Welcome to the latest update from Gilbert + Tobin's Corporate Advisory team. The update provides a summary of key recent legal developments, particularly relevant to in-house counsel.
In this issue, you will find:
- Legislation and proposed legislation
- Rethinking the Competition and Consumer Act: Exposure draft legislation lays groundwork for the most significant change in a generation
- Government to facilitate use of employee share schemes
- Unfair contracts regime extended to small businesses from 12 November 2016
- Treasury consults on insolvency practice rules legislative instruments
- Government to clamp down on abuse and manipulation of financial benchmarks
- Bill to reduce corporate tax rate introduced into Parliament
- A watchdog for registered organisations
- Legislation to clarify the evidentiary status of certificates, instruments and registers
- Australia’s proposals to develop international blockchain standards approved by ISO
- ASIC clarifies guidance on forward-looking statements for mining and resources companies
- ASIC continues auditing relief for proprietary companies and reporting relief for wholly owned entities
- ASIC releases new guidance on ‘robo-advice’ in Australia
- ASIC clarifies guidance on forward-looking statements for mining and resources companies
- ASIC continues auditing relief for proprietary companies and reporting relief for wholly owned entities
- ASIC releases new guidance on ‘robo-advice’ in Australia
- Other G+T publications
- Blockchain and Smart Contracts: Digital Utopia versus the Real World
- 2017 Getting the Deal Through – Initial Public Offerings and Fintech
- Some insight into nature and content of a directors’ duty of care and diligence in section 180(1) of the Corporations Act: Australian Securities and Investments Commission v Cassimatis (No 8) FCA 1023
- Former Padbury Mining directors banned for 3 years: ASIC, in the matter of Padbury Mining Limited v Padbury Mining Limited  FCA 990
- Are resolutions of a public company board with less than 3 directors valid?: In the matter of Condor Blanco Mines Ltd  NSWSC 1196
Rethinking the Competition and Consumer Act: Exposure draft legislation lays groundwork for the most significant change in a generation
Exposure draft legislation has been released to amend the Competition and Consumer Act 2010 in line with the majority of the recommendations of the Harper Review. The controversial proposed changes to section 46 (misuse of market power) will be implemented according to the “Full Harper” formulation.
For further details, see Rethinking the Competition and Consumer Act: Exposure draft legislation lays groundwork for the most significant change in a generation dated 12 September 2016 by Elizabeth Avery, Simon Muys and Matt Rubinstein.
Government to facilitate use of employee share schemes
The Government is taking steps to make it easier for employers to provide incentives to their employees through employee share schemes.
In 2015, the Government introduced tax concessions for employee share schemes issued by eligible start-up companies. However, current disclosure requirements in the Corporations Act 2001 (Cth) (Act) can discourage those start-ups from implementing an employee share scheme because it may result in the release of commercially sensitive information.
As part of its National Innovation and Science Agenda, the Government has now released:
- exposure draft legislation to amend the Act so that employee share scheme disclosure documents for certain start-up companies are not made publicly available when they are lodged with ASIC; and
- a consultation paper on potential changes that could be made to the disclosure regime in the Act that would make employee share schemes more user-friendly by giving employers more choices as to how they offer incentives to their employees and reducing the red tape associated with offers of incentives to employees.
Comments on the exposure draft legislation are due by 2 November 2016 and submissions for the consultation paper are due by 7 December 2016.
Unfair contracts regime extended to small businesses from 12 November 2016
Following a 12 month implementation period, the unfair contract term protections in the Australian Consumer Law and the Australian Securities and Investments Commission Act 2001 (Cth) will be extended to standard form contracts entered into or renewed on or after 12 November 2016 by small businesses.
For further details, see G+T Client Update by Kirish Kulajarah and Tim Gole dated 23 October 2015 and also the Australian Competition & Consumer Commission website.
Treasury consults on insolvency practice rules legislative instruments
Following the introduction of the Insolvency Law Reform Act 2016 (Cth) earlier this year, Treasury has released for consultation a number of legislative instruments required to give it full effect.
The legislative instruments released by Treasury for consultation include:
- the Insolvency Practice Rules (Corporations) 2016, which regulate the external administration of companies and the registration and discipline of external administrators (intended to commence 1 March 2017);
- the Insolvency Practice Rules (Bankruptcy) 2016, which regulate the external administration of private individuals and the registration and discipline of bankruptcy trustees (intended to commence 1 March 2017); and
- related regulations which, among other things, provide for the partial delay of corporate law and personal insolvency amendments under the Insolvency Law Reform Act 2016 (Cth) and the change of fees required due to the new Practice Rules.
In addition to providing a digestible overview of the insolvency law reform package, the explanatory material provides a useful visual summary of the legislative architecture.
Submissions are due by 4 November 2016.
See also media release dated 12 October 2016.
Government to clamp down on abuse and manipulation of financial benchmarks
The Federal Government has announced that it intends to strengthen financial regulation to prevent the abuse and manipulation of the bank bill swap rate by banks.
ASIC is already pursuing 3 of the 4 major Australian banks over unconscionable conduct and market manipulation in setting the bank bill swap rate (which is a key financial benchmark that serves as the reference rate for the pricing of a range of financial products) from 2010 to 2012.
The Government’s announced reforms follow recommendations submitted to the Federal Government by the Council of Financial Regulators (CFR), which broadly cover the following:
- administrators of significant (that is, systemically important) benchmarks be required to hold a new “benchmark administration” licence issued by ASIC unless granted an exemption;
- ASIC be empowered to develop enforceable rules for the administrators of significant benchmarks and for entities that make submissions to such benchmarks (including the power to compel submissions to benchmarks in the case that other calculation mechanisms fail); and
- the manipulation of any financial benchmark (significant or non-significant) or financial product used to determine a financial benchmark used in Australia be made a specific criminal and civil offence.
The Federal Government intends to implement these reforms over the next 18 months.
See further the Government’s media release dated 4 October 2016 and the CFR recommendations.
Bill to reduce corporate tax rate introduced into Parliament
The Bill will progressively reduce the corporate tax rate to 25% by the 2026-27 income year.
The Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (Cth) will amend the Income Tax Rates Act 1986 (Cth) to reduce the corporate tax rate to 27.5% for the 2016-2017 income year for small business entities (being entities that carry on a business and have an aggregated turnover of less than A$10 million).
This lower corporate tax rate will the progressively be extended to all corporate tax entities by the 2023-24 income year.
The corporate tax rate will then be cut to:
- 27% for the 2024-25 income year;
- 26% for the 2025-26 income year; and
- 25% for the 2026-27 income year and later income years.
See Treasury’s media release dated 1 September 2016.
For further details, see also Australian Federal Budget 2016/17 dated 4 May 2016 by Hanh Chau, Andrew Sharp, Adam Musgrave, Rianne Chen and Mack Wan.
A watchdog for registered organisations
The purpose of the Fair Work (Registered Organisations) Amendment Bill 2014 (Cth) is to improve the governance and financial transparency of registered organisations and provide an appropriately empowered and independent regulator that will ensure compliance with the Fair Work (Registered Organisations) Act 2009 and the Fair Work Act 2009 by registered organisations, branches of registered organisations and their officers.
The Fair Work (Registered Organisations) Amendment Bill 2014 (Cth) proposes to amend the Fair Work (Registered Organisations) Act 2009 (Cth) (RO Act ) and the Fair Work Act 2009 (Cth).
Broadly, the Bill will:
establish an independent watchdog, the Registered Organisations Commission (Commission), to monitor and regulate registered organisations with enhanced investigation and information gathering powers, with the Commission to be headed by the Registered Organisations Commissioner who will assume the investigations, enforcement advice and assistance responsibilities of the General Manager of the Fair Work Commission in relation to registered organisations;
- amend the requirements on officers’ disclosure of material personal interests (and related voting and decision making rights) and change grounds for disqualification and ineligibility for office;
- strengthen existing financial accounting, disclosure and transparency obligations under the RO Act by putting certain rule obligations on the face of the RO Act and making them enforceable as civil remedy provisions; and
- increase civil penalties and introduce criminal offences for serious breaches of officers’ duties as well as new offences in relation to the conduct of investigations under the RO Act.
The amendments that provide for the disclosure of material personal interests, increased accounting and disclosure obligations, criminal offences for serious breaches of officers’ duties and increased civil penalties broadly mirror those that apply to companies and their directors under the Corporations Act 2001(Cth) and have been adapted to align with the RO Act framework.
See the explanatory memorandum for further detail
Legislation to clarify the evidentiary status of certificates, instruments and registers
The Statute Update Act 2016 (Cth) amends a number of Commonwealth Acts to make clear that certificates, instruments and registers are prima facie evidence of the matters in them.
Among other things, the Statute Update Act 2016 (Cth) (Act) amends a number of provisions in other Commonwealth Acts dealing with the evidentiary status of a certificate, instrument or register to make clear that they are prima facie evidence of the matters stated in them. The other Acts that the Act amends include, among others:
- A New Tax System (Australian Business Number) Act 1999 (Cth)
- Competition and Consumer Act 2010 (Cth);
- Customs Act 1901 (Cth);
- Health Insurance Act 1973 (Cth);
- Income Tax Assessment Act 1936 (Cth);
- Insurance Act 1973 (Cth);
- International Tax Agreements Act 1953 (Cth);
- Migration Act 1958 (Cth); and
- Trade Marks Act 1995 (Cth)
Australia’s proposals to develop international blockchain standards approved by ISO
Establishing international standards around blockchain will provide a basis for ensuring international interoperability.
The Treasurer has welcomed the decision by the International Organization for Standardization (ISO) to support Australia’s proposal to develop new international standards on blockchain, with Australia to lead the international committee.
Standards Australia submitted a proposal for new international standards on blockchain technology and electronic distributed ledger technologies in April this year. The proposal has been considered by the 161 member countries of ISO, and its approval will see the development of standards that support interoperability among systems, privacy, security and terminology.
See Treasury media release dated 15 September 2016.
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ASIC clarifies guidance on forward-looking statements for mining and resources companies
ASIC’s Information Sheet 214, an initial draft of which was released in April 2016, was designed to provide clarity to stakeholders regarding the publication of forward looking statements by mining and resources companies. Instead, it provoked widespread rancour and confusion, which ASIC has now sought to address in a revised version of the document, which was released on 12 October 2016.
For further detail, see ASIC issues revised Information Statement 214 by Sarah Turner and Garth Landers dated 13 October 2016.
ASIC continues auditing relief for proprietary companies and reporting relief for wholly owned entities
ASIC has continued existing auditing relief for proprietary companies and reporting relief for wholly owned entities without significant change (except in respect of APRA-regulated entities which are now excluded from the reporting relief for wholly-owned entities). Importantly, ASIC has confirmed that to join a party to an existing deed of cross guarantee, a new deed will need to be executed or the existing deed varied to reflect ASIC’s revised Pro Forma 24.
Following public consultation (see Consultation Paper 267 Remaking ASIC class orders and guidance on audit and financial reporting (CP 267)), ASIC has remade 3 legislative instruments that affect financial reporting by companies without significant changes before they were due to expire on 1 October 2016. The relief is now set out in the following new legislative instruments:
- ASIC Corporations (Audit Relief) Instrument 2016/784 (replaces Class Order 98/1417 Audit relief for proprietary companies and applies for financial years ending on or after 1 January 2017). The new Instrument continues to provide relief to large proprietary companies and certain small foreign-controlled proprietary companies from the need to appoint an auditor and have their financial report audited;
- ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (replaces Class Order 98/1418 Wholly-owned entities and applies for financial years ending on or after 1 January 2017). The new Instrument continues to relieve wholly-owned companies from the need to prepare and have audited a financial report, provided they enter into a deed of cross-guarantee with their holding company and other wholly owned companies (except that the relief is no longer available to APRA-regulated entities); and
- ASIC Corporations (Qualified Accountant) Instrument 2016/786 (replaces Class Order 01/1256 Qualified accountant). The new Instrument continues to specify the classes of accountants who are qualified accountants for particular purposes under the Corporations Act 2001 (Cth), particularly for the purpose of giving sophisticated investor certificates.
ASIC has also released:
- updated versions of the following documents related to audit relief for certain proprietary companies:
- updated versions of the following documents related to relief for certain wholly owned companies:
ASIC has also confirmed in REP 497 Responses to submission on CP 267 (see paragraphs 19 to 21) that a consequence of remaking Class Order [CO 98/1418] as an ASIC instrument is that in order to join a company to a deed of cross-guarantee executed before 29 September 2016, a new deed will need to be executed or the pre-existing deed varied to reflect the revised Pro Forma 24.
In addition, Class Orders [CO 98/106] Financial reports of superannuation funds, approved deposit funds and pooled superannuation trusts and [CO 99/1225] Financial reporting requirements for benefit fund friendly societies have been repealed on the basis that they are no longer necessary or useful.
ASIC releases new guidance on ‘robo advice’ in Australia
In response to the rapid growth of digital financial product advice (also known as ‘robo-advice’) since 2014 by both start-up Australian financial services (AFS) licensees and existing AFS licensees, ASIC has now released guidance on its approach to the regulation of robo-advice in Australia.
‘Robo-advice’ involves the provision of computer-generated financial advice that is automated through the use of algorithms and other technology with minimal human involvement, and can comprise general or personal advice and range from advice that is narrow in scope to a comprehensive financial plan.
Recognising the potential benefits to consumers of the growth and development of the market for robo-advice in Australia, ASIC has released Regulatory Guide 255 Providing digital financial product advice to retail clients (RG 255) which brings together some of the issues that persons providing robo-advice to retail clients need to consider when operating in Australia – from the licencing stage through to the actual provision of advice.
RG 255 does not introduce any new regulatory concepts (as the law is generally technology neutral) but it provides guidance on how ASIC will approach the regulation of robo-advice, as distinct from traditional (ie, non-digital) financial product advice. RG 255 also includes guidance on some specific issues that are relevant for robo-advice, including:
- how the organisational competence obligation applies to AFS licensees in the robo-advice context;
- the ways in which AFS licensees should monitor and test the algorithms underpinning robo-advice; and
- the minimum expectations for robo-advice providers to assist them in providing scaled advice (ie personal advice that is limited in scope) that is in the best interests of their clients.
RG 255 follows consultation earlier this year (see Consultation Paper 254 Regulating digital financial product advice and Report 490 Response to submissions on CP 254 Regulating digital financial product advice).
See also ASIC media release dated 30 August 2016.
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ASX releases new guidance note on managing liquidity requirements
The new ASX Clear Operating Rules guidance note provides guidance on the minimum liquidity management arrangements a participant should have to meet its obligations under the ASX Clear Operating Rules.
ASX has released the ASX Clear Operating Rules Guidance Note 13 Managing Liquidity Requirements which covers four main points:
- the requirement for participants to have a sufficient formal liquidity risk framework in place;
- the requirement for participants to have an officer responsible for liquidity management;
- the requirements for a board-approved annual liquidity plan which considers both “normal” and “stress” conditions and robust liquidity-related operational processes and management reporting; and
- the different expectations of authorised deposit-taking institutions and their related bodies corporate.
The guidance note is a response to an ASX consultation with Clearing Participants in February 2016, and a draft Guidance Note that was circulated to Clearing Participants in July 2016.
ASX has indicated that it expects Clearing Participants to comply with the requirements of Guidance Note 13 from 28 February 2017.
See ASX’s media release dated 31 August 2016.
Blockchain and Smart Contracts: Digital Utopia versus the Real World
Blockchain and smart contracts have set us on a collision path, posing challenges that we haven't had to deal with before. People with technology, commercial and legal expertise all need to work together in the blockchain environment - and their expectations can be quite different.
For further details, see Blockchain and Smart Contracts: Digital Utopia versus the Real World dated 2 September 2016 by Bernadette Jew and Peter Reeves
2017 Getting the Deal Through – Initial Public Offerings and Fintech
John Williamson-Noble and Tim Gordon have contributed the Australian Chapter of 2017 Getting the Deal Through – Initial Public Offerings and Peter Reeves has contributed the Australian Chapter of 2017 Getting the Deal Through– Fintech.
See Getting the Deal Through – Initial Public Offerings and Getting the Deal Through – Fintech.
Some insight into the nature and content of the directors’ duty of care and diligence in section 180(1) of the Corporations Act: Australian Securities and Investments Commission v Cassimatis (No 8)  FCA 1023
This case provides some valuable insights into the nature and content of the duty of a director under section 180(1) of the Corporations Act 2001 (Cth) and the circumstances in which a director maybe be liable for action (or inaction) which causes a breach by their companies of the Act.
Since 1994, Storm Financial Limited (Storm) operated a system by which it recommended to clients, on an indiscriminate basis, that they invest substantial amounts in index funds using “double gearing” which involved taking out both a home loan and a margin loan to fund the purchase of units in index funds (Storm Model). By late 2008 and early 2009, many of Storm’s clients were in negative equity positions and had sustained significant losses.
ASIC’s case related to a sample of investors who were allegedly over 50 years of age, were retired or approaching retirement, had little or limited income, few assets and little or no prospect of rebuilding their financial position in the event of financial loss (Relevant Investors).
Edelman J in the Federal Court found that:
- Storm had breached sections 945A(1)(b) and 945A(1)(c) of the Corporations Act 2001 (Cth) (Act) because it did not give consideration to, or conduct investigation of, the advice as was reasonable in the circumstances, which in turn led to the provision of financial advice which was not appropriate to the Relevant Investors having regard to their circumstances; and
- Mr and Mrs Cassimatis each contravened section 180(1) of the Act by exercising their powers in a way which caused or permitted inappropriate advice to be given by Storm to the Relevant Investors by Storm in breach of sections 945A(1)(b) and 945A(1)(c).
Edelman J described the test to be applied for breach of section 180(1) (as expressed in Vrisakis v Australian Securities and Investments Commission) as involving “consideration of all circumstances, including the foreseeable risk of harm to any of the interests of Storm and the magnitude of that harm, together with the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question, and any burden of further alleviating action”. Consideration of these matters is from the perspective of a reasonable person being a director of Storm, in the circumstances of Storm, having the responsibilities of Mr and Mrs Cassimatis.
Applying this test, Edelman J found that:
- Mr and Mrs Cassimatis had an “extraordinary degree of control” over Storm (they were also its sole shareholders) and would reasonably have been aware that the Storm Model was applied to financially vulnerable clients which included the Relevant Investors;
- a reasonable director, with the responsibilities of Mr and Mrs Cassimatis, and in Storm’s circumstances, would have realised that the application of the Storm Model to financially vulnerable investors was likely to involve inappropriate advice and would have taken some alleviating precautions to prevent the giving of that advice; and
- Mr and Mrs Cassimatis should have been reasonably aware that the application of the Storm Model would be likely to (and did) cause contraventions by Storm of section 945A(1)(b) and 945A(1)(c) of the Act, and could (and did) have devastating consequences for many Relevant Investors and the discovery of the breaches would have threatened the continuation of Storm’s AFSL and Storm’s very existence.
In coming to his conclusions, Edelman J also made some useful and interesting observations on the nature and content of the duty under section 180(1), including:
- on the question of whether the duty under section 180 is a public or a private duty, Mr and Mrs Cassimatis submitted that the duty is owed by them only to Storm whereas ASIC submitted that section 180 creates a public duty which exists independently of the private duty and is owed to the public at large, and not merely a public duty that attaches additional enforcement and sanctions to a private duty owed to a company. While Edelman J did not consider it necessary in the circumstances to reach a concluded view, after considering past authority (which he noted had not explored the precise character of the section), the text of section and other contextual and purposive considerations, he did not rule out the possibility that a contravention of section 180(1) might involve both a public and a private wrong;
- in considering the test for breach of section 180(1), Edelman J observed that:
- the foreseeable risk of harm to the company which calls to be considered in section 180(1) is not confined to financial harm and includes harm to all the interests of the company (including its reputation and it interests which relate to compliance with the law (such as potential loss of Storm’s Australian Financial Services Licence));
- a director may not avoid liability merely because he or she proved that the balancing of risk against potential benefits for the purposes of section 180(1) showed that the likely financial cost of a penalty was exceeded by the likely profit from a serious contravention of the law; and
- consideration of the foreseeable risk of harm together with the potential benefits that could reasonably have been expected to accrue must take place from the perspective of the company’s circumstances and the office and responsibilities of the director (which was particularly significant in this case because of the vast responsibilities assumed by Mr and Mrs Cassimatis and the strength of control they had over Storm);
- Edelman J considered that ASIC had set itself a high bar to establish liability because it relied on an actual breach by Storm as a “stepping stone” for a finding of a breach by Mr and Mrs Cassimatis. In fact, His Honour expressed serious doubts whether an actual breach by a company is a necessary requirement for a breach of section 180(1) by an officer, noting that if this was the case, a director could escape liability simply because, by some good fortune, no actual breach by the company occurred;
- Edelman J held that as the duty under section 180(1) is not a duty of strict liability to ensure compliance by the company with its statutory obligations, section 180 cannot be used as a backdoor method for imposing accessorial civil liability on directors for contraventions by the company. While contraventions, or risks of contraventions, by the company are circumstances to be taken into account, they are not the only circumstances, and are not conditions for liability. The steps that a reasonable director must take to avoid a foreseeable risk of contravention will always depend on all of the company’s circumstances, and the assessment of whether a breach by a particular director has been committed will depend on the response of a reasonable person who is a director of the company in those circumstances with the same responsibilities of the director.
- Edelman J held that directors who are also the sole shareholders of a solvent company are not precluded from potentially breaching section 180(1) even if they intentionally act in contravention of the Act. Rather, His Honour found that the business judgment rule does not give a director carte blanche to engage in any venture even if the venture is highly likely to (and does) contravene the law. While it was conceded that shareholders acquiescence might affect the practical content of the duty, acquiescence does not eliminate or relieve the duty where there are other relevant interests of the company apart from the interests of the shareholders.
Former Padbury Mining directors banned for 3 years: ASIC, in the matter of Padbury Mining Limited v Padbury Mining Limited  FCA 990
Two former directors of Padbury Mining have been disqualified from managing corporations for a period of 3 years after the Federal Court found that they breached their duty of care and diligence to Padbury Mining under section 180(1) of the Corporations Act by approving the release of an announcement which caused Padbury Mining to contravene both section 1041H (because it was misleading or deceptive) and section 674 (because it did not contain all the information required under Padbury Mining’s continuous disclosure obligations).
Padbury Mining Limited (Padbury Mining) entered into a shareholders’ agreement pursuant to which Superkite Pty Ltd (Superkite) undertook, subject to a number of contractual pre-conditions, to provide $6 million to a subsidiary of Padbury Mining, as funding for the construction of deep water port and rail network at Oakajee, WA (Project). Padbury Mining then made an announcement to the ASX that it had successfully secured $6 billion in funding for the Project. Between the time of the announcement and a trading halt four hours later, Padbury Mining’s shares traded within a range of 3.2 cents and 5.2 cents per share (when the shares were trading at 2 cents before the announcement) and more than 200 million shares were traded. The shareholders’ agreement was subsequently terminated and the funding was never provided.
The parties tendered an agreed statement of facts and a minute of consent orders which set out proposed orders (on which each party made submissions). Siopsis J in the Federal Court of Australia found that:
- Padbury Mining contravened section 1041H(1) of the Corporations Act 2001 (Cth) (Act) because the announcement was misleading and deceptive and likely to mislead or deceive in that the funding was dependent upon the satisfaction of conditions precedent (relating to the obtaining of bank guarantees) that Padbury Mining was not in a positon to satisfy at the time of the announcement;
- Padbury Mining contravened its continuous disclosure obligations under section 674(2) of the Act by not notifying ASX in the announcement that there were conditions precedent to the funding and not identifying the party or parties responsible for providing the funding;
- Mr Stokes (Padbury Mining’s managing director) and Mr Quinn (Padbury Mining’s chairman) both contravened section 674(2A) of the Act in that they were involved in Padbury Mining’s contravention of section 674(2); and
- Mr Stokes and Mr Quinn both contravened section 180(1) of the Act in that they failed to discharge their duties to Padbury Mining with a degree of care and diligence that a reasonable person would exercise in the circumstances by authorising or otherwise approving the release of the announcement and thereby causing Padbury Mining to make the funding representation in contravention of section 1041H.
In considering the breach of section 180(1) by Mr Stokes and Mr Quinn, Siopsis J noted that they had both admitted that:
- when approving the announcement, they ought reasonably to have been aware that if Padbury Mining issued an announcement that was misleading or deceptive (or likely to mislead or deceive) or failed to disclose information required under section 674 of the Act, it would be harmful or potentially harmful to Padbury Mining in that it would contravene, or risk contravening, section 1041H or 674 and, if revealed, it would be harmful to its reputation and expose it to litigation and regulatory action;
- it was necessary for the proper discharge of their duties to Padbury Mining to satisfy themselves that the announcement contained the information required by section 674(2) and did not contain statements that were misleading or deceptive or likely to mislead or deceive; and
- when they authorised or otherwise approved the release of the announcement, they ought reasonable have been aware that, among other things, the shareholders agreement contained the guarantee conditions precedent, that Padbury Mining was not in a position to procure the guarantees, that Padbury Mining had not obtained any third party verification about the capacity of Superkite to meet its funding obligations and that it did not disclose the existence of the conditions precedent or the identity of the funding party.
Siopsis J also ordered that both Mr Stokes and Mr Quinn:
- be disqualified from managing a corporation for a period of 3 years – Whilst noting that this was not a case of dishonesty on the part of Mr Stokes and Mr Quinn, Siopsis J emphasised that they had both recognised that their conduct in approving the announcement, which was ‘of critical importance to the company’s future and the market perception thereof’ was ‘a serious departure from the standards expected of directors of a public company in a like situation’. Save for the fact that both Mr Stokes and Mr Quinn had co-operated with ASIC at an early stage and in doing so, had recognised the seriousness of their conduct and exhibited contrition, Siopsis J would have found that a 5 year disqualification period was justified;
- pay a pecuniary penalty of $25,000 – Siopsis J noted that while a pecuniary penalty should only be imposed if a disqualification order is an inadequate or inappropriate remedy, the seriousness of a contravention may warrant an additional pecuniary penalty even if only a modest amount; and
- pay ASIC’s costs of the proceedings in the fixed sum of $200,000.
Are resolutions of a public company board with less than 3 directors valid?: In the matter of Condor Blanco Mines Ltd  NSWSC 11201A(2)96
In this case, Barrett AJA found that the fact that a public company had less than the statutory minimum of 3 directors under section 201A(2) of the Corporations Act 2001 (Cth) did not affect the validity of a board resolution to appoint an administrator under section 436A(1) in circumstances where the constitution permitted a board with only 2 members to function. As such, the case seems to suggest that provided that the constitution of a board complies with the company’s constitution, the fact that it has less than the statutory minimum number of directors will not affect the validity of resolutions passed by it which are otherwise valid.
At the time of the purported appointment of an administrator to Condor Blanco Mines Ltd (Condor) (a publicly listed company), Condor had only 2 directors in office.
Barrett AJA in the Supreme Court of New South Wales found that the appointment of the administrator was invalid on the basis that one of the Condor directors (the former managing director) did not, on the facts, have the opinion that the company was insolvent or likely to become insolvent as set out in section 436A(1)(a) of the Corporations Act 2001 (Cth) (Act).
Whilst it was not necessary for Barrett AJA to decide given his finding in relation to the solvency resolution, His Honor nonetheless considered the questions of whether the “board” referred to in section 436A(1) must be a board made up of at least the minimum number of directors required by section 201A(2) (being 3 directors for a public company) and whether section 201A(2)go further and prohibit action by a directorate of less than the statutory minimum. Barrett AJA found that had it been necessary to decide, he would have found that the fact that Condor only had 2 directors did not affect the validity of a board resolution that was otherwise valid based on the following:
- a company which is not in compliance with section 201A(2) contravenes the section and it is guilty of on offence punishable by fine or ASIC penalty notice;
- whether or not a penalty is provided for, there is a question as to whether the statute intends to go further and prohibit conduct inconsistent with observance of the statutory requirement;
- in considering the effects of statutory illegality on contracts, courts have emphasised that the relevant factor is public policy and the predominant consideration is whether, according to “the scope and purpose” of the statute, the legislative purpose will be fulfilled without regarding the contract as void and unenforceable;
- the Act itself contemplates valid and effective action by a public company board with less than 3 directors – pursuant to the replaceable rules in section 201H and 248F, if the number of directors in office falls to one, the total number of directors is not enough to make up the quorum called for by section 248F (2 directors) and the sole director is empowered by section 201H(1) to appoint a director to make up the quorum. In this way, the directorate of a public company governed by the replaceable rules is, by the Act itself, allowed to function even though it consists of fewer than 3 members;
- based on the above, the scope and purpose of the Act are such that a public company without a constitution which has fewer than 3 members is capable of functioning. The scope and purpose of the Act in relation to a company that does have a constitution cannot be different, and it is therefore necessary to consider the provisions of the Condor constitution that relate to capacity to function with a deficiency of directors; and
- under the Condor constitution, the restriction on the ability of the directors to function is when the number falls below 2 (the number necessary to determine a quorum) and provided there are at least 2 directors, the restriction does not operate and those directors are able to exercise all the powers reposed in the directors as a body. The fact that their number was less than the minimum required under section 201A(2) does not affect that conclusion.
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By Hiroshi Narushima and Sally Randall