member of a company • Outline the procedural rules relating to membership • Differentiate between personal and derivative rights •  Explain members’ rights arising under contract,

general law and statute and apply remedies

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KEY POINTS

• General law — Fraud on the minority • Corporations Act (Standing, Grounds, Orders)

• Oppression; sections 232-234 • Statutory derivative action; sections 236-242

• Winding up; section 461 •  Injunction; section 1324 • Procedural irregularities; section 1322

Member of a company •  ‘Member’ usually refers to a shareholder •  But, ‘member’ and ‘shareholder’ not synonymous • Company limited by guarantee does not issue shares

but has members •  Company must have at least one member section

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Member of a company

• Company has power to issue shares section 124 •  ‘Shareholder’ means a member of the company •  Section 231 > ways in which person can become member: • A member on company’s registration; • After registration –person agrees and name

entered on register of members • Becomes a member under conversion provision

section167

‘person’ = natural and artificial

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Company membership

• All companies must keep a ‘register of members’ sections 168-169

• Register must be open for inspection (member and non member) section 173

• Application to court to have register corrected (company or ‘person aggrieved’ section 175

• Evidentiary value of registers to determine member status section 176

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Remedies available to members

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Context of members’ remedies

•  Important – lots of case law •  Tend to arise in concert with other aspects of

corporate administration eg directors’ duties and powers

•  Limitations •  Remedy for what purpose/to correct what harm?

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Protections/remedies arising in … Conflict of interests between: members and directors directors exercising power in ways that adversely affect members’ interests, eg • directors disregarding members’ right to participate

in meetings • dilution of voting power by issuing new voting shares members themselves eg minority group disagree with decision made at general meeting by majority vote

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Members legal rights and remedies

Figure 14.1 , Textbook 10th ed p 426. .

Personal v derivative rights

• Rights held personally by member eg right to vote, right to attend a members’ meeting • Rights held by the company (derivative rights)

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Source of remedies

Derivative

Statutory derivative

action – Part 2F.1A

Personal

Contract General law Statutory

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Source: Figure 14.2 Text 10th ed p 461

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Remedies available to members © John ORR

General Law Fraud on the minority Contract Corporations Act 2001 (Cth) •  Inspection of Books sections 247A-247D •  Class rights sections 246B-G •  Oppression sections 232-234 •  Statutory derivative action sections 236-242 •  Winding up section 461 •  Injunction section 1324 •  Procedural irregularities; section 1322

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General law: fraud on minority •  Section 1070A shares, and rights attached, are

personal property of member • Majority vote > decision-making body •  Exercise power for proper purpose Ngurli Ltd v McCann (1953) 90 CLR 425 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 Peters American Delicacy Company Ltd v Heath (1939) 61 CLR 457 Gambotto v WCP Ltd (1995) 182 CLR 432

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General law: fraud on minority Examples of ‘fraud on minority’ include: • Expropriation of company property Menier v Hooper’s Telegraph Works (1874) 9 Ch App 350

•  Improper ratification of directors’ breach of duty Ngurli Ltd v McCann (1953) 90 CLR 425

• Expropriation of members’ property : Gambotto v WCP Ltd (1995) 13 ACLC 342 (revise topic 3)

The test in Gambotto > expropriation of minority shares – a valuable proprietary right – only lawfully when it is:

(i) for a proper purpose and (ii) fair in all the circumstances

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Personal rights & remedies under contract law; Upholding the constitution section 140 •  Section 140 constitution = statutory contract

•  Enforceable - by member in capacity of member

•  Section 135(3) - breach does not constitute breach of Act

•  Remedy sought – court order forcing compliance

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Personal rights & remedies under contract law

CORPORATE CONSTITUTION 1.  Written document 2.  Replaceable rules 3.  Combination of 1 & 2

Section 136

Operates as a CONTRACT between: •  Company and member •  Company and director •  Company and company secretary •  Members amongst themselves

Section 140

Enforceable where breach affects: • Member as member • Director or company secretary (in that capacity) Hickman v Kent or Romney Marsh Sheep Breeders’ Association [1915] 1 Ch 881

May be supplemented by: •  Shareholders’ agreement •  Supplementary ‘special’ contract

Members’ statutory rights & remedies

• Part 2F.3 sections 247A-247D Inspection of Books • Part 2F.2 sections 246B-G Class rights • Part 2F.1 sections 232-234 Oppression • Section 461 Winding up • Section 1324 Injunction • Section 1322 Procedural irregularities • Part 2F.1A sections 236-242 Statutory derivative action

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Part 2F.3 sections 247A-247D Inspection of Books

• A member can apply to the court for an order authorising them to inspect the company books under section 247A

•  If section 247D (replaceable rule) applies, director (or

the general meeting through the passage of an ordinary resolution) may authorise a member to inspect the company’s books

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Inspection of Books Section 247A • Applicant must be acting in ‘good faith’ and the inspection must be for a ‘proper purpose’

• Does applicant have a bona fide interest in accessing the documents?

•  Inspection may be in connection with the bringing of a derivative action under section 237 section 247A(5)(b)

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Correction of the register and refusal to register

• A member has a right to have the register corrected; section 175; and

•  rights against the refusal to register a transfer of shares without just cause; section 1071F

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Part 2F.2 sections 246B-G Class rights

•  The variation of shareholder rights found in sections 246B-246F seek to protect the special proprietary rights attached to classes of shares from the unrestrained voting power of the majority.

• A member has a right to challenge the variation of shares section 246D

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Variation of shareholder rights

•  The removal of special rights given to classes of shareholders is subject to a special meeting of the class prior to any resolution at a GM.

•  If there are constitutional provisions relating to the variation of the class rights s.246B(1) must be followed.

•  If there is no constitutional provision for the variation of the class rights s.246B(2) must be followed.

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• STANDING – who? • GROUNDS – why? • ORDERS – what?

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Statutory OPPRESSION REMEDY: sections 232-234 STANDING Section 234 Who can apply for order GROUNDS Section 232 Grounds for Court order ORDERS Section 233 Orders the Court can make

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Statutory oppression remedy: sections 232-234

STANDING Section 234 Who can apply for order The definition of a member in section 231 is important here although past members can apply under limited circumstances and the ASIC has some discretion.

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Minority oppression sections 232-234

•  A member or former member section 234 may apply for remedy under section 233

GROUNDS where the company has: •  acted in the ‘conduct of the company’s business’ section 232(a) •  through an act (actual or proposed) or omission section 232(b) •  passed/proposed a resolution, of members or a class of

members section 232(c) that is:

•  contrary to members’ interests as a whole section 232(d) or •  oppressive to/unfairly prejudicial to/unfairly discriminatory

against a member/s section 232(e)

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GROUNDS Section 232 Company’s conduct or an actual or proposed act or omission or resolution is contrary to the interest of members as a whole OR oppressive to, unfairly prejudicial to or unfairly discriminatory against a member OR members, whether in their capacity as members or any other capacity a court may make an order under section 233; see section 232

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GROUNDS (Cont) Originally - legislation referred only to “oppression” = conduct which is ‘burdensome, harsh and wrongful’ Re Bright Pine Mills Pty Ltd [1979] VR 1022 and Re Tivoli Freeholds [1972] VR 445 Section 232(e) Grounds now wider - encompass acts that are

oppressive to, unfairly prejudicial,

unfairly discriminatory, or contrary to the interests of the members as a whole

all elements of same issue – commercial unfairness

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ORDERS Where breach of section 232 has been established, court has the power to make range of under section 233 to remedy oppression or prejudice to members Orders that may be made include: • company be wound up - but note section 233(2) •  restrain/require specific acts • constitution be amended - but note section 233(3) • company to purchase member’s shares • company partake in proceedings against another

party • appointment of receiver

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Conduct deemed to be oppressive under section 232

•  Inaction • Gains by controlling member or director •  Restricting members’ voting rights • Dividends – failure to pay or review policy • Uncommercial loans •  Exclusion from management •  Failure to provide information • Abuse of process

TB 444-445

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Further oppression cases

Vadori v AAV Plumbing (2010) 77 ACSR 616 Campbell v Backoffice Investments Pty Ltd [2009] HCA 25

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Statutory WINDING UP: sections 461 & 462 STANDING Section 462 Standing to apply for winding up GROUNDS Section 461 General grounds on which company may be wound up by Court ORDERS Section 461 General grounds on which company may be wound up by Court

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STANDING

Section 462(2) provides for those who may apply for the winding up of a company under an order of the court: a)  The company b)  A creditor c)  A contributory d)  The liquidator e)  ASIC (pursuant to section 464) f)  ASIC (subsection 2A) g)  APRA

• See also section 462(5)

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GROUNDS Nine general grounds section 461(1)(a)-(k). For example, (e) directors have acted in their own interests rather than in the interests of the members as a whole (f) affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial or unfairly discriminatory, contrary to interests of members as a whole (g) act/omission/resolution (or proposed) that is (or would be) oppressive or unfairly prejudicial or unfairly discriminatory, contrary to interests of members as a whole

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GROUNDS section 461(1)(k) just & equitable

• Court can not make an order to wind up the company on just and equitable grounds if some other remedy is available section 467(4)

•  Section 461(1)(k) imports a wide discretion on the courts

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Just and equitable winding-up order section 461(1)(k) •  Justifiable lack of confidence in management of

company’s affairs ASIC v AS Nominees Ltd (1995) 62 FCR 504

•  Breach of equitable considerations Ebrahimi v Westbourne Galleries Ltd [1973] AC 360

•  Fraudulent or oppressive conduct • Company unable to make/implement decisions due

to deadlock in management Re Yenidje Tobacco [1916] 2 Ch 426

•  Failure of substratum (company’s purpose) Re Tivoli Freeholds Ltd [1972] VR 445

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ORDERS

Section 461 •  ‘the court may order the winding up of a company’ • Doughty v Abboud [ 2010] NSWSC 721

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INJUNCTIONS section 1324

STANDING Section 1324 (1) & (2) On application • of ASIC • by a person whose interests have been, are or would be affected by the conduct

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GROUNDS Section 1324(1)

Conduct that constituted/constitutes/would constitute: a)  Contravention of CA b)  Attempt to contravene CA c)  Aiding, abetting, counselling, procuring

contravention of CA d)  Inducing/attempting to induce contravention of

CA e)  Directly/indirectly concerned with/party to

contravention of CA f)  Conspiring to contravene CA

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ORDERS

Court may grant an injunction. Section1324 generally provides for an injunction: •  restraining the contravention of the Act, or • compelling compliance with the Act; section

1324(1)&(2)

Court has power to order a variety of remedies including damages section 1324(10)

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PROCEDURAL IRREGULARITIES

Section 1322 Court has power to declare proceedings invalid if there has been or might be a substantial injustice and that cannot be remedied by any other orders Liwszyc v Smolarek [2005] WASC 199 Per Hasluck J 54-56 Biodiesel Producers Limited (ACN 099 165 876 099 165 876 ) v Stewart [2007] FCA 722 at 353

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Source of remedies

Derivative

Statutory derivative

action – Part 2F.1A

Personal

Contract General law Statutory

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STATUTORY DERIVATIVE ACTION (SDA)

Before 2000, rule in Foss v Harbottle (1843) 67 ER 189 •  Proper plaintiff rule •  Ratification of wrong by simple majority

Exemptions: •  Actions ultra vires •  Requirements of constitution not met •  Infringing personal rights of member •  Fraud on minority •  Interests of justice

Section 236(3) abolished this general law derivative action

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SDA - sections 236-242

STANDING Section 236 (1)standing (2) proceedings brought in company’s name Section 237 • Applying for and granting leave

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Subject to section 237(3), a court MUST grant leave if it is satisfied as to ALL the matters in section 237(2): Requirements for leave: (a) probable company will not itself bring proceedings (b) applicant is acting in good faith (c) in best interests of company that the applicant be granted leave (d) serious question to be tried (e) notice is given unless waived by the court.

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STATUTORY DERIVATIVE ACTION

Section 237(3) rebuttable presumption that granting leave not in the best interests of the company if: a)  Third party is involved, b)  the company does not to bring/defend

proceedings and c)  the decision of the directors conforms to the

business judgment rule section 180(2)

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STATUTORY DERIVATIVE ACTION ORDERS Court has wide powers under section 241 a)  Interim orders b)  Conduct directions eg mediation c)  Order directing action d)  Appoint independent investigator Note section 242 re orders as to costs. Vadori v AAV Plumbing [2010] NSWSC 274 Ward J Oates v Consolidated Capital Services Ltd [2009] NSWCA 183 per Campbell JA Power v Ekstein [2010] NSWSC 137 per Austin J at 95 and 105

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STATUTORY REMEDIES (SUMMARY) •  Investigating company records and investigation

by ASIC; •  Variation of shareholder rights •  Correction of the register and refusal to register •  Oppression: sections 232-234 •  Winding up by the court see section 461; note‘just

and equitable grounds; section 461(1)(k) •  Injunctions; see section 1324 •  Procedural irregularities; section 1322 •  Statutory Derivative Action; sections 236-242

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KEY POINTS

• General law — Fraud on the minority • Corporations Act (Standing, Grounds, Orders)

• Oppression; sections 232-234 • Statutory derivative action; sections 236-242

• Winding up; section 461 •  Injunction; section 1324 • Procedural irregularities; section 1322

Topic 4 Members’ rights and remedies AIM: At the end of this topic you

should be able to:

•  Identify a member of a company • Outline the procedural rules relating to membership • Differentiate between personal and derivative rights •  Explain members’ rights arising under contract,

general law and statute and apply remedies

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Next Week

Lecture — Topic 5.1 • Directors’ duties

Tutorial/Collaborate Attempt Activity 4.3.2