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Corporate Law Bulletin Bulletin No. 76, December 2003 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
4. Recent Corporate Law Decisions
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1. Recent Corporate Law and Corporate Governance Developments |
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1.1 Draft Code of Conduct for soft dollar payments On The Draft Code incorporates three key proposals: · Banning of practices
such as gifts and conferences that are linked to product sales; The Code is in response to changing community expectations and is the latest initiative implemented by the financial services industry to improve operating practices and transparency on remuneration. The Code will form a key part of the FPA’s Professional Code of Conduct and will become an IFSA Standard. Throughout the year both groups have implemented a number of joint initiatives such as improvements to the Product Disclosure Statement, Financial Services Guide and Statement of Advice. The draft Code of Conduct is now being circulated for comment throughout the industry and the two organisations hope to finalise it by the end of February, for operation shortly thereafter. For further information please contact: Richard Gilbert, CEO
of IFSA on 0417 247 998 For copies of the Briefing paper “IFSA/ FPA Code of Practice – Disclosure of Alternative Forms of Remuneration” please see the IFSA or FPA websites.
1.2 CLERP (Audit Reform and Corporate Disclosure) Bill introduced into Parliament On Significant measures contained in the Bill include: (a) Continuous Disclosure · ASIC will have the power to
issue infringement notices to disclosing entities where ASIC has reason to
believe that have been breaches of the continuous disclosure provisions in
the Corporations Act. The notices will contain financial
penalties based upon a company’s market capitalisation, up to a maximum of
$100,000. The power will enable the corporate regulator with the ability to
deal with less serious contraventions of disclosure laws in a more timely
manner. (b) Executive Remuneration · Directors’ and senior
executives’ remuneration is to be clearly disclosed in a remuneration report,
contained in the directors’ report. (c) Audit Oversight and · The Bill establishes a
regulatory framework governing audit oversight and independence. It provides
for the Financial Reporting Council (FRC) to have oversight over a
reconstituted Australian Auditing Standards Board, with a
Government-appointed Chair. The FRC will also have an oversight role to advise
the Treasurer in relation to auditor compliance with independence
requirements. The Bill responds to the recommendations of the Ramsay Report on the independence of Australian company auditors and takes account of relevant recommendations of Report 391 of the Joint Parliamentary Committee of Public Accounts and Audit. The Bill also incorporates recommendations of the HIH and Cole Royal Commissions. The Bill is available on the Parliament of Australia website.
1.3 SEC takes steps to address late trading, market timing and related abuses On The Commission voted to propose a rule requiring that fund orders be received by 4:00 p.m. Specifically, this proposal would require that an order to purchase or redeem mutual fund shares be received by the mutual fund — or its primary transfer agent or a registered securities clearing agency — by the time that the fund establishes for calculating its net asset value in order to receive that day's price (typically 4:00 p.m. for most funds). This rule would effectively eliminate the potential for late trading through intermediaries that sell fund shares. A public comment period concerning this proposal will run for 45 days following its publication in the Federal Register. The Commission also voted to adopt a compliance rule that will require funds and advisers to (i) have compliance policies and procedures, (ii) annually review them and (iii) designate a chief compliance officer who, for funds, must report to the board of directors. Designated compliance officers and written policies and procedures will have several benefits, including having a designated person charged with fund compliance who must answer to, and be accountable to, the fund's board of directors, thereby enhancing compliance oversight by directors, as well as allowing the SEC's examination staff to review the reports made to the board. Compliance with this rule will be required no later than nine months after its publication in the Federal Register. Finally, the Commission voted to propose enhanced disclosure requirements. These enhancements would require funds to disclose (i) market timing policies and procedures, (ii) practices regarding "fair valuation" of their portfolio securities and (iii) policies and procedures with respect to the disclosure of their portfolio holdings. This type of explicit disclosure would shed light on market timing and selective disclosure of portfolio holdings so that investors could better understand the fund's policies and how funds manage the risks in these areas. A public comment period concerning these proposals will run for 45 days following their publication in the Federal Register.
1.4
Committee reviewing On ·
"The
United States Federal-State Model of Securities Regulation" by Professor
Joel Seligman, Dean, Washington University School of Law, St. Louis, and
author of the definitive history, The Transformation of Wall Street: A History of the Securities and
Exchange Commission and Modern Corporate Finance. The mandate of the
Committee is to undertake an independent objective review of the current
securities regulatory framework and identify an appropriate model for
securities regulation in
1.5 On The Bill would direct the SEC to issue rules requiring funds to provide investors with improved disclosure of the following: · Estimated operating expenses, in
dollar amounts, on a hypothetical $1,000 investment. (b) Increase transparency: The Bill would give investors access to enhanced information about fund internal operations and potential conflicts of interest associated with mutual fund sales and internal workings to help mitigate those conflicts and help investors make informed investment decisions. Provisions included in the Bill would: · Codify SEC rules requiring the
disclosure of votes cast on behalf of shareholders as well as the policies
and procedures for proxy voting. (c) Enhance corporate governance and management integrity, strengthen director oversight: The Bill builds on the Sarbanes-Oxley Act by furthering the independence and accountability of mutual fund directors. Provisions included in the Bill would: · Require two-thirds of all board
directors to be independent. (d) Address recently revealed fraudulent trading practices: To protect mutual fund shareholders from trading practices that may disadvantage long-term investors, the Bill also includes provisions to eliminate conflicts of interest in portfolio management, ban short-term trading by insiders, allow higher fees to discourage short-term trading, encourage fair value pricing, and strengthen funds’ compliance with rules. These provisions would: · Prohibit the joint management by
the same person(s) of mutual funds and hedge funds. The ability of firms to
provide advisory services to both kinds of funds, however, would not be
limited. To ensure a full trading day,
investors could place orders up to but not after 4 p.m. In some cases, this
means intermediaries could place trades with funds after the close; however,
strict monitoring and an audit trail would be required to ensure that the 4
p.m. closing system is not being gamed. In this manner, those in the western
parts of the United States and pension funds or other investors using
intermediaries would not be disadvantaged. Investors would also be assured of
receiving same-day execution of orders. The Bill would also require all mutual funds to abide by the same audit committee standards required of exchange-listed companies under the Sarbanes-Oxley Act, which ensures strengthened auditor independence and accountability.
1.6 Calvert survey on corporate responsibility and investor confidence Released on 18 November 2003, the Calvert study seeks to examine the public’s concern about unethical business practices among potential investments and their interest in mutual funds that consider ethics when making investments. The following is extracted from the executive summary of the study. (a) Investors have become less trusting of corporate management over the last 2 years · The large majority of investors
(77%) have become less confident in the trustworthiness of corporate
management. (b) Investors’ interest in knowing more about the companies they are investing in has increased over the last 2 years · The large majority of investors
(79%) have become more interested in how corporations are governed. (c) Investors want to invest in companies they perceive as ethical · Most investors (84%) would be
more likely to invest in a mutual fund if they knew one of its principles was
to invest in companies that engage in ethical business practices in terms of
operations and reporting. (d) And, most believe that doing so will be associated with less investment risk and better returns · 71% of investors agree that
companies that operate with higher levels of integrity carry less investment
risk. (e) Investors feel they are ill-equipped to identify companies that are engaged in unethical business practices · 78% say that they are only a little or not at all equipped to identify companies that are engaged in unethical business practices; 23% believe they are fairly or very well-equipped. (f) Investors think it is essential or very important that socially responsible mutual funds require companies to be open and honest in reporting of finances and environmental liabilities. · To encourage ethical business
practices, the vast majority of investors think it is essential or very
important that mutual funds require companies to be open and honest when it
comes to: financial reporting (94%), and environmental liabilities (81%)
Details of the survey are available on the Calvert website.
1.7 European Commission proposes Directive on cross-border mergers On 18 November 2003, the European Commission presented a proposal for a Directive to make cross-border mergers easier, by overcoming obstacles caused by different national laws. It would make such mergers simpler for all companies with share capital. However, it would be especially useful for small and medium-sized businesses that want to operate in more than one Member State, but not throughout Europe, and thus are not likely to seek incorporation under the European Company Statute. The proposed Directive would set up a cross-border merger procedure whereby mergers would be governed in each Member State by the principles and rules applicable to "domestic" mergers. The proposed Directive would fill an important gap in company law and is the first measure to be presented under the Commission's Action Plan on company law and corporate governance in the European Union, published in May 2003 (see IP/03/716 and MEMO/03/112). The proposal for a Directive will be submitted for adoption under the so-called 'co-decision' procedure to the EU's Council of Ministers (subject to qualified majority voting) and the European Parliament. As EU law now stands, cross-border mergers are possible only if the companies wishing to merge are established in certain Member States. In other Member States, the differences between the national laws applicable are such that companies wanting to merge have to resort to complex and costly legal arrangements. These arrangements often complicate the operation and are not always implemented transparently and with legal certainty. Moreover, they usually result in the acquired companies being wound up, which can be a very expensive operation. The present proposal, which covers all companies with share capital, both public limited liability companies and others, aims to make cross-border mergers possible and easy all over the European Union by approximating the cross-border merger procedure to the procedures used for "domestic mergers" between companies governed by the laws of the same Member State. In other words, each company taking part in a cross-border merger would, under the Directive as proposed, do so in accordance with the laws of its own Member State (except in specific cases provided for in the Directive related to the cross-border nature of the merger). Operators are already familiar with these national procedures through use. Protection is afforded under national laws, and would thus be maintained by the proposed Directive, for creditors, debenture holders, the holders of securities other than shares, minority shareholders and employees. In the specific case of employees' rights, the general principle of the national law of the company created by the merger applies. If there were no employee participation, this would continue to be the case and if the merged company were created in a Member State with rules on employee participation, it would be governed by those rules. However, if at least one of the companies taking part in the cross-border merger were governed by rules on employee participation in its home Member State and if the merged company were to be created under the rules of a Member State where such rules do not apply, then a negotiation procedure, as provided for under the European Company Statute, would apply (Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European Company and the accompanying Council Directive 2001/86/EC of 8 October 2001). This procedure would allow for interested parties to define an agreed participation regime on employee participation. It would only be where interested parties failed to reach agreement that, as a fall-back, the pre-existing co-determination regime would be extended. In a situation where two companies merged and both operated under a compulsory co-determination regime, they could choose to incorporate in a Member State which has a compulsory regime but which is not equivalent to the most stringent co-determination regime, without having to enter into negotiations as foreseen in the European Company Statute. The full text of the proposal is available on the Europa website: A complementary proposal to update, clarify and broaden the scope of the European Community's Directive that provides for tax deferral in the case of cross-border mergers and divisions of companies, transfers of assets and exchanges of shares (90/434/EEC) was presented recently by the Commission (see IP/03/1418).
1.8 Centre for Corporate Law and Securities Regulation releases Prospectus Survey report In November 2003, the Centre for Corporate Law and Securities Regulation, The University of Melbourne released the report “Use of Prospectuses by Investors and Professional Adviser”. The research report contains the results of two surveys of recipients of prospectuses: investors and their professional advisers. The objective of the surveys was to obtain information on how prospectuses are used and obtain views on the utility of prospectuses. The distribution of the surveys was as follows: · 4,000 surveys were distributed
to individual investors who are members of the Australian Shareholders
Association with 891 returned (22.3%) (a) Summary – Investor Survey(i) Background information ·
891 responses were
received. (ii) Shares owned directly ·
Half of the
respondents own shares in less than 20 companies each, but all have
diversified investments. (iii) Managed investment fund prospectuses ·
460 respondents
completed this section. 23% have money in only one managed fund. (iv) General results on prospectuses ·
Only 36% of
respondents said that the prospectus gives them sufficient information to
make an investment decision. 52% still feel the need to seek professional
advice after reading the prospectus. (b) Summary – Professional Adviser Survey(i) Background information · 171 responses were received. (ii) General results on prospectuses · 85% of respondents found that
clients have difficulty understanding prospectuses, finding them too long,
too detailed, and too full of legal or technical jargon. (iii) Share prospectuses · 19 respondents did not complete
this section, saying they are unlicensed to offer advice on direct share
investments. (iv) Managed investment fund prospectuses · Clients most frequently ask
about fees and charges relating to funds (31%) followed by performance
history (18%), risk (13%) and what the funds invest in (12%) A total of 17%
either ask if they need to read the prospectus, ask the adviser to interpret
the prospectus or rely solely on the adviser’s recommendation. The full report is available from the Centre for Corporate Law and Securities Regulation website.
1.9 Centre for Corporate Law and Securities Regulation releases ASIC Enforcement report (a) Overview of research report ·
This research
report reports the findings of an empirical study of court-based enforcement
activities undertaken by the Australian Securities and Investments Commission
("ASIC").
(b) Research Methodology ·
The project
involves an empirical study of AISC court-based enforcement activities over
the period January 1997 to December 1999. (c) Key findings of the study · The empirical study analyses three aspects of ASIC court-based enforcement activities during the sample period:
(i) Characteristics of regulatees The
study found that ASIC was more likely to pursue court-based enforcement: ·
against individuals
(rather than companies); (ii) Types of enforcement activity The study found that ASIC was more likely to pursue penal enforcement in relation to: ·
laws that were
mandatory (rather than enabling) in nature; (iii) Enforcement outcomes The study found evidence of: ·
the predominant use
of penal enforcement activities by ASIC over civil enforcement activities; (iv) General conclusions ·
The study
highlights the predominant use of penal enforcement activities and sanctions
within the dataset of ASIC court-based enforcement work. The full report is available from the Centre for Corporate Law and Securities Regulation website.
1.10 Survey reveals more US companies report detecting fraud A KPMG survey of 450 medium
to large United States companies published on 1 December 2003 has found that
75% of the companies surveyed reported at least one instance of fraud this
year, compared to 62% in 1998. This reflects not so much an increase in the
incidence of fraud but increased awareness resulting in uncovering more
instances of fraud, said KPMG. Thirty-six percent of the companies reported
losses of US$1 million or more from fraud in 2003, compared to 21% in 1998.
Theft of assets and expense account fraud more than doubled since 1998, and
the number of companies that said they were uncovering financial fraud also
doubled from 3% in 1998 to 7% in 2003. About 77% of firms polled had taken
steps to detect fraud through internal controls, up from 51% in 1998; while
65% of companies conducted internal audits, up from the previous 43%.
Sixty-three percent of fraud cases were uncovered in employee reports, up
from 58% five years earlier. Some 43% of corporate and government officials
expect fraud cases to decline in the next 12 months, with only 7%
anticipating an increase.
1.11 Group of 100 releases “Guide to Compliance with ASX Principle 7” The Group of 100, an association of senior Australian finance executives, has released the “Guide to Compliance with ASX Principle 7: ‘Recognise and Manage Risk’”. The guide, which was prepared for the Group of 100 by Deloitte, is designed to give general guidance in relation to compliance with Principle 7. The guide identifies issues and provides recommendations in the following areas: · formal framework; The Guide is available from the Group of 100 website.
1.12 Study of shareholder resolutions at meetings of US companies In November 2003, a study of shareholder resolutions and shareholder voting at meetings of US companies was released. The study, by the consulting firm Georgeson Shareholder, covered meetings held during the first seven months of 2003. The key findings of the study are: · Fifty-six percent more
governance proposals came to a vote – 427 in 2003, versus 273 for the same
period in 2002. This represents the largest increase in years. The study is on the Georgeson Shareholder website.
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2.1 ASIC
releases results of the financial reporting surveillance project The project also covered more than 1000 listed Australian entities with a 30 June balance date to review:
(a) Findings The review has not identified
systemic non-compliance with financial reporting requirements generally or
any trends in specific areas. This supports the findings of the earlier 2002
surveillance programme. · improper acquisition accounting
in terms of the value of assets acquired and the value of consideration, and
the non-recognition or inappropriate valuation of goodwill Our initial observations from
inquiries to date suggest that the need for improved disclosure identified in
2002 remains an issue. ASIC has issued letters to 74
companies seeking additional information where it appears options have been
issued to any of the Directors and the 5 named officers receiving the highest
emoluments and the options were not valued as part of that disclosure. · disclosing the value of options
through an announcement to the ASX, including advice that options have no
value in the rare case where the appropriate application of a suitable
valuation methodology indicates that outcome, and no further action will be taken. 'The legislation treats
disclosure of this information as an important component of directors'
reports to shareholders.' ASIC's regulatory response ensures that the
information is provided to the market on a timely basis', Mr Pound said. · require compliance with section
322 of the Act requiring amendment and re-lodging of an updated director's
report, which will require the company to update all aspects of the report to
the date of re-lodgement, or To date the following companies
have resolved the matter by taking the following action: ASIC has reviewed the financial
reports of all listed companies with a 30 June financial year for the
disclosures required by Accounting Standard AASB 1028 'Employee
Entitlements'. It has identified companies that are corporate sponsors of
defined benefit superannuation plans and that have significant deficits in
those plans that may represent a liability to the company. · Flight Centre Limited and
Pacific International Limited (now reporting net revenues only from agency
transactions rather than the gross value of customer transactions); In addition, ASIC has asked a
number of companies to improve the accounting disclosures in their next
financial report. A number of these involve disclosure of policies for the
deferral of major cyclical maintenance expenditure.
2.2 ASIC
releases final SRI guidelines
The guidelines state
that where labour standards or environmental, social or ethical
considerations are taken into account, the PDS must tell consumers which
matters are taken into account, and how they are taken into consideration, so
that consumers can clearly understand the approach. The PDS must also clearly
state where the investment firm does not take such matters into
account.
2.3 ASIC grants relief in relation to mortgage offset
accounts Lenders commonly
offer loans with a 'mortgage offset' account as part of their range of home
loan products. Other loans, apart from home loans, may also be packaged with
an offset facility. ·
the
amounts deposited are notionally offset, either fully or in part, against the
balance of the borrower's loan account, so the borrower pays interest on the
reduced balance only; or Usually, the credit balance on the offset account is available to the borrower at call.
2.4 Southcorp settles with ASIC over market disclosure On 27 November 2003, Mr David Knott, Chairman of the Australian Securities and Investments Commission (ASIC), announced that orders had been made in the Federal Court of Australia settling ASIC’s civil penalty proceedings against Southcorp Limited (Southcorp). Under the settlement, Southcorp has consented to a declaration being made that it has contravened the market disclosure provisions of the Corporations Act. Mr Justice Lindgren of the Federal Court ordered that Southcorp pay a pecuniary penalty of $100,000 plus ASIC’s costs. ‘The court orders provide an effective and strong regulatory outcome in an area that ASIC has highlighted over the past four years’, Mr Knott said. ‘The selective release of information to analysts has the capacity to undermine broad- based retail investor confidence in the fairness of the market. Companies should generally ensure that relevant information is provided to the whole market at the same time.’ ‘Southcorp’s decision to settle with ASIC on the basis of today’s orders has resulted in a significant saving of taxpayer resources that would otherwise have been required to fully litigate this matter’, Mr Knott said. Background On 18 April 2002, Southcorp’s then Executive General Manager of Corporate Affairs, Mr Glen Cunningham, sent an email to selected analysts containing information about the likely impact of the poor 2000 vintage for premium wines on Southcorp’s 2003 gross profit. After the email was sent to the analysts on 18 April 2002, until the close of trading at 1.07pm on the following day, there was a drop in the share price of 7 per cent and the volume of shares traded was five times the average daily traded volume in the previous two weeks. The matter was investigated by ASIC following a referral by the Australian Stock Exchange (ASX). ASIC alleged that the information should have been disclosed to the ASX under its Listing Rules and in accordance with the Corporations Act, rather than to selected analysts. In its statement of claim filed in the Federal Court of Australia on 26 February 2003, ASIC sought a declaration that Southcorp had contravened the continuous disclosure provisions of the Corporations Act. Under section 1317E of the Corporations Act, the Court has power to make a declaration that the continuous disclosure provisions of the Act have been breached. If a declaration is made, the Court may impose a pecuniary penalty of up to $200,000. These provisions took effect on 11 March 2002. This brings an end to the proceedings, which were set down for hearing in the Federal Court of Australia from 1 to 5 December 2003. Further details about the Federal Court judgment are in Item 4.2 of this Bulletin.
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3.1 Guidance note on market makingOn 28 November 2003 ASX released a guidance note on Warrant market making (ASX Business Rule 8.4.2). The guidance note sets out an explanation of the rule, when the obligation to make markets applies and exceptions to the obligation.
3.2 Listing rule amendments - Capital Raising Mechanisms in a Disclosure-based Market – SubmissionsDue to overwhelming interest, the closing date for submissions on the current Exposure Draft - Capital Raising Mechanisms in a Disclosure-based Market was extended until Friday 5 December 2003. The Exposure Draft is available on the ASX website at the following link: http://www.asx.com.au/about/l3/ProposedListingRuleAmendments_AA3.shtm
3.3 ASX Market Reforms - Enhancing the Liquidity of the Australian Equity Market ASX has released a market consultation paper which outlines proposals to change certain aspects of the microstructure of ASX's cash equity market. The most significant change proposed relates to the dissemination of broker identifiers. Currently, broker identifiers are only visible to ASX Participating Organisations (eg Brokers). ASX is proposing to implement changes to its equity market design such that investors and brokers will have equal access to broker identification details. The market consultation paper and a separate Supplement - Request for Comment containing the list of questions for which ASX is seeking feedback are available on the ASX website at the following link: http://www.asx.com.au/about/l3/MarketStructuralReforms_AA3.shtm
3.4 Corporate Governance Council – Principles of Good Corporate Governance and Best Practice Recommendations. Corporate Governance Principle 7 - 'Recognise and Manage Risk' Principle 7 of the ASX Corporate Governance Council Principles of Good Corporate Governance & Best Practice Recommendations provides guidance for the certification of internal risk management and control frameworks. To assist listed entities in implementing these recommendations, the ASX Corporate Governance Council has provided supplementary guidance to its interpretation. The guidance is available on the ASX website at the following link:
3.5 Corporate Governance Council – Implementation Review GroupThe Implementation Review Group (IRG), a high-level industry body charged with the review of the implementation and uptake of the ASX Corporate Governance Council’s Principles of Good Corporate Governance & Best Practice Recommendations (Principles), met in November to review feedback and analysis presented to the group from a broad range of sources. The IRG finds that the articulation of the Principles has been generally well received. Early feedback suggests that companies using the Principles to trigger discussion and engage in internal governance review have seen it as making a positive contribution to corporate practice. The IRG will be making recommendations to the Council in the first quarter of next year, once initial analysis of feedback is complete. The group thanks those who have already provided valuable feedback and welcomes further contribution. Comments should be provided in
writing to the IRG Secretariat.
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4.1
Disqualification from managing corporations: relevant considerations Australian Securities and Investments Commission v Starnex Securities Pty Ltd [2003] FCA 1375, Federal Court of Australia, Finkelstein J, 28 November 2003 The full text of this judgment is available at: http://cclsr.law.unimelb.edu.au/judgments/states/federal/2003/november/2003fca1375.htm
or (a) Summary This case concerned an application by the Australian Securities and Investments Commission ("ASIC") for the disqualification of a director under section 206E of the Corporations Act. The Court considered what factors are relevant to the application of section 206E. (b) Facts The fifth defendant, Emanuele Camiolo, was a director of Icorp Technologies Ltd, Contech Australia Ltd, Starnex Capital Ltd and Starnex Securities Pty Ltd ("Starnex Securities"). Starnex Securities acted as a broker and arranged loans for its clients. The other companies did not actively conduct any business. Following a complaint from a client of Starnex Securities, the companies were investigated by ASIC. (i) ASIC's investigation The Court found that ASIC's investigation of the companies revealed several matters of concern. The investigation uncovered that: · the companies were insolvent; ASIC applied to have Mr Carmiolo disqualified from managing corporations for a period of two years. (ii) Section 206E of the Corporations Act Section 206E provides that the Court, on application by ASIC, may disqualify a person from managing corporations if: · the person has at least twice
been an officer of a corporation that has contravened the Act while they were
an officer and, on each occasion, they failed to take reasonable steps to
prevent the contravention; or (c) Decision (i) Considerations in relation to disqualification Finkelstein J referred to the comments of Anderson J in Re Gold Cost Holdings Pty Ltd (in liq) Australian Securities and Investments Commission v Papotto (2000) 35 ACSR 107, 111. In this case Anderson J held that the factors governing the Court's powers of disqualification are: "the character of the offender, nature of the breaches, structure of the company and nature of its business, interests of shareholders, creditors and employees, risks to others from continuation of offenders as company directors, honesty and competence of the offender, hardship to the offender and his personal and commercial interests, and the offender's appreciation that future breaches could result in future proceedings...". The Court in HIH Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80, 96-99, held that it is also necessary to consider whether: · a disqualification order is
needed to protect the public; On the facts before the Court, his Honour held that it was in the public interest that Mr Camiolo be disqualified from the management of any company. Mr Camiolo had failed to act responsibly as a director of the companies. Further, Finkelstein J commented that Mr Carmiolo "appear[ed] to have little or no knowledge of how a company should be managed. He certainly ha[d] little appreciation of the legal obligations imposed on a corporation in relation to its administration and record keeping." Accordingly, his Honour ordered that Mr Carmiolo be disqualified for a period of two years. (ii) Disqualification must be "justified" This issue arose because ASIC and Mr Carmiolo had initially asked that a disqualification order be made by consent. Finkelstein J commented that section 206E(1)(b), which requires the Court to be satisfied that the disqualification is justified, cannot be satisfied simply because the parties agree to that course. Finkelstein J referred to Re One.Tel Ltd (in liq); ASIC v Rich (2003) 44 ACSR 682 where it was held that the Court must consider the facts itself and can only make an order when satisfied, in all the circumstances, that the order should be made.
4.2
$100,000 penalty for continuous disclosure contravention Australian Securities and Investments Commission v Southcorp Limited (No 2) [2003] FCA 1369, Federal Court of Australia, Lindgren J, 27 November 2003 The full text of this judgment is available at: http://cclsr.law.unimelb.edu.au/judgments/states/federal/2003/november/2003fca1369.htm or (a) Summary In this case Lindgren J imposed a penalty of $100,000 on Southcorp Ltd ("Southcorp") for breaching the continuous disclosure requirements of the Corporations Act. This is the first time that a court has imposed a civil penalty for a continuous disclosure contravention. Southcorp had admitted the contravention and, jointly with ASIC, put before the court a Statement of Agreed Facts. The parties agreed to suggest, for the Court's consideration, a penalty of $100,000. (b) Facts On 18 April 2002 at 4.29 pm Southcorp's Executive General Manager of Corporate Affairs, Glen Cunningham, disclosed by email to 11 analysts the following information (the "Information"): · that all of Southcorp's 2000
vintage super premium wines were expected to be sold in the 2003 financial
year; and This information had not previously been released to the market. The last trade during normal trading in Southcorp's shares before the email was sent was at $6.27 per share. Between the close of trading on ASX on 18 April 2002 and 10.12 am on 19 April 2002 there was a 5% fall in Southcorp's share price. At 1.07 pm ASX halted trading in Southcorp securities at the request of Southcorp. Between the close of trading on ASX on 18 April 2002 and the Trading Halt, the price of Southcorp shares fell by 7%. At 5.36 pm, Southcorp made an ASX profit clarification announcement to the market. ASIC subsequently commenced civil penalty proceedings against Southcorp, alleging that the disclosure to the analysts contravened the continuous disclosure rules. Southcorp admitted that its conduct gave rise to a contravention of the continuous disclosure requirements in 674(2) of the Corporations Act. The section is a 'civil penalty provision'. In accordance with subsection 1317E(1) if a court is satisfied that a person has contravened such a provision it must make a declaration of contravention. Subsection 1317G(1) allows the court to impose a pecuniary penalty of up to $200,000 where a declaration of contravention has been made and certain other conditions are satisfied. ASIC and Southcorp agreed that these conditions had been satisfied and jointly submitted that an appropriate penalty would be $100,000. The parties also agreed that, before the release of the Information to the analysts, Southcorp did not have an obligation to disclose the Information because it was covered by an exception referred to in ASX Listing Rule 3.1. However, by sending the email, Southcorp communicated the Information selectively to the analysts, without first disclosing it to the entire market by notifying the ASX, thereby contravening section 674(2). (c) Decision As Southcorp admitted the contravention, the issue for Lindgren J was to determine whether the jointly submitted penalty of $100,000.00 was appropriate in all the circumstances of the case. (i) Considerations against Southcorp Lindgren J stated that contravention of the continuous disclosure requirements is serious and not acceptable. Despite the fall in the market value of Southcorp's shares, Lindgren J was not satisfied that the fall resulted from the disclosure to the 11 analysts. Even so, he found that the fall in market price was relevant because it could incite speculation that the fall was caused by the selective disclosure of the Information. Lindgren J considered that these types of events generate confusion and a loss of faith in the market. (ii) Considerations in favour of Southcorp Lindgren J took into consideration a number of matters in Southcorp's favour: · There was no suggestion that Mr
Cunningham had a fraudulent intent or other unworthy motive. Lindgren J held that he was required to imposed the penalty of $100,000 suggested by ASIC and Southcorp if, on the agreed facts, and having regard to all the relevant matters, he could accept the amount as "appropriate", even if he would not have arrived at precisely the same amount. In light of the above-mentioned considerations, Lindren J accepted the suggested penalty of $100,000 and ordered Southcorp to pay ASIC's costs. Lindgren J indicated that, in future cases where a penalty was jointly submitted by the parties, the parties might reasonably be expected to supply to the Court, in support of the penalty suggested, details of penalties which had been imposed in relevantly similar cases and of the circumstances of those cases. (d) Implications of CLERP 9 draft legislation on continuous disclosure contravention In order to impose the $100,000 penalty on Southcorp there was a need for a court declaration of contravention pursuant to section 1317E of the Act. CLERP 9 proposes to give ASIC the ability to hold hearings into suspected breaches of the continuous disclosure requirements, and to issue infringement notices and impose penalties if it determines that a minor contravention of the requirements has occurred. While such changes would save court time and expense, compliance with an infringement notice would deny companies the opportunity of putting their version of events before the court. Another impact would be to give ASIC the combined role of investigating alleged contraventions and then holding a hearing into whether a contravention has actually occurred. At another level, centralising the process in the hands of ASIC has the potential to restrict the remedial recommendations in terms of corporate governance that can flow from a court ruling. It is unlikely, however, that the CLERP 9 proposals would have produced a different outcome in Southcorp's case. It is intended that the infringement notice regime will apply only to "minor" contraventions. ASIC and Southcorp agreed that the contravention by Southcorp was "serious".
4.3 Company officers and the recognition of fiduciary obligations to joint venturers (By Simon Morris and Wendy Shang, Corrs Chambers Westgarth) Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd [2003] QSC 402, Supreme Court of Queensland, Chesterman J, 26 November 2003. The full text of this judgment is available at: http://cclsr.law.unimelb.edu.au/judgments/states/qld/2003/november/2003qsc402.htm
or (a) Summary This case concerned a joint venture operated by a company where the joint venturers were also the shareholders of the company. The joint venturers brought actions against the officers of the company alleging that they had breached their fiduciary obligations to them by providing them with misleading information. The court confirmed the principle that the officers of a company generally owe their fiduciary obligations to the company and not to the shareholders. In some circumstances, however, a fiduciary relationship may arise by virtue of particular circumstances or dealings between an officer and a shareholder. However, such fiduciary duties cannot be concurrent with or identical in subject matter to the fiduciary duties owed to the company. (b) Facts The first defendant, Ensham Resources Pty Ltd (“Ensham”), operated an open cut coalmine in Central Queensland. The second, third, fourth and fifth defendants were the shareholders of Ensham in the proportions: 37.5 percent, 47.5 percent, 10 percent and 5 percent (together the “JV parties”). They also held interests, as joint venturers, in a mining venture known as the Ensham Coal Joint Venture (“Ensham coal project”) in the same proportions as their respective shareholding in Ensham. Emsham was the operator of the Ensham coal project and, at all material times, acted for and on behalf of the JV parties. Ensham owned and operated two draglines to remove overburden from the coal seal. However, in 1999, Ensham decided that it required additional stripping capacity and started searching for a new dragline. All decisions with respect to the Ensham coal project were made via a joint venture management committee (“the Committee”). The two key officers of the project were Kenneth Foots (“Foots”), the chief executive officer of Ensham, and Raymond Bird (“Bird”), the mine manager. Foots and Bird often attended the Committee meetings to give advice and make recommendations with regards to the Ensham coal project. When asked about purchasing a new dragline, Foots informed the Committee that the only dragline available on the market was small and the vendor would not sell it to Ensham because it was a competitor. Instead, the vendor agreed to sell it to the plaintiff, Southern Cross Mine Management (“Southern Cross”) who would enter into a contract with Ensham to strip overburden at an agreed rate (“the dragline agreement”). On 16 September 2002, Ensham rescinded the dragline agreement and did not pay for a substantial amount of work performed by Southern Cross. Southern Cross sued to recover the unpaid amount. Ensham resisted the claim and counterclaimed against Foots and Bird and their companies. (i) The Counterclaim Ensham and the JV parties claimed that Foots and Bird owed fiduciary obligations to Ensham and the JV parties and breached these obligations by informing the Committee that Southern Cross’ dragline was the only dragline available on the market when, in truth, a larger capacity dragline could have been purchased or leased by Ensham resulting in a more efficient and economical mine. Ensham and the JV parties claimed that they both suffered loss as a result of this alleged breach. The JV parties argued that fiduciary obligations were owed to them on the following basis: · Ensham held assets on trust for
the joint venturers and acted for and on behalf of the joint venturers. Therefore, Ensham and the JV parties argued that Foots and Bird owed them a fiduciary duty to act in their best interests and not to profit from their position as fiduciaries. (ii) Arguments by Foots and Bird Foots, his company and Bird sought orders to strike out the claim made against them by the JV parties. In particular, they sought to strike out the JV parties from the prayer for relief where it was alleged that the JV parties suffered loss as a result of Foots’ and Bird’s breach of fiduciary duty. Although Foots and Bird were not directors but employees, arguments proceeded on the basis that their duties were akin to directors’ duties. Foots and Bird relied on the rule in Brunninghausen v Glavanics (1999) 46 NSWLR 538 (“Brunninghausen”) and Charlton v Baber (2003) NSWSC 745 that “a director’s fiduciary duties are owed to the company and not its shareholders”. In these cases, the courts recognised that ‘where a director has a fiduciary duty to his company, equity prevents the recognition of a concurrent and identical duty to the shareholders covering the same subject matter’. Therefore, Foots and Bird argued that they did not owe a fiduciary duty to the JV parties because a duty was already owed to Ensham which was identical in scope and content. (c) Decision The court upheld Foots’ and Bird’s argument that they did not owe fiduciary obligations to the JV parties. It relied on Pilmer v Duke Group Ltd (in liquidation) (2001) 207 CLR 165 in which Dawson and Toohey JJ made clear that not every relationship involving trust and confidence is a fiduciary one. In the present case, there was no precise legal relationship between Ensham and the JV parties other than the shareholding. The court upheld the principle in Brunninghausen that a director’s fiduciary duties are generally owed to the company and not its shareholders. There is good reason for this rule since if each shareholder had a personal right against the company officers, directors would be exposed to a multiplicity of actions. However, this does not mean that a director can never owe a fiduciary duty to shareholders in relation to dealings in their shares. The court acknowledged that, in some circumstances, a director may owe fiduciary obligations to the shareholders of the company of which he is director or employee where such duty “springs from particular dealings in particular circumstances between them”. In Brunninghausen, Handley JA recognised the several categories in which such a duty would arise including where: · the directors, on behalf of the
company, seek further capital from their shareholders or are issuing new
shares; However, it should be noted that a duty owed to shareholders cannot be concurrent with and identical to the fiduciary duties owed to the company with respect to the company’s property or undertaking. Chesterman J recognised that a fiduciary duty concerning the operation of the company’s affairs would generally be a duty owed to the company and not to the shareholders. In the present case, the transactions in which the JV parties said the fiduciary obligations should have been observed were those concerning Ensham in the operation of the mine. If Foots and Bird owed a duty to the joint venturers, it would be precisely the same duty owed to Ensham (i.e. to minimise costs with respect to the coal project and to perform their contract of employment with Ensham loyally). The consequence of a breach of that duty would be Ensham’s loss of opportunity to acquire the larger dragline. Therefore, the court held that it was unnecessary to recognise a fiduciary duty owed to the JV parties. Foots and Bird were successful in obtaining an order to strike out the JV parties from the prayer for relief. In particular, the phrase alleging that “the JV parties” suffered loss in consequence of the Foots’ and Bird’s breaches of fiduciary duty was struck out. The loss was clearly Ensham’s. Foots and Bird were not however successful in obtaining an order to strike out the joint venturers’ counterclaim altogether. The court held that such an order should not be made unless it was clear that no possible reformulation of the claim could succeed, and it was not obvious that was the case.
4.4 Self-exposure to a penalty – whether imposed for a
‘punitive’ or ‘protective’ purpose Rich & Silbermann v the Australian Securities & Investments Commission [2003] NSWCA 342, New South Wales Court Of Appeal, Spigelman CJ, Ipp JA McColl JA, 26 November 2003 The full text of this judgment is available at: http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2003/november/2003nswca342.htm
or (a) Facts The Appellants (Rich & Silbermann) are former directors of One.Tel (in liq) (“the company”). ASIC (the Respondent) alleges a number of contraventions by the Appellants of section 180(1) of the Corporations Act 2001 (Cth) in their discharge of that office. The Respondent sought declarations of the alleged contraventions (section 1317E), orders disqualifying the Appellants from management of companies (sections 206C and 206E) and orders requiring compensation to be paid by the Appellants to the company (section 1317H). The Respondent applied to Justice Austin for interlocutory orders compelling the discovery of documents and filing of witness statements (including statements of the Appellants’ anticipated testimony) by the Appellants in the proceedings in respect of those contraventions. The Appellants resisted the application on the ground that the interlocutory orders would require the Appellants to expose themselves to a penalty, namely the orders sought by ASIC. The Respondent argued that the final orders involved no imposition of a penalty, the disqualification orders being sought for a protective purpose, so that the privilege against self-exposure to a penalty was not available to the Appellants. Justice Austin held that the proceedings did not seek the imposition of a penalty and the privilege did not apply, and granted the Respondent’s application. The Appellants challenged his Honour’s characterisation of the proceedings as not punitive, seeking in particular to emphasise the severity of the consequences of disqualification for a company director. (b) Decision Held per Chief Justice Spigelman, Justice Ipp agreeing, Justice McColl dissenting): ·
The
characterisation of a statutory sanction as a penalty for purposes of the
privilege against self-exposure to a penalty is affected by whether the
sanction is imposed for the purpose of punishment.
4.5
Admissibility of expert evidence ASIC v Vines [2003] NSWSC 1095, New South Wales Supreme Court, Austin J, 25 November 2003 The full text of this judgment is available at: http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2003/november/2003nswsc1095.htm
or (a) Summary ASIC alleged that the three defendants had contravened section 232(4) of what was then the Corporations Law, and that the third defendant had contravened section 232(2). ASIC sought to admit expert opinion evidence on the standard of competence of each of the defendants. The Court concluded that the experts' opinions were generally admissible, however admissibility would have to be considered on a paragraph by paragraph basis. (b) Facts ASIC alleged that the three defendants had contravened section 232(4) of what was then the Corporations Law, and that the third defendant had contravened section 232(2). Section 232(2) required an officer of a corporation to act honestly in the exercise of his or her powers and in the discharge of his or her office. Section 232(4) provided that an officer of a corporation must exercise the degree of care and diligence that a reasonable person in like circumstances would exercise. The allegations related to the defendants' roles, while employed by the GIO Group, in the preparation of the reinsurance component of the profit forecast in GIO's Part B Statement, issued in response to AMP's takeover bid in December 1998. ASIC sought to read three affidavits as expert evidence. ASIC sought to read an affidavit of Mr Hogendijk in its case against the first defendant, Mr Vines. ASIC also sought to read an affidavit of Mr de Vroome in its case against the second defendant, Mr Robertson, and another affidavit of Mr de Vroome in its case against the third defendant, Mr Fox. Mr Hogendijk gave his opinion on the first defendant by reference to the standard of a reasonably competent chief financial officer. Mr de Vroome gave his evidence on the second and third defendants by reference to the standard of a reasonably competent reinsurance manager. The defendants sought the exclusion of the three affidavits on three grounds. Firstly, it was contended that the affidavits were inadmissible opinion evidence not falling within section 79 of the Evidence Act (NSW). Secondly, it was contended that Mr Hogendijk's evidence was irrelevant because it addressed the wrong question. Thirdly, it was submitted that the evidence should be excluded under section 135 of the Evidence Act (NSW), on the discretionary ground that its value was substantially outweighed by the danger that the evidence might cause or result in undue waste of time. The Court only dealt with the first and third grounds. (c) Decision (i) Admissibility under section 79 Section 79 of the Evidence Act (NSW) allows opinion evidence to be admitted if the opinion is based wholly or substantially on the person's specialised knowledge, acquired through training, study or experience. The Court stated that the application of section 79 to opinion evidence contained in an affidavit depended upon: · whether the deponent had
specialised knowledge based on his training, study or experience; and The Court first examined the meaning of 'specialised knowledge'. The Court noted that the concept of specialised knowledge is not restrictive; it encompasses knowledge formally acquired through training or study, as well as knowledge based on experience. It is more than the observations of a non-participating onlooker. Specialised knowledge requires there to be a sufficiently organised or recognised body of knowledge, accepted as a reliable body of knowledge or experience. The Court stated that there also needs to be a general standard of professional diligence or competence that can be applied. The Court then examined the issue of determining whether an expert's opinion is wholly or substantially based on specialised knowledge. In examining this issue, the Court concluded the following: · a professional may give evidence
about the content of general practices of professionals in his or her field; The Court first examined Mr Hogendijk's specialised knowledge. Despite counsel for Mr Vines submitting that the field in which Mr Hogendijk expressed his opinion was not one of specialised knowledge, the Court disagreed. The Court held that Mr Hogendijk's evidence would identify a common set of responsibilities borne by CFOs, that it would show that he occupied the office of CFO over a substantial period of time and that therefore he must have acquired specialised knowledge about the core set of responsibilities. Counsel for Mr Vines submitted that Mr Vines' role differed from many of the core responsibilities of a CFO, and therefore Mr Hogendijk's evidence should be excluded. The Court held that as the hearing was still incomplete, it was not possible to determine at this stage whether that was the case, and therefore was not a sufficient ground to exclude Mr Hogendijk's evidence. The Court also held that it was not necessary for Mr Hogendijk to have experience in the same line of business as the GIO Group in order to equip himself to express an opinion about the standard of a reasonably competent CFO. The Court then sought to determine whether Mr Hogendijk's affidavit was wholly or substantially based on specialised knowledge. The Court found that his opinion was carefully expressed in terms of what a competent CFO would have done in Mr Vines' position. His affidavit did not try and answer the 'ultimate issue' and did not try and usurp the function of the trier of fact. He did not purport to give an opinion on what he would have of done if he was in the same position as Mr Vines. He meticulously set out the assumptions on which his opinions were expressed, and there was a general linkage between his field of specialised knowledge and the facts. For these reasons, the Court found that there was no basis for concluding that that the opinions expressed in Mr Hogendijk's affidavit were not wholly or substantially based on his specialised knowledge. The Court looked at similar issues in assessing Mr de Vroome's affidavits. The Court concluded his affidavits supported the view that he had specialised knowledge of the standard of competence and diligence expected of a reinsurance manager of a substantial reinsurance business, based on his experience in working as a reinsurance manager and his overall experience in the reinsurance industry. On the issue of whether the opinion was wholly or substantially based on Mr de Vroome's specialised knowledge, the Court did find some flaws in his affidavits. In particular, the Court found that some of his assumptions were not fully articulated, and that he had engaged in some fact finding. However, these flaws were not so endemic that the affidavits should be wholly or substantially inadmissible. (ii) Discretionary exclusion under section 135 The Court held that as a substantial portion of the evidence went to technical and complex matters, it had a potential to be useful and so should not be excluded at this stage of the trial. The Court agreed that there was a substantial risk that by the time the trial is over, the usefulness of the evidence may have evaporated for various reasons, such as the true issues not being the ones about which the experts gave their opinions. However, this did not lead to the conclusion that nothing of any use would emerge from the expert opinions. (iii) Conclusion The Court concluded that the affidavits of Mr Hogendijk and Mr de Vroome were not generally inadmissible, and that they should not be excluded under section 135. The Court stated that it would be necessary to consider the admissibility of the affidavits paragraph by paragraph.
4.6
Granting an extension of time to lodge a charge after an insolvency event
occurs Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd [2003] FCAFC 256, Full Court of the Federal Court, Whitlam, Branson and Allsop JJ, 21 November 2003 The full text of this judgment is available at: http://cclsr.law.unimelb.edu.au/judgments/states/federal/2003/november/2003fcafc256.htm
or (a) Summary This case discusses whether section 266 of the Corporations Act 2001 (“the Act”) allows a court to grant an extension of time to lodge notice of a charge after the commencement of winding up, administration or execution of a deed of company arrangement has occurred. By a majority of two to one, the Federal Court held that an extension could be granted under section 266(4) in such circumstances. The courts discretion to grant an extension is broad, but must be guided by what is “just and equitable”. The discretion must also be exercised in light of the statutory schemes, rights and liabilities which are invoked for the protection of general creditors when the insolvency events in sections 266(1)(a), (b) and (ba) occur. Consequently, where the chargor company is insolvent or its solvency is doubtful, the interests of unsecured creditors is a relevant consideration. Interestingly, the Court’s preferred interpretation of section 266, based on the historical development of the provision, was that this section did not contemplate an order for extension of time after an insolvency event has occurred. The majority felt bound by recent authority, however, and deferred to the High Court’s jurisdiction to determine the matter differently. (b) Facts Under an agreement dated 28 October 2002, GE Capital Finance Pty Ltd (“GE”) provided a $35 million revolving credit facility, including a $500,000 letter of credit sub-facility, to Daisytek Australia Pty Ltd (“Daisytek”). As security for the loan, Daisytek granted GE a fixed and floating charge over all its assets under a deed of charge dated 22 November 2002. Due to innocent inadvertence, notice of the charge was not lodged within the 45 day period prescribed in section 263 of the Act (that is, by 6 January 2003). On 4 March 2003, GE’s solicitors became aware of this fact and the form was subsequently lodged on 14 March. On 16 May 2003, the directors of Daisytek resolved that the company was insolvent or likely to become insolvent in future and an administrator was appointed under Part 5.3A of the Act. On 22 May 2003, an application was made to the court under section 266(4) of the Act for an order extending the period in which notice of the charge could be lodged. On 13 June 2003, the primary judge made an order extending the period for lodgement up to and including 14 March 2003 on the condition that the charge would only be enforceable when the amount owing under a facility agreement between GE, Daisytek and a related company of Daisytek exceeded $3.7 million and only in respect of any amount owing in excess of $3.7 million. Hewlett Packard Australia Pty Ltd (“HP”), an unsecured creditor and major supplier of Daisytek, appealed this decision. GE cross-appealed, seeking removal of the condition to the extension. (c) Decision By a majority of two to one (Whitlam J dissenting), the Full Court of the Federal Court dismissed both the appeal and the cross-appeal. In coming to this conclusion, the Court identified three key issues, namely: · does section 266 empower the court,
after commencement of winding up, administration or entry into a deed of
company arrangement, to extend the period for lodging notice of a charge; The “critical day” is defined in section 266(8) as the day winding up commenced or, in the case of administration or deed of company arrangement, the day the relevant administration commenced. (i) Can an extension be granted after an insolvency event has occurred? Section 266(1) relevantly provides that where winding up, administration or a deed of company arrangement is in place, a registrable charge is void against the liquidator or administrator unless the charge was registered within 45 days or such other period as extended by the Court under section 266(4). Resolution of the first issue is a matter of statutory construction based on the development of the legislation and corresponding case law. In the main judgment, Allsop J reviewed the historical development of section 266(1) and (4) and its predecessors. Before 1981, the predominant view was that an extension under the equivalent of section 266(4) would only be granted on the condition that the charge was subject to the rights of secured creditors whose interests were created before registration. Once liquidation occurred or was imminent, an extension was rarely granted as the rights of general creditors had or would soon crystallise under the statutory schemes for insolvency. Since the Companies (State) Codes 1981, however, the case law in Australia has supported the contrary view that the court can grant an extension after the critical day: Douglas-Brown as liquidator of De Barros Nominees Pty Ltd (in liq) v Standard Chartered Finance Ltd (1990) 8 ACLC 993 (Full Court WA Supreme Court). Consequently, the majority in this case felt bound by precedent, as an intermediate appellate court can only overturn a decision of another intermediate appellate court which is “plainly wrong”: Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485. With this threshold issue decided, the Court went on to assess the position of unsecured creditors in relation to granting an extension. (ii) Is an unregistered charge, in the absence of an extension, void on the critical day? GE asserted that since an extension could be granted after an insolvency event had occurred, an unregistered charge is void unless an extension is granted on or after the critical day. That is, the charge is not necessarily void against the liquidator or administrator, and the rights of unsecured creditors are subject to the Court’s power to extend the period for lodgement of the charge at some future time. The Court rejected this argument and confirmed that an unregistered charge is void “unless and until” it is revived by a subsequent order of the Court under section 266(4). The Court pointed to the temporal language of section 266(1) and stated it was unlikely that Parliament intended to prolong any uncertainty about the status of the charge or the rights of the creditors, liquidator or administrator affected by the charge. (iii) When should an extension be granted under section 266(4)? Section 266(4) states that the Court may extend the period for lodging notice of a charge where the failure to lodge was either accidental or inadvertent, or would not prejudice the position of creditors or shareholders. An extension may also be granted where it would be just and equitable to grant the extension. The Court held that its discretion to grant an extension is broad, but it must be guided by what is “just and equitable”. Regard should be had to the effect of an extension on the statutory schemes, rights and liabilities which are invoked when the insolvency events in sections 266(1)(a), (b) and (ba) occur, for the benefit of general creditors. The interests of unsecured creditors becomes a particularly relevant consideration where the chargor company is insolvent or its solvency is doubtful. The conduct or facts surrounding an administration may also be relevant to the decision. Although past cases referred to an extension being granted in “exceptional circumstances”, this is not a separate requirement of section 266(4). Instead, the phrase illustrates that the circumstances must be sufficient to justify the effect an extension has in defeating the rights of general creditors, particularly in a winding up. GE put forward an unsuccessful argument that the Court should only consider the interests of unsecured creditors who would actually be prejudiced by an extension, for example, because they relied on the incorrect register of charges. The Court reiterated that an extension affects the rights of creditors generally, so broader consideration of the facts and circumstances is relevant.
4.7
Irregularities in a share buy back scheme found to require complete
re-commencement of process In the Matter of Village Roadshow Limited [2003] VSC 440 & In the Matter of Village Roadshow Limited (No.2) [2003] VSC 456, Supreme Court of Victoria, 20 November 2003 and 14 November 2003 respectively The full texts of these judgments are available at: http://cclsr.law.unimelb.edu.au/judgments/states/vic/2003/november/2003vsc440.htm
and (a) Summary VRL sought to conduct a buy back scheme of its A Class preference shares. VRL failed to notify combined shareholders of their right to vote against the buy back. Such shareholders were notified later by way of advertisements. Preference shareholders who were also entitled to vote against the scheme were not notified at all. Mandie J found that the rights of VRL preference shareholders were abrogated by the buy back scheme. His Honour further found that preference shareholders were not absolutely prohibited from voting in the scheme; only from casting votes in favour of the scheme. A separate meeting need not have been held for each group of preference shareholders. Mandie J dismissed Village Road Show’s application for the scheme to be approved. In the Matter of Village Roadshow Limited (No 2) [2003] VSC 456 Mandie J rejected VRL’s suggestion that the general meeting be adjourned, or ASIC’s suggestion that a fresh general meeting be called. Mandie J held that VLR ‘had to start again.’ (b) Facts · Village Road Show Limited (“VRL”) sought to implement a scheme to buy back A Class preference shares. The key features of the ‘buy back’ scheme were:
· An independent expert noted that
the holders of the preference shares were likely to be better off if the
scheme was approved.
(c) Mandie J’s Judgment (i) Were the rights of VRL preference shareholders abrogated by the buy back scheme? In considering this issue, Mandie J distinguished the present situation from the leading cases In the Matter of Fowlers Vacola Manufacturing Co Limited [1966] VR 97 and House of Fraser plc v ACGE Investments Limited [1987] 1 AC 387. In both of these cases the respective Courts found that the rights of the preference shareholders under each company’s constitution were not abrogated by proposed reduction of capital schemes. In Fowlers Vacola the value of the shares had been affected, not the legal rights of the preference shareholders. In House of Fraser the scheme was held to be in accordance with the original conditions of the preference share issuance. Distinguishing these two cases, Mandie J found that the VRL buy back scheme was analogous to the scheme in Re Allgas Energy Ltd (1998) 27 ACSR 729. The Court in Allgas found that a company’s scheme to cancel its preference shares was an abrogation of the preferential shareholders’ rights. In reaching this decision, Mandie J argued that the buy back resolution and the scheme would automatically entitle VRL to buy back all of the preference shares. This action was not within the scope of the rights attaching to the preference shares. (ii) Were the preferential shareholders entitled to vote for the buy back scheme? At issue was the correct interpretation of section 257D(1)(a) of the Act. This section excluded affected preference shareholders from casting votes in favour of a preference share buy back scheme. Mandie J found that the words ‘mean what they say’. Both preference shareholders and combined shareholders were permitted to vote in the buy back resolution but those in favour would not be counted. The former were not informed of their right to do so, while combined shareholders were only notified by a very late series of advertisements. Votes cast by a member, Granada, in favour of the buy back resolution were not to be counted. Although still a registered preferential shareholder at the relevant date, G had recently sold its preferential shareholding. (iii) Should a separate meeting be held for each class of preferential shareholder? There was not a sufficient ‘dissimilarity of interest’ between the preferential shareholders and the combined shareholders to justify holding separate class meetings. (iv) The effect of these irregularities at the general meeting VRL argued that even if the votes of combined shareholders were counted, the requisite majority still remained. VRL also submitted that its failure to inform the relevant shareholders was a ‘procedural irregularity’ within the meaning of section 1322 (2) of the Act. Mandie J did not accept these submissions. His Honour was not convinced that these irregularities did not cause substantial injustice. Mandie J did not want to speculate that the outcome of the general meeting would have been the same without these irregularities. Mandie J dismissed VRL’s application for its scheme to be approved. (d) In the Matter of Village Roadshow Limited (No 2) (a continuation of Mandie J’s reasoning in the above case)VRL suggested that the general meeting be adjourned, and that the buy back Scheme should be put again to the meeting. Mandie J agreed with VRL’s submission that the buy back scheme was ‘unfinished business’ for the purposes of VRL’s constitution. However, Mandie J was not convinced that this would be an ‘appropriate’ course of action. There was no guarantee that the persons entitled to vote at the November general meeting would be substantially the same as those entitled to vote at the December meeting.Mandie J also held that the two stage approval process adopted by the company would be undermined by the adjournment of the meeting. The process involved stage one, approval of the scheme at the general meeting, and stage two, a dedicated scheme meeting. Preference shareholders who have voted in the scheme meeting would be denied the ability to consider the results of the general meeting. The alternative, ASIC’s submission to hold a fresh general meeting, was not agreed to by Mandie J. His Honour deemed that such a course would be undermined by the same constituency determination problem. VRL’s application for the adjournment of the general meeting was therefore rejected by Mandie J. His Honour concluded that VRL needed to commence the buy back process again.
4.8
Misleading Advertising – Bank’s Promises on Home Loans Australian Competition and Consumer Commission v Commonwealth Bank of Australia [2003] FCA 1129, Federal Court of Australia, Conti J, 17 October 2003 The full text of this judgment is available at: http://cclsr.law.unimelb.edu.au/judgments/states/federal/2003/october/2003fca1129.htm
or (a) Summary The Australian Competition and Consumer Commission (ACCC) brought proceedings against the Commonwealth Bank (Bank) for misleading and deceptive conduct in relation to a series of television advertisements (TV Adverts) as well as promotional material used on posters in various branches of the Bank (Posters). The Bank produced a series of T.V. Adverts which represented to members of the public that no establishment fee was payable in respect of the Bank’s home loans. However, not every type of home loan granted by the Bank during the relevant period was made available to customers upon the basis that no establishment fee was payable. The ACCC pleaded that the Bank, by its conduct in broadcasting the T.V. Adverts and displaying the Posters in its branches, had committed misleading and deceptive conduct under sections 52, and the bank has also breached sections 53(c), 53(e), 53(g) of the Trade Practices Act 1974 (TPA). The ACCC also submitted that the failure to adequately reveal the existence of conditions attached to the home loans was of particular significance as the T.V. Adverts and the Posters contained the word “free” which would create a lasting impression on the target audience of the T.V. Adverts as well as customers of the Bank. The ACCC was granted relief in the form of corrective advertising by way of a television broadcast comprising thirty seconds for one week. The Bank was also ordered to place in-branch advertising comprising of a large framed notice adjacent to the main public entrance door of each head office and branch of the Bank during that same week. The Bank was ordered to pay the ACCC’s costs of the proceedings. (b) Facts During Channel 9’s coverage of the international cricket matches, the Bank released 3 different T.V. Adverts to be screened in Australia on Channel 9 entitled ‘Blood Nut’; ‘Where’s the Action’; and the ‘Sick Boy’. The first segment of the T.V. Adverts featured a humorous incident, the second segment included a voiceover, bold text captions and smaller print containing qualifications to the home loan offer at the bottom of the screen which took up approximately 28% of the size of the bold captions. The T.V. Adverts lasted for 30 seconds and had been broadcast by Channel 9 over 200 times across Australia. The Bank also displayed Posters in various branches which essentially contained the same representations in relation to the “no establishment fee payable” on home loans.Each of the T.V. Adverts represented that customers did not have to pay any establishment fees in relation to the Bank’s home loans. The ACCC pleaded that those representations were misleading and deceptive principally on the basis that: ·
not
all the home loan applications made to the Bank for home loans made during
the televised advertising period were granted on the basis that no
establishment fee was payable;
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Corporate Law Teachers’ Association Annual Conference 2004 “Regulating Corporations”, 8-10 February 2004, The Australian National University, Canberra, Australia Debates about how and why we should regulate corporations have been given renewed vigour in the early years of the 21st century. The theme of this conference invites presenters to reconsider these debates - are we looking at the same old arguments about regulation v de-regulation, or investor protection v efficiency, or have there been shifts in the way we conceive of corporate regulation? Topics to be considered include: ·
the contemporary relevance of the legal model of the
corporation Speakers include: Professor John Parkinson,
Professor of Law, University of Bristol and Professor Janet Dine, Professor
of Law, University of Essex
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6. New Corporate Law Book - Synthetic, Insurance and Hedge Fund Securitisations |
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"Synthetic,
Insurance and Hedge Fund Securitisations", which was launched on 9
December 2003, is an in-depth guide to structuring the vast array of
innovative securitisations. Paul Ali and Jan Job de Vries Robbe have
combined their extensive legal and banking experience and knowledge to
develop the first book to discuss in detail the design and regulation under
Anglo-Australian law of synthetic securitisations, insurance-linked
securities, and hedge fund, intellectual property and whole business
securitisations. Paul is a member of the Centre for Corporate and
Securities Regulation at The University of Melbourne. Jan Job is a
lawyer (admitted in the Netherlands) with Minter Ellison. The book also
includes a foreword by Professor Steven L Schwarcz of Duke Law School.
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Centre for Corporate Law and Securities Regulation 2003 You may use this material for your own personal reference only. The material may not otherwise be used, copied or redistributed in any form or by any means without a multiple user licence with LAWLEX.
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