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Important notice: You may use this material for your own personal reference only. The material may not be used, copied or redistributed in any form or by any means without a LAWLEX enterprise wide subscription. Corporate Law Bulletin Bulletin No. 91, March 2005 Editor: Professor Ian Ramsay, Director, Centre for Corporate Law and Securities Regulation Published by LAWLEX on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Stock Exchange and the leading law firms: Blake Dawson Waldron, Clayton Utz, Corrs Chambers Westgarth, Freehills, Mallesons Stephen Jaques, Phillips Fox. Use the arrows to
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Detailed Contents |
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1. Recent Corporate Law and Corporate Governance Developments 1.1
Insolvency law reform proposals – Government response to James Hardie
Commission of Inquiry
2.1 ASIC seeks
better disclosure for shareholders in related party transactions
3.1 Changes to
the ASX website
4. Recent Corporate Law Decisions
4.1 Directors ability
to claim legal costs under a provision in company's constitution |
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1. Recent Corporate
Law and Corporate Governance Developments |
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1.1 Insolvency law reform proposals – Government response to James Hardie Commission of Inquiry On 22 March 2005 the Parliamentary
Secretary to the Treasurer, the Hon Chris Pearce MP, announced that the
Government would address corporate law issues raised by the James Hardie
Special Commission of Inquiry in the context of developing an integrated set
of proposals to improve the operation of Mr Pearce said that the paper presented by the Commonwealth Government at the meeting on 22 March of the Ministerial Council on Corporations (MINCO) emphasised the significance and complexity of the issues identified in the inquiry.
The Government expects to release proposals for consultation with stakeholders by the end of 2005. Mr Pearce also announced that he would ask the Companies and Markets Advisory Committee (CAMAC) to examine the issue of directors’ duties and to consider whether or not the Corporations Act should be amended to require directors to take account of the interests of groups other than shareholders when making corporate decisions. CAMAC is a statutory advisory committee that was established to provide advice to the Australian Government on issues that arise from time to time in corporations and financial markets law and practice. It is the Government’s principal source of external advice on corporate law matters. These new developments follow on
from the following initiatives that have already taken by the Commonwealth
Government in relation to the James Hardie Commission of Inquiry:
1.2 Executive and board remuneration report 2005
On 18 March 2005, Ernst &
Young published the 2005 Remuneration Report. The report provides an analysis
of senior executive and NED remuneration practices of the major listed
companies in (a) Short-term incentives
The incidence of
STI payments was higher in larger companies across all positions analysed –
82% of companies with market capitalisations less than $550 million reported
STIs for any executive position, compared to nearly all positions in
companies with market capitalisations of greater than $6 billion. Nineteen percent (19%) of companies operated an STI plan with a deferral component in FY04. This is an increase from FY04 (12%). The incidence of STI deferral was highest in larger companies - 45% of companies with market capitalisations of greater than $6 billion. There was increased disclosure of STI performance measures in FY04, 78% of companies provided a high level description of the performance measures.
(b) Long-term incentives
Of those companies that operated an executive LTI plan, approximately 78% made grants to at least one executive during the year. Share option plans
remained the most prevalent type of executive LTI plan (73% of companies)
with performance rights plans the second most common (20% of companies) and
increasing in prevalence. Share option plans were the most common vehicle
from which grants were made to executives in FY04. Performance
measures used in executive LTI plans varied according to company size. Total
Shareholder Return (‘TSR’) was the most common measure in plans overall, but
particularly in larger companies. Smaller companies were more likely to use
share price as a measure in their executive LTI plan slightly less than
one-quarter of plans operated by companies with market capitalisations of
less than $550 million used share price as a performance measure. Slightly more than
one quarter of executive LTI plans did not incorporate a performance measure
for vesting purposes. Performance re-testing was observed in a minority of LTI plans overall (28%), but was most common for companies with a market capitalisation of greater than $6 billion (48%).
(c) Non-executive directors
As with executive
remuneration, the level of fees paid to NEDs increased with company size. The median fee
pool ($1.5 million) for companies with market capitalisations greater than $6
billion was more than three times the median pool for companies with market
capitalisations less than $550 million. A large number of companies requested an increase in the NED fee pool (34%) during FY04. Forty percent (40%) of all companies operate an equity plan for NEDs. This is a significant increase since FY03 (14%).
For all companies, the median number of NEDs on the board (including the non-executive chairman) was six.
There were very few companies (9%) providing retirement benefits to NEDs in FY04. This is a significant decrease since FY03 (65%).
(d) Reward for performance
Based on analysis of 50 companies in the ASX 200, statistically there was very little evidence of an alignment between accrued STI payments (that is, awards earned during the financial year) and performance outcomes (using EPS growth and ROIC) over the same time period.
It is stated in the report that due to this, companies and boards have an increasing responsibility to demonstrate the relationship between remuneration and company performance and should consider how they will explain this to shareholders. The level of shareholder interest in executive remuneration is likely to increase as shareholders become more informed as a result of increased disclosure. Shareholders may also become wary of ‘generalised’ corporate governance statements and seek further information and clarity through open consultation and the AGM forum. As a result, companies will need to be well prepared to respond to shareholders and articulate the business rationale for remuneration decisions.
It is also stated in the report that the implementation of new accounting rules under AASB 2 will increasingly result in companies using market purchased shares to satisfy equity grants, allowing a tax deduction and eliminating dilution (although there is a cash cost), given that newly issued shares and market purchased shares now have the same accounting expense.
1.3
On 17 March 2005 the New Zealand
Securities Commission released a practice note on historical information in
offer documents prepared in accordance with the
The practice note addresses
certain issues relating to summary historical financial information in offer
documents required under the Securities Act 1978 and the Securities Regulations
1983. These issues are expected to arise for an issuer the first time it
adopts
The practice note is available at: http://sec-com.govt.nz/publications/documents/practice-note-170305.shtml
1.4 Draft UK Company Law Reform Bill On 17 March 2005 the UK Trade and Industry Secretary Patricia Hewitt, released for public comment a draft Company Law Reform Bill. The proposals relating to small companies
include: For all companies the proposed reforms
include: Shareholder engagement will also be promoted
through enhancing the powers of proxies and making it easier for indirect
investors to be informed and exercise governance rights in the company. The Bill would also be used to implement the European Union Takeover Directive, placing the work of the UK Takeover Panel on a statutory footing. The consultation is open until 10 June and the aim is to introduce a Bill as soon as Parliamentary time allows. A separate consultation document, also issued on 17 March 2005, covers a further recommendation of the Company Law Review–the extension of the option to prepare and distribute summary financial statements to all companies. This consultation also includes proposals for allowing companies that prepare their accounts using international accounting standards to continue to take advantage of the summary financial arrangements. The draft bill and accompanying White Pager are available on the UK Department of Trade and Industry website at: http://dti.gov.uk/cld/review.htm
1.5 Termination payments for executives
On 17 March
2005 the Australian Council of Superannuation Investors (ACSI) called upon
company directors and regulators to re-think the current approach to
providing termination benefits for executives of publicly listed companies
and published a report by Proxy ACSI called
upon company directors and regulators to:
1.6 US Business Roundtable CEO survey on corporate governance and the costs of Sarbanes-Oxley implementation
On 16 March 2005, the US Business Roundtable, an association of CEOs of 160 leading US companies, released its third annual survey of corporate governance practices among its members.
The survey was completed by 106 of the Roundtable’s 160 member companies.
Following is additional information on the survey.
(a) Board independence
The survey results continue a
strong trend toward independence in corporate governance: (b) Executive session
Every company (100%) expects outside directors to meet in executive session in 2005, with 71% expecting executive sessions at every board meeting. In 2004, 68% of companies responding indicated that their independent directors met in executive session at every board meeting, a significant increase over the 55% that met in executive session at every board meeting in 2003.
(c) Director involvement
More than 92% report more director participation in the past two years.
(d) Committee meetings and involvement
Audit Committee: member involvement in the past two years. · 79% of companies have observed an increase in the number or length of their compensation committee meetings, or have otherwise seen more committee member involvement in the past two years. (e) Director education 65% of companies encourage all their directors to participate in an orientation/education program; 43% make the participation of new directors a requirement.
(f) Shareholder communication
90% of companies have established a procedure for shareholder communications (e.g. providing a phone number or a form on the company website) with directors, up from 87% last year.
(g) Director nomination procedures
Companies continue to improve the procedures for nominating directors: · 87% of nominating committees have established qualifications or criteria for directors, and another 3% are considering them;
Asked about the costs incurred
in connection with the Sarbanes-Oxley law and new NYSE/NASDAQ listing
requirements, responding companies gave these projections: 1.7 Review of administrative burdens on On 16 March 2005 the UK
Treasury published a report by Philip Hampton titled ‘Reducing administrative
burdens: effective inspection and enforcement'. The report considers how to
reduce administrative burdens on The report finds that
there is much good practice in The report proposes entrenching the principle of risk assessment throughout the regulatory system, so that the burden of enforcement falls most on highest-risk businesses and least on those with the best records of compliance. At present, not only are unnecessary inspections carried out, but necessary inspections are not carried out. Under the proposals in the report, inspection rates would be reduced where risks are low, but enhanced where necessary. The report estimates,
based on regulators' past experience, that comprehensive risk assessment in a
streamlined structure could: In addition, the report
recommends:
1.8 Report on shareholder voting processes On 14 March 2005, Paul
Myners published his progress report to the Shareholder Voting Working Group
on his review of the impediments to voting The original report, in
February 2004, outlined a program to remove impediments to the process by
which One year on, there is a high degree of confidence that the barrier has been broken. Every FTSE 100 company now allows electronic voting or is taking steps to do so. At the end of 2004, 88 of companies in the FTSE 100 facilitated CREST’s electronic voting service, compared with 47 in 2003, and the remaining 12 have indicated that they will be taking the necessary steps to do so in 2005. Myners expects this increase to cascade rapidly into the next tier of companies by market capitalisation. There has also been more use of electronic voting facilities by institutional investors over the year, although take up is still not universal and not all institutional votes are cast electronically. A new issue requiring attention is the increase in stocklending and the impact this has on voting practices. When shares are lent, the voting rights transfer from lender to borrower. Myners believes this is something to which participants need to be alerted in order to ensure that economic interest and voting activity are aligned rather than subverted. Beneficial owners have an important role in driving the standards in the voting process. The expansion of reports under FRAG21/94 on fund managers’ and custodians’ internal controls to cover the voting process and the communication of stock positions and stock lent, should make a significant difference in involving owners. The ICAEW’s steps to redraft FRA21/94 in this respect are welcomed in the report.
1.9 FSA calls for contributions to enforcement process review On 11 March 2005 the UK Financial Services Authority (FSA) invited interested parties to help shape views on its Enforcement Process Review. An issues paper published on 11 March outlines the legislation under which the FSA must operate, including the warning notice, decision notice and tribunal framework, and makes clear that the FSA is not contemplating any changes to primary legislation as a result of the Review. It does, however, note that within the constraints of the legislation there is considerable scope for flexibility in the process and the current model is not the only possible one. The paper sets out the objectives for the decision-making process, which were established through consultation before the FSA formally gained its powers in 2001. These are, broadly, that the process be fair and seen to be fair and be efficient and effective. The paper seeks views on whether these objectives remain valid. The recent 150% increase in the number of regulated firms highlights the importance of the FSA having decision-making processes that work effectively for small firms (which now comprise over 97% of total regulated firms) and individuals, as well as for large firms. The paper also considers the accountability of decision-makers to the FSA Board and asks what additional information could be published about the operation of its decision-making process which would enable commentators to make a better informed assessment as to whether the process is operating fairly and effectively. The paper is available on the FSA website.
1.10 Canadian securities regulators issue harmonized rules for continuous disclosure by investment funds On 11 March 2005 the Canadian Securities
Administrators (CSA) released a nationally harmonized set of continuous
disclosure (CD) requirements for investment funds. The instrument harmonizes
CD requirements for investment funds among Canadian jurisdictions and
replaces most existing local CD requirements. It sets out the obligations of
investment funds with respect to financial statements, management reports of
fund performance, delivery obligations, proxy voting disclosure, annual
information forms for investment funds that do not have a current prospectus,
material change reporting, information circulars, proxies and proxy
solicitation, and certain other CD-related matters. The instrument prescribes the
form which sets out the contents of the management reports of fund
performance. The CSA also published a companion policy to assist users in
understanding and applying the instrument and to provide views on the
interpretation of certain provisions. The CSA, the council of the
securities regulators of Further information about the new requirements is available on the Ontario Securities Commission website.
1.11 Government response to the PJC report on the CLERP 9 Bill
On 10 March 2005, the Australian government announced its response to the Parliamentary Joint Committee on Corporations and Financial Services (PJC) report on the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003.
1.12 The impact of Sarbanes-Oxley on private and non-profit companies
On 10 March 2005, Foley & Lardner published a study showing that the Sarbanes-Oxley Act continues to have a significant impact on private organizations as 87% of survey respondents felt that SOX or other corporate governance reform requirements have impacted their organizations compared to 77% in 2004.
The impact of corporate governance reform on non-profit organizations was even more apparent as 97% of non-profits responding to the survey felt that corporate governance reform had impacted their organizations compared to 80% of for-profit organizations. More than three-quarters (78%) of the private organizations surveyed have self-imposed corporate governance reforms, compared to 60% of respondents in 2004.
When the Sarbanes-Oxley Act was adopted, the Congressional record indicated that it was not intended to apply to any organization other than public companies. At that time, many claimed that regardless of the intent of Congress, these guidelines would eventually permeate all businesses under the guise of best practices. Although an unintended consequence, the responses reported in the study indicate this is in fact happening. Many of the aspects of corporate governance reform currently being adopted by private organisations include CEO/CFO financial statement certification, appointment of independent directors, adopting a corporate ethical code, establishing whistle blower procedures, and approval of non-audit services by the board.
However, it remains to be seen whether Section 404 audits of internal financial controls are adopted by these organizations as a best practice, as these audits are generally expensive and time-consuming to implement.
The private organizations responding to the survey generally believe in the principles guiding corporate governance regulation and in many areas are increasingly adopting corporate governance reforms as best practices. However, the smaller organizations responding to the survey (those with under US$300M in revenue or annual budget) are more likely to choose not to adopt the higher-cost elements of corporate governance reform.
1.13
Audit Quality Forum issues policy proposals
1.14 Superannuation choice regulations published On 1 March 2005, the Federal Assistant Treasurer, Mr Mal Brough MP, released the superannuation choice regulations, the standard choice form to be provided to employers and details of forthcoming amendments to the legislation. Among other things, the superannuation choice regulations, developed in consultation with industry and stakeholders, outline the minimum insurance requirements for default funds under choice. Retirement Savings Accounts (RSAs) have been exempted from the minimum insurance requirement. Most RSAs are opened by employers with a high turn over of casual staff and also tend to have low account balances, and hence are most likely to be eroded by insurance premiums. The Minister also released the standard choice form to be provided by employers to their eligible employees. Employers will receive copies of the form in a mailout from the Australian Taxation Office in April, along with a comprehensive information booklet to help them meet their choice obligations. A call centre and website will also provide assistance to employers. Legislative amendments will be introduced to clarify the operation of the choice legislation. It will also clarify how businesses that already provide choice to their employees will be exempted from having to select a default fund. The choice of fund legislation as it currently stands does not apply to employees covered by a state award. The Government will be introducing an amendment to the choice legislation to allow the Commonwealth to override state awards in respect of superannuation from 1 July 2006. (a) The
superannuation choice regulations: · It also includes the standard
choice form that employers will provide to their employees after 1 July. (c) The enhanced fee disclosure regulations: The Corporations Amendment Regulations 2005: The Superannuation
Holding Accounts Special Account (SHASA):
1.15 Australian High Court clarifies test for transmission of business and employee entitlements
(by Bella Stagoll, Romy Klein and
Graham Smith, Clayton Utz, Melbourne) On 9 March 2005 the
High Court handed down its decision in the much publicised Gribbles
Radiology Case, setting aside the order of the Full Court of the Federal
Court of Australia made on 28 March 2003. This decision will lead to greater
commercial certainty in business acquisitions, transfers, contracting and
outsourcing. The same day, the court also handed down an important decision on employees' rights to redundancy pay following a corporate restructure and a change of employer.
(a) Gribbles: the facts The facts in Gribbles (Clayton
Utz acted for Gribbles) were: (b) Decision of the High Court: No transmission of business
Under section 149(1)(d) of the Workplace Relations Act, an award binds not only a named
employer, but also a "successor, assignee or transmittee to or of the
business or part of the business of an employer". The High Court has
clarified that in order to be a "successor" to the business or part
of the business of a former employer (and therefore, to inherit the
awards/certified agreements of that employer), the new employer must carry on
some part of the "business" of the former employer. This will
require examination of whether what the new employer has taken over can be
described as a part of the former employer's business, and it will not
suffice to show that the new employer pursues the same kind of business
activity. In the present case, it could not be said that Gribbles was a successor to or of any part of the business of MDIG because, while it pursued the same business activity as MDIG in the same place, using the same equipment and the same employees, it did so without taking over any part of the tangible or intangible assets of MDIG's business. The clinic did not belong to either Gribbles or MDIG, the equipment belonged to Region Dell, and Gribbles occupied a part of the clinic premises under a new licence from Region Dell after MDIG's licence had come to an end. There was no transaction between MDIG and Gribbles. Therefore, Gribbles was not a successor to or of any part of MDIG's business and was not bound by the award that governed the employment of the relevant employees.
(c) What does this mean for employers?
The High Court's decision has clarified the test for establishing whether a transmission of business has occurred and narrowed the circumstances in which a business will inherit the awards and certified agreements of its predecessors. In order to establish that a party is the successor to the business of the other, it will be necessary to show that the combination of activities and assets that together constitute the former employer's "business" have continued in the hands of the successor, largely unaffected by what has happened. In most cases, this will require the existence of some commercial transaction between the parties.
(d) Amcor decision overturned
The High Court also handed down on 9 March 2005 a decision overturning the Full Federal Court in Amcor Limited v Construction, Forestry, Mining and Energy Union regarding the entitlement to redundancy pay following a corporate restructure that resulted in a change of employer.
The High Court has unanimously held that the relevant clause in the certified agreement did not provide an entitlement for employees to be paid redundancy pay in circumstances where the employees worked in the same jobs, under the same terms and conditions but, as a result of a corporate restructure, their employer changed.
(e) Background
Amcor conducted a packaging and a paper business. The paper business, consisting of four paper mills, was sold by Amcor to a wholly owned subsidiary, Paper Australia, however the employees working at the mills continued to be employed by Amcor. The terms and conditions of employment were set out in the Australian Paper/ Amcor Fibre Packaging Agreement 1997 ("the Agreement"). Amcor subsequently decided to separate the packaging and paper business, and to sell the paper business to a third party. As a result, the employees working for the paper business were transferred to Paper Australia. This involved Amcor terminating their employment and Paper Australia engaging them in the same positions, on the same terms and conditions and with recognition of prior service and accrued entitlements.
The CFMEU claimed that Amcor was in breach of clause 55.1.1 of the Agreement, arguing that the employees were entitled to redundancy pay under the terms of the Agreement. Clause 55.1.1 of the Agreement relevantly provided that "should a position become redundant and an employee subsequently be retrenched, the employee shall be entitled" to various entitlements, including redundancy pay.
Justice Finkelstein and subsequently a Full Court of the Federal Court of Australia upheld the CFMEU's claim, holding that the transfer of employees to Paper Australia did not affect the employees' right to a redundancy package under the Agreement. The High Court has now overturned this decision.
(f) No redundancy in circumstances where "position in business" unchanged
The key question for the High Court was whether the positions of the employees became redundant and the employees were retrenched under clause 55.1.1 of the Agreement. The CFMEU argued that redundancy of an employee's "position" meant their "position in the employment of Amcor", so that a change in the identity of the employer meant that the positions became redundant. Amcor argued that the correct interpretation of clause 55.1.1 is that it would apply where a position in the business became redundant, and that the identity of the employer of the person occupying the position was irrelevant.
In four separate
judgments, the High Court unanimously preferred the interpretation argued by
Amcor. That is, the High Court held that under clause
55.1.1 "position" refers to a position in the
business. There was no redundancy because the positions performed by the
employees did not cease to exist, but rather continued in exactly the same
way, with the only change being the legal entity of the employer. The crux of the High
Court's reasoning is that:
(g) What does this mean for employers?
The High Court's
decision should provide some comfort to employers in transmission of business
situations because it has clarified that an employer will not necessarily be liable
to make redundancy or severance payments in circumstances where a corporate
restructure or sale of a business results in a change of employer. However,
each situation will turn on its own facts, in particular the wording of the
relevant certified agreement and the terms and conditions of employment to be
offered to employees who will transfer to a new employing entity. The best
way for employers to minimise exposure to claims for redundancy pay is to:
1.16 UK Government consults on EU company law and corporate governance On 10 March 2005 a consultation document to promote competitiveness and enterprise was published by the UK Department of Trade and Industry. The EU proposals are all part of the European Commission's Company Law and Corporate Governance Action Plan. The Action Plan aims to
modernise the EU's corporate governance framework to help improve investor
confidence and encourage competition within the single market. The first two of these proposals have already been published by the Commission, the third proposal is expected be published shortly. A copy of the consultation document "Directive proposals on Company Reporting, Capital Maintenance and Transfer of the registered Office of a Company - a Consultative Document" is available at: http://www.dti.gov.uk/cld/current.htm The consultation closes on 3 June 2005. The European Commission
published its Action Plan on 21 May 2003, entitled "Modernising Company
Law and Enhancing Corporate Governance in the European Union - A Plan to Move
Forward". The proposal to amend
the 4th/ 7th Company Law Directive aims to enhance confidence in the
financial statements and annual reports published by European companies. To
meet this objective the Commission has proposed amendments covering three key
issues, namely to: The proposal is available at: http://europa.eu.int/eur-lex/lex/LexUriServ/site/en/com/2004/com2004_0725en01.pdf The proposal to amend
the 2nd Company Law Directive aims to simplify some of the rules governing
the capital maintenance regime. It proposes six changes to existing rules: The proposal is available at: http://europa.eu.int/comm/internal_market/company/docs/capital/2004-proposal/proposal_en.pdf A proposal for a new 14th
Company Law Directive that would establish a legal framework for European
companies to transfer their registered office from one Member State to
another has not been published yet. However, the Commission carried out an
open consultation outlining its proposed approach. The Commission's consultation document is available at: http://www.europa.eu.int/comm/internal_market/company/seat-transfer/2004-consult_en.htm#frame
1.17
GMI releases new global governance ratings The current ratings include for the first time the constituent companies of the US S&P SmallCap 600 Index. Gavin Anderson, GMI President and CEO, said that the “S&P 600 companies as a group have governance profiles that are weaker than their large cap brethren. Their average ratings are almost twenty percent lower than the S&P 500 companies, they have the largest number of “red flags” that we issue for governance concerns, and proportionally they represent a greater number of low scoring companies. Their inclusion in our coverage has resulted in a decline of the average score of all US companies from 7.23 last September to 7.03 . This is not to say that all small cap companies have poor governance characteristics we found exceptions to the rule nor that there are no problem areas at larger companies, where we also found problems, but it does seem to confirm the conventional wisdom that there is a market cap difference in governance characteristics at corporations”. This market cap difference is
borne out elsewhere. GMI looked at small cap companies in the United Kingdom and
Japan where it covers in excess of 350 companies in each and found similar
results. In the United Kingdom, the 50 lowest market cap companies had an
average score of 6.70 versus the average of 7.40, and in Japan a similar
number of companies had an average score of 3.10 versus the country average
of 3.50. The average market cap of these 100 companies was $644 million. Interestingly, in the United States, the Securities and Exchange Commission has just established a new advisory panel (the Committee on Smaller Public Companies) to study the impact of the Sarbanes-Oxley Act on smaller companies but it is not known what market cap cut off this panel has decided upon.
(a) Director independence and
professionalism
At the same time there are fewer
companies with combined chairman and CEO roles. In July 2003 47 percent of
the companies GMI covered had a combined chairman and CEO whereas today the
number is 39 percent. Also of interest is the degree to which boards are now
undertaking self evaluations. While not conclusive, it does provide an
indication of a more professional approach to the role of a board and may be
a measure of increased sense of responsibility on the part of directors.
During the two research periods covered from August 2004 to February 2005,
GMI rated a total of 2,538 global companies at least once in each cycle. For
each period, GMI looked at board performance evaluation on three different
levels: From a global perspective, GMI saw an aggregate increase in all three measures within its universe of rated companies. Among the larger markets covered
by GMI, the UK showed the most notable improvement. Across all three metrics,
UK companies respectively recorded period-to-period increases of between 15
and 80%. Australia was not far behind, with respective increases of between
10 and 32%. Though not as eye-catching, the US nonetheless registered modest
improvement of between 2 and 15%, and Canada 1 to 3% across all three
metrics. In the US, the lower rate of change is probably due in part to the
already phased in adoption of governance reforms by most companies. Most of the smaller markets covered by GMI exhibited nominal increases across all measures. Most European markets had little change from one period to the next. Canada, Australia and the U.S. have the strongest practices with regard to board evaluation. For the companies covered in the February 2005 research period, 98% of Canadian boards evaluated their own performance, 68% performed some sort of individual director evaluation, and 73% had at least one committee that undertook a self-evaluation. For Australia these numbers were respectively 92%, 78% and 48% and for the US, 91%, 27% and 9%. Most striking was that 497 companies undertook all three measures of evaluation.
(b) Red Flags – remuneration in the US and anti-takeover provisions in Europe
As part of its service, GMI
assigns red flags to companies where an important governance issue has been
identified. Red flags are issued for a number of matters but include such
things as: unequal voting rights; regulatory and criminal investigations;
large potential options dilution and significant related party transactions
involving amounts greater than one percent of revenues of the company.
Thirty-six percent of the GMI universe or 1,163 companies received red flags
in this ratings release with 202 receiving two or more. The GMI category that received the largest number of red flags was Remuneration; this was also the most frequent category for US companies. It accounted for 31 percent of US red flags versus only 6 percent in Europe and 5 percent in the Asia Pacific nations. The second most frequent category for red flags was GMI’s Market for Control section, which screens for ownership concerns and anti-takeover provisions. Here European companies were responsible for the vast majority of flags, accounting for 15 percent of the total versus 6 percent in the US and only one percent in Asia.
(c) Noteworthy country ratings In the two years that GMI has
been conducting global ratings the countries that repeatedly have had the
highest average scores have been the UK, US, Canada and Australia. These are
all known for strong legal systems with property right enforcement
mechanisms, high levels of disclosure and large and sophisticated
institutional investment communities. However, compared to GMI’s first global
ratings in July 2003 the country with the most significant change has been
The Netherlands, where the average company score rose from 4.20 in July 2003
to 6.45 . Last year the Dutch legislature provided a statutory basis for
the voluntary Tabaksblat Code which was first published in December 2003. From the 2004 financial year
onwards, Dutch listed companies have to include in their annual report a
section on their corporate governance and compliance with the Code and have
to explain any non-compliance. Key provisions of the Code are term limits for
management and board members; the requirement that they disclose conflicts of
interest; and the requirement that the supervisory board meet on an annual
basis without management to discuss strategy and review the performance of
the individual board members. Only one supervisory board member may be deemed
not independent and at least one member must be designated as a financial
expert. Shareholders have the responsibility for approving option and stock plans at the AGM and companies must disclose an overview of their remuneration policy. Departing management board members cannot receive more than one year’s salary in the event of dismissal and loans can no longer be granted to management board members. Additionally, companies are now required to develop a publicly disclosed “whistle blowing” policy and to disclose biographical details of supervisory board members. Finally, the outside auditor must be assessed every four years and this assessment must be communicated to the company’s shareholders.
1.18 IOSCO action plan to strengthen capital markets against financial fraud
On 1 March 2005, the Technical Committee of the International Organization of Securities Commissions (IOSCO) released its report on ‘Strengthening Capital Markets Against Financial Fraud’. The report is the result of an in-depth study of recent financial scandals involving large, global companies and represents a review of securities market regulation aimed at identifying possible weaknesses to the international financial system and how these weaknesses can be addressed.
The Report notes
that, in many cases, there already exist international standards and
principles designed to address the weaknesses identified in the Report.
However, absent thorough implementation and enforcement by all securities
regulators, these weaknesses will remain. Consequently, by emphasizing
implementation and enforcement cooperation, the Technical Committee believes it can
significantly enhance the effectiveness of the international infrastructure
supporting securities markets. The Report notes that the
Technical Committee is adopting three policies to help achieve these goals: Further details of the IOSCO Action Plan and this project can be found in the report located on the IOSCO website.
1.19 Shift in auditor fee income Large accountancy firms in the
UK are earning nearly half their fees from non-audit clients, according to
the UK Professional Oversight Board for Accountancy (POBA). The POBA's report, ‘Key Facts and Trends in the Accountancy Profession’, shows that the proportion of fees from non-audit services to audit clients fell from 35% in 2001-02 to 25% in 2003-04. However, the big four accountancy firms have increased the proportion of their income from non-audit clients from 38% in 2001-02 to 46% in 2003-04. The POBA took this as a
reflection of post-Enron legislation designed to restrict the number of
services audit firms can supply to a listed audit client. It noted that the
Auditing Practices Board has recently published ethical guidelines for
auditors, including guidance on non-audit services; and the Combined Code
contains new guidance on the role of audit committees in listed companies,
including in relation to the purchase of non-audit services from a company’s
auditors.
1.20 International regulators and related organisations announce the Public Interest Oversight Board for the international accountancy profession
On 28 February 2005 the International Organization of
Securities Commissions (IOSCO), the Basel Committee on Banking Supervision
(BCBS), the International Association of Insurance Supervisors (IAIS), the
World Bank and the Financial Stability Forum announced formal establishment
of the Public Interest Oversight Board (PIOB) to oversee the public interest
activities of the International Federation of Accountants (IFAC). The PIOB will oversee IFAC’s international standard
setting activities in the areas of audit performance standards, independence
and other ethical standards for auditors, audit quality control and assurance
standards, and education standards. It will also oversee IFAC’s Member Body Compliance
Program. The establishment of the PIOB is the result of a collaborative effort by the international financial regulatory community, working with IFAC, to ensure that the auditing standards set by IFAC and its committees are set in the public interest. Establishment of higher quality standards, coupled with strengthened auditor oversight nationally are part of the substantive reforms that regulators have identified as necessary to achieve a step-up in the quality of external audits of individual companies around the world. The PIOB will strengthen international auditing standards by injecting informed oversight in the public interest into IFAC’s standard-setting activities, and by enhancing the transparency and consultative processes of these activities.
1.21 Report on Australian businesses preparing to report under AIFRS Those businesses that fail to communicate effectively the impact of Australian equivalents of International Financial Reporting Standards (AIFRS) on their financial statements risk seeing their business performance misinterpreted and penalised by the markets according to the results of a recent KPMG commissioned survey dated 28 February 2005. In late 2004 KPMG commissioned a survey of financial analysts in Melbourne and Sydney to assess the readiness of the Australian capital markets for the introduction of reporting under AIFRS. The results released in the KPMG report, ‘Perceptions and Realities’ identifies a number of emerging challenges for listed companies as they prepare to report under AIFRS. As companies need to prepare financial reports which must comply with AIFRS for financial years commencing on or after 1 January 2005 it was important to determine the level of understanding the financial analyst community has around AIFRS, said Geoff Wilson, National Managing Partner of KPMG’s Audit and Risk Advisory Services. The significant message from the survey is that companies face a real risk that their financial performance as reported under AIFRS will be misunderstood or misinterpreted by the market. None of the surveyed analysts felt very confident about their ability to distinguish between changes in a company reported results due to changes in underlying business performance and those that directly relate to the adoption of AIFRS, confirmed Mr Wilson. The majority (62 percent) of surveyed analysts responded that they are likely to mark down a company shares if they do not understand why its results look different under AFIRS. Furthermore the survey results revealed that 40 percent of analysts believe that there are valuation issues with reporting under AIFRS and that the market has not yet factored in these issues to share prices. In addition, one third of the analysts surveyed responded they did not understand the impact of AIFRS on key areas such as, presentation of the income statement, share options, financial instruments, pensions and mergers and acquisitions. It is also important to note that two thirds of the surveyed analysts believe the prime responsibility for educating the markets about AIFRS lies with the companies they track. Yet most have so far received little or no information about AIFRS-related matters from these companies. At the moment analysts feel sceptical about the benefits of AIFRS and 43 percent feel there will be no benefit from the move to AIFRS, or simply don’t know. The findings also reported that more than half (56 percent) felt that current confusion and uncertainty was also one of the most significant disadvantages of moving to AIFRS. The KPMG report, ‘Perceptions and Realities’ is available on the KPMG website.
1.22 US Class Action Fairness Act of 2005
On 18 February 2005, US
President George Bush signed into law the Class Action Fairness Act of 2005.
The stated purposes of the Act are to ensure that cases of national
importance are heard in federal courts, to promote fair and fast resolution
of legitimate claims, and to lower consumer prices while encouraging
innovation in settlement. The Act is a response to the
perceived inequity of forcing businesses to litigate consumer and mass tort
class actions in state courts selected by plaintiffs for their reputedly
lenient class certification procedures and large verdicts. The Act, which applies to civil
actions commenced after its enactment, creates federal jurisdiction over
class actions with 100 or more class members seeking in the aggregate over
US$5 million where at least one member of the class is from a different state
(or country) than at least one defendant. Such class actions, if commenced in
state court, generally can now be removed by a defendant to federal district
court. Notably, however, many actions
involving corporate and securities questions are exempt from the Act’s broad
grant of federal jurisdiction. These include actions relating to the internal affairs or governance of a corporation or other entity and actions that concern rights, duties (including fiduciary duties) and obligations relating to or created by any security. In addition, the Act provides for federal jurisdiction to be declined in certain instances in which a substantial number of class members are citizens of the forum state.
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2.1 ASIC
seeks better disclosure for shareholders in related party transactions
The campaign targeted eight
areas of disclosure where the quality of information in related party
documents sent to shareholders continues to be defective. These areas of
disclosure include: As outlined in MR 04/257, ASIC
no longer permits companies to amend documents after it has identified
defects. Under the current campaign, identification of a common defect will
trigger a comment letter, issued by ASIC to the company, under section 220 of
the Corporations Act 2001. If a comment letter is issued, it
must be circulated to shareholders along with the related party documents.
During the three-month period
September 2004 to November 2004, ASIC reviewed a total of 223 notices of
meeting and accompanying documents, including re-lodged notices of meeting.
58 notices of meeting were found to have common defects. As a result: If ASIC considers that the documents do not provide adequate disclosure to shareholders, it can issue a comment letter that the company is required to distribute to shareholders, along with the related party documents. (d) Recurring common
defects identified in the course of the related party campaign In relation to each
proposed related party resolution, each director of the company must either: If, for some reason, a
director is not available to make either of these statements, they must also
state why this is the case. (ii) Inadequate valuation of the financial benefit A failure to adequately
value the financial benefit continues to be one of the most commonly
occurring defects in related party documents lodged with ASIC. This is the
case where the financial benefit is the issue of shares, options or
convertible notes, or where it involves the sale or purchase of an asset,
such as a mining tenement or an existing business. Where a company is purchasing an asset from, or selling an asset to, a related party it will be necessary to include a valuation. It may be necessary where a company is purchasing an asset from a related party in exchange for shares, to include both a valuation of the asset and a valuation of the shares. Where relevant, the valuation methodology should be consistent with that required to be adopted in the financial reports of the company. (iii) Inadequate details of the financial benefit being given including reasons for giving the type and quantity of the benefit Complete details of the financial benefit to be given to the related party must be provided to the shareholders. This includes not only details of what the benefit is (both as to nature and quantity), but also the reason for giving the benefit and the basis for giving the particular benefit. For example, if options are to
be granted to a director, ASIC expects the following information to be disclosed: The effect of this is that if, for example, a company proposes to give 1 million options to a director, it is necessary to state both the reason why the options are being given and why that amount and value of the options was chosen. (iv) Inadequate disclosure of a relevant director's total remuneration package Where the financial
benefit to be conferred on a related party is a benefit conferred by way of
remuneration or incentive, the amount of the total remuneration package must
be disclosed to the shareholders. For example, if options are to be granted
to a director, the company must provide a proper valuation of those options
as well as give shareholders details of other remuneration the director will
receive.
2.2 ASIC
seeks industry comment on market stabilisation Further information is available on the ASIC website.
2.3 ASIC'S position on off-market share buy-backs incorporating
fully franked dividends
There has been a
clear and public enunciation of the negative implications of off-market
buy-backs for 'retail' shareholders. An off-market buy-back at below
prevailing market prices is unattractive to a 'retail' shareholder on a
normal tax rate. This means that they generally do not participate, but see
lower tax-paying shareholders receiving very large distributions of franking
credits, as well as a capital loss against which other capital gains can be
offset. This is regarded by opponents of such buy-backs as inequitable and
discriminatory, particularly when there are other ways that excess share capital
can be returned.
The question whether
it is appropriate for a company to return excess share capital by way of an
off-market buy-back, as opposed to some other mechanism, is a matter for the
careful consideration of the directors.
The decision whether
or not to accept an off-market buy-back can be a complex one for a 'retail'
shareholder. It involves an understanding of capital gains (and losses) and
dividend imputation, as well as share price/value considerations.
Shareholders also typically have to participate in the Dutch auction tender
system to ensure that their shares are actually acquired. 'Retail'
shareholders are often at a disadvantage in this process. Further uncertainty
is created by the fact that the 'market value' of each share for tax purposes
cannot be finally determined until after the close of the buy-back period.
ASIC currently facilitates off-market buy-backs by granting the following relief:
(i) 'Dutch auction' tender
Allowing companies to invite shareholders to tender some or all of their shares using a 'Dutch auction' system. This enables companies to accept the lowest bids up to the number of shares sought to be bought back, rather than requiring them to make offers at a fixed price. The relief enables companies to treat these buy-backs as 'equal access' so long as each shareholder has the same opportunity to participate, even though there is no guarantee that all or even some of an individual shareholder's shares will be bought back.
(ii) Scale-back
Allowing companies to scale back the number of shares to be acquired where there are more shares tendered at the buy-back price than were sought to be bought back.
(iii) Priority allocation/priority tender
Allowing 'priority allocation' and 'priority tender' arrangements designed to reduce the chances of small holders being left with unmarketable parcels of shares and protecting them from excessive scale back.
2.4 ASIC
seeks comment on policy for better experts' reports
ASIC has released the PPP to:
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3.1 Changes to the ASX website
The entire ASX website is currently being redesigned. The purpose of the redesign initiative is to improve the site's usability for both investors and professionals. The outcome of this will be an improved web service to assist and increase trading activity. For more information please visit: http://www.asx.com.au/site_redesign.htm
(i) Amendments to specifications for ASX Wool Futures Contracts Amendments have been made to the specification for ASX Wool Futures in the ASX Market Rules to increase the vegetable matter (“VM”) tolerance for deliverable wool from 1.5% to 1.8%, subject to a discount to be applied where the VM exceeds 1%. (ii) ASX Market Rules exposure draft of proposed miscellaneous amendments As of 8 March 2005 the Exposure Draft contains draft miscellaneous amendments to the ASX Market Rules and a discussion of the proposed amendments. Submissions on the Exposure Draft are invited until 5 April 2005 as discussed further in the Exposure Draft. Further information is available on the ASX website.
3.3 ASX share ownership study – 2004 findings
Share ownership in Australia continues to evolve and broaden, according to the 2004 ASX Share Ownership Study released on 24 February 2005. The Study, the latest in an ASX series stretching back to 1991, showed that 55 percent of adult Australians (8 million people) now include shares as an asset class in their investment portfolio, up from 51 percent last year (7.4 million people). Carried out in November 2004 among a sample of 2,402 adult Australians randomly selected from across the country, the Study provided a detailed snapshot of the nation’s shareholding ranks, measuring their numbers, circumstances, behaviour and attitudes.
As part of the 2004
Study, ASX also commissioned qualitative research, conducted in September.
Respondents in the qualitative stage expressed the view that shares have
‘come good’ in the last 12 months or so. They understood that the market goes
in peaks and troughs, with property being seen to have had its day for now.
Many said that shares have taken over as the stronger performer. A strong
economy and good company profits were cited as factors behind the performance
of shares. According to ASX data,
retail investors accounted for around 55 percent of all trades on ASX for
2004, but only around 22 percent of the total value traded on ASX. According
to the Australian Bureau of Statistics, Australian households own around 22
percent of all Australian equities. Pension, or superannuation funds,
international investors and corporations own the remainder. For more information you can visit the ASX media room at: http://www.asx.com.au/about/Media_AA2.shtm
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4.1 Directors ability to claim legal costs under a provision in company's constitution
(By Michelle Burton, Phillips
Fox) Craddock v Sweeney [2005] QSC
37, Queensland Supreme Court , Douglas J, 2 March 2005 The full text of this judgment
is available at:
(a) Summary
A director of Bluegum International Marketing Pty Ltd ("BIM") lodged a proof of debt with the company's liquidator for legal costs incurred in performance of his duties as a director. A clause in the company's Constitution indemnified the company's directors, secretaries and executive officers against liabilities incurred by them by virtue of holding office and acting in their capacity as director, secretary or executive officer. The liquidator rejected the proof of debt. His Honour Justice Douglas upheld the liquidator's decision on the grounds that the costs incurred were not authorised by the company or the liquidator and therefore could not have been incurred by the applicant by virtue of his holding office in BIM and acting in his capacity as director or secretary.
(b) Facts
The
applicant, Christopher John Craddock ("Craddock"), was a director
of Bluegum International Marketing Pty Ltd ("BIM"), a company now
in liquidation. The respondent, Paul Desmond Sweeney, was appointed as its
liquidator. On 25 August 2004 Craddock lodged a proof of debt with the
liquidator for $133,698.33, said to be legal costs he had incurred for
The legal fees incurred by
Craddock in the period of 1 June 2004 to 4 August 2004 dealt with a variety
of matters, including the winding up of BIM, possible
oppression proceedings in respect of its operations, disputes with the other
director of BIM and an entity called SV Partners. The solicitors’ retainer
was said to be to act for Craddock in relation to the affairs of BIM and
another company, Robinson Craddock & Associates Pty Ltd ("Robinson
Craddock"), "which may include preparing and conducting Court
applications to wind up one or both of the aforementioned companies". Craddock
was also a director of BIM’s sole shareholder, Robinson Craddock. He was also
the sole shareholder of Stepha Investments Pty Ltd, a 50% shareholder of
Robinson Craddock. Craddock’s co-director of BIM and Robinson Craddock was Mr
Robinson. Mr Robinson and his wife held all the shares in the other 50%
shareholder of Robinson Craddock. There was a conflict between Craddock on
the one hand and Robinson and another director or purported director in
respect of the management of BIM. This led to a deadlock and the appointment
of a provisional liquidator on 7 July 2004. The liquidation was instigated by
a creditor and supported by the directors, other than Craddock, because of
the internal management deadlock of BIM and its alleged insolvency. The
proof of debt was rejected by the liquidator for the reason that Article 24
of the Constitution of the company when read in its entirety contemplates the
directors being indemnified in respect of actions being brought against them
by external parties as a result of their conduct or actions as directors. In
relation to the claim for costs brought by Craddock the liquidator found
that:
4.2 Foreign companies can sue and be sued in Australian courts regardless of registration as a foreign company
(By Peter Hulbert, Blake Dawson Waldron)
The full text of this judgment
is available at:
(a) Summary
In dismissing an application to set aside a writ of fi fa issued by a previously deregistered foreign company, French J has restated the principle that a foreign company can sue and be sued in Australia whether or not registered here as a foreign company. The power of the Federal Court of Australia to award costs under the Federal Court of Australia Act 1976 (Cth) is not affected by the deregistration of a foreign company in Australia. French J has suggested that the controls on the registration and re-registration of foreign companies may require some consideration.
(b) Facts
The name of Eastern Prosperity
Investments Pte Ltd (EPI) with ARBN 065 747 006, a company formed in
Singapore and registered in Australia as a foreign company, was removed from
the foreign companies register in February 2001 on the basis that it had
ceased to carry on business in Australia. Notwithstanding its deregistration,
EPI continued to exist in Singapore and did not lose its registration there.
A company with the same name and directors was subsequently registered in
Australia in August 2001 and was issued the new ARBN 097 952 193. An interlocutory costs order in the amount of $4,700 was made in favour of EPI in September 2002 in relation to the proceedings, the details of which are not relevant here. On 17 March 2003 EPI was wound up and a liquidator was appointed. The application against EPI was wholly dismissed on 25 March 2003 and an application for leave to appeal against that decision is still pending. After the application was dismissed EPI issued a writ of fi fa to recover the $4,700 in costs owed to it.
(i) One company, two ARBNs
The identity of EPI by reference
to the two ARBNs was in question and the following facts were considered by
French J in determining this issue:
(i) One company
French J found that, on the balance of probabilities, EPI is one company that was deregistered in February 2001 and registered afresh in August 2001, albeit with a new ARBN. This finding alone would have been enough to dismiss the motion to set aside the writ of fi fa to recover costs, on the basis that EPI continued to exist despite having been deregistered in February 2001.
(ii) Legal capacity regardless of registration
French J identified the
fundamental issue not as being whether EPI was one company with different
former and current ARBNs, but that a company may sue and be sued in
Australian courts (and recover incidental costs) regardless of registration
as a foreign company. French J pointed out that the existence of EPI as a legal entity derives from its incorporation under the laws of Singapore, not under its registration as a foreign company which conducts business in Australia. As a matter of comity its existence as a legal entity by reason of Singapore law entitles it to recognition as a legal entity in Australia.
French J referred to the authority of Lord Wrenbury in
Russian Commercial and Industrial Bank v Comptoir D'Escompte de Muhouse
[1925] AC 112 at 148-149:
4.3 Conduct before 15 July 2001: can it amount to an offence under the Corporations Act 2001? (By Sally Gibson and Mark McFarlane, Mallesons Stephen Jaques) Regina v Frawley [2005] NSWCCA 66, New South Wales Court of Criminal Appeal, Spigelman CJ, Mason P and Santow JA, 23 February 2005 The full text of this
judgment is available at: The NSW Court of Criminal Appeal in Frawley had cause to consider the validity of the transitional provisions in Chapter 10 of the Corporations Act 2001 (Cth) (“Current Legislation”). This case note is primarily focused on the reasoning of the Court in that decision. However, central to an understanding of the operation of the transitional provisions, and how conduct prior to 15 July 2001 (the commencement date of the Current Legislation) may amount to an offence under the Current Legislation, is a consideration of two further judgments that have dealt with these matters, namely the recent decisions of the Full Federal Court in Kennedy v ASIC [2005] FCAFC 32 (10 March 2005) (“Kennedy”) and the Queensland Court of Appeal in Regina v Corbett [2004] 1 Qd R 146 (“Corbett”). All three courts were called upon to determine whether sections 1400 (in Frawley and Kennedy) and 1401 (in Corbett) of the Current Legislation operate retrospectively to create an offence.
(b) Facts
In Frawley, the Commonwealth Director of Public Prosecutions had presented an indictment alleging that the Applicant committed insider-trading offences in violation of section 1002G(2) of the current Legislation on numerous occasions in 1998. The Applicant alleged in the alternative that:
The matter that was of primary significance to the Court’s decision - and it is a matter common to the fact situations arising in Frawley, Kennedy and Corbett - was that the conduct alleged to have amounted to a contravention of the Current Legislation was conduct that occurred prior to 15 July 2001. Essentially, the charges in the indictment presented by the Director were based on legislation that came into being subsequent to the conduct that was said to give rise to an offence: see paragraph 5 of Frawley.
(c) Decision (i) Moving to the Current Legislation In response to the High Court decisions of Re Wakim; Ex parte McNally (1999) 198 CLR 511 and R v Hughes (2000) 202 CLR 535, by agreement between the States and the Commonwealth, the legislative framework supporting the corporations law of each of the States was dismantled. Prior to the enactment of the Current Legislation, what was described in Kennedy as a “cooperative regime” was in place, whereby each State enacted legislation (being the Corporations (New South Wales) Act 1990 in New South Wales) which adopted the Corporations Act 1989 (Cth) as the law of the State (“Previous Legislation”). Following Re Wakim and R v Hughes, each of the States introduced legislation (being the Corporations (Commonwealth Powers) Act 2001 in New South Wales) to refer to the Federal Parliament, pursuant to section 51(xxxvii) of the Commonwealth Constitution, certain matters relating to corporations for the purpose of enabling the Federal Parliament to enact the Current Legislation. Chapter 10 of the Current Legislation was drafted with the aim of providing for a “smooth transition from the regime provided for in the [Previous Legislation] to the regime provided for in the [Current Legislation]” so that all persons are, to the greatest extent possible, put in the same position immediately after the commencement as they would have been if the Current Legislation was simply a continuation of the Previous Legislation: see section 1370 of the Current Legislation and paragraph 40 of Kennedy. This aim is to be kept in mind when resolving any ambiguity as to the meaning of the transitional provisions contained in Chapter 10 of the Current Legislation: section 1370(2). (ii) Relevant transitional provisions The interpretation of section 1400 of the Current Legislation was pivotal to the judgment of Spigelman CJ (with whom President Mason and Justice Santow concurred) in Frawley. Of particular importance was the meaning attributable to sub-section (2), which provided:
It is relevant to note that section 7(2) of the Corporations (Ancillary Provisions) Act 2001 (NSW) (there is equivalent legislation in each of the States) provides that, if by force of Chapter 10 of the Current Legislation a person acquires, accrues or incurs a right or liability in substitution for a pre-commencement right or liability, the pre-commencement right or liability is cancelled at the relevant time and ceases at that time to be a right or liability under a law of the State. (iii) Invalidity of section 1400 of the Current Legislation? The Applicant argued that on the commencement of the Current Legislation he did not incur a liability equivalent to his pre-commencement liability. It was agreed between the parties and accepted by the Court that a pre-commencement liability arose under sections 1002G and 1311 of the Previous Legislation and that there were relevant corresponding provisions (being sections 1002G and 1311) in the Current Legislation. However, the Applicant submitted that the “equivalence” requirement of section 1400(2) could not be fulfilled by virtue of the fact that the liability under the Current Legislation (being a liability arising under Commonwealth law) could not be classified as being equivalent to the liability that existed under the Previous Legislation (being a liability arising under a State law): see paragraph 11 of Frawley. This argument was rejected by Spigelman CJ in the following terms:
The second drafting issue raised by the Applicant was also based on section 1400(2) and focused on the words in parentheses, beginning with “as if”. The interpretation to be given to the phrase “as if” was also raised as an issue by Mr Kennedy in Kennedy. Arguments were advanced in both cases that the phrase was ambiguous and could, in summary, be interpreted in one of the two following ways:
While not explicitly recorded in Spigelman CJ’s judgment in Frawley, presumably the Applicant was seeking to show (as Mr Kennedy was in Kennedy) that criminal liability will not be created by retrospective legislation without words of clear intention and, in the case of the phrase “as if”, its ambiguity evidences the lack of requisite intent: paragraph 68 of Kennedy. Both the Court of
Criminal Appeal and the Full Federal Court found that section 1400 does not
operate retrospectively. For Spigelman CJ, the Applicant’s focus on “as if”
was plainly “misconceived”, with the phrase having the effect of qualifying
or explicating the words of the subsection designed to have the primary
operative effect, being the phrase “acquires, accrues or incurs”: paragraph
14 of Frawley. Support for Chief
Justice Spigelman’s reasoning can be found in the decision of the High Court
in Re Macks; Ex parte Saint (2000) 204 CLR 158, where the Court was called
upon to determine the validity of legislation, enacted to deal with the
invalidity of Federal Court judgments in light of Re Wakim, containing the
following formula:
The “formula” was
challenged on the basis that it purported to validate ineffective judgments
of the Federal Court: see paragraphs 18-21 of Frawley. The majority of the
Court (Kirby J in dissent) upheld the validity of the legislation on the
basis, in summary, that the legislation did not seek to alter, impair or
detract from the operation of any order made by the Federal Court but created
separate rights and liabilities using the order of the Federal Court only as
a point of historical reference: page 159 of Re Macks. The effect of section
1400(2) of the Current Legislation is to create criminal liability as and
from the commencement of the Current Legislation. The transitional provisions
create present liabilities by reference to a historical fact, being the
liability existing under the Previous Legislation: see paragraphs 22 of
Frawley and 71 of Kennedy. The same conclusion was
reached by the Full Federal Court in Kennedy. The judgment of the Court
included an example to emphasise that section 1400 does not operate
retrospectively. On 14 July 2001, Mr Kennedy was liable to be prosecuted for
a contravention of s1309 of the Previous Legislation. Section 1309 is a
carried over provision under the transitional provisions of the Current
Legislation. As such, on 15 July 2001, Mr Kennedy’s liability to be
prosecuted under section 1309 of the Previous Legislation was transformed by
section 1400 of the Current Legislation into a liability to be prosecuted
under section 1309 of the Current Legislation: see paragraph 69 of Kennedy. In Corbett, the Court considered the same issues in respect of section 1401 of the Current Legislation, which is, relevantly, in identical terms to section 1400, and found that the provision does not operate retrospectively or enable the Commonwealth to prosecute what is in effect a State offence: paragraphs 24-26 of Corbett. (iv) Impact of the decisions in Frawley, Kennedy and Corbett The following examples provided in the Explanatory Memorandum to the Corporations Bill 2001 as to substituted rights and liabilities under section 1400 are validated by the Frawley decision:
The reasoning in the three decisions appears to establish the validity of not only sections 1400 and 1401 of the Current Legislation, but the transitional provisions in Chapter 10 generally. In light of the decisions it would be difficult to argue the invalidity, for example, of sections 1383 and 1384, which deal with proceedings commenced, but not concluded, before the commencement of the Current Legislation in respect of proceedings other than federal corporations’ proceedings and federal corporations proceedings respectively. On 25 June 2003, the High Court refused special leave to appeal from the decision in Corbett, so the prospects of a successful leave application in either Frawley or Kennedy must be considered remote given the similarity of issues addressed in all three decisions. The reasoning and the ultimate conclusions reached by the NSW Court of Criminal Appeal, the Queensland Court of Appeal and the Full Federal Court exemplify the effectiveness of Chapter 10 in ensuring a truly “smooth transition” from the regime provided for in the Previous Legislation to the regime provided for in the Current Legislation.
4.4 Application alleging a voidable transaction under section 588FF of the Corporations Act
(By Joel Cox, Phillips Fox) Tolcher (as liquidator of Lloyd Scott Enterprises Pty Ltd (in Liq)) v Capital Finance Australia Ltd [2005] FCA 108, Federal Court of Australia, New South Wales, Tamberlin J, 18 February 2005 The full text of this judgment
is available at:
(a) Summary
The liquidator of Lloyd Scott Enterprises Pty Ltd ('the Company') sought interlocutory relief to support an application under section 588FF(1) of the Corporations Act 2001 ('the Act'). The liquidator alleged the first respondent ('Capital Finance') had received money by way of insolvent transactions from the Company and brought an application for repayment under section 588FF(1) of the Act on 22 June 2004. In the same application the liquidator also sought an order pursuant to section 588FF(3)(b) of the Act to extend the time within which any application in respect of any voidable transaction could be made. Capital Finance resisted an extension of time on the basis that the application under section 588FF(3)(b) could not be so general and required the transactions to which it related to be specified. The liquidator also sought to join the second respondent ('Capital Corporate') to these proceedings and to extend the time limit to make an application under section 588FF(3)(b) in relation to Capital Corporate. His Honour Justice Tamberlin found that section 588FF(3)(b) of the Act permitted an extension of time in these instances and that the joinder of Capital Corporate was appropriate. His Honour said that an application for an extension of time under section 588FF(3)(b) of the Act did not require relevant voidable transactions to be specified.
(b) Facts
(i) The relevant legislative provisions
Section 588FF(1) of the Act provides that where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE of the Act, the court may make an order directing payment of an amount paid under the voidable transaction. Section 588FE of the Act is concerned inter alia with insolvent transactions. Section 588FF(3) provides that an application may only be made under subsection (1):
The 'relation back day' is defined by the Act and is essentially the day on which a company is taken to be wound up.
(ii) Extension of time under section 588FF(3)(b) of the Act
The Company was a dealer in photo-copiers and related products in New South Wales. It entered into leasing transactions with its customers as an undisclosed agent for various financiers, including Capital Finance and Capital Corporate. The Company was put into liquidation and the liquidator formed the view that various preference payments made to Capital Finance under the lease agreements were insolvent transactions of the Company under section 588FC of the Act. On 22 June 2004, the liquidator filed an application seeking an order directing Capital Finance to pay to the Company an amount under section 588FF(1) of the Act and this application listed various transactions. A further order sought that the period prescribed by section 588FF(3)(b) of the Act, within which any application in respect of any voidable transaction could be made, be extended. Capital Finance resisted the application on the basis that the Court did not have power to, nor should it as a matter of discretion, grant an extension of time under section 588FF(3)(b) of the Act because the application for an extension of time was made in a general form in relation to a class of transactions and therefore lacked sufficient specificity required by the Act.
(iii) Joinder of Capital Corporation
Capital Finance alleged in its defence to the original accusations that certain relevant payments were made to Capital Corporate. Capital Corporate had been deregistered as from 18 January 2004, however, upon becoming aware of these payments, the solicitors for the liquidator indicated that they would be seeking reinstatement of this company under section 601AH of the Act and the consequent joinder of Capital Corporate to the proceedings. Capital Corporate was subsequently reinstated and the liquidator sought an order that it be joined to these proceedings. Capital Finance resisted this on the basis that at the date of the commencement of the proceedings, so far as concerns Capital Corporate, the joinder would fall outside the three year limitation period contemplated by section 588FF(3) of the Act and any joinder would therefore be futile.
(c) Decision
(i) Extension of time under section 588FF(3)(b) of the Act
His Honour Justice Tamberlin rejected the respondent's contention that an application for an extension of time under section 588FF(3)(b) of the Act needed to specify the transactions to which it related. He said:
His Honour referred to the judgment of Spigelman CJ (with whom Mason P and Handley JA agreed) in BP Australia Ltd v Brown (2003) 58 NSWLR 322, at 168, who said:
His Honour found that the weight of authority and legal reasoning, together with the literal meaning of the Act and practical commercial considerations supported his conclusions. His Honour referred to Greig & Duff v Australian Building Industries Pty Ltd (2004) 2 Qd R 17 (Greig & Duff), where the Queensland Court of Appeal reached a different conclusion. In that case, Jerrard JA said at 111:
However, Justice Tamberlin said that other courts had expressed the view that some circumstance could take the case out of the general rule expressed above. His Honour found that the present circumstances were such. (ii) Joinder of Capital Corporation
His Honour held that the effect of an order made pursuant to section 588FF(3) of the Act, which extends time, is that the proceeding may be commenced by making the application under section 588FF(1) of the Act. His Honour said that the provision is not directed to an amendment of an existing claim, but rather with the bringing of a new claim. Therefore Capital Corporation could be joined and the liquidator could make an application under section 588F(1) of the Act pursuant to the extension granted.
4.5 Court’s power to validate an invalid deed of company arrangement
(By Sabrina Ng and Martin Squires, Corrs Chambers Westgarth) Edward Gem Pty Ltd, in the matter of ACN 005 973 688 Pty Ltd (In liq) [2005] FCA 74, Federal Court of Australia, Merkel J, 16 February 2005 The full text of this judgment
is available at:
(a) Summary
The Court found that it had power under section 447A(1) to validate an invalid Deed of Company Arrangement which would take the company named ACN 005 973 688 Pty Ltd (“ACN”), out of voluntary liquidation.
(b) Facts
The creditors of ACN (in administration) resolved that ACN enter into a Deed of Company Arrangement. Pursuant to section 444B(2)(a) the Deed had to be executed by 3 February 2005 but was not executed until the next day. By the time the Deed was executed, ACN was in voluntary liquidation because of the operation of section 446A(2) and did not have the capacity nor the entitlement to execute the Deed. Edward Gem Pty Ltd, a creditor, applied for orders under section 447A that the time limit in section 444B(2)(a) be extended to 22 days, hence validating the Deed.
(c) Decision
Merkel J made the order sought, swayed by the fact that there was no evidence of any third party rights accruing by reason of the liquidation which would be adversely affected by the order. Merkel J considered whether ACN’s liquidation was an “insuperable discretionary obstacle” to making the order but decided it was not since the Act otherwise provides for companies to be placed into and taken out of liquidation.
4.6 Possible criminal sanctions relevant to civil penalties for insider trading
(By Darrel Chia, Mallesons Stephen Jaques) Australian Securities and Investments Commission v John Petsas and Marc Miot [2005] FCA 88, Federal Court of Australia, Finkelstein J, 15 February 2005 The full text of this judgment
is available at:
(a) Summary
This appears to be the first occasion where a judge has been required to impose a civil penalty on a person who has contravened the insider trading provision, section 1034A of the Corporations Act 2001. Finkelstein J stated that it went without saying that the profits from the trading should be disgorged. The issue was whether in imposing a civil penalty, a judge can take into account the fact that the offender would have been imprisoned on the same facts had the matter proceeded as a criminal trial. On the basis of this consideration, and the need for deterrence even in civil prosecution, Finkelstein J decided that “at least a moderate penalty” should be imposed in this case. This decision gives guidance on how this consideration can be applied in assessing the quantum of a civil penalty.
(b) Facts
BRL Hardy Ltd (BRL) is a public company listed on the ASX, with call options on its shares traded on the Derivatives Trading Facility operated by the ASX. In late November 2002, Constellation Brands Inc (Constellation), a US corporation and one of the world’s largest producers and suppliers of alcoholic beverages, entered into confidential discussions with BRL about a possible merger. BRL’s banker, Australia and New Zealand Banking Group Limited (ANZ) was retained to assess the impact of the merger on BRL. At the time, Mr Petsas worked as a client manager in ANZ’s Institutional Food Beverages and Agribusiness section which was involved in the assessment (although Mr Petsas was not personally involved in the matter). On 13 January 2003, Mr Petsas acquired information about the existence of confidential merger discussions between BHL and Constellation from the ANZ’s computer system. On obtaining this information, Mr Petsas communicated the information to his friend, Mr Miot and they agreed to purchase call options over BRL shares in Mr Miot’s name. Mr Miot acquired 95 BRL Hardy call option contracts on the same day. Both Mr Petsas and Mr Miot were aware at all material times that:
The next day, BRL announced it was in merger discussions with Constellation and the price of its shares eventually rose to $10.50, being the cash value attributed to the shares under the proposed merger and effected by a scheme of arrangement. Mr Miot started selling the options on that day, eventually making a total profit of $128,495.15. ASIC discovered these illegal purchases and the defendants admitted their wrongdoing. ASIC prosecuted the defendants for breach of section 1043A of the Act which under section 1311 attracts criminal liability of a penalty and/or imprisonment, as well as a civil penalty under section 1317G. ASIC elected to conduct the prosecution as a civil trial.
(c) Decision
In imposing a civil remedy when on the same facts in a criminal court the offender would have been imprisoned, should the judge attempt to achieve equivalence or disregard this consideration? Finkelstein J noted that the traditional distinction between criminal and civil proceedings has for some time been collapsing, for various reasons. He considered that serious inequality in sentencing must be avoided, citing Mason J in Lowe v The Queen (1984) 154 CLR 606, 610-611 for the proposal that:
Finkelstein J considered that putting aside the personal considerations that must be taken into account, the sentence that could be imposed in a criminal court in this case would be a minimum of 3-6 months imprisonment, together with an order for restitution. Although it is impossible to calculate the monetary value of a term of imprisonment, Finkelstein J regarded this as a relevant factor in deciding to impose “at least a moderate penalty” of $75,000 on Mr Petsas for contravention of section 1043A(1)(d) of the Act and $65,000 on Mr Miot for contravention of section 1043A(1)(c) of the Act. Mr Petsa’s offence was the more serious of the two because he had breached his position of trust with ANZ to keep market sensitive information secret and not to make personal use of this information. In addition, the defendants were jointly required to disgorge their total profits of $128,495.15 to compensate the companies that had sold option contracts to them and who had consequently suffered a corresponding loss. The defendants were also jointly required to pay ASIC’s costs fixed in the sum of $93,254.00. To assess the impact of a likely term of imprisonment were the proceedings held in a criminal court, Finkelstein J also took note of the following considerations:
4.7 Breach of directors’ duties in the context of a reduction of capital
(By Isabel Knott, Freehills) Doyle v Australian Securities and Investments Commission [2005] WASCA 17, Supreme Court of Western Australia, Wheeler, McClure and Jenkins JJ, 11 February 2005 The full text of this judgment
is available at: (a) Summary The case involved an appeal against a decision that the appellants had contravened directors’ duties provisions of the former Corporations Law 1990 (Cth) (Law). The impugned conduct related to the return of money paid for the issue of shares and securities in Chile Minera NL (the Company). The judge at first instance held that:
The appeal was heard by the Full Court of the Supreme Court of Western Australia. The Court dismissed Doyle’s appeal on liability but upheld his appeal against penalty. The Court upheld Satterthwaite’s appeal on liability. (b) Facts In October 1996, the Company issued shares and options to Doyle Capital Partners Pty Ltd (DCP) and its clients for a subscription price of $400,000 (the placement). Doyle was a director and shareholder of DCP. The placement money was paid to the Company on the basis that the shares would rank pari passu with existing shares. However, the placement breached ASX Listing Rule 7.1 and ASX subsequently informed the Company that the shares could not be voted at the Company’s forthcoming annual general meeting. On 21 November 1996, the day before the Company’s annual general meeting, Doyle wrote to the directors of the Company on behalf of DCP requesting the return of the placement money on the basis that the shares did not rank pari passu with existing shares in relation to voting rights. On the same day, Doyle attended a directors’ meeting as an alternate director. Satterthwaite was also present at the meeting. The directors resolved to cancel the allotment of shares and return the placement money to DCP (the first resolution). Later that day, Doyle and Satterthwaite signed a circular resolution concerning the payment (the Circular Resolution) and then Satterthwaite and another director arranged for a bank cheque of $400,000 payable to DCP. Doyle was appointed a temporary director of the Company on 22 November 1996 so that he could attend that day’s annual general meeting as a director. Following the annual general meeting, a further directors’ meeting took place at which a resolution to return the subscription money was passed (the third resolution). Doyle was then handed the cheque payable to DCP. The minutes did not record any mention of Doyle declaring a conflict of interest or of not voting on any resolution. On 17 December 1996, the Company received counsel’s opinion that the payment of $400,000 amounted to a reduction in share capital to which former section 195 of the Law applied. The requirements of section 195 had not been complied with. On 19 December 1996, the Company requested that DCP return the subscription money and three days later Doyle informed the Company that he would not return the placement money. It was accepted that Doyle was a director of the Company at all relevant times and that he had a material personal interest in the matter of whether the subscription money should be returned to DCP. (c) Decision (i) Was the payment to DCP an unlawful reduction of capital? The Court considered whether the payment of $400,000 to DCP constituted an unlawful reduction of capital or whether it could properly be characterised as the compromise of an arguable claim that the placement was void or voidable. The High Court in Commonwealth Homes & Investment Co Ltd v MacKellar (1939) 63 CLR 351 established that a company can reduce its share capital without recourse to section 195 of the Law if the contract and associated allotment is void, voidable and has been avoided or there is a bona fide compromise of a claim that the allotment or contract is void or has been lawfully avoided. The trial judge found that the claim was arguable but that, on the facts, there had not been a bona fide compromise. The Court stated that DCP’s purported avoidance of the placement and the Company’s purported cancellation of the allotment resulted in a reduction of capital. However, the Court was satisfied that the arrangement by which the placement money was held on trust by DCP pending the resolution of the surrounding legal issues was a compromise of an arguable claim that the placement was voidable. This was found to be the case even though the parties differed as to whether counsel’s opinion would be determinative of DCP’s legal entitlement to the return of the subscription money. The compromise was bona fide and, therefore, there was no unauthorised reduction of capital. (ii) Did Doyle breach section 232(6) of the Law? The requisite connection between improper use and gaining an advantage or causing a detriment is purposive rather than causal. Doyle’s presence at the board meetings on 21 and 22 November and his voting on the first, third and Circular Resolution amounted to improper conduct. The Court accepted that Doyle’s purpose in engaging in the improper conduct was to advantage the allottees, including DCP, by securing the return of the money when the question of the allottees’ legal entitlement to it remained in question. Doyle contended that, despite his presence, he did not vote at the relevant directors’ meetings. In reliance upon the contemporaneous documentary record, the Court concluded that Doyle did vote. Doyle’s execution of the Circular Resolution provided compelling support for this view. Further, had the directors been conscious of acting in accordance with Doyle’s constraints, the minutes would be expected to acknowledge that fact. The Court found in the alternative that even if Doyle did not vote, but was present at the relevant meetings, Doyle’s opportunity to put DCP’s case would constitute an improper use of position for a relevantly improper purpose.
(iii) Doyle’s appeal against liability was dismissed
The Court also dismissed Doyle’s appeal against the finding of the trial judge that his contravention was serious for the purposes of section 1317EA. The Court held that there was a reasonable basis for the finding of seriousness because Doyle was present and actively participated in the meetings and voted on resolutions in which he had a material personal interest and that he did so for the purpose of benefiting a third party. (iv) Whether Satterthwaite in breach The Court held that the evidence did not support the trial judge’s findings that the Company’s interest in the placement money was entirely unprotected and that Satterthwaite failed to take any measures to ensure the money could be recovered if necessary. The moneys were held in trust pending resolution of the relevant legal issues. The Court held that, there having been a bona fide compromise of DCP’s claim, it was not satisfied that a breach of duty could be established simply by virtue of the Company ceasing to have unilateral control over the placement money or failing to secure DCP’s agreement to repay the money if counsel advised that the capital reduction was unauthorised. Satterthwaite’s appeal against liability was upheld. (v) Appeal against the penalty imposed on Doyle The trial judge’s erroneous finding that there was an unauthorised reduction of capital coloured his approach to penalty and enlivened the Court’s supervisory jurisdiction. The Court concluded that there was a clear and obvious conflict of interest to Doyle’s knowledge and that his conduct amounted to a fundamental intentional breach of a basic and well-known standard of corporate behaviour. The Court was not satisfied that Doyle was a fit and proper person to manage a corporation. However, having regard to Doyle’s previous good character and reputation and the fact that there was no unauthorised reduction of capital, the Court concluded that a relatively short period of prohibition would be appropriate. The prohibition order of two years was set aside and replaced with an order for six months. The pecuniary penalty was not altered.
4.8 Service of statutory demand
(May Yeung, Blake Dawson Waldron) Derma Pharmaceuticals Pty Ltd v HSBC Bank Australia Ltd [2005] SASC 48, Supreme Court of South Australia (Full Court), Duggan, Besanko and White JJ, 10 February 2005 The full text of this judgment
is available at:
(a) Summary
It is an essential condition to exercising the right to set aside a statutory demand under section 459G of the Corporations Act that the application is made within 21 days after service of the statutory demand. The Court does not have jurisdiction to extend the time limit. In this case, receipt by the Appellant of the statutory demand did not occur simultaneously with service of the statutory demand. The statutory demand was taken to be held at the Appellant's registered office more than 21 days prior to the date of the application. The statutory demand was later sent to, and received by the Appellant, at the Appellant's business address (which was at a different location to the registered office). The Court found that the statutory demand was served in accordance with under section 109X(1)(a) of the Corporations Act at the point when it was held at the registered office. The Appellant applied to have the statutory demand set aside within 21 days of receiving it at its business address, but failed in its attempt because service of the statutory demand occurred at the registered office more than 21 days before the date of the application.
(b) Facts
HSBC Bank Australia Limited (Respondent) withdrew credit facilities it had provided to Derma Pharmaceuticals Pty Ltd (Appellant). The Respondent issued a statutory demand dated 9 October 2003 under section 459E of the Corporations Act. On 13 October 2003, the Respondent's solicitors mailed the statutory demand via express mail to the registered office of the Appellant, which was, at the time, care of an accounting firm in South Australia. The statutory demand was received at the relevant post office in South Australia on 14 October 2003. The accounting firm held a post box at the post office. The practice of the post office was to deposit the accounting firm's mail in that post box instead of delivering it to the firm's premises. On 14 October 2003, the post office received the statutory demand and placed it in the accounting firm's post box. The Appellant received the statutory demand at its business address (at another location in South Australia) on 24 October 2003. On 13 November 2003, the Appellant applied for an order under s459G of the Corporations Act to set aside the statutory demand. The Master dismissed the application on the grounds that the appellant failed to satisfy the requirement under s459G that the application be made within 21 days of the statutory demand being served. Drawing an inference, the Master found that service of the statutory demand occurred at some point between 14 October and 23 October 2003 – more than 21 days before the date of the application.
(c) Decision
The Supreme Court unanimously dismissed the appeal. Besanko J gave the leading judgment.
(i) Service of the statutory demand occurred more than 21 days before the application
Section 459G(2) provides that an application to set aside a statutory demand can only be made within 21 days after the demand is served. To succeed, the Appellant had to establish that service of the statutory demand occurred 21 days or less before it made its application to have it set aside on 13 November 2003 – ie that the statutory demand was served on or after 23 October 2003. The Court upheld the Master's decision that the statutory demand was served in accordance with section 109X(1)(a) of the Corporations Act between 14 and 23 October 2003 and therefore, found that the Appellant failed to satisfy the time limit. The Master determined the date of service by drawing an inference that, after the statutory demand was placed in the accounting firm's post box on 14 October 2003, an employee of the accounting firm, between 14 to 23 October 2003, cleared the post box, took the statutory demand to the accounting firm (that is, the Appellant's registered office) and then sent the statutory demand to the Appellant's business address. Section 109X(1)(a) of the Corporations Act provides that a document may be served by "leaving it at" or posting it to, the registered office of a company – in this case, the accounting firm. The statutory demand was not left at the accounting firm by the Respondent or its agent, however the Appellant did not argue this was a requirement of section 109X(1)(a). The Master decided that so long as the statutory demand was for a time, however briefly, held at the accounting firm, then at that point service on the Appellant within section 109X(1)(a) was effected.
(ii) Time limit cannot be extended
The Court rejected the Appellant's submission that despite the conclusion that the statutory demand was served prior to 23 October 2003, the application should nevertheless have been permitted in the circumstances (it was clearly proved that the Appellant did not receive the statutory demand until 24 October). Citing Gummow J in David Grant & Co Pty Ltd (Receiver Appointed) v Westpac Banking Corporation, the Court held that the 21 day time limit is an essential condition of the jurisdiction of the Court to make an order under section 459G and cannot be extended.
(iii) Obiter – deemed service by post
Besanko J also considered the Respondent's submission that under, section 29(1) of the Acts Interpretation Act 1901 (Cth) (which is taken to apply to the Corporations Act under section 5C(1) of the Act), the statutory demand was deemed to have been delivered in the ordinary course of post within two days (that is, on 15 October 2003). Section 29(1) of the Acts Interpretation Act provides that:
The Master found that "the contrary was proved" – the act of placing the statutory demand in the accounting firm's post office box instead of delivering it to the accounting firm's address excluded the deeming provision. Justice Besanko referred to cases which may have supported an opposite conclusion, but did not pursue the possibility as the cases were not cited by either counsel and the Court had already reached a decision to dismiss the appeal (for the reasons discussed above).
4.9 Clear wording of offer documents
(By Tania Chahine) Aevum Limited v National Exchange Pty Limited [2004] FCA 1781, Federal Court of Australia, Emmett J, 20 January 2005 The full text of this judgment
is available at:
(a) Summary
This was a case brought by Aevum Limited and the Australian Securities and Investments Commission ("ASIC") in two separate proceedings. ASIC commenced its action partly out of concern that Aevum did not have standing to claim the relief sought in its proceedings. The two proceedings were heard separately. However, on request, one judgment was given in respect of both proceedings. The plaintiffs claimed that the offers made by National Exchange Pty Limited ("NE") did not comply with certain provisions of Division 5A of the Corporations Act 2001 (Cth). The Court found that NE had not complied with section 1019E(2) as the offer documents were not sent to the offerees as soon as practicable after the date of the offers, and further, that section 1019G(2) had not been complied with, as the offers were not expressed to remain open for at least one month. However, the Court did not agree with the plaintiffs that NE had engaged in misleading and deceptive conduct. Accordingly, the Court ordered that NE send the members of Aevum a letter informing them of their rights under section 1019K(3) to refuse to transfer, or to seek the return of their shares.
(b) Facts
On 29 September 2004, Aevum published a prospectus offering 11.1 million new shares for subscription at 90 cents each. On 27 October 2004, Aevum wrote to its members to inform them that the offer under the prospectus was open. On or around 1 to 2 November 2004, the members of Aevum received a written offer by NE to buy the shares in Aevum held by the recipient ("the offer document") for 35 cents per share. The offer document contained an estimate by NE of the value of the shares as being within the range $0.90 to $1.29 per share. That estimate was followed by a statement that the estimate was given to satisfy a legal requirement and should not be considered to be a valuation. The offer document, although dated 22 October 2004, was not sent to members of Aevum until 28 October 2004. The plaintiffs alleged that:
(c) Decision
(i) Section 1019E(2)
NE submitted that the delay in sending the offer documents to Aevum's members was due to the fact that further revisions had been made to the documents, and there had been confusion with the printing company over the fees payable. The Court found that NE had taken a "somewhat leisurely attitude towards the despatch of the offer documents" to the members of Aevum. It found that had appropriate enquiries and arrangements been made before sending the documents to the printing company, the printing and despatch of the offer documents could have been effected within 24 hours of the final form of the documents being provided to the company. Accordingly, the Court held that NE breached section 1019E(2) and it followed that any members who had accepted the offer made by NE had the right under section 1019K to refuse to transfer the shares, or to have the shares returned to the member (as the case may be).
(ii) Section 1019G
The question before the Court was whether section 1019G(2) prohibits an offer containing a term that the offer will lapse after a specified period of time of less than one month or upon occurrence, within one month, of a particular condition, if not accepted before that time. Aevum contended that section 1019G(2) should be construed so as to require an offer to remain open for at least one month. The Court stated that although there was nothing in the section that expressly said that an offer must remain open for any minimum period of time, such as one month, it agreed with the plaintiffs that the underlying intention of the provision (in light of the other provisions of the Act) was that the offer remain open for at least one month to allow the offeree an adequate opportunity to consider the merits of the offer and to obtain advice in relation to it. Accordingly, the Court found that NE had not complied with section 1019G(2) so construed. However, Aevum's formulation of the claim was that NE contravened section 1019G(2) by representing that the offer would be withdrawn upon the earlier of the two times specified. The Court stated that the prohibition was not against making representations, and hence the remedy in section 1019G(4), which provides that a purported withdrawal contrary to section 1019G(2) would be ineffective, was not attracted. In relation to Aevum's claim that NE had contravened section 1019G(3), the Court found that the placing of a notice by NE in The Australian would not be a withdrawal, but was merely a method whereby NE will notify offerees that the offers have terminated, by lapse of time or occurrence of a condition. There was no representation in the offer document that the offer could be withdrawn in a particular way.
(iii) Section 1019I(4)
The plaintiffs argued that by breaching section 1019G(2), the wording of the offers was not clear, concise and effective, and hence NE breached section 1019I(4). However, the Court found that the offer document was explicit in its wording and the failure to comply with section 1019G(2) was that a remedy under section 1019K(3) was attracted only. There was no failure to comply with section 1019I(4).
(iv) Misleading and deceptive statements
In relation to the claim that the offers made by NE were misleading and deceptive, the Court found that on the evidence, it was fair to conclude that a substantial number of the shareholders who purported to accept the offers were confused and misapprehended the value of their shares. This was adduced from the fact that 22 acceptance forms were sent to Aevum instead of NE, suggesting that members may have perceived some connection between the two, and the fact that a majority of the members elected not to proceed with the sale after being given the opportunity of withdrawing by the Court. However, the Court stated that it did not follow that any such confusion or misapprehension was in any way connected with the form of the offer document sent by NE. The confusion was likely to have resulted from the fact that members received two communications around the same dates, the offer from NE, and a letter from Aevum, which amounted to two different invitations to dispose of their shares. Further, the Court held that in making unsolicited offers to specific shareholders of Aevum, NE could not be said to be engaging in conduct that was liable to mislead the public.
(v) Unconscionable conduct
While the Court acknowledged that a particular member of Aevum may be successful in a claim against NE for unconscionable conduct, that was not the claim that had been made in this case. It found that it was inappropriate to make a declaration or grant any other relief as to unconscionable conduct except at the suit of a specific person who seeks relief in relation to that conduct.
(vi) Standing of Aevum
Aevum contended that its interests had been, or would be, affected by NE's conduct in contravention of the Act, such that it had standing under section 1324 of the Act. The Court found that, in so far as the circulation of such offer documents affected the market for shares in Aevum generally, Aevum may have had standing to seek orders restraining that conduct. However, Aevum had sought to exercise a paternalistic interest on behalf of its members instead. Accordingly, it did not have standing pursuant to section 1324 of the Act.
4.10 Unclean hands not a barrier to a successful winding up application
(By John-Paul Cashen, Corrs Chambers Westgarth) Pham Thai Duc v PTS Australian Distributor Pty Ltd [2005] NSWSC 98, New South Wales Supreme Court, Barrett J, 24 February 2005 The full text of this judgment
is available at:
(a) Summary
The court found that the relationship between the directors, Mr Pham and Mr Tang had been irreparably damaged. The directors were not able to conduct board meetings or communicate with each other and as a result the company was not able to be administered appropriately. This was sufficient to constitute just and equitable grounds for winding up. The court considered arguments that Mr Pham should not be entitled to seek winding up on just and equitable grounds because he may have breached fiduciary duties owed to the company. However the court found that a failure to come to the court with clean hands was not a complete bar to a successful application. While the applicant’s responsibility for the circumstances which led to the winding up application are a relevant factor the court held that Mr Pham’s degree of fault was not sufficient to deny the application and had to be considered in light of the corresponding inappropriate behaviour of Mr Tang.
(b) Facts
After relocation to the new premises Mr Pham single-handedly entered into a franchise agreement with IGA. He and his associates undertook all expenses, and conducted the business for their own benefit. This business was later sold and the Pham interests did not recognise any rights of PTS.
(i) Alleged breach of fiduciary
duties
(ii) Orders sought
Counsel for Mr Tang conceded that the parties had fallen out and that the business was effectively unable to trade due to the inability to conduct board meetings, keep records of the company and generally consult on business matters. He also asserted, however, that the business needed to be kept alive in order to deal with pending matters. These matters related primarily to litigation that was already on foot between PTS, Mr Tang and Mr Pham in relation to the alleged breaches of fiduciary duties.
(c) Decision
(i) Carrying on of business by
one director cannot mask company’s problems
Barrett J found that PTS was not being properly administered. The fact that one director was carrying on the basic functions of the business could not protect a company from a finding it was not operating properly, particularly when the director’s actions were in some cases outside his authority. Barrett J noted that “it is a case in which records have been falsified and misrepresentation has been engaged in in an attempt to mask the paralysis by which the company is afflicted.”
(ii) Unclean hands not an
absolute bar to a successful application
Barrett J cited Santow J in Ruut v Head (1996) 20 ACSR 160 who stated that the requirement of clean hands cannot be an absolute bar to an applicant in a winding up application. In many instances both parties will come with unclean hands and this should not prevent the granting of the order. Nevertheless, Barrett J considered that the actions of the applicant should still be an important consideration for the Court when deciding whether or not to grant the order. Barrett J found that this case was an instance where both parties contributed to the breakdown upon which Mr Pham sought the winding up order. The test he chose to apply was whether the degree of fault on the part of the applicant for winding up (Mr Pham) was such as to make it inappropriate to accede to his application. In the circumstances, Barrett J found that Mr Pham’s fault, when considered in context with Mr Tang’s, was not enough to deter the court from making the winding up order.
(iii) Cost of liquidator not
relevant
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