CHAPTER 14 MEMBERS’ RIGHTS AND REMEDIES At the end of this topic you should: • appreciate the difficulties faced by members who are.

Transcript CHAPTER 14 MEMBERS’ RIGHTS AND REMEDIES At the end of this topic you should: • appreciate the difficulties faced by members who are.

CHAPTER 14

MEMBERS’ RIGHTS AND REMEDIES At the end of this topic you should: • appreciate the difficulties faced by members who are seeking to challenge actions or decisions by a company, especially where breaches of directors’ duty are involved; • understand the difference between derivative actions and personal actions; • know when a decision of the majority may be challenged as being a “fraud on the minority”; • know when the statutory injunction under s 1324 can be involved; • understand Pt 2F.1 and how it applies; and • understand when s 46(1)(e)-(g) and (k) can be applied.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

Introduction

The object of members’ remedies is to protect members (principally, minority members) from abuse at the hands of the controllers of the company, whether they be the directors or controlling (majority) members of the company.

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Introduction

Every member has a set of rights conferred by: • the general law; • the company’s internal rules; • statutory derivative action; • oppression remedy; and • other Corporations Act provision.

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Members’ Rights and Remedies

Sources of rights and remedies Personal Derivative SDA Part 2F.1A

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Balancing Members’ Interests

Majority Larger investment in company Members’ interests Minority Vulnerable to harm by controllers Entitled to have more say in management Risk of reduction or loss in investment  2013 Thomson Legal & Regulatory Ltd. All Rights Reserved.

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Terminology

An understanding of the terminology used in connection with members’ legal actions is essential, including: • personal actions; • derivative actions; • representative actions; • statutory actions; and • class actions.

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Personal Rights and Remedies – General Law

The general law provides a range of methods by which members can challenge company decisions or actions detrimental to their interests. These include: • the right to challenge a fraud on the minority; • the right to have their voting rights protected against improper actions by the directors which would dilute or otherwise harm those rights (

Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4))

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Personal Rights and Remedies – General Law

• the right to sue directors for breach of their fiduciary duties where the directors owed duties to particular shareholders; and • the right to challenge modifications of the company’s internal rules which expropriate valuable proprietary rights attaching to shares:

Gambotto v WCP Ltd

(1995).

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Fraud on the Minority

“Fraud”, in this context, does not mean deceit, but rather abuse of power, whereby the majority of members use their voting power to secure an unfair gain at the expense of the minority.  2013 Thomson Legal & Regulatory Ltd. All Rights Reserved.

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Fraud on the Minority

Examples of fraud on the minority include: • improper ratification of director’s breach of duty; • expropriation of the company’s property; • expropriation of members’ property; and • modifying the company’s internal rules.

These complaints may also entitle a member to bring a derivative action (s 236) and/or oppression claim (s 232).

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Personal Rights and Remedies Statute

The Corporations Act gives members a wide range of specific statutory rights and remedies, including the: • right to inspect company’s books (s 247A); • right to correct register (s 175); • right to challenge variation of shares (s 246D); • right to seek an injunction against a breach of the Corporations Act under s 1324; • right to seek a remedy for oppression under Pt 2F.1; and • right to apply for a winding up order under s 461(1).

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Personal Rights – Statutory Contract

If the majority breaches a provision of the internal rules which confers personal rights on members, the majority can be restrained (

Pender v Lushington

(1877)).

The difficulty is to decide whether a breach of the internal rules is either: • an internal irregularity capable of being ratified by the general meeting; or • a serious infringement of a personal right.

The question then becomes whether the individual right should prevail over the wishes of the majority.

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General Statutory Rights and Remedies

In addition to statutory rights which can be used by members seeking to enforce their rights against the company, members also have available a number of general statutory rights and remedies which are granted by the Corporations Act, including: • derivative action: ss 236 and 237; • oppression remedy: ss 232-235; • injunction: s 1324; • procedural irregularities: s 1322; • winding up order: ss 461-462; and • class action: s 50.

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Derivative Action

It is important to appreciate that an action under s 236 must be concerned with correcting a wrong done to the company.

Proceedings can be bought by: members; and directors or officers.

The proceedings covered by s 236 include causes of action that the company has against either: a director; or third party.

A person must apply for leave of the court and the court must grant the application if certain criteria are satisfied: s 237.

The court has broad discretions regarding orders for costs (s 242), and whether to take into account any ratifications (s 239).

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Oppression Remedy

There are two limbs to conduct covered by s 232: 1. that affairs of the company are being conducted in a manner which is, or 2. that an act or omission or resolution by the company or a class of members was, or would be, oppressive, or unfairly prejudicial to, or unfairly discriminatory against, a member or members, or contrary to the interests of members as a whole.

If satisfied that oppression has taken place, the court has a discretion under s 233(1) to grant any order it considers appropriate.

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Successful Cases on Oppression

• Inaction by directors and the company:

Re Bright Pine Mills

• Controlling member gains:

Re Overton Holdings Pty Ltd

• Gains by Directors:

Sanford v Sanford

• Restricting members’ voting rights:

Shears v Phosphate Co-op

• Failure to pay, or review dividend policy:

Shamsallah Holdings

• Uncommercial Loans:

Re George Raymond

• Exclusion from management:

Fexuto v Bosjnak Holdings

• Failure to provide information to a minority member:

Shum Yip

• Abuse of Process:

Turnbull v NRMA

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Statutory Injunction Procedural Irregularities Class Actions

The Corporations Act gives the court a very broad power to grant an injunction in respect of a breach or threatened breach of the Corporations Act: s 1324(1).

Where a procedural irregularity (such as a lack of notice or failure to call a poll) has caused substantial injustice, the aggrieved members may apply to the court under s 1322(2).

ASIC can bring a “class action” in the public interest on behalf of members or investors to recover damages for fraud, negligence, breach of duty or other misconduct: s 50  2013 Thomson Legal & Regulatory Ltd. All Rights Reserved.

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Winding Up Order Section 461

The Court may order the winding up of a company if conduct has been: • “unfair or unjust”: s. 461(1)(e); • oppressive/unfairly prejudicial conduct (s 461(1)(f) (g); or • if it is just and equitable to do so: s 461(1)(k).

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Winding Up Order Section 461

Examples of “just and equitable” winding up orders: • breakdown of mutual trust and confidence:

Re Wondoflex Textiles Pty Ltd

; • deadlock:

Re Superbee Pty Ltd;

• fraud, misconduct, Oppression:

Loch v Blackwood Ltd;

and • failure of substratum:

Re Tivoli Freeholds Ltd.

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Restitution Rights of Members

The High Court has recently drawn a distinction between a member claiming a right or remedy in their capacity as a member of the company and a member claiming a right or remedy against the company in an alternative capacity.

According to the High Court the distinction is important because a member’s right to claim against a company may be founded not in the capacity as a member but instead in an alternative capacity (eg Tort/Restitution) which would survive an insolvency and provide the member with the right to lodge a claim with a liquidator:

Sons of Gwalia Ltd v Margaretic

(2007).

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Corporations Amendment Sons of Gwalia Act 2010 (Cth)

The Sons of Gwalia Act reverses the High Court decision so that any claim bought by a shareholder against a company that arose from the buying, selling, holding or other dealing with a shareholding is to be postponed in a windup until after all other claims have been paid.

Hence, claims for compensation, including damages awards against a company, would be subordinated below the claims of other creditors in the event of external administration.

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Other Rights and Remedies

Apart from the legal remedies, there are a number of other mechanisms which work to limit the effect of divergences of interest between controllers of companies and their minority members, including: • member voting rights; • enforcement by ASIC and ASX; and • market forces.

PowerPoint  slides to accompany Corporations Law: In Principle, 8 th Edition. Ciro & Symes.

CHAPTER 14 MEMBERS’ RIGHTS AND REMEDIES At the end of this topic you should: • appreciate the difficulties faced by members who are.

Transcript CHAPTER 14 MEMBERS’ RIGHTS AND REMEDIES At the end of this topic you should: • appreciate the difficulties faced by members who are.

CHAPTER 14

Introduction

Introduction

Members’ Rights and Remedies

Balancing Members’ Interests

Terminology

Personal Rights and Remedies – General Law

Personal Rights and Remedies – General Law

Fraud on the Minority

Fraud on the Minority

Personal Rights and Remedies Statute

Personal Rights – Statutory Contract

General Statutory Rights and Remedies

Derivative Action

Oppression Remedy

Successful Cases on Oppression

Statutory Injunction Procedural Irregularities Class Actions

Winding Up Order Section 461

Winding Up Order Section 461

Restitution Rights of Members

Corporations Amendment Sons of Gwalia Act 2010 (Cth)

Other Rights and Remedies

Directory