Corporate Law Examination

Answer

Corporate Law Examination

Question 1

1. Breach of Officer’s Duties

An officer of a company is defined under the s.9 of Corporations Act (the Act) as either a director or the secretary of the corporation. However, an officer is also broadly defined as a person who makes specific decisions, which have an effect on the whole or substantial part of the business. Additionally, an officer has the capacity and power to have a significant effect on the financial standing of the corporation. However, in the recent case of ASIC v King [2020], the High Court of Australian held that s. 9(b)(ii) does not make any requirement to the effect that a person must be named an officer of a corporation for them to be deemed to be an officer. In the present case, the following are the officers of Effective Solar Solutions (ESS) who breached their duties under the Act.

• Romanoff and O’Connor

Based on the definition in the Act, Romanoff is an officer because he is a director of the company whereas O’Connor is an officer due to his role as both the corporate counsel as well as the secretary of the corporation. Both officers breached the duty of care and negligence (s.180). Specifically, they hired a person who was not qualified (Sparkee Bell) as a technical advisor. The directors should have done due diligence to ascertain whether Harvard School of Electrical Science exists. The Court in Shafron v ASIC [2012] argued that the duties of the appellant as a general counsel could not overlap with those of his position of the company secretary and his conduct did not display care and diligence. Similarly, in a recent case of Cassimatis v ASIC [2020] the court held that officers of a company should discharge their duties with both care and diligence and prevent the company from being exposed to a reasonably foreseeable risk of harm. in the present case, Romanoff and O’Connor hired a person from a non-existent college/university and thus, exposed the company to a foreseeable harm.

• Hogan and Bell

Hogan is an officer of the company because he is a director and also exercises firm control of the company. Bell, on the other hand, is an officer because he made decisions that affected the whole of the company’s business. For instance, the decision on developing a formula predicting savings on electricity costs affected the entirely of the business. Both officers breached the duty to act for proper purpose which is owed by both directors and officers (s.181). They both developed a deficient formula for the calculation of predicted savings. Such a formula did not lead to the anticipated savings, which resulted in negative reviews for the company and even legal action by ASIC. As indicated in Re Idylic Solutions Pty Ltd [2012] and Bell Group Ltd (in liq) v Westpac Banking Corp (2008), an objective test of their actions indicate that a person with same knowledge and skills as these officers would not have acted in the manner in which they did.

1. Defenses For The Breach

• Business Judgement Rule

The business judgment rule would be applicable defense for the alleged breach of the duty of care and diligence. S.180(2) allows Romanoff and O’Connor to mount a defense by arguing that they made the judgment to hire Bell in good faith a for a proper purpose. Additionally, they can show that they did not have any material personal interest in the matter of the judgement and that they reasonably believed that the judgement they made to hire Bell was in the best interests of their company (ESS). Specifically, Romanoff and O’Connor can allege that they did not abdicate their duty of care and diligence because the judgment call they made to hire Bell without ascertaining whether the institution he claimed to study from existed was in good faith and they honestly wanted the company to get the best mind for the position of the Senior Technical Consultant. However, based on the judgement in ASIC v Rich [2009], the onus of proving that the decision was made in good faith and for the interests of the company is on the defendant. As such, in the present case, Romanoff and O’Connor would have the onus of proving the requirements of the business judgment tile as set out in s.180(2). Similarly, in ASIC v Fortescue Metals Group Ltd (FMG) [2012], the Court decided that the directors of a company who rely on the business judgment rule should demonstrate that each component of the rule as set out in the Act is satisfied.

• Reliance on Others

The defense that Hogan can have on the alleged breach of duty to act for proper purpose is that he relied on the expert advice of Bell and other experts. Notably, the director will not be responsible for the breach of such a duty is he proves that he relied on advice given by a person who was both reliable and competent. However, some of the factors that must be proved for this defense to hold include that he believed on reasonable grounds and in good faith and after making enquiries about the circumstances that the advice given was both reliable and competent. This defense can also be relied upon by Romanoff and O’Connor who can argue that in employing Bell, they relied on the reliable and competent advice of the human resource department the company. In ASIC v. Macdonald [2009], the Court held that directors can rely on advice of experts and the non-executive directors as long as they were not aware of the circumstances such as a character that is so manifest such that a prudence person would not have relied on such an advice. Similarly, in Daniels v Anderson [1995], the Court held that if a director proves that he reasonably relied on the advice of a competent and reliable non-executive director, then he will not be held personally liable for the breach of the duty of care and diligence as well as acting for proper purpose.

Question 2

Ball can rely on the following remedies from the Corporations Act:-

• Derivative action

Under s.236,  a shareholder or an officer of the company is allowed to apply to the court for permission to institute proceedings on behalf of the company, especially if the company is unbale or unwilling to do so. In this case, Ball can bring an action on behalf of the company (WSM) against his fellow shareholder Mountainsson. However, in s.237, the court must be satisfied that WSM will not probably bring the action itself or even take proper responsibility for the proceedings. Additionally, Ball must act in good faith and in the best interests of the company. In the present case, WSM has only two directors and thus, the company will not bring the proceeding, which make Ball fulfill these requirements. For instance, in Charlton v Baber [2003], one of the directors brought an action on behalf of the company and the Court granted the application because it was satisfied that he had met all the elements required in s.237. However, the claim must not also be frivolous and the applicant must furnish the court with enough material to demonstrate that there is a serious question to be tried. In the current case, Ball can demonstrate the serious question of Mountainsson passing a director’s resolution and apportioning himself shares at a very low cost.

• Injunction

A statutory injunction would be a remedy that Ball can explore to stop that actions of his fellow shareholder. Under s.1324, a statutory injunction can be granted by the court to stop a person from engaging in a particular action that breaches the Act. Ball can apply for a court order to stop Mountainsson from tarnishing the name of WSM which is a breach of a fiduciary duty. Notably, in Mesenberg v Cord Industrial Recruiters [1996], it was held that; in a company with two shareholders, the nature of the relationship between them demands that one member has a fiduciary duty to the other and to the company. As such, a breach of this duty justifies the application for an injunction to stop the breach. Similarly, in McCracken v Phoenix Constructions [2012], the Court granted an injunction on the basis that one of the officers had breached his duties as a director. In the current case, WSM has only two directors who owe a fiduciary duty to one another. However, the actions of Mountainsson of apportioning himself shares is breach of fiduciary duty and an injunction can be a possible remedy for Ball.

• Oppressive and Unfair Conduct

Company shareholders are allowed under s.233 to seek a wide range of remedies if they are convinced that the affairs of the company are being conducted contrary to the interests of the members or they consider the conduct to be both oppressive and unjustly discriminatory. As such, Ball can apply to the court to declare Mountainsson’s actions unfair and oppressive and seek to be granted appropriate remedies. This remedy would particularly be applicable in the WSM company because it has only two shareholders and one has acted arbitrarily without the consent of the other. Ball should seek to petition the court to declare that the resolution passed by Mountainsson issuing himself shares is contrary to the interests of the members of the company and unfairly prejudicial as provided for under s.232. As was held in Wayde v NSW Rugby League Ltd [1985], the test of unfairness is objectively determined and there is no requirement to prove that the conduct in question was dishonest and was meant to intentionally oppress the member. Moreover, in Campbell v Backoffice Investments Pty Ltd [2008], conduct deemed to be contrary to the interests of the members as a whole was found to be oppressive. In the present case, the conduct of Mountainsson suits his interests as opposed to those of the company as a whole.

• Winding Up

Winding up is the remedy of last resort that may be sought when all other alternative remedies cannot address the issue that a member is facing. S.461 provides that one of the grounds that the court may order for the winding up of the company is when it finds that the act and omission in question is contrary to the interests of the members as a whole. As such, Ball can petition the court for winding up claiming that what Mountainsson did is contrary to the interests of the members and winding up would be the only solution that would remedy such an act.  In Posgate & Anor v Hanson & Anor [2018], the Court held that although a breakdown in relationship between two equal shareholders was enough to justify the winding up of a profitable company, the shareholders must first consider the other options available to them and ensure that they adopt an alternative to winding up. However, the court would nevertheless wind up WSM is if considers it just and equitable to do [s.461(1)(k)]. Nevertheless, Ball should have to convince the court that winding up would be just and equitable in the circumstances.

• Grounds For Challenging The Issue of Shares

The issuing of shares refers to the creation of new shares. The shares are then granted to the proposed shareholders. Notably, once the transaction for the issuing of shares is complete, a share certificate is then issued. However, the resolution passed by Mountainsson alone on the issuing of 10,000 shares can be challenged my Ball. For a private company to issue preference shares, a special resolution has to be passed by the members based on the terms as described in the constitution of the company and pursuant to the provision of 254A(3). The forms that have to be lodged include notification of the resolutions. Ball can claim that such a special resolution was irregular because it was not pursuant to the constitution of the company. In Weinstock v Beck [2013], the Court held that the shares should be issued by a special resolution and all the requirements of the Act have to be fulfilled. Ball can thus, claim that resolution was irregular because the Act and the company’s constitution was not followed.