Notes- Shareholder Remedies

Pages 552-565: Compulsory Liquidation Remedies 1. Introduction * Deficiency of current law: (1) despite introduction of statutory derivative action, formulation is unclear and scope is uncertain (2) focus on single act/transaction rather than whole picture/pattern/period (3) remedies are directed to particular transaction and confined to restraint of conduct, Recovery of property or ordering of financial compensation * Statutory remedies fall into 2 categories a.Compulsory liquidation remedies courts can order winding up of company if: – court is of opinion that it is just and equitable that company be wound up s461(k) – directors acted in affairs of company in own interest, not interest of members a whole, or any other manner that appears to be unfair/unjust to other members s461(e) – affairs of company are being conducted in manner that is oppressive or unfairly prejudicial to or unfairly discriminatory against a member or in manner that is contrary to interest s of members as a whole s461(f) – act/omission or proposed act/omission by or on behalf of company or a resolution or proposed resolution of a class or members of the company was or would be oppressed or unfairly prejudicial to, unfairly discriminated against a member(s) or was or would be contrary to interest of members as a whole s461(g) b. emedies for oppression or injustice: Pt2F. 1 wider range of remedies to oppressed/injustice refer to wk 11 last page 2. The just and equitable ground a. History and broad scope of the remedy * just and equitable that company be wound up s461(k) traced back to English Act of 1848 * History p 553-555 b. Re Tivoli Freehold Ltd [1972] VICSC—applying just and equitable rules to wind up co: (i) just and equitable give court a wide discretion which must be exercised judicially (Baird vHenry Lees 1924) question of fact: all circumstances to be considered (ii) facts rendering it just and equitable to be wound up: more than one category may be applied in relief – determine best fit iii) regard to changing circumstances and developments in relation to company practices including relevant changes in law (iv) just and equitable to be wound up if it engages in acts which are entirely outside what can be fairly regarded as having been within the general intention and common understanding of member when they become members (v) wound up due to failure (Galbraith v Meito Shipping CO 1947): failure not evidence by discontinuance of business activities- even if for a lengthy time. TEST of failure: ‘business w/in objects of incorporation should have become at least in the practical sense ‘impossible’ (vi) prime source for ascertaining intention and common understanding of members i the company’s memorandum of association which among other things states its object HELD: equitable and just to be wound up. c.Ebrahimi v Westbourne Galleries Ltd [1973] * FACTS: Def via general meeting voted to remove pl from office as director. Pl petitioned to wind up co on just and equitable grounds. * LAW: Where acts show a dissolution of partnership between them, a winding up may be ordered, use of ‘just and equitable’ in partnership act supports this * Rights of members governed by articles of association and have contractual force- court can dispense parties from obligation where they have been excluded from management * Exception: prove that exclusion was not made bona fide in the interest of the company * Elements for just and equitable wind up i. ssociation formed or continued on basis of personal r/ship involving mutual confidence (usually found where pre-existing partnership in turned into a limited company ii. an agreement, or understanding, that all or some of the shareholders shall participate in the conduct of the business iii. Restrictions upon the transfer of members’ interest in the company so that if confidence is lost one member is removed from management, he cannot take out his stake and go elsewhere HELD: wind up: exclusion of pl was not for best interest of company as whole Application of quasi-partnership analogy in AUSTRALIA * 3 groups of decisions indicate scope of the clause for subjection legal rights to ‘equitable considerations’ arising from understanding b/wn corporators 1. A.Re Caratti Holdings Ltd: constitution gave its governing director power to acquire shares of other members at nominal value which they were originally issued power against a particular shareholder, although formally valid is sufficient grounds to apply order for wind up under the clause B. Kokotovich Constructions pty ltd v Wallington: winding up order made at the suit of a minority shareholder whose small shareholding was granted on formation of company, under sole proprietor, in recognition of ‘moral partnership’ founded upon a pre-existing intimate business relationship- winding up justified by continuing animosity between parties and risk of further oppression and limited nature of the company’s activities 2.City Meat CO pty Ltd: all company members where members of a single family who’d acquired shares via inheritance court held that majority shareholder ‘consistently ignored the rights, expectations and obligations’ of petitioners’ branch of family- wind up 3. Re Dalkeith Investments Ltd: shares in co divided equally b/wn former spouses and their daughter company was a ‘partnership in corporate form’= wind up 3. Directors acting in their own interest * s461(e) permits making of winding up order where directors have acted in affairs of company in their own interest rather than interest of company as a whole, or in a way that was unfair or unjust to other members * OBJ TEST: whether directors have acted in own interest etc or otherwise unfairly/unjustly * 461(e) compliments 461(f) and (g) a. Re Cumberlands Holding Ltd 1976 1. directors’ not limit to whole board act unanimously, ONLY met where shown that the effective majority has acted in its own interest or in the interest of one or more of those board members or even where on directors by some means caused his will to be carried into effect by board with result of personal interest being preferred 2. ‘directors’ same application in (e) 3. ‘affairs of the company’ wide interpretation, not limited to business/trade but encompass capital structure, dividend policy, voting rights, consideration of takeover offers 4. ‘own interest’ acted in interest of another company of which they are also directors/shareholders 5. ‘interest of members as a hole’: debate over interests of majority and minority directors preferred interest over that of significant section of members not apply preferred interest over one or more or perhaps some significant section of the members applies 6. appears’ doesn’t carry much weight 7. â €˜unjust or unfair’ discussed elsewhere b. Re Weedmans Ltd [1974] * The directors, other than the independents, failed to observe the requisite standard of commercial morality * Effect of failure: reacted unfairly and unjustly against other members * They could have had the allotment set aside, but didn’t ask for that feature so in absence of a case for relief under Pt2F. 1 there is no other remedy before the justice other than to wind up. Pages 122-130: Insolvency * Winding up * Voluntary administration * Receivership * Creditor’s scheme or arrangement (loan default) 1. Voluntary administration * Pt5. A: provides an inexpensive procedure capable of being implemented swiftly and flexibly and offering alternative options for creditors for dealing with financially trouble company * Outcomes available: a. co will resume operation w/ deferred/reduced debt burden under deed of company arrangement approved by creditors b. secured creditor will exercise right to app oint receiver to obtain repayment of its debts by disposal of company assets and who will effectively displace the administrator while doing so c. Creditors will vote to put company into liquidation * Voluntary administration is usually initiated by company itself where directors resolve that: a. In their opinion the company is insolvent or likely to become insolvent at some future time AND b. nd administrator of the company should be appointed s435A * While under administration, administrator has control of company’s property and business s437A * Powers of other corporate officer (i. e. directors) are suspended and may not be exercised except by written approval of administrator s437C(1) * Company officers are not removed from their offices by appointment of administrator s437C(2) * Administrator must be a registered liquidator who is independent of that company ss448B 448C * C company is solvent ONLY IF able to pay all its debts as and when they become due and payable s95A( 1) * Otherwise it is insolvent s95A(2)- test . :. ook at cash flow not balance b/wn assets and liabilities * If director of company in financial difficulties allows it to continue to trade and incur debts while insolvent, they may be personally liable for losses sustained by creditors ss588G s588FA * Voluntary administration offers directors safe harbour from future insolvent trading liability but with loss of control of company affairs, property and operations to administrator s437A-D * Administrator may be appointed by company s436B or by secured creditor who is entitled to enforce a charge over whole or substantially the whole of the company’s property s436C * Administrator to notify secured creditor of their appointment as soon as practical the next business day s2405A(3) * w/in 13 business days of administrators appointment, a substantial charge may enforce its charge, usually by appointment of receiver or other agent s441A * if substantial charge opts to enforce charge by virtue of higher power than administrator may supplant the administration s442D(1) * IF the substantial charge must enforce charge in relation to all property of company subject of it and does not have the option of appointing receiver to some small part only of the company’s property, if they wish to over override power of administrator s441A(1)(b) ‘all or nothing’ (Harmer report) * If no substantial chargee or opt not to enfore charge, there is a general moratorium upon action/proceedings against company and its property by creditors and owners or lessors of property used by company ss440A-D and F * Moratorium provides a period for investigation and collective assessment of option w/out scramble for individual recover.. expectation for proceedings to commence before the administration’s commencement or in espect of perishable property ss441F-Gs * During admin there us a stay of enforcement of guarantees given by directors or their relative of a libali ty of their company without the leave of the court s440J * As soon as practice admin’or must investigate the company’s business, property and financial circumstances s438A * w/in 5 business days appoint committee of creditors to consult with s436E&F * at this first meeting, creditors may also replace the administrator with person of own choosing s436E(4) * w/in 21 days of appointment, admin’or must convene meeting to decide future of company s439A (28days for Christmas and Easter periods) * with the notice ofthe meeting, admin’ore muyst report to the creditors about company’s business, property and financial circumstances s439(4)(a) * at the meeting creditors may resolve: company execute deed of company arrangement specified in resolution, administration should end and company return to control of its directors company be wound up s439C * admin’or report must include statement of opinion and if deed of company arrangement is propose must inc lude report * resolution is passed at meeting of creditors it is decided on the voice unless demand a poll reg5. 6. 9 * deed of company arrangement might treat groups of creditors differently from order of application of assets under winding up, likely to prompt an application for its termination by court s445D * deed of company arrangement must preserve the priority available to employee creditors in a winding up unless employees agree to waive their priority – court may approve alteration of priorities if deed ensures same/better outcome for employee creditors result than from a wind up 444DA * if creditor accept deed then admin’or draws up deed for execution by co and deed admin’or within 21 days of resolution s444A-444B * voluntary admin end once company become subject to deed of company arrangements s435C(1)(b), (2)(a) * creditors right to indemnity and unaffected where debt is released by acceptance of terms of deed of co arrangement s444H * deed binds all unsecured and secured creditor, owners, lessors of prop used by co who voted for deed, the company, its officers, shareholders s444D, G * court may order that secured creditors etc who voted against the deed are nonetheless bound by it wgere enforcement of their rights would have material adverse effect on achievement of deed’s purpose and their interest will be adequately protected s444D(2), (3) 444F * court may declare deed void or validate it despite contravention Pt5. 3A, s445G * Pt 6D. 2 obliged disclosure obligations do not apply to equity for debt swap * Admin’or’s statement must indicate statement is not a prospectus . :. contain less info than prospectus s708(17A) * Court may alter times, the way in which deed operated in relation to a particular co s447A(1) where provisions are being abused the company is solvent s447A(2) * Order wind up power to supervise co under administrator or under deed of co administration s447E Receivership * Securities given by companies to lenders commonly grant the lender right when a defined act of default occurs to appoint a person to take possession and control either of a particular asset or group or assets or whole property. * Court may appoint receiver to protect particular property or funds of the company under s1323(1)(h) * ‘controller’ refers to a receiver, receiver and manager, mortagagee in possession or its agent s9 * Where receiver is appointed by court, directors’ powers over property are suspended and revive only upon termination of receivership Winding up a. Appointing of liquidator and its consequence winding up process leads to liquidation of co and termination of registration and existence – made by court order or voluntary s491(1) by members – voluntary wind up= unavailable where insolvent – requirement of resolution at separate meetings of members and creditors s491 497; creditors will appoint the liquidator and control the liquidatorâ€⠄¢s conduct – if 2nd meeting under voluntary admin and resolve to wind up.. moves to creditors voluntary winding up procedure s446A * Etc p 128 b. Order of application of company assets p128 – after the liquidator has realised the assets of the company, the funds are applied to discharing the claims of creditors – rule: ‘all debt and claims in winding up rank equally and if the property of the company is nsufficient to meet them in full, the must be paid proportionally s555 * Priority of debt and repayments where property available for repayment of creditors is insufficient for certain unsecured loans s561 * Unsecured claims are given priority in that they must be paid sequentially s556, 558 (i. e. liquidation expenses, wages, superannuation etc. * W/in each debt of each class ‘all debts are equal’ rule applies s559 c. Recovering property and compensation for benefit of creditors p129 * Pt 5. 7B structure for recovery of property or compensati on for benefit of credit of an insolvent company — complemented by Pt5. 8A in relation to agreements/transaction to avoid payment of employee entitlement * Pt5. B s588FE : avoidable transactions where entered into w/in specific time of winding up * S88FF: if voidable transaction – liquidator must seek court order concerning those transactions and orders releasing the company from debt and orders varying the terms of agreement or declaring them void/unenforceable * p129 d. Schemes of arrangement: used by company facing the prospect of insolvency to restructure its debts, typically through compromise of creditors’ claim// initiated by court order that meeting of creditors be convened for approval of explanatory statement to be sent with notice of meeting s411, 412 * Compromise must be approved by court after application to it s411(4)